Capital Planning Session 3

Transcription

1 Capital Planning Session 3 Dave Koch - COO dkoch@farin.com Tom Farin - CEO tfarin@farin.com Farin & Associates, Inc. 1 Capital Planning Webinar Charting your way through troubling waters 2 1

2 Capital Planning Steps 1. Assess Your Static Position 2. Assess Your Dynamic Position 3. Design Stress Scenarios 4. Run A Stress Test 5. What is Your Definition of Failure 6. Modify Your Base Plan 7. Develop Contingency Capital Plan 8. Set Your Capital Goals 9. Develop the Written Portion of the Plan Loop 3 Hands On Session 3 Dynamic Test Objectives Adjust information on the Loan Stress tab to reflect Loan distribution by call category 1 Year Stress Loss Assumptions Provide Stress Adjusting Entries for future years Tax Rate PLL Addition to ALLL Note: You ll need to do this and above with each copy of model Run a Stress Test on your Dynamic Analysis Put a 1 in row 139 in the two adjacent years in which you want to run the test Review Results Save Results 4 2

3 Speedboat Credit Tests - Dynamic Pre-Stressed Unstressed PLL Stressed PLL Adj to ALLL Potential Stressed Income Other Factors Before and After ROA 5 Speedboat Credit Tests - Dynamic Run stress test in 2016 & 2017 Pre-test results Post-test results Stress test multiplier what would it take to fail? 6 3

4 Speedboat Credit Tests - Dynamic 7 Capital Planning Steps 1. Assess Your Static Position 2. Assess Your Dynamic Position 3. Design Stress Scenarios 4. Run A Stress Test 5. What is Your Definition of Failure 6. Modify Your Base Plan Loop 7. Develop Contingency Capital Plan 8. Set Your Capital Goals 9. Develop the Written Portion of the Plan 8 4

5 Potential Definitions of Failure Your Sub S Stockholders are Very Unhappy Restrictions are Placed on Dividends, Capital Retirement, Discretionary Management Bonuses You Fell Below Adequately Capitalized Plus the Capital Conservation Buffer Nasty Mail Begins to Arrive From Your Regulator Memorandums of Understanding and Other Regulatory Letters You are Wearing Handcuffs You Fell Below Well Capitalized Minimums Hate Mail Begins to Arrive from Your Regulator (C&D Orders and Other Threats) You are Wearing Handcuffs and Leg Irons - You Fell Below Adequately Capitalized Minimums Long Black Cars Pull Up to Your Back Door on Friday Afternoon You re Dead - You Fell Below Severely Capitalized Minimums 9 Definition of Failure Example Our definition of failure is: For the bank to fall below well capitalized status. For the holding company to fall below adequately capitalized plus the Capital Conservation Buffer. 10 5

6 Capital Planning Steps 1. Assess Your Static Position 2. Assess Your Dynamic Position 3. Design Stress Scenarios 4. Run A Stress Test 5. What is Your Definition of Failure 6. Modify Your Base Plan & 7. Develop Contingency Capital Plan 8. Set Your Capital Goals 9. Develop the Written Portion of the Plan Loop 11 What is a Contingency Capital Plan? A set of modifications to a stressed business plan that consider: Changes in growth and balance sheet mix that are likely to result from the stress over time. Management actions that modify the business plan in stress situations to do such things as: Changes in asset and funding growth rates. Capital preservation actions like reducing dividends, eliminating capital retirement plans, issuing new capital, etc. Changes in balance sheet mix to reduce credit risk, concentration risk, hedge interest rate risk, and manage liquidity. Reductions in operating expenses and other actions that have a positive effect on earnings. 12 6

7 CCP Modifications Growth Rate Balance Sheet Mix 13 Incorporating Other Stress Results These are calculated credit stress results. But if you are using a more sophisticated model they can be overridden. Other income statement adjustments can be made to incorporate: Other income adjustments due to credit stress Other income adjustments due to interest rate risk Other stressed income adjustments 14 7

