Intersession Project For the Class of 2018 LOAN PORTFOLIO MANAGEMENT YEAR Session

Transcription

1 Intersession Project For the Class of 2018 LOAN PORTFOLIO MANAGEMENT YEAR Session

2 P L E A S E N O T E For any questions regarding The Loan Portfolio Management Year 1 intersession project, the contacts are: Primary Contact, Sections 1 and 4 George Ruth gruth_1@yahoo.com Section 2 Rob Newberry Rob Newberry rnewberry@farin.com Section 3 Tom Farin tfarin@farin.com For any administrative questions, contact the Graduate School of Banking staff:

3 INTERSESSION PROJECT POLICIES Graduate School of Banking (Updated June 2016) Project Completion, Extensions & Penalty Points YOU NEED TO STAY IN CONTACT WITH THE GSB OFFICE TO REQUEST EXTENSIONS; THEY ARE NOT AUTOMATICALLY GIVEN. FAILURE TO REQUEST AN EXTENSION ON OR BEFORE A PROJECT DUE DATE THROUGH THE GSB OFFICE MAY RESULT IN THE MAXIMUM 30 PENALTY POINTS BEING ASSESSED ON THE PROJECT NEEDING AN EXTENSION. ALL PROJECTS MUST BE SUBMITTED NO LATER THAN APRIL 15 OR YOU WILL BE SUSPENDED FROM THE PROGRAM. Key items and policies related to GSB Intersession Projects: 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. Projects must be submitted on or before midnight of the due date to avoid penalty points. Students needing an extension of any due date 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. 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 April penalty points o A reminder that all projects must be received no later than midnight on April 15. This means that projects with spring due dates have fewer extensions available. The maximum penalty points (30) will be assessed to any project received after April 15. 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. April 15 is the final acceptance date for all projects (except the Bank Management Simulation project). After April 15, students with any outstanding projects are suspended and the maximum of 30 penalty points will be given on each outstanding project. Suspended students may be reinstated when all outstanding projects are received, pending approval of the GSB administration. If a Senior student is suspended, they will not be able to submit the Bank Management Simulation project until all other projects have been received. Under no circumstance will any student projects be accepted after June 15. If a student has any outstanding projects as of June 16, they will be cancelled from the program and will be unable to attend that year s Session.

4 GSB CLASS OF 2018 INTERSESSION PROJECT DUE DATES ASSIGNED AT THE 2016 GSB SESSION COMPLIANCE with the following due dates is required of all students. If you are unable to submit your project on or before the due date, you are required to call the GSB office. Projects must be submitted by midnight on the due date. First Letter of Your Last Name Project Due Project Due Project Due Project Due A - E Bank Marketing Bank Performance Analysis/Funding Loan Portfolio Management Year 1 Leadership Beyond Management F - L Bank Performance Analysis/Funding Loan Portfolio Management Year 1 Leadership Beyond Management Bank Marketing M - R Loan Portfolio Management Year 1 Leadership Beyond Management Bank Marketing Bank Performance Analysis/Funding S - Z Leadership Beyond Management Bank Marketing Bank Performance Analysis/Funding Loan Portfolio Management Year 1 Grading Information You will receive a word grade. The word grade will translate into points recorded in your records as listed below: 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) NOTE: All projects must be submitted and receive a grade of Acceptable or better prior to your return for the next GSB Session. It is recommended that you begin work on your projects immediately. By doing so, you will find the assignment easier, the educational value greater, and the complications fewer. GRADUATE SCHOOL OF BANKING 5315 Wall Street, Suite Madison, WI

5 Inter Session Project Assignment Guide Loan Portfolio Management Year 1 August 2016 George Ruth Rob Newberry Tom Farin 1

6 Introduction The bank s loan portfolio constitutes the largest component of the bank s assets, and is the catalyst for the bank s ability to generate profits and return on equity capital. To become successful profit managers and effective stewards of the bank s capital, bank managers must understand the risk and reward inherent in the loan portfolio, and be able to develop policies and procedures balancing loan growth, profitability and risk. As a result of the Loan Portfolio Management Year 1 session at GSB, participants are required to complete an intersession project demonstration competence in understanding the concepts presented in the classroom session. This assignment guide outlines the parameters of the project and the criteria for submission and grading of the project. Loan Portfolio Management Year 1 is the first course in a two year curriculum, exposing participants to credit risk and portfolio management concepts, including portfolio risk analysis, stress testing, and loan pricing. The Loan Portfolio Management Year 1 intersession assignment presents participants with the opportunity to develop a credit risk profile of their institution and address the effectiveness of their bank s credit risk management practices. Overall Project Description The intersession project will be divided into 4 sections based upon the classroom presentations made at GSB. The intersession project will be broken down into four subdivisions and graded as follows: Section 1: Foundations History & Risk Management Philosophy, General Exposure Section 2: Stress Testing Stress Testing the Loan Portfolio and Stress Testing Segments Section 3: Loan Pricing Pricing various Loan Products and Achieving Profitability Section 4: Capstone Overall Conclusions & Credit Risk Profile Other Project Issues The following guidelines should be adhered to when writing and presenting the project to GSB: 1. The paper is to be no more than 25 pages in length (it can and has been done successfully in less); use Exhibits for data, exhibits do not count under the 25 page limit; 2. The project should be in PDF format only, with a single project copy submitted. 3. The assignment should be presented in the 4 section format explained above and in more detail on subsequent pages of this assignment guide. Deviations from the format may result in a lower grade. 4. The paper should be double spaced 5. Include a cover page with student name, bank name, and class year 2

