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Assignment #2 Due February 4 See “output” folder in “handout” folder on class web site

Assignment #2 Due February 4 See “output” folder in “handout” folder on class web site. Hand in strategy sheet Can modify—must be in writing to me Type of bank—brief description Types of deposits, loans Branching strategy Financial services strategy Address use of jumbo CDs

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Assignment #2 Due February 4 See “output” folder in “handout” folder on class web site

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  1. Assignment #2Due February 4See “output” folder in “handout” folder on class web site

  2. Hand in strategy sheet Can modify—must be in writing to me Type of bank—brief description Types of deposits, loans Branching strategy Financial services strategy Address use of jumbo CDs Address relevance of core deposits

  3. Sources and Uses:Historical continued and Planning

  4. Sources and Uses • Stmts End Yr. 3 Qtr. 3 and Yr.3 Qtr. 4

  5. Basics of Sources and Uses U ( - ) S ( + ) A A L L

  6. Sources and Usesin more detail • Not just Net Securities, but Securities maturing, Securities Purchased and Market Value Change. • Not Just Loans, but each class of loan. • Not just Deposits and Savings, but each class of deposit and savings with Brokered Deposits (CDs) separate.

  7. Be Clear About What You Control • Direct Decision Control: Securities, Loans, Premises, Deposits, Dividends and Capital • Indirect Decision Control: Fed Funds • No Control: Cash, Other Assets, Accrued Taxes, Other Liabilities

  8. Initial Decision Framework • Assume some public deposit levels • Track securities for pledge requirements, taking account of current maturities • Track other deposit and loan changes • Balance with CDs & Fed Funds • Prepare decision form

  9. Decisions • Loan Rates (Industrial) • You cannot offer less than 1.5% below mkt. • Rate over mkt: P, +.2%; H, +.3%; M, +.4% • (Consumer) • You cannot offer less than 2.5% below mkt. • Rate over mkt: 3% • Credit Card Loans not a decision

  10. Decisions • Loan Rates (Real Estate) • Rate a 20 Yr. Rate Decision • Ability to sell old loans; Pro-rata last 5 yrs. • Ability to sell up to 80% of new origination • In all cases, you keep servicing • Credit Policy/Letter of Credit • More Aggressive; More Loans/Fees, More Loan Losses/Non-accruals • Less Aggressive; Less of All….

  11. Decisions • Service Charges and Fees • Commercial: Per check taken in deposit and cents of svc chg credit per $100 bal kept • Retail: Per check written and cents of svc chg credit per $100 bal kept • Credit Card Processing Fee • Percent of $ CC transaction • Requires a comm’l ckg acct (so affects DDs!)

  12. Decisions • CDs $ Amt of 3mo, 6 mo and 1Yr from S/U form • Syndicated Loans Purchased • $ Amt to keep up portfolio • Futures Position (See Pg. 70-72) • Bought futures: speculative! • Sold futures = (DW value of Secs * .68) * (3