KATHLEEN JONES
‘Popular’ event

The state of community banking dominated the presentations and conversations at the recent Massachusetts Bankers Association New England Conference, held on Sept. 18 in Whitefield, N.H. Also prominent during the conference was the introduction of a new deposit insurance network option for banks.

According to MBA executives, the conference was well received by community bankers, even amid discussions of the uncertain economy and challenges community banks face in the future.

“The New England conference has become very popular. It was a very positive conference and all of the speakers were very well received. The one big theme was insuring banking success and the risks that community banks will face in 2004,” said Kathleen Jones, senior vice president of education and management development at the MBA. “Our kickoff speaker was Eugene Ludwig and he praised the MBA and talked about, in general terms, the challenges that community banks should face … and the importance of community banks within the whole community.”

Ludwig, chairman and chief executive officer of Promontory Interfinancial Network and former U.S. comptroller of the currency, said the conference was well attended and bankers showed a genuine interest about trends in the community banking industry.

“The conference was terrific, and I spoke about new trends in community banking. My basic pitch to banks is that in today’s day and age, there are various pillars in the community banking franchise, including relationships, quality of staff, importance of using technology, importance of diversification, safety and soundness and the need to have some scale and offer some sophisticated products. I went over with them the steps within those pillars that, in a modern dynamic world, they have to take,” said Ludwig. “I also lauded the MBA for really trying to make sure the Gramm-Leach-Bliley [Act] is implemented into this state. It’s appalling to me that … Massachusetts Insurance Commissioner [Julianne Bowler] has limited the ability of Massachusetts’ banks to sell insurance, and I think inappropriately, and the MBA has fought this with enormous vigor.”

The conference also featured Jack Vonder Heide, president of Technology Briefing Centers in Chicago, who talked about the emerging risk areas to community banks and how use of the Internet has grown and changed, increasing the need for safety and security precautions.

Jim Clark, principal of Clark Consulting in Villanova, spoke on the different models in financial institutions, including the different characteristics of a savings and loans and community banks and the efficient tools of technology that both institutions need to leverage their revenue.

“Dr. Clark said financial characteristics of a successful [financial institution] model are higher fee income, higher expenses, good relationships on both side of the balance sheet and operations driven by revenue and expenses,” said Jones.

As part of his presentation on trends in community banking, Ludwig introduced his firm’s new financial product, CDARS – which stands for Certificate of Deposit Account Registry Service – to community bankers.

CDARS is a new financial network that allows community bank customers to receive Federal Deposit Insurance Corp. deposit insurance above the standard $100,000 limit. Many banks have customers with deposit balances that exceed $100,000, but depositors often spread their funds among several institutions so every dollar is insured.

The FDIC insures up to $100,000 of a depositor’s money in a single institution. Banks participating in CDARS exchange certificates of deposit’s with each other so that no bank holds more than $100,000 of any customer’s deposit, solidifying the FDIC’s coverage of the entire amount and allowing banks to develop stronger customer relationships, said Ludwig.

Share Plan

Ludwig said investors using the new CDARS service are eligible for up to $5 million of insurance coverage from the FDIC for their retirement, IRA and other funds placed in certificates of deposit.

“This is a nice complement for the banks in Massachusetts – actually, it goes beyond a complement,” said Ludwig. “We have seen around the country that the ability of banks to attract and retain their very best customer base is really enhanced by CDARS because there is a surprisingly [growing group] of customers for whom increased safety is either a necessity or very strongly needed. If you have $1.5 million and that is all you have to live on for your life, you don’t have the ability to take a chance on it. [CDARS] can enhance the franchise of community banking by building a relationship banking business … where your consumer comes to the bank affirmatively over time.”

Ludwig said many investors maintain accounts of just below $100,000 each at multiple banks to maintain FDIC coverage. Now, when a bank receives a customer’s $500,000 deposit, it insures the first $95,000 and then sends out the remaining $405,000 to other banks in the CDARS network. These receiving banks, in turn, each insure the remaining portions of the deposit, all under the per-bank limit of $100,000. The customer’s name is not disclosed to the any other bank in the network except the initial depositing bank, and when the bank sends out the excess funds, it receives an equal amount of deposits back from other banks in the CDARS network as if the money never left the bank.

About 350 banks nationwide have signed up for CDARS to date. Ludwig said the network will “revolutionize” community banks and “help anchor them as the place to go in their communities for safe savings.”

According to a spokeswoman at Promontory, the $900 million-asset Capital Crossing Bank in Boston has already joined the CDARS system, and about a dozen more Massachusetts banks are in the process.

The idea, said Ludwig, is to give small banks an opportunity to compete with large banks and keep “bigger aggregate accounts for customers.”

“Smaller banks do not have the same leverage [as larger banks] so here is a way to let them share customers, in a sense, by sending this money out to other banks,” he said.

“In a classic CDARS agreement, the community bank takes the $1 million customer and gives one CD from the bank and disburses the rest of the money to nine other banks who do not know who that client is,” said Ludwig. “This allows those banks to keep the customer relationship and gives banks in the system who want the money the access to have the money. And there is a 100 percent FDIC coverage on every penny.”

The new CDARS program, along with other technology information and tools accessible to community bankers, were discussed in depth at the MBA conference and Jones said the MBA plans to do more such leadership conferences in the future.

“The program has grown over the last few years and now we get about 300 attendees. The evaluations are very good and the MBA is going to be doing more for director training in the future. The reaction was positive,” said Jones. “There were some concerns, but I think [the presentations] were mostly giving the community bankers the tools to take back [to the bank] and make changes or [enhancements]. Every message that all the speakers came with are ‘here are some tools, you’re doing a good job, and here are some suggestions for improving your community bank.'”