2024 Journal of Community Bank Case Studies

2024 COMMUNITY BANK CASE STUDY COMPETITION

its strategies to manage the associated risks. In scenarios where rates spike by 400 basis points, the bank adapts its approach from both the loan and deposit side of the balance sheet by making changes to safeguard the bank’s stability. As a check of simulations provided by third-party systems like Compass and Empyrean for managing IRR, b1Bank independently operates an Excel model to compare the outputs from each to verify alignment. Every month, the bank loads the bank’s financial results into an Excel-based model developed by their financial team, b1Bank uses the model to recast and forecast various elements of the balance sheet and income statement. The dynamic model allows the balance sheet data to drive the earnings model to ensure that it reflects real-time financial conditions and forecasts (Robertson et al, personal interview, 21 Mar 2024). Subsequently, the bank loads the model results into Empyrean with the b1Bank-specific assumptions and analyses. The software package calculates the cash flows for each instrument based on contractual obligations, as well as factors such as loan prepayments or changes in deposit rates. While the Excel model directly leverages balance sheet data to project financial outcomes, Empyrean performs calculations for each balance sheet instrument based on detailed specifications, including prepayment speeds and changes in deposit rates. The usage of both systems helps verify that the data from b1Bank’s core systems and general ledger sync (Robertson et al, personal interview, 21 Mar 2024). If b1Bank identifies discrepancies, they make the necessary adjustments to align the models, ensuring that their financial strategies and risk assessments are based on reliable, up-to-date information.

FCCB has experienced significant growth

over the period despite current

challenges with the inverted yield curve compressing margins.

of its balance sheet (Robertson et al, personal interview, 21 Mar 2024). Strategic responses to competition enable b1Bank to maintain a balanced deposit base, optimize its cost of funds, and manage interest rate exposure while taking advantage of prevailing market conditions to maximize financial performance. In their IRR models, b1Bank tests for instantaneous shocks by examining the impact of rate changes of up to ±400 basis points on their overall balance sheet to see what it does to net income and the economic value of equity. The shock tests help b1Bank assess the cash flow, capital effects, and credit underwriting impacts from interest rate changes. The tests attempt to discern cash flow variations of up to ±300 basis points at the time of loan origination ((Robertson et al, personal interview, 21 Mar 2024). The tests gauge how a loan made two years ago would perform under current conditions, simulating both the loan aspect and the overall asset liability management response. If rates rise by 100 basis points, b1Bank proactively adjusts

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