President’s Letter

Dear Chesapeake Chapter Members:

One of the roles of your Chesapeake Chapter Board of Governors is to stay in contact with the RMA member banks in our area and in particular with the Senior Associates of those banks. What we find too often is that many of our associate members think of RMA only in terms of The RMA Journal and the RMA Annual Statement Studies. RMA headquarters offers so many more valuable services, including educational and training programs taught on site and via audio conferences and webcasts. I remind you that RMA has begun to offer programs that go beyond its traditional area of credit risk and into the areas of operating and market risk as well RMA can provide a well-rounded training program for anyone looking to have a successful career in risk management.

To complement and supplement the programs offered by RMA headquarters, your Chesapeake Chapter seeks to develop programs that seize on the important banking topics of the day Already this fall we have held a panel discussion on the new revisions to the bankruptcy laws and have hosted an OCC official speaking on his agency’s studies of non-traditional mortgage products and what regulators might be looking for in future examinations with respect to these products In 2006, we will again be sponsoring (in separate events) or popular regulators and bank presidents panels, and in April we will be hosting a self-explanatory program, “Hot Sales From Cold Calls”.

I want to remind our local members that the Chesapeake Chapter is your RMA chapter. We want to provide local programming that appeals to you, our members. Your Board of Governors will to continue to call on the Senior Associates at our member banks to learn what you want from RMA. Which RMA courses will help you to meet your training needs? What current risk management topics do you want to see discussed at local programs? Which locations and times make it the easiest for you to attend RMA programs? How can we better meet the needs of our members who live and work outside of the Baltimore-Washington corridor?

I invite you to contact me directly at Daniel.herr@mercantile.com or 301-745-5838
with your ideas, suggestions and questions. You can also use the “Contact Us” link in this newsletter, or you can use the “Officers” link to contact a Board member that you know personally. I look forward to seeing you at RMA events and look forward to meeting many of you.

Daniel L. Herr
The Fidelity Bank

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Understanding Risk-Based Capital Rules

What is this Basel I, IA, and Basel II all about?

First in a Series of Articles

Let’s start with some background.
Basel 1. The current U.S. risk-based capital rules, adopted in 1989, are based on the “International Convergence of Capital Measurement and Capital Standards” (the 1988 Capital Accord), which is also known as Basel I, developed by the Basel Supervisors Committee (BSC). Advance Notice of Proposed Rulemaking (ANPR) outlines the potential revisions to the U.S. risk-based capital rules for banking organizations.

Under the Basel I framework, banking organizations were required to maintain regulatory capital against not only on-balance sheet exposures, but also, more importantly, off-balance –sheet exposures. All exposures were assigned to one of four broad categories of credit risk, which carried minimum capital charges ranging from zero percent to eight percent.

Basel IA. The four US federal banking agencies (the FRB, FDIC, OCC, and OTS, collectively the “Agencies”) published an Advanced Notice of Proposed Rulemaking “(ANPR”) concerning changes in the risk-based capital rules, commonly referred to as “Basel 1A”, that are designed to potentially reduce the risk capital requirements of the vast majority of US banking institutions. Comment period for the ANPR on Basel 1A ends 90 days after its publication in the Federal Register (which was October 6, 2005). The Agencies then anticipate publishing a proposed Basel 1A, along with a proposed Basel II in the first quarter of 2006. The Agencies are seeking broad input from the banking industry on how to develop the Basel 1A Framework.

Basel II. The largest, international US banking institutions are anticipated to adopt a very sophisticated approach to capital risk-weighting generally referred to as Basel II. These “core” US banking institutions (Basel II Banks) are expected to initially number between 20 and 40 and have devoted substantial resources and funds putting in place the data gathering and analysis systems as well as the risk management processes and procedures, needed to implement that risk rating regime. However, a recent study, known asQ1S4 indicates Basel II Banks generally are expected to enjoy materially reduced risk capital requirements when Basel II becomes fully effective in the US.

Why Should Community Banks Be Concerned?
Because of the reduction of risk capital Basel II affords the largest US Banks, members of Congress and the Agencies, and the majority of the US banking institutions have expressed significant concern that the Basel II Banks will gain a substantial competitive edge over the approximately 9,000 US banking institutions to which Basel II will not apply (the Basel 1A Banks). This competitive advantage could result in Basel II banks operating more profitably than and more easily and rapidly acquiring, Basel 1A banks. As a result, the Basel 1A ANPR seeks to increase the risk sensitivity of the capital rules applicable to Basel 1A Banks and thereby reduce the risk-weighting edge the Basel II Banks are expected to enjoy over the Basel 1A Banks. It should be noted the ANPR makes clear, unlike the significant requirements imposed on those Banks selecting Basel II, the Agencies are very focused on not imposing significant additional burdens on banks implementing Basel 1A. The Agencies believe that the Basel 1A Banks should be able to implement the changes outlined in the ANPR using currently available data, and specifically seek comment as to circumstances where Basel 1A Banks disagree with this assumption.

