Rocks And Whirlpools Bank Strategy 2010 V 2

Between Rocks and Whirlpools: Bank Strategy 2010

Directors’ AssemblyMarch 9, 2010

http://www.ncbankers.org/index.php

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Required DisclosuresThe following information is for informational purposes only and was prepared from sources believed to be reliable but is not guaranteed as to accuracy and is not a complete summary

or statement of all available data. The views or opinions expressed in this material are solely those of the speaker/author and do not necessarily represent those of Janney Montgomery

Scott LLC.

Janney Montgomery Scott LLC is a broker-dealer registered with the US Securities and Exchange Commission and member NYSE, FINRA, and SIPC.

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Speaker Credentials: Roger G. Powell

Academic

B.A. Economics 1971 Davidson College, Davidson, NC

Certificate, Advanced Management Program 1978

North Carolina School of Banking, Chapel Hill, NC

Experience

Investment Banking

Banks / Thrifts

Mortgage Companies

Credit Card

Issuers

Processors

Commercial Finance

Janney Montgomery Scott (2008 - )Alex. Brown & Sons1 (1990-1999)

Investment Research

Banks / Thrifts

Mortgage Cos

Credit Card Cos

Asset Managers

Alex. Brown & Sons (1983-1990)The Powell Group (1972-1976)

Corporate Development / Strategic Planning

Deutsche Bank AG2 (2000-2007)United Carolina Bancshares (1976 – 1982)

Native of Fayetteville

Former Scoutmaster, Troop 17, Christ Church, Charlotte

Interests: family, American history, antique maps, conservation and outdoor activities

1 And successors: BT Alex. Brown and Deutsche Bank Securities d/b/a

Deutsche Bank Alex. Brown

2 Global Private Client Group and Deutsche Bank Alex. Brown, a business unit of Deutsche Bank Securities Inc.

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Rocks and whirlpools: the sailor’s fear…

National Maritime Museum Picture Library, Greewich, England

Adm. Shovel’s fleet on the Rocks of Scilly, 1707

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Rocks and whirlpools…

Admiral Cloudsley Shovel – a 26 year veteran of the most advanced and powerful naval power of the time – lost his flagship, his life and ~2,000 sailors and marines along with a large part of his fleet on the Scilly Isles in 1707.

He knew the islands were there – they are well known to English, Irish and Cornish sailors – off of Cornwall at the entry of the Irish sea.

He did not know where he was and an storm drove the fleet upon the rocks.

This disaster, the greatest in the history of the British fleet, incited the Lords of the Admiralty to offer a prize for the maker of an accurate chronograph in order that navigators could accurately compute their longitude.

As a banker you know the rocks in your course – the known risks of the business. You must always know where you are relative to those risks by using the best techniques of navigation. Do not let a storm throw you upon t he rocks.

Adm. Shovel’s fleet on the Rocks of Scilly, 1707

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Maelstrom of Lofoten, Norway

New-York Magazine; or, Literary Repository

Of the celebrated WHIRLPOOL called the MAELSTROM on the Coast of Norway, Vol. II No. XII Dec 1791

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Whirlpools rise from action of tide and wind, generally in narrow channels.

The most famous is off the coast of Norway and was named ‘Maelstrom’ by Dutch sailors.

A small vessel can be destroyed by its action.

To avoid a whirlpool requires adquate flotation and power to avoid its force.

The tide of regulatory vigor has set with full force; the wind of the economy has blown Force 5.

Capital is a bank’s flotation; earnings is its power. It takes both to avoid the vortex of the Maelstrom.

Maelstrom of Lofoten, Norway

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Rocks

You know where they are.

Where are you?

Can you be blown upon them?

Whirlpools

Arise with winds of regulation and economic tides; you will not see them until you are upon them.

Are you large enough to survive?

Do you have enough flotation, i.e. capital?

Can you power, i.e. earn, through them?

Goal: avoid the known risks; be able to survive the unknown.

