Intersession Project For the Class of 2019 BANK PERFORMANCE ANALYSIS/FUNDING Session

Transcription

1 Intersession Project For the Class of 2019 BANK PERFORMANCE ANALYSIS/FUNDING 2017 Session

2 P L E A S E N O T E For any questions regarding the Funding/Bank Performance Analysis intersession project contact: Joe Olson jolson@farin.com ext For any administrative questions, contact the Graduate School of Banking staff:

3 Project Completion, Extensions & Penalty Points INTERSESSION PROJECT POLICIES Graduate School of Banking (Updated July 2017) Students may collaborate with fellow classmates when completing GSB projects to seek advice and/or to discuss ideas. However, students must submit their own final project that is unique to them (i.e. data interpretation, summaries, recommendations, etc.). If any student(s) is/are found to have plagiarized any or all of another student s project (or submits a nearly identical project), all students involved will automatically receive 50 penalty points, will be required to resubmit an acceptable project, and will be disqualified from receiving any honors recognition upon graduation. If deemed necessary, GSB administration may also enforce additional disciplinary action up to and including removal from the program. Key items and policies related to GSB Intersession Projects: Projects must be submitted on or before midnight of the due date to avoid penalty points. Students can receive one 30-day extension per project without penalty. A limited number of extensions may be requested past this 30-day free pass and will be granted in 2-week increments to the next 1 st or 15 th of the month. Penalty points will be assessed based on the following schedule: o 1 st extension: project rec d w/in 30 days of original due date 0 penalty points o 2 nd extension: additional two weeks past 1 st extension 5 penalty points o 3 rd extension: additional two weeks past 2 nd extension 10 penalty points o 4 th extension: additional two weeks past 3 rd extension 20 penalty points o 5 th (FINAL) extension: project must be received by June 1 30 penalty points Students needing an extension of any due date (including the 1 st extension) must complete the extension request form found on the Intersession Project website on or before that due date. For each project extension request a new extension request form must be submitted. All projects must receive a grade of Acceptable or better in order to return for the next GSB Session. Projects receiving the grade Needs Improvement will be returned to students for correction and resubmission; resubmits are typically due within 30 days unless otherwise indicated by GSB administration. June 1 is the final acceptance date for all projects. If a student has any outstanding project(s) as of June 1 they will be cancelled from the program and will not be allowed to attend the 2018 Session. CLASS OF 2019 INTERSESSION PROJECT DUE DATES Assigned at the 2017 GSB Session GRADING INFORMATION You will receive a word grade. The word grade will translate into points recorded in your student record as listed below. 1 st Letter of Your Last Name A - E Project Due Bank Marketing Project Due F - L BPA/Funding LPM-Yr 1 M - R LPM-Yr 1 Project Due BPA/Funding LPM-Yr 1 Leadership Beyond Management Leadership Beyond Management Bank Marketing Project Due Leadership Beyond Management Bank Marketing BPA/Funding Exceptional (recorded as 100) Excellent (recorded as 95) Superior (recorded as 90) Very Good (recorded as 85) Good (recorded as 80) Acceptable (recorded as 75) Needs Improvement Under 70 (requires resubmission) S - Z Leadership Beyond Management Bank Marketing BPA/Funding LPM-Yr 1 NOTE: All projects must be submitted and receive a grade of Acceptable or better prior to your return to the next GSB Session.

