Without the partnership that Community Bank of Tri-County has with the Federal Home Loan Bank of Atlanta our ability to compete and survive as a community bank would be problematic at best.

As a $193 million-asset community bank we have come to realize that deposit funding can no longer be counted on as a viable resource to meet rising loan demand. Although we still have toasters in the supply room, they no longer attract deposits. This same realization is unfolding in other parts of the country as well.

Simply look at the growth of mutual funds compared to the growth of insured deposits over the last decade.

Mutual funds grew from just under $1 trillion in 1990 to $5 trillion in 1998! At the same time, bank deposits topped out at only $4.1 trillion.

Furthermore, capital levels of banks and thrifts are growing faster than deposits. What this trend leads to is a serious under-leveraging of net worth, which feeds into declining returns on equity and lower stock values for shareholders.

Though financial institutions are all different in their business plans, one measurement is constant. We all have Camels ratings assigned by our regulators. The first letter of the Camels rating is "C" for capital.

People often ask: What is the optimal level of capital that a banking institution should maintain? The mergers and acquisition experts will tell you that if you have too much capital it is of little incremental value. Further, having too much capital is a symptom of under-leveraging and insufficient earnings.

At Community Bank, deposit growth has been outstripped by our strong earnings growth; therefore, we have to leverage our capital with Home Loan bank advances to bring our net worth to an optimal level. In our business plan, a residential portfolio of specific duration fits our bank. It acts as a platform to leverage capital to fund both residential and nonresidential community development loans.

Here's an example of our strategy at work with Home Loan bank advances:

We recently financed a building to house a $2.4 million university satellite facility by collateralizing residential loans for advances. The university loan was matched with terms of the advance and provided an earnings spread that drops to our bottom line.

Because the advance was customized to the lease, the mismatch premium normally associated with deposit funding was eliminated. We, a small-town community bank, were the successful bidder among large, out-of-state banks and brokerage firms.

That accomplished four things for our Camels rating: Our capital was profitably leveraged, asset quality was improved, earnings were augmented, and the overall bank portfolio's sensitivity was improved.

Here's another example of the opportunities that we can pursue when we use the Home Loan advance window:

We are currently bidding on a $1 million financing for a firehouse in our county. The asset quality is of the highest level.

By using the Home Loan bank's community investment advance program, we can again match the municipality's borrowing to the terms of the advance, gaining spread by eliminating the match-risk premium associated with deposit funding.

Further, the markup on community investment advances is so narrow that the final rate to the municipality competes favorably with deposit funding and makes our bid very attractive.

Another letter in our Camels rating is "L" for liquidity. The fact that the Home Loan bank system exists makes liquidity management much easier. The unused capacity in our lines of credit allow an efficient use of liquidity levels that add to earnings rather than dragging them down. I might add that our regulators have firmly endorsed the fact that the Home Loan bank is our lender of first choice.

Aside from the Camels criteria, our partnership with the Home Loan banks also helps us attain a strong community reinvestment grade, which is public information.

We keep this as high as we prudently can, using a variety of direct investments as well as programs such as the Atlanta Home Loan Bank's affordable-housing program.

Community Bank has used this program several times to support our community reinvestment activities through grants and lending programs to low- and very-low-income housing candidates. It has given us the ability to help community housing groups make projects viable that would otherwise be difficult to fund.

These examples illustrate how successful the Home Loan bank system can be as the metamorphosis of the community banking industry unfolds.

With the cooperative design of the system, correspondent relationships add benefit by mutual activity that is noncompetitive.

The Atlanta Home Loan Bank's motto is: "We give communities credit." This helps my bank make a reality of our motto: "the way banking was meant to be."

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