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					                              Madison Bank & Trust Case
                              Monday Team Assignment
       Using the “CapitalPlan” Tab of Capital Planning Model, develop a 5 year capital/liquidity plan for
        MB&T
            o A balanced set of strategic financial goals
            o Annual goals that lead to achievement of the strategic goals within 5 years
       Complete the “Core Funding Strategy Worksheets” describing the strategies you plan to use to
        accomplish the core funding growth and mix goals you discussed and set in the capital plan.

                              Tuesday Team Assignment
       Complete a Non-Regulatory Core Worksheet for each of the funding sources you propose that
        MB&T should use as either a base funding or contingency resource.
       Complete the Stress Test Definition worksheet for MB&T



                            Wednesday Team Assignment
       Complete the Investment Strategy Worksheet – Roy Hingston will provide your assignment in
        class.
       Model the loans introduced in class and in the Loan Strategy Worksheet
       Complete the Loan Strategy Worksheet

                             Thursday Team Assignment
       Discuss your overall strategy for solving the case and wrap up your case discussion and record
        your results on the Team Strategy Recommendation worksheet.
       Complete the school takeaway worksheet and discuss takeaways you hope to take back and put
        to work with your team.




1
Monday – Capital Planning

Develop a 5 year capital plan using the Capital Planning Model

Respond to the following capital planning questionnaire.



MB&T Capital Planning Questionnaire

    1. List and briefly discuss the thought process behind each of the Strategic
       Financial Goals you set as part of the capital planning process.




    2. Discuss generally the path you hope to following in the 5 year plan in
       achieving the strategic financial goals.




2
Monday - MB&T Core Funding Plan Assignment

    1. Develop a core funding strategy for the Savings/MM sector. The plan
       should address products you might introduce and general pricing rules
       you will follow for the accounts. Model the strategies you are
       recommending against base for both the current rate environment and
       in a 200 bp rising rate environment using the Marginal Cost calculator.
       Then complete the worksheet for the Savings/MM sector.
    2. Sketch out your general strategic approach for the remaining three
       sectors – Checking, Short-Term CDs, and Long-Term CDs. It is not
       necessary to model these strategies.




3
                                 ABA Liquidity Toolbox

                         Core Funding Strategy Worksheets
Core Funding Strategy: Savings/Money Market Sector

Goal:




Products:




Pricing Rules:




Modeling Results:




4
Core Funding Strategy: Short-Term CD Sector

Goal:




Products:




Pricing Rules:




Core Funding Strategy: Long-Term CD Sector

Goal:




Products:




Pricing Rules:




5
Core Funding Strategy: Checking Sector

Goal:




Products:




Pricing Rules:




6
Tuesday – Non-Core Funding Strategy

    1. Review the non-core sources addressed by Karl Nelson in his session.
    2. Select the Non-Core Sources you feel MB&T needs to have available to
       meet base liquidity needs and contingency funding plan needs.
    3. Complete a non-core worksheet for each of the non-core sources
       selected.

                                    ABA Liquidity Toolbox

                       Non-Regulatory Core Funding Worksheet For:
Institution: Madison Bank & Trust

Source:                 Date Completed:            Completed By:

Funding Type:      Near-Core        Non-Core     Brokered       Non-Brokered
Description:
Policy Limit:
Discussion:




Funding Utilization:     Base Funding     Contingency Funding
Discussion:




Facility Status:   Operational      Under Development
Discussion:




7
                                    ABA Liquidity Toolbox

                       Non-Regulatory Core Funding Worksheet For:
Institution: Madison Bank & Trust

Source:                        Date Completed:              Completed By:

Funding Type:      Near-Core        Non-Core     Brokered       Non-Brokered
Description:
Policy Limit:
Discussion:




Funding Utilization:     Base Funding     Contingency Funding
Discussion:




Facility Status:   Operational      Under Development
Discussion:




8
                                    ABA Liquidity Toolbox

                       Non-Regulatory Core Funding Worksheet For:
Institution: Madison Bank & Trust

Source:                 Date Completed:            Completed By:

Funding Type:      Near-Core        Non-Core     Brokered       Non-Brokered
Description:
Policy Limit:
Discussion:




Funding Utilization:     Base Funding     Contingency Funding
Discussion:




Facility Status:   Operational      Under Development
Discussion:




                                    ABA Liquidity Toolbox

                       Non-Regulatory Core Funding Worksheet For:
Institution: Madison Bank & Trust

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Source:                        Date Completed:              Completed By:

Funding Type:      Near-Core      Non-Core       Brokered      Non-Brokered
Description:
Policy Limit:
Discussion:




Funding Utilization:    Base Funding     Contingency Funding
Discussion:




Facility Status:   Operational    Under Development
Discussion:




10
                                    ABA Liquidity Toolbox

                       Non-Regulatory Core Funding Worksheet For:
Institution: Madison Bank & Trust

Source:                 Date Completed:            Completed By:

Funding Type:      Near-Core        Non-Core     Brokered       Non-Brokered
Description:
Policy Limit:
Discussion:




Funding Utilization:     Base Funding     Contingency Funding
Discussion:




Facility Status:   Operational      Under Development
Discussion:




11
                                    ABA Liquidity Toolbox

                       Non-Regulatory Core Funding Worksheet For:
Institution: Madison Bank & Trust

Source:                        Date Completed:              Completed By:

Funding Type:      Near-Core        Non-Core     Brokered       Non-Brokered
Description:
Policy Limit:
Discussion:




Funding Utilization:     Base Funding     Contingency Funding
Discussion:




Facility Status:   Operational      Under Development
Discussion:




12
                                    ABA Liquidity Toolbox

                       Non-Regulatory Core Funding Worksheet For:
Institution: Madison Bank & Trust

Source:                 Date Completed:            Completed By:

Funding Type:      Near-Core        Non-Core     Brokered       Non-Brokered
Description:
Policy Limit:
Discussion:




Funding Utilization:     Base Funding     Contingency Funding
Discussion:




Facility Status:   Operational      Under Development
Discussion:




13
Tuesday: Credit

     1. Review the case specific materials behind Rob Newberry’s Powerpoints
     2. Based on MB&T current Loan portfolio concentrations, Identify the key
        variables that should be adjusted when creating loan portfolio stress
        testing scenarios




     3. Create stress testing scenarios that incorporate variables that you have
        identified and discuss how the results would be incorporated in setting
        or modifying capital goals for MB&T




     4. Based on the information provided in the case study, assess the
        adequacy of the MB&T’s current ALLL reserve compared to their peers




     5. Based on MB&T’s 3 Yr Forecast Balance Sheet, estimate the ALLL
        reserve balance and the potential impact to capital from an ALLL
        reserve and loan loss perspective




14
Wednesday – Loan Pricing

Model using the Farin & Associates pricing model, the following four loan
opportunities. Based on your results make recommendations to management
on course of action using the following worksheets.

Scenario 1: Fixed-Rate Commercial Real Estate Loans

The competitive market for high quality 5/20 commercial real estate
mortgages has heated up with prevailing competitive rates for 75% LTV A
credits at 5.25%. Typical deal is $750,000. Loss experience is 0.50%. Option
risk, origination costs, servicing costs, prepayment speeds, and benchmarks
are those already in the model. As none of your competitors offers a fully
amortizing 20 year fixed rate Comm R/E.

     1. Calculate the ROE on the typical 5.25% 5/20 deal. Calculate break-even
        rate needed to hit the ROE goal.

     2. Calculate the break-even rate on a fully amortizing 20 year fixed-rate
        commercial R/E deal.

     3. Calculate the deal break-even rate for the fixed-rate commercial real-
        estate deal with the addition of a $50,000 average collected balance
        non-interest bearing commercial checking account.

     4. Complete the following questionnaire:




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Scenario 1 Questionnaire:

     1. Is the 5/20 loan profitable at current pricing?




     2. What is the break-even rate on the 5/20 commercial real estate loan?




     3. What is the break-even rate on the fully amortizing 20 year fixed-rate
        commercial real estate loan?




     4. How does the addition of the $50,000 average collected balance
        checking account affect the break-even rate?




     5. Comment on how you feel this strategy might affect MB&T’s
        concentration risk.




     6. Given the results of your testing what course of action would you
        recommend to management?


16
Scenario 2: Refinance High LTV Mortgages

MB&T has historically followed the practice of originating 30 year FRMs,
selling these loans to Fannie Mae and concurrently approving HELOCs up to
80% combined LTV. Housing prices in Madison have dropped 30% on higher
priced homes, leaving MB&T upside down on many home equities approved
before the financial crisis. A fair number have outstanding lines in excess of
$100,000 and are with A credit borrowers. These loans are typically not
classified as the loans are performing and no recent appraisals have been
pulled.

By refinancing the first, MB&T has the potential of reducing its HELOC
exposure and gaining control over both the first and second should
foreclosure be necessary. But the appraisal may result in the loan being
classified. Mortgage rates have dropped considerably since many of these
loans were last refinanced.