7 Grading Criteria Your grade is the word ( exceptional, Excellent, etc.); this grade is recorded in your records as the points listed below (the highest number in the range): 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) All projects must be submitted and receive a satisfactory grade prior to your return for the next GSB Session. It is recommended that you begin work on your projects immediately. By doing so, you will find the assignment easier, the educational value greater, and the complications fewer. The Grade of VERY GOOD is considered well above average, do not expect to submit a Good or Very Good paper and receive a Superior, Exceptional or Excellent grade. Do not expect to receive extended dialogue and commentary regarding the paper content or grading, the value should be derived from completion of the paper, not the grading or commentary. The following presentation guide outlines parameters for the intersession project. Bank Portfolio Information In order to appropriately address certain sections of the intersession project, it will be necessary to become familiar with your bank s loan portfolio and the size and types of loans carried on the bank s balance sheet. Specifically Section 1 of the intersession project will require you to obtain information on the size, scope and granularity of the portfolio. There are many ways to find this information, and depending on your individual bank s reporting capability you might find it useful to obtain information as follows: 1. Internally from board of director reports, loan review, the chief credit officer, or the senior lender within the bank 2. UBPR reports, either from your bank s files or from the FDIC or FFIEC web sites 3. RC C schedules from your bank s Call Reports, either from your bank s files or FDIC or FFIEC web sites 3

8 You can obtain UBPR and Call Report info by going to the FDIC home website ( and following these steps: 1. Under Quick Links by User, click on Analysts ; 2. Under Data and Statistics, click on Call & Thrift Reports or UBPR ; 3. If you clicked on Call & Thrift Reports, click on Call Report & Thrift Financial Report (TFR) Data, on the next page; 4. One the next page; insert your FDIC certificate number. You should also put in your bank s name and address. You will need to obtain information regarding the composition of the portfolio to complete Section 1 of this project. Additionally, you will need to begin to build a credit risk profile of your bank using this information to describe the overall risk management philosophy of the management, and the effectiveness of the bank in managing portfolio risk. 4

9 SECTION 1 Credit Risk and Portfolio Management Contact for this section: George Ruth Section 1 Criteria 1 Section 1 Criteria 2 Section 1 Criteria 3 Section 1 Criteria 4 History & Risk Management, Risk Tolerance Information Gathering Exposure Management Risk Management Criteria Describe the bank s history and origins, including ownership if applicable. Summarize number of locations, current size, and competition Describe the bank s overall risk management philosophy regarding credit risk management. Explain the credit underwriting process Summarize the bank s risk rating system; who determines risk rate, and approves changes to risk rating Discuss how information regarding credit exposure is collected, processed and presented at the bank. Board of Directors and Senior management The growth and risk management message regarding the loan portfolio What are the marching orders? Summarize the various credit reports the Board of Directors receives Explain how the Board of Directors is involved in developing and approving the loan policy How does the Board communicate to the CEO/CCO and lenders? Has the board changed portfolio direction in recent years? How was this change communicated? Explain how the Board of Directors views loan policy exceptions, approves loan policy exceptions, and communicates any concerns regarding exceptions. Use your UBPR to generally outline the bank s exposure to loan types by economic sector, i.e. Manufacturing, Agriculture, Agriculture Real Estate, Owner Occupied Commercial Real Estate, Investor Commercial Real Estate, Residential, Retail* Define your bank s natural core industries and sector expertise What kinds of businesses are prevalent in your bank s area? Explain the banks use of NAICS codes or other industry tracking methods Summarize the concentration limits for major industries How does the bank train lenders and assist lenders in developing industry expertise? What industries are considered high risk by your bank? Moderate? Low? Why are certain types of businesses high, moderate, or low risk to your bank? How does the bank use covariance in establishing portfolio concentrations? What are various lending authorities by title? (Do not include names) Explain the bank s loan approval process for different loan products: consumer, mortgage, agriculture, and commercial How effective is your loan committee? How often are credits declined or changed? If the bank does not use a loan committee, how is the signature approval system established? How does Loan Review analyze individual loan portfolios? Do lenders perform a post mortem on loan losses? 5