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Position

versus changing competition

relative to your balance sheet risks

Capital

to survive

to thrive

to earn

Control

of operations and risk position

of message and information

of future

For 2010 Strategy cycle: focus on critical themes

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Secular

Banks lose share to capital markets

Consolidation creates highly competitive markets

Capital markets pricing and structure degrade overall bank pricing

Portfolio mix responds to disintermediation of cards, cars and mortgages

Cyclical

Risk cycle takes away momentum

risk realization exceeds trend after a decade below-trend

Asset quality and capital issues distract management

Competitive banks have opportunity

Regulators as referees

Position: versus competitors

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Banks lose share to capital markets


Shifting Shares of Major Non-Bank Players in Credit Provision[Ex cludes Credit Market Assets Held by Federal Reserv e]

Banks(Commercial Banks, Bank Holding

Cos., Thrifts, Credit Unions)

Government Sponsored Enterprises

"Private Label" MBS Issuers, and Consumer Credit &

Business CreditABS Issuers

Pension Funds

Insurance Cos.

Money MarketMutual Funds

Other Credit Providers

0%

20%

40%

60%

80%

100%

1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

Percent of Total Credit Market Assets Held by Financial

SectorCredit Providers

Source: Figure A1. in Susan Hickok and Daniel E. Nolle, "The U.S. Financial System in 2011: How Will Sufficient Credit Be Provided?" Economics Working Paper 2009-6, Office of the Comptroller of the Currency (Nov. 2009).

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Position: “A Banking Battleground”

Source: New York Times, March 6, 2010 “A Banking Battleground”

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Capital markets pricing and structure degrade spreads


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Portfolio mix responds to


* OTS –

Supervised Savings Associations do no identify agriculture loans.

Source: FDIC Quarterly Banking Profile 4Q:02 and 4Q:09

Residential30%

Commercial & Industrial

19%All Other Loans

14%

Construction5%

Agriculture *1%

Leases3%

Other Consumer10%

Credit Cards6%

Commercial Real Estate12%

Residential25%

Commercial & Industrial

17% All Other Loans19%

Construction6%

Agriculture *1%

Leases2%

Other Consumer9%

Credit Cards6%

Commercial Real Estate15%

December 31, 2002 December 31, 2009

Loan Portfolio Composition

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0.00

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Mar-9

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Mar-9

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Mar-9

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Mar-9

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Mar-0

0

Mar-0

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Mar-0

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Mar-0

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Mar-0

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Mar-0

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Mar-0

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0.00

0.50

1.00

1.50

2.00

2.50

3.00

Below-trend risk realization ends

Position: versus balance sheet

Source: Federal Reserve Bank of St. Louis

Average ’84-’09 = 0.84%

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Asset quality and capital issues distract management


Source: SNL Financial.

1

6

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0

5

10

15

20

25

30

> $10 bn $1 bn - $10 bn < $1 bn

Banks Headquartered in NC with NPAs / Assets > 4% at 12/31/09

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Opportunity for active banks to take share by becoming a strategic partner

Historical advantage of commercial banks: information advantage

View of cash flows

Intimate business analysis

Collateral ties

Regulators are the referee

Regulatory vigor animates the board room

Banks become the ‘whipping boy’

of the economy

The savings & loans are no longer the instrument of housing and economic policy

Winners / Losers

Position: cyclical opportunity

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Secular Trend

Reversal of trend to lower tangible equity levels

Basel II was height of trust in risk models and infinite liquidity

“The new 10% is 12%”

and etc.

What ROE translates to premium share price?

Portfolio mix responds to disintermediation of cards, cars and mortgages

Cyclical Factors

Access degraded, especially for ‘micro-cap’

and smaller

Trust preferred reverts to single-issuer –

no longer ‘just-in-time’

for all

Internal capital growth depends upon earnings retention

Capital

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Reversal of trend to lower Tier 1 Risk Based Capital levels

Capital: seek higher levels

0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

16.00

18.00

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009


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What ROE translates to premium share price?

Investor attention turns to ‘pre-provision normalized earning rate’

If asset quality is seen to be stable or improving, THEN bank earnings matter

SPDR S&P 500 Index ETF: 21.2%

trailing ROE a/o 2/28/2010 (β~1.08)

SPDR KBW Bank ETF: 0.14%

trailing ROE (β~2.35)

Investors have abandoned ‘micro-’

and ‘nano-cap’

stocks

Large-cap = $8 billion common equity value and larger

Mid-cap = $1 < $8 billion common equity value

Small-cap = $250 million < $ 1 billion common equity value

Micro-cap = $50 million < $250 million common equity value

Nano-cap = less than $50 million common equity value

Capital: what is good performance?