One of MB&T’s loan officers has proposed that we approach loan customers
with high credit scores and high LTVs with the following proposal:

     1. We refinance the first mortgage over 15 years at 50 bp over market
        rates (3.75%) up to the Fannie Mae maximum of $417,000 and at a
        maximum of 80% LTV. These loans would be retained. However
        because they meet secondary market standards, they may subsequently
        be sold.

     2. Any additional home equity line needed to complete the refinance
        would be placed in HELOC priced as follows:

           a. Combined 80-90% LTV – Prime +75, 5.25% floor

           b. Combined 90-100% LTV – Prime + 1.25%, 5.75% floor

           c. Combined 100% - 110% - Prime + 1.75%, 6.25% floor

     3. Model relationship profitability (first plus HELOC) for a $500,000 deal
        with a 98% combined LTV on an A credit borrower
17
Assumed loss experiences, origination and servicing costs, prepayment
speeds, option risk adjustments, and benchmarks have already been entered
into the model.



Scenario 2 Questionnaire:

     1. What is the relationship ROE for the deal you modeled.




     2. Discuss the moral, ethical, regulatory, and performance dilemmas posed
        by this scenario.




     3. Given your response to questions 1 and 2, what would you recommend
        to management?




18
Scenario 3: ‘Get Out of Debt’ Mortgages

MB&T has historically followed the practice of originating 30 year FRMs and
selling to Fannie Mae. Because MB&T has retained servicing, they have good
records on the performance of these mortgages. With 15 year fixed-rate
mortgage rates at 3.25%, customer desiring to refinance are often electing to
refinance over 15 years. Management believes there is significant potential
for building a portfolio “Get out of debt” fixed-rate mortgages with
amortization of 12 years or less. Depending on tax bill based LTVs, MB&T
may not require appraisals on some of these properties. Management is
considering limiting loan sizes to a maximum of $200,000 with a rate of:

     • 3.75% on a 12 year amortization

     • 3.5% on a 10 year amortization

     • 3.25% on an 8 year amortization

Model a $200,000 deal under 12, 10, and 8 year amortizations. Assume a loss
experience of 0.20%, 0.15%, and 0.10% respectively. All other assumptions
are already in the model. Note that a program very similar to this is already
being offered by a ‘real world’ Madison based institution.

Then complete the following questionnaire.




19
Scenario 3 Questionnaire:

     1. Discuss the profitability of all three deals based on your analysis.




     2. How do you feel about the low doc, low fee concept in the current
        regulatory environment and using tax value in lieu of an appraisal?




     3. Based on your modeling and feelings, what recommendation would you
        make to management regarding this proposal?




20
Scenario 4: Indirect Boat Loans

MB&T has been approached by a new boat dealer to offer indirect financing
on its boat paper. The dealer offers high end boats and related products.
MB&T would only consider A credit paper.

     • Typical loan amount would be $20,000 with a typical term of 84
       months. The dealer would like to receive a fee equal to ½% of the
       contract amount. The bank estimates its own origination costs at $250
       and annual servicing costs of 0.50%.

     • The bank has no loss experience with this kind of paper. In a survey of
       banks active in this kind of paper, loss estimates range from a low of 1%
       per year to a high of 2.25% per year.

     • Perform sensitivity testing on rates needed to achieve a 15% ROE
       across the range of estimated loss experience.

All assumptions on this loan have already been entered into the model.

When your testing is complete, complete the following questionnaire.




21
Scenario 4 Questionnaire:

     1. Share the results of your credit risk sensitivity testing?




     2. Discuss how you feel about MB&T entering a lending area with very
        little prior experience.




     3. What recommendation would you make to management on this
        proposal?




22
Wednesday: Investments

Roy Hingston will share your investment assignment in class. Take this area
to discuss your results for this assignment.




23
Thursday Afternoon Assignment

     1. Wrap up discussions with your teammates relating to the MB&T case.



     2. Consider the following dilemma. The nine teams have come up with at
        least nine different case solutions, some similar, some not so similar.
        Imagine being on the position of having to choose between these
        strategies proposed by different members of your ALCO committee.
        What qualitative and quantitative tools would you use in choosing the
        best strategy for MB&T management to pursue?




     3. It is a good time to think about and document school takeaways. A
        portion of Friday’s discussion will be devoted to takeaways. List the
        takeaways from the school you hope to implement in your institution
        when you return home. While you may discuss this as a group, this
        portion of the assignment should be completed individually as it is your
        priority list for what you want to accomplish when you return home.
        Come to Friday’s session prepared to discuss.




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