10 Section 2 Stress Testing Contact for this section: Rob Newberry Section 2 Criteria 1 Section 2 Criteria 2 Section 2 Criteria 3 Section 2 Criteria 4 Resource Availability Key Variables Stress Test Scenarios Stress Test Barriers Identify the systems of record/data sources for the data elements required to perform loan portfolio stress test What systems does the bank use to monitor risk and perform stress testing? If a system is not used, what methodology does the bank use to monitor risk in various loan types, such as consumer, real estate, agriculture, and commercial loans Explain how various loan types are underwritten for stress at time of origination: consumer, portfolio mortgage, agriculture, and commercial. Identify the key variables that will be adjusted when creating stress testing scenarios. What key variables would you apply to the three largest loan types originated by your bank. For example: for an investor real estate loan, would it be NOI? Vacancy? For a corn producer loan, the price of a bushel of corn? Fuel prices? Explain how risk rating would be used as a key variable to perform stress testing. Effectively discuss how changes in key variables or assumptions will be incorporated into the stress test results. What difference will changes in these key variables make to the loan position? Why Create at least one stress testing scenario that incorporate variables that you have identified and discuss how the results would be incorporated at your institution. Using your answers to Criteria 1 and 2, create a scenario using these variables. What is the net effect if the worst case happens? Explain how changes in collateral values or cash flows are shocked to perform stress testing. Use the OCC model to stress test the bank s portfolio Summarize the results of the OCC modeling. Attach the OCC modeling as an exhibit I Identify three barriers to effectively incorporating loan portfolio stress testing at your institution. What would prevent stress testing from becoming standard procedure at your bank? Time is not an acceptable reason for not perform stress testing. 6

11 Section 3 Profitability: Loan Pricing Contact for this section: Tom Farin In this section you will describe how loan pricing decisions are made in your bank and discuss how credit risk adjustments are incorporated into your loan pricing decisions. In addition, you will select two loans your bank commonly makes and run the loan through the Farin & Associates Loan Pricing Model. You will discuss the results of each analysis, indicate which of the four measures of the loan profitability is most relevant, and make recommendations to management on whether to originate the loan at the rate you modeled. Section 3 Criteria 1 Section 3 Criteria 2 Section 3 Criteria 3 Section 3 Criteria 4 The Loan Pricing Decision Discuss how the bank currently makes its loan pricing decisions for each major type of loan: consumer, portfolio mortgage, agriculture, and commercial. Are loans priced individually or using a rate sheet? Discuss how loan pricing models are used or not used in evaluating profitability of loans being priced. Is it purchased model or developed internally? Explain the major components of the model. If the competition offers a lower price and the model indicates the loan would not be profitable at that price, how does the bank decide how to price the loan or to make the loan? Including Credit Cost Pricing Discuss how credit risk is factored into loan pricing decisions. What kind of look back period on historical loss experience is being used? Explain loss rates by various loan types How are credit risk adjustments to your loan s price determined? How long of a look back period is used for risk? How often are credit cost pricing adjustments made? How do finance, credit, and the CEO interact to determine loan pricing based on loss history? Test Cases Select one loan commonly originated loan to test Describe the loan and how it gives off cash flow. Describe any changes you made to inputs on the loan pricing model to effectively model cash flows. Describe how you came up with the loss experience to use in modeling the loan. How long does the loan being originated give off its principal and interest cash flows? What assumptions did you use in pricing the loan? Model the Test Cases Using the Farin model, effectively model two loans (different types) and make well thought out recommendations. For each loan modeled: Discuss the results produced by the model. Indicate which of the four measures is most relevant in evaluating the loan s profitability. Tweak the loans to model different results. Tweaking could be terms, rate, fees, accounts, etc. Make any recommendation to management based on your results. What are the results of each of the four measures of loan Profitability? 7

12 Section 4 Capstone: Contact for this section: George Ruth The final section of this intersession project requires a summary conclusion and recommendation for your bank regarding risk management practices and procedure, and the effectiveness of the same. Section 4 Criteria 1 Section 4 Criteria 2 Section 4 Criteria 3 Section 4Criteria 4 Institutional Understanding of Credit Risk Conclusions Stress testing Pricing for Risk Conclusions Comprehensive Linkage of Sections and Lessons Learned Does the bank have an effective risk management philosophy? Why or why not? Is there a balance between soundness, profitability and growth? What is the strategy for growth and how is this being executed? How does the bank manage the portfolio mix? What changes to portfolio management do you recommend? What recommendations do you have to improve the banks current stress testing system? How will these changes improve the bank s loan portfolio over time? What does the bank need to do now to prepare for stress testing or to improve the current stress testing done? Is the bank appropriately pricing for risk? What changes need to be made to the banks current loan pricing models? What recommendations do you have to improve your banks loan pricing systems? Discuss the role of competition with management, how should this impact pricing? Make recommendation to address any shortcomings discovered in the project, tying the entire paper together in a summary statement. Link the first three sections. Based on the first three sections: what big picture changes may be needed? What disconnects do you see? For example, if the CEO said the bank has a conservative risk philosophy have the loan losses over time been lower than peers? Explain how effective your bank balances soundness, profitability, and growth 8