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5 Graduate School of Banking 2017 BPA and Funding Tracks Intersession Project The intersession assignment for the BPA and Funding Tracks will be an exercise in developing a portion of a core funding strategy for your institution or an institution of your choice. At school we will show you how to complete this exercise and introduce you to the model you will use to compile the information for the project. In Thursday of week two you will spend a portion of the day in a lab where we will help you get a running start on this project. Be sure to bring your notebook computer to lab. You should also receive an asking you to gather some data prior to the school and bring it with you so you have something to work on in the lab. The information you need to complete this project is also discussed later in this document. Project Scope As we attend GSB in the summer of 2017, we find ourselves emerging from the bottom of the rate cycle with prospects of a rising rate environment. A combination of the fact that many institutions have experienced asset quality problems combined with funding costs that may have fully reacted to market rates but loan yields that haven t is challenging financial institution net incomes. With rates as low as they are some of the segmentation strategies discussed in class will have little effect as your cost of funds is likely to already be well below 100 bp. So we d like you to focus on your pricing strategy for the first 200 bp increase in market rates. You are not required to model a 200 bp rising rate environment. But it is the default (easily overridden) on the model you will be using. It is our hope that your presentation of your paper and recommendations to bank senior management will have a positive impact on your institution s ability to manage its funding costs now and in the next rising rate environment while meeting your goals for funding growth. Beyond cost of funds management, deposit growth will be one of the greatest challenges facing bank management for at least the next decade. An effective deposit pricing process will greatly improve your institution s chances of meeting its funding goals while effectively managing its cost of funds. As part of this project you will do the following. 1. Give a brief overview of your institution s history and challenges. The purpose of this portion of the exercise is to give the project grader a sense for the culture of your institution, its history, and some of the challenges it faces. 2. Use some of the materials taught in Bank Performance analysis along with quarterly call report data from SNL to discuss recent trends in your institution s performance. The purpose of this portion of the exercise is to give you and the grader a sense for the financial context in which your core funding strategies are being developed. For example if you have been shrinking or restricting growth to maintain adequate capital while working through an asset quality problem, it 1

6 makes no sense to model strategies aimed on accelerating deposit growth. You should be working on strategies aimed at reducing your cost of funds while holding onto the deposits you have in order to open up your net interest margin. 3. Use a Simple Capital Planning Model to develop a 5 year capital plan. The purpose of this exercise is to take what you learned in reviewing your banks performance history and extend it in looking at the future. It should also give you a sense for the deposit growth goals you hope to achieve in the funding section of your paper. 4. Evaluate the trends of deposit growth in your deposit market or markets, your own deposit growth in those markets, and the trends in your market share in those markets using FDIC branch market share data. The purpose of this portion of the exercise is to give you and the grader a sense for whether your market is growing or shrinking as well as how you are doing from the perspective of market share trends in your market. 5. Select one of the four consumer deposit sectors to focus on in your analysis: checking, savings & MMDA, short-term CDs, and long-term CDs. We recommend you choose a sector in which your institution has potential for significant improvement rather than a sector where effective pricing strategies are already in place. 6. Do a deposit product audit that shows the deposit products your institution offers in the sector, their terms and conditions, and the total balances in the accounts. This will lay out your funding structure, balance distribution and pricing in the sector. 7. Evaluate your institution s competitive position (products and pricing) in your chosen sector by comparing your product offerings and pricing to that of your competitors using survey data. The competitive analysis will give you a sense for how you stack up competitively and allow you to put the actual current pricing strategy into writing. 8. Model at least two alternative pricing scenarios you would employ in the sector for the first 200 bp increase in market rates in the next rising rate environment. Each scenario will compare two strategies. These two scenarios should make sense in the context of your recent performance, competitive position, and capital plan. For each scenario, you will model two strategies to see which is the most cost effective. 9. Recommend to management what your institution s pricing strategy should be in this sector in the next rising rate environment based on the results of your modeling. In the past, most senior managers have been impressed with GSB student methodology and approach. In over 50% of the past projects, one or more recommendations have been forwarded to pricing or ALCO committees for action. We ve had CEOs get back to GSB after project presentations and indicate this one project more than paid for three years of banking school. What We ll Provide We will support this intersession project with the following resources: 2