Specific 1A Proposals include:

• Increase Number of Risk –Weight Categories – currently there are 5 –the ANPR proposes to add 4 new categories 35%, 75%, 150% and 350%
• Use of External Ratings – ANPR seeks comment on broader use of external credit ratings publicly issued by Nationally Recognized Statistical Rating Organizations (NRSROs) to assign risk weights
• Expand Recognized Collateral/Guarantors
• 1-4 Family/Multifamily Mortgages –Currently 1-4 family mortgages generally are risk weighted at 505 and multi-family at 100%. The ANPR proposes varying the risk weight of 1-4 family 1^st mortgages based on the loan to value (LTV) ratio of the mortgages
• Other Retail Exposures – For example consumer and auto loans, the ANPR asks whether the use of borrower credit ratings, LTV ratios, or any other methodology may best serve the dual goals of increasing risk sensitivity without causing undue burdens
• Short-Term Commitments – ANPR suggests a new capital charge by applying 10% credit conversion factor on commitments less than one year.
• Past Due Loans –Increase in the risk capital charge for exposures that are 90 day or more past due or placed on non accrual
• Commercial Real Estate – ANPR proposes to increase risk capital weighting for certain commercial exposure i.e. acquisition, development and construction loans
• Small Business Loans – In response to certain industry concerns, ANPR suggests a lower risk weight
• Early Amortization – ANPR suggests a flat conversion factor of 10% or an approach based on level of excess spread
• Basel 1A Application –Agencies seek comment on whether banks should be able to retain some or the entire current capital regime even if Basel 1A is implemented and how to minimize additional regulatory reporting and related burdens that Basel 1A would impose

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2006 Calendar Shaping Up

CCRMA is hosting a number of events in the new year. Starting off the year, we have a Young Financial Professionals Happy Hour, two RMA co-sponsored seminars and a President’s Panel.

January 12 - YFP Joint Happy Hour with MACPA, Mt. Washington Tavern, Baltimore, MD
5 - 8 pm; Cash bar at happy hour prices; registration fee of $10 covers munchies.

February 27 - Intermediate Real Estate Lending, Wachovia, Baltimore, MD

March 23 - Bank Presidents Panel Presentation, Tremont Grand, Baltimore, MD

March 27 - Real Estate Developer Financial Statement Analysis I, Wachovia, Baltimore, MD

April 20 - Cold Call Seminar, Licnthicum, MD

June - Annual Regulators Panel Luncheon, Baltimore, MD

For more details and registration, visit the CCRMA website

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Boost Your Career with Certification

Apply through Feb. 3, 2006 to take the RMA-CRC exam during the next testing window, March 1 - April 28, 2006. All you need is at least 3 years’ experience.

Whether you're a lender, credit officer, credit analyst, credit risk manager, or loan review officer with RMA's new credit risk certification you can:

* Validate your credit risk skills.
* Advance your career.
* Capitalize on the many opportunities for continuing professional education from RMA.

In today's rapidly changing financial services industry, you need practical, day-to-day knowledge that will help you excel in your profession. You need the latest skills—skills that are current and complete. And you need the demonstrated ability to serve a diverse base of clients.

Plus, you need all of your knowledge, skills, and abilities to be validated by a respected organization like RMA. Read more about this exciting new opportunity at RMA’s website.

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2005 RMA Annual Conference

Over 600 members from around the country attended the RMA Annual Conference in Washington D.C. The Chesapeake Chapter earned Gold Status Award and the Chapter Newsletter won First Place. Thanks to all those who continue to make this Chapter successful through their participation! The Chapter was well represented and provided the volunteers to assist with the conference. Special thanks to David Miller, Kathy King and Cheryl Dahut for their exceptional work on planning and organizing the volunteer efforts!

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RMA's Headquarters Moves

With the expiration of their lease after 18 years, RMA relocated to larger office space one block west at 1801 Market Street, on September 17, 2005. The additional space provides RMA ample room for continued growth. All fax, phone and email addresses remain the same. Here’s their new mailing address:

The Risk Management Association
1801 Market St., Suite 300
Philadelphia, PA 19103-1628

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Welcome to Independence Federal Savings Bank

Founded in 1968, Independence is primarily engaged in 1^st mortgage and student lending programs. Their headquarters are located at 1229 Connecticut Avenue NW, Washington DC, with 4 other locations. The firm is listed on NASDAQ, trading symbol IFSB. Additional information is listed on the website: www.ifsb.com and our CCRMA Senior Associate is William Fuller, Chief Credit Officer.

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Welcome New Members

Keith Arnold
Senior Loan Review Analyst
National Cooperative Bank

Devin Blum
Commercial Loan Officer
Preferred Business Xchange LLC

Bart Boland
Vice President
The Columbia Bank

Ronald Brezler
Credit Analyst
Hagerstown Trust Company

William Brooks
VP & Corporate Risk Analysis Manager
Provident Bank of Maryland

Helen Canlas
Chief Auditor
National Cooperative Bank

William Carroll
Vice President
Maryland Financial Bank

Aissata Cisse
Credit Analyst
Chevy Chase Bank FSB

Thomas Drake
Vice President
Howard Bank

Delroy Elleston
Credit Analyst
Preferred Business Xchange LLC

Monica Fisher
Senior Account Manager
National Cooperative Bank

William Fuller
Chief Credit Officer
Independence Federal Savings Bank

Loren Geisler
Executive Vice President
Monument Bank

Diane Hahn
Business Consultant
Maryland Small Business Development Ctr

Mark Hiltz
Chief Risk Officer
National Cooperative Bank

Byron Kittler
Credit Analyst
Preferred Business Xchange LLC

Holly Klima
Credit Analyst
The Columbia Bank

Judith Ledbetter
Portfolio Supervisor
National Cooperative Bank

Suzanne Liker
Loan Review Analyst
National Cooperative Bank

Ellen Lytton
Manager/Information Center
Overseas Private Investment Co

Raj Mehra
SVP& Chief Financial Officer
RLJ Bank

Michael Metz
Corporate Relationship Officer
Hagerstown Trust Company

Carla Nealy
Vice President
Independence Federal Savings Bank

Alex Roth
Federal Railroad Administration

Shanton Williams
Monument Bank

Wanda Wright
Senior Credit Officer, SVP
BB&T

Kip Yego
University of Maryland

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