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Alco reporting best practices community banks 2013

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ALCO & Fair Value Reporting: Community Bank Best practices describes how community banks can meet and exceed bank regulatory requirements for an action-oriented ALCO

ALCO & Fair Value Reporting: Community Bank Best practices describes how community banks can meet and exceed bank regulatory requirements for an action-oriented ALCO

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  • 1. ALCO & Fair Value Reporting: Community Bank Best Practices, 2013 (includes sample reports) Fred Poorman Jr., CFA, Managing Principal Lawrence Poppert III, CPA, Managing Principal Michael Van Zandt, CPA, Principal mvanzandt@bankriskadvisors.com 1
  • 2. introduction Welcome sessions is interactive • please ask questions • quick introductions • please note your title & functional responsibilities • what issues you would like addressed • we will note how the co-sourced process can help with your function • loan example: • map your loan rating process to market- based approach • quarterly updates on market spreads by rating grades, FICO/LTVS, etc. • stress-testing based on ratings migration, spread/LTV/FICO changes, etc. 2
  • 3. Introduction Welcome session overview • process issues • model inputs • model processing • outputs & outcomes • available reports • annual ALCO reporting calendar for regulatory compliance • view risk & return on an integrated basis • other issues • liquidity risk • credit risk • enterprise risk 3
  • 4. introducing our firm • Market/IRR risk • Credit risk • Liquidity risk • Model risk each business segment has: • Principal w/ CFA or CPA designation • 3 of 4 have Quantitative Director w/ PhD and practical experience • Next year: Enterprise risk People • Principals average 25+ years experience • Consultants average >25+ yrs. experience in academia, audit, bank, regulatory, software, and on Wall Street • Backgrounds include ”C” level bankers, CPAs, CFA, and PhDs Processes • process summaries are checklist-driven prepared by Big 4 auditor. • detailed process documentation; i.e. 200+ pages for ALCO reporting. • certain processes & deliverables have been reviewed/validated by 3rd parties. 4
  • 5. firm is moving into proprietary analytical products: • Core Deposits analyses • Loan prepayment analyses • Liquidity risk reporting, scenario analysis, and stress testing • Integrated financial risk stress-testing meets client and international market needs systems licensed • Bloomberg for investment analytics and data • Moody’s (formerly Markit) for structured cash flow (CMOs & ABS) analytics. • SAS & JMP for statistically-driven behavioral loan and deposit analyses • Secure, encrypted SharePoint for collaboration and doc transfer • ZMdesk for ALCO, Economic Capital, Fair Value, and Credit Risk reporting and analyses, OAS- based valuations and stochastic analyses. “Tops down” loan stress-testing. • ZMnet powers www.onlineALMnetwork.com a cloud-based solution since 2006. • Sageworks Financial for ALLL preparation, review and validation. “Bottoms up” loan stress- testing and concentration analysis. 5
  • 6. firm is adding Credit division: • CCR engagements • EC engagements • Loan grading, pricing, and FTP • Rollout ZM credit capabilities to more banks • Have Quant PhD from DB & NYU • Principals to be announced upon completion of FDIC assignments • Integrated financial risk stress-testing proprietary product in 2013 more stuff • business mix: • 80% mid-size banks • Begin marketing to community and large- size banks in Q4 2012 • 95% domestic • FL is largest domestic market • active in European, Mid-Eastern & Asian markets via presentations & publications • Proposal pipeline includes banks in Canada, France, Holland, India, Indonesia, Israel, and Scotland • new website by month-end • onlineALM processing capabilities quadrupling; in process now • only firm doing parallel benchmarking validation in mid-size bank market with a “comprehensive” ALM model 6
  • 7. different U,S. regulators have different views of risks different international regulators have different views of risks Basel III is attempt to ensure comparability on both a national and international basis This applies to risk and Capital. 9 Risk types (OCC/Treasury) • Credit risk • Interest Rate risk (market) • Liquidity risk • Price risk (market) • Foreign Currency Translation risk (market) • Transaction risk • Compliance risk • Strategic risk • Reputation risk 7
  • 8. OCC focus D.C. relationships Examiner training Open & ongoing dialogue All-day training session earlier this month • OCC • Director, Market Risk • Capital Markets Specialists from 7 regional offices • Bank • CEO, CFO, Treasurer, analysts • Mortgage Bank • CEO, VP Capital Markets, analyst • Bank Risk Advisors • managing principal, market risk principal, sr. consultant 8
  • 9. why take an integrated view? silo risk management ignores interactions between risk types may result in risk multiplication not risk mitigation accurate financial product pricing and valuation requires an integrated approach • engagements begin with education and knowledge transfer • ongoing process • onsite training • in-person, teleconference and web conference ALCO presentations and attendance • New ALCO charter & policy • ongoing focus on integrated approach • banking & mortgage banking • risk interactions and correlations 9