8 CET1 Stressed Results Under CCP Reflects Holding Company Capital - Pass 15 T1/RBA Stressed Under CCP More reflective of Bank Capital 16 8

9 Total RB Stressed Under CCP Should CCP be revised to defer repayment of $10 mm of Additional Tier 1 Capital? 17 Capital Planning Steps 1. Assess Your Static Position 2. Assess Your Dynamic Position 3. Design Stress Scenarios 4. Run A Stress Test 5. What is Your Definition of Failure 6. Modify Your Base Plan & Loop 7. Develop Contingency Capital Plan 8. Set Your Capital Goals 9. Develop the Written Portion of the Plan 18 9

10 Setting Capital Goals Goals should reflect capital minimums and capital targets under Dynamic plan before running stresses (blue bars) We recommend setting a: Minimum standard (yellow light) Capital target (green light) Minimum buffer should be drop in bars from: Blue (Dynamic Plan) to Red (CCP) for Binding Basel III Capital Standard 19 CET1 Risk Based 8.53% % = 2.63% Buffer 6.5% % = 8.13% Yellow = 8.25% Green = 8.75% Note: Based on OCC Stress Test Assumptions 20 10

11 Tier 1 Risk Based 9.84% % = 1.84% 6.00% % = 7.84% Yellow = 8.25% (CET1) Green = 8.75% (CET1) 21 Total Risk Based 10.84% % = 1.29% 10.00% % = 11.29% Yellow = 11.4% Green = 11.9% 22 11

12 Tier 1 Leverage 8.96% % = 2.33% 5.00% % = 7.33% Yellow = 7.5% Green = 8.0% 23 Capital Goal Inputs 24 12

13 Tier 1 Leverage Goals - Dynamic Note: Focus on Grey Bars vs. Goals 25 CET1 RB Goals - Dynamic Note: Focus on Grey Bars vs. Goals 26 13

14 Tier 1 RB Goals - Dynamic Note: Focus on Grey Bars vs. Goals 27 Total RB Goals - Dynamic Note: Focus on Grey Bars vs. Goals Would you submit this plan? 28 14

15 Capital Planning Steps 1. Assess Your Static Position 2. Assess Your Dynamic Position 3. Design Stress Scenarios 4. Run A Stress Test 5. What is Your Definition of Failure 6. Modify Your Base Plan & 7. Develop Contingency Capital Plan 8. Set Your Capital Goals 9. Develop the Written Portion of the Plan Loop 29 Developing the Written Plan Inputs Word Template Sample Capital Plan Sample Policies Actions Complete Financial SWOT Document and Discuss Static Test and Dynamic Tests Discuss Our Definition of Capital Failure Discuss Kinds of Stress Tests Run and Results Discussion of Final Base Plan Summary of Contingency Capital Plan and Results Discussion of Strategic Financial Goals Including capital Goals Linkage to Business Plan Fact Plan Implementation is Supported by Action Plans 30 15

16 Management Summary 31 Detailed Report See example from Session 3 Slides 9-10 See example from Session 1 Slides See example from Session 2 Slides

17 Detailed Report Strengths Listing of the major financial strengths as identified using trends and peer comparisons. Weaknesses - Listing of the major financial weaknesses as identified using trends and peer comparisons. Hopefully the business plan will address these weaknesses. Opportunities Should flesh out what we re trying to accomplish in our business plan and support our growth forecasts. Threats Events that could stress our business plan. Stress tests will be built around these threats. 33 Detailed Report See example from Session 2 Slides 3-6 See example from Session 2 Slides 7-10 See example from Session 3 Slides

18 Detailed Report Triggers Financial ratios and potential events you will monitor as an early warning a potential capital failure may be developing. Leads to beginning implementation of Contingency Capital Plan. Key Actions A summary of the actions that will be taken if a capital stress develops. See example from Session 3 Slides See example from Session 3 Slides Detailed Report See example from Session 3 Slides Summary 2-3 wrap up paragraphs 36 18

19 Questions? 37 19