7 1. Four lectures, one pre-session and three at the school, in which we will lay out the process for developing effective funding strategies. 2. An Excel model that can be used to perform marginal cost calculations and perform a number of other key tasks to provide exhibits to support your paper. This model was developed specifically for use at the school and is free. 3. A lab session in the second week of the school where you will have an opportunity to learn about the portions of the project and get a running start while at the school. 4. A Microsoft Word Strategy Recommendations document structured for presenting your findings and recommendations. 5. A completed Strategy Recommendations document for case institutions providing an example of how a completed paper might look. This document will include analysis for two sectors, short-term CDs and savings/money market so you can see how a study might be approached for a CD sector and a for non-maturity deposit sector. You ll only be asked to do analysis on one sector. 6. Access to SNL, which you can use in the financial trend analysis portion of the exercise. 7. A support line you will be able to call should you encounter any problems with the model or your project while you are working with the intersession project. Selecting Your Institution and Market The focus of the project will be on an institution s competitive situation and pricing strategies in one or more geographic markets. What s a Market? A geographic market could be a city, a county, multiple cities or counties, a metropolitan statistical area or even a set of zip codes. Many small institutions may serve only a single market, even though they may have multiple locations (branches) in the market. The key question you need to ask yourself in determining whether your institution serves one or more markets is whether the institution could develop different deposit pricing strategies in each market. If an institution has two branches in a small community, it would be nearly impossible to have different rates in each branch. However, if the institution serves two small towns 25 miles apart, it may be very feasible to set different rates in different markets. Keep in mind also that you do not have to price differently in one market than in another in order to segment geographically. A product may be aggressively marketed in one market and be positioned as a stealth product in another. A grand opening CD special might be offered in one market but not another. Your institution does not need to be executing different pricing strategies in each market currently for you to study multiple markets. You merely need to have the potential for executing differently in each market. Here are some of the factors that increase the potential for an institution deciding to operate with different pricing strategies in one market than another. The more of the following criteria your individual markets meet, 3

8 the greater the potential for developing different pricing strategies in one market than another. 1. The markets are geographically separated by either distance or some barrier to population mobility between markets (interstate highway, river, mountain range, etc.) 2. There is limited population mobility on a day-to-day basis between the two markets. 3. Different advertising media might be used in marketing to the first as opposed to the second market. Note that direct mail can be targeted at a specific zip code or even a postal route. So the fact two markets are covered by the same radio and television statements and newspapers doesn t preclude geographic segmentation. 4. There is a significant difference in population demographics. 5. Your market share is significantly different in one market as compared to the other. Ideally in this project you will work with between one and three markets. You are only required to do the analysis for one market. If you choose to analyze two or more markets, you will receive extra credit on your paper. If you choose to go beyond three markets, the amount of data you will be required to gather and the amount of analysis you will be required to perform will increase significantly. Choosing your Institution and Markets For most of you, choosing the institution will be easy. Your institution will be the institution you work for. Your project will focus on the deposit pricing process and strategies for your institution. Those of you that work for large financial institutions or large multi-bank holding companies will want to study a subset of your organization so that your focus will be on no more than three markets. Here are some examples of how to define an institution and its markets. You work for a small bank with one or more branch locations in a small community. Your institution will be your bank, and the single market studied will be the community it serves. You will define the geographic area of the market as being the city, or the county, or counties you serve. You work for a small bank with branches in two adjacent communities. The communities are so close together you traditionally didn t feel it is feasible to price differently in one city than the other as there is no geographic separation, the communities use common advertising media, and there is significant population mobility between communities on a daily and weekly basis. But you could target a different direct mail campaign at community A as compared to Community B. Your institution will be your bank and under a single market option, your single market will be made up of the two cities or the county or counties in which they are located. Or your institution will be your bank and under a multiple market option, your two markets will be made up of the two cities or counties in which they are located. The market definition for each market will be the city or county served by each of your locations in each of your two markets. 4

9 You work for a small bank that has branched 40 miles down the road into another community. There isn t a great deal of population movement between the markets and advertising media is different between the two markets. Your institution will be your bank and you will have two markets. Market definition for each market will be the city or county served by each of your locations in each of your two markets. You work for a small bank holding company with three separate banks, each serving a separate community. 50 miles separate the two closest institutions. Your choice is to either select one of the three institutions to study or to choose all three. In the second case, your institutions are the three banks, each servicing a city or county defined as its geographic area. You work for a bank in a holding company with a significant number of unit banks or geographic locations. Your bank is the institution. You will choose one or more markets to focus on. Define each market s geography using the cities or counties representing the market area. If you don t work for a bank, you ll need to choose a bank to work with. In order to obtain the data you ll need to make contact with management of the bank, explain you are doing a project for banking school and that you ll need some information from them to complete the project. Indicate that when you complete your project, you will be presenting them with the results of your study and making recommendations as to deposit product offerings and pricing. Feel free to supply them with a copy of this document so they gain a sense for the project. It will be easier to gain access to management if you choose a small local institution to work with. Also, the institution is likely to be operating in three markets or less. If you are from a regulatory agency and don t feel comfortable with discussing recommendations with the institution s management, discuss your recommendations with someone above you in your regulatory agency s organization structure. If you are an international student, you won t have access to SNL or FDIC branch market share data for your market. Please discuss your project with me at the school and we ll decide how you can best approach this project. Pulling Together Information from the Institution You will need the following information for the institution and market chosen to complete the project. 1. Financial trends analysis data covering a number of years of historical data on your institution. In class we ll demonstrate how to pull data containing all this information for your institution using SNL as a source. 2. A rate sheet listing the institution s deposit products and the rates they pay on those deposits. Get as recent a rate sheet as possible. If the institution prices differently in different markets, get a rate sheet for each market you will study. 5

10 You will be building a chart of accounts for the sector you wish to study at the same level of detail as the rate sheet. 3. Product brochures for the institution s deposit products in the sector you chose for your study. 4. You may find in a discussion with management that the institution may offer deposit products in your chosen sector that are not on the rate sheet (stealth products). You ll want to find out under what circumstances and terms and conditions these products are offered. You ll need current offering rates for these products. The institution may also allow managers or customer service employees to match competitor rates for individual customers or make pricing exceptions subject to some limit (25 bp for example) in order to hold onto balance. You ll want to learn about how this discretionary pricing works at the institution. 5. Competitive survey information showing competitor rates for roughly the same data as the rate sheet. Most institutions contract with a rate survey firm like Informa, Market Rates Insight, Datatrac (SNL), or Rate Watch to survey what they consider to be their most important competitors for deposit products. If your bank doesn t normally conduct surveys, you might visit competitor Web sites or visit their lobbies and pick up their rate sheets. There is also survey data available in SNL. Some institutions obtain separate survey data for each market. Most institutions gather one set of survey data and use it for pricing in all markets. If you are unable to obtain survey data discuss your situation with us and we ll see how to come up with a solution. 6. Current total balances for all deposit service lines at the same level of detail as the product breakdowns on the rate sheet. Ideally, these deposit breakdowns will be available by market. You will also need current balances on deposit products no longer offered like dead CD specials. You may have some difficulty pulling the balance data together. This is not a project in accounting. If you are unable to obtain exact balances, estimates will work for our purposes and will yield satisfactory results. If you are estimating balance breakdowns due to lack of data. Please explain what you are doing in the deposit audit section of your paper. Project Resources You can download the documents referenced in this section starting at the following freshman intersession project page at the GSB Web site. GSB_2017 Funding Example.doc This is a Microsoft Word document containing the analysis and strategy recommendations for a case study institution. It is an example of a completed project. The case study document covers two of the four deposit sectors. You will only be required to complete an analysis for one of the four sectors. GSB_2017_StrategyRecommendations.doc This is a blank version of the Microsoft Word document for you to use in writing up your analysis and recommendations. GSB_2017_Funding_Intersession.doc This is an electronic version of this intersession project. 6

11 GSB 2017_Funding Spreadsheet.xls This is the Excel worksheet that can be used to produce marginal cost calculations and other exhibits. GSB_2017 Market Share Worksheet Instructions.Doc This document contains instructions on pulling market share data from the FDIC Web site. Completing the Project This project has six parts 1. Selecting your institution and market(s) A discussion of how to do this is earlier in the document. 2. Selecting the sector you wish to study. We suggest you converse with senior management at your institution and identify the sector the institution is having the greatest difficulty in meeting goals. You will choose one of the following sectors: Checking, savings/money market, short-term CDs, long-term CDs. Because the CD sectors and savings/money market sectors have the greatest percentage of rate sensitive customers, we recommend you focus on one of these sectors unless you have a compelling reason to focus on the checking sector. 3. Gathering the data The information needed to complete the project is discussed earlier in this document. 4. Entering data into the GSB 2016 Funding Spreadsheet.xls - The Excel model contains complete instructions on how to enter data into the various sections of this model. You can also call our support line for support on this model if you encounter difficulties. 5. Writing up your strategy recommendations - Instructions on completing the Strategy Recommendations document are contained in the Pricing Instructions document including how to cut and paste tables and charts from the Funding Spreadsheet into the Strategy Recommendations document. In addition, the Case Study Recommendations document is a completed Strategy Recommendations document for a case study institution. 6. Presenting your recommendations This is a crucial part of this exercise. This project has the potential to have a meaningful effect on your institution s deposit pricing process and a meaningful effect on the relationship between its cost of funds and demand for deposit products. The next section will discuss this part of the project. Presenting Your Findings and Recommendations In this project, you are evaluating alternative pricing strategies for the sector you have chosen for the next 200 bp of the next rising rate environment. You will be making recommendations to management on what your strategy should be in that sector in the rising rate environment. You have a number of options in presenting your findings and recommendations. 7

12 Present your findings to an individual above you in your organization s organization chart. Ideally, you ll choose a person that plays a role in your institution s deposit pricing decisions. Present your findings to the institution you chose to study s deposit pricing committee. If this is feasible in your situation, this option is preferable to the previous option. Involve your deposit pricing committee in your analysis and recommendations. Yes, you have our permission to get others involved in the final recommendations made as part of your project. If it is feasible in your situation, this is the best of the three options as the findings and recommendations coming out of your study are most likely to be adopted in the institution if they come from a group of people. If you do not work for the bank you are studying, you have the option of making the presentation to an individual above you in your employer s organization chart or to management of the bank you studied. Ideally you would choose the latter of the two options. But if you work for a regulatory agency, you may not be allowed to pursue that option. What Must Be Submitted A completed project should contain two documents: 1. A completed Strategy Recommendations document containing your analysis and findings. 2. A completed discussion of the results of your presentation. The presentation summary document you need to complete and submit begins on the following page. Confidentiality Issues Occasionally, a student raises the issue that they are being asked to supply confidential information and are reluctant to do so. In some cases, in their paper, they have either concealed the name of the institution and/or faked the data explaining that they do not feel comfortable supplying real data or identifying the institution. This raises two issues in grading a paper: 1. Was the confidentiality card played to allow the student to fake the entire paper? 2. Can claims in the paper that limit the scope of the paper be verified? We have hundreds of clients that regularly supply us with confidential financial data for use in making deposit and loan pricing decisions and in asset-liability analysis. We fully understand the issues relating to handling and disclosing confidential financial data. We are happy to sign non-disclosure agreements when necessary. If you have issues relating to confidentiality of data being submitted as part of this intersession project, please call our support line and discuss the issue with us. We should be able to come up with an acceptable solution to your concerns. Primary Model Support Person If you have questions relating to use of the models, contact: 8

13 Joe Olson Farin & Associates x4243 Results of Presentations of Findings The following document needs to be submitted with your paper. 9

14 Results of Presentations of Findings Institution Name: Date: Period Covered by Study: Document Author: Study Team Members: Discuss who the findings were presented to and why the person or persons were chosen Discuss what came out of the presentation To be completed by the person or a team member from the team to whom you presented your findings Name: Position: Comment on the presentation and recommendations Signature: 10