  • 10. why take an integrated view? silo risk management ignores interactions between risk types may result in risk multiplication not risk mitigation accurate financial product pricing and valuation requires an integrated approach • the traditional franchise hedge of mortgage banking is that origination/sales & servicing are natural value hedges • rates increase • origination/sales value declines • servicing value increases • rates decrease • origination/sales value increases • servicing value decreases • an updated franchise hedge of mortgage banking is that core deposits are natural value hedges • rates increase • origination/sales value declines • core deposit values increases • rates decrease • origination/sales value increases • core deposit value decreases 10
  • 11. co-sourcing and team approach • Bank • Bank Risk Advisors • ZMFS Bank team • ALCO • Finance • Mortgage Banking • Board Bank Risk Advisors team for your community bank • Greg Driscoll, Principal • Lawrence Poppert, Managing Principal • Michael Van Zandt, Principal ZMFS • Full-featured ALM with OAS capabilities • www.onlineALMnetwork.com • Priced @ $25,000/yr. (included) 11
  • 12. process issues • model inputs • data inputs • granular data inputs for bank • data inputs for mortgage bank – monthly: some granular some summary – annual: all granular to validate summary approach 12
  • 13. process issues • model inputs • assumption inputs • capital markets by Bank Risk Advisors, reviewed by Bank – many automated via Bloomberg – others use third parties like Level One for mortgage inputs • all other assumptions by bank & mortgage bank reviewed by Bank Risk Advisors 13
  • 14. process issues • model processing • About ZMFS • Started as Pinehurst Analytics Liability Management Systems (PALMS), a spin out from Smith Breeden – Focused on FHLBs and others – Purchased by Fiserv in 1998 – Spun out in 2003 • ZMFS – Z(hoa) M(iner) Financial Systems original clients include: » FHLBs » Broker/Dealers » Banks » Fund Managers » Bank Risk Advisors • Have expanded market presence in banks, Cus, broker/dealers. Fund managers, and consultant 14
  • 15. process issues • model processing • About ZMFS & Bank Risk Advisors • Principals and staff have worked together for 15+ years • ALMnetwork/BRA assisted ZMFS with production release of ZMnet • Quantitative Director of BRA, through his own company, wrote ZMdesk user’s manual and validated v3.5 prepayment model • Ongoing development and technology partnership • About Bank Risk Advisors’ independence • Ongoing relationship with Fiserv since 1987 • Previous beta client of SunGard/Bancware and others • Ongoing relationship with Thomas Ho Co. 15
  • 16. process issues • model processing unique two-tier architecture with: 1. ZMdesk with ALM & Trading views 2. ZMnet, seen as onlineALMnetwork (2006) • ZMnet, seen as onlineALM (2007) • ZMnet, others (2008- 2012), including Corp CUs • www.onlineALMnetwork.com • ZMnet v3.3 • Mike, who is the best in the business will demo the current implementation • www.ALMnetwork.onlineALM.com • ZMnet v3.5 – New prepayment model – Enhanced planning capabilities – Additional stress-testing and sensitivity analysis functionality • Mike will demo the new version • ZMdesk v3.5 • “Comprehensive model” with Trading & ALM views • Credit functionality (PD, LGD, transition matrices and vectors) • Mike will demo if you wish 16
  • 17. reporting Welcome report notes • proprietary ALM reports available on SharePoint • 100+ reports available @ www.onlineALMnetwork.com • reviewed with Finance/Treasury and Mortgage Banking teams • reviewed twice with ALCO, with more to come • reports used as inputs for liquidity reporting, scenario analysis, stress- testing, and survival horizon analysis 17
  • 18. reporting 18
  • 19. reporting 19
  • 20. Lots of summary reporting 20
  • 21. Lots of detailed reporting 21
  • 22. reporting pipeline ALCO report • 10 page summary • 60 pages of detailed reports online reports • >100 reports quarterly Fair Value reports • 50 pages of process and third party sources • 20 tabs of spreadsheets for review Annual ALCO calendar examples • Quarterly fair value report • Deposit sensitivity analysis for rates and attrition • Prepayment sensitivity analysis • OAS/credit stress testing • Stochastics (100 or 1000) • Basis risk • Annual/quarterly/monthly back-test • Annual budget/strategic planning analytics • Ad hoc analysis • Monthly/quarterly forecast vs. static balance sheet • Daily rate update with re-forecast and analysis (almost real-time ALM) 22
  • 23. People + Process + Systems = Best practices at a value price People • Summit NJ team from 10 years ago • Team from community and mid-size bank backgrounds Process • Documented processes provided to bank, auditors, and regulators • Training provided to bank personnel to generate reports, do “what ifs”, and create annual and strategic plans • Scalable design, including liquidity, credit, enterprise, and capital stress-tests Systems • Leading edge systems • Cloud-based ALM modeling since 2006 • Full featured ALM model included 23

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