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$0 $20,000 $40,000 $60,000 $80,000 $100,000 $120,000

Common

Preferred

TARP Preferred

TRUPS

Subordinated Debt

Senior Debt

<$1.0B 554 126 1,491 16 35 176

$1.0B - $25.0B 11,045 1,412 3,752 405 297 404

$25.0B - $100.0B 6,330 1,800 - 935 1,500 960

>$100.0B 94,331 64,137 30,000 32,984 710 24,775

Common Preferred TARP Preferred TRUPS Subordinated Debt Senior Debt

Capital Raising in 2009 By Institution Asset Size ($MM)


Market access degraded, especially for ‘micro-cap’ and smaller

Capital: equity market access degraded

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Internal capital growth depends upon earnings retention

Capital: growth relies on internal equity retention

Source: Janney Montgomery Scott LLC

11.67% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0% 90.0%0.25% 3.75% 3.33% 2.92% 2.50% 2.08% 1.67% 1.25% 0.83% 0.42%0.50% 7.50% 6.67% 5.83% 5.00% 4.17% 3.33% 2.50% 1.67% 0.83%0.75% 11.25% 10.00% 8.75% 7.50% 6.25% 5.00% 3.75% 2.50% 1.25%1.00% 15.00% 13.33% 11.67% 10.00% 8.33% 6.67% 5.00% 3.33% 1.67%1.25% 18.75% 16.67% 14.58% 12.50% 10.42% 8.33% 6.25% 4.17% 2.08%1.50% 22.50% 20.00% 17.50% 15.00% 12.50% 10.00% 7.50% 5.00% 2.50%1.75% 26.25% 23.33% 20.42% 17.50% 14.58% 11.67% 8.75% 5.83% 2.92%

Dividend Payout Ratio (%)

ROA

(%)

Rate of Growth Supported by Equity Retention at 6% Constant Equity/Assets

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Secular Trend

Tolerances are small in low growth environment

Margins remain under pressure

Fee sources under attack

Internal controls must tighten in response to demanding operating conditions

‘Big Bank’

risk management systems become ‘best practices’

Cyclical Factors

Regulatory pendulum swings to full vigor

Governance issues take higher profile (SarbOx

and fiduciary law developments)

Public relations demand high resolution

Control

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Tolerances are small in low growth environment

You must manage the details all day every day

Margins remain under pressure

Pricing degradation is permanent –

find a niche where you can

Fee sources under attack

Populism and consumerism go hand-in-hand and marry in post-recession scenarios

Internal controls must tighten in response to demanding operating conditions

While you must retain marketing momentum

‘Big Bank’

risk management systems become ‘best practices’

How can you efficiently implement enterprise risk management?

Control: secular factor response

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Regulatory pendulum swings to full vigor

Position statements from Washington may not jibe with examination outcomes

Governance issues take higher profile (SarbOx

and fiduciary law developments)

Financial statement certification is serious

Prudential management is serious

Public relations demand high resolution

Say only what you mean to say

Be able to defend everything that you say

“Never write if you can speak; never speak if you can nod; never nod if you can wink”.-attributed to Martin Michael Lomasney (December 3, 1859 -August 12, 1933), Boston politician

“never put it in email”-

attributed to Eliot Laurence Spitzer (born June 10, 1959), New York politician

Control: cyclical factor response

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Between Deer Island, N.B. and Eastport, Me


‘Old Sow’ – the largest whirlpool in the western hemisphere

Watch out, you sport kayakers!

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Janney Montgomery Scott Contact Information

JMS Contact Telephone Email LocationCliff Booth, Head of FIG Practice 410-583-5992 [email protected] Baltimore / Philadelphia

Ed Losty, Head of Bank Practice 757-564-9737 / 215-665-4491 [email protected] Virginia / Philadelphia

Roger Powell, Managing Director 410-583-5993 / 215-665-6687 [email protected] Baltimore / Philadelphia

Jay Junior, Managing Director 215-665-4497 [email protected] Philadelphia

Documents

Rocks And Whirlpools Bank Strategy 2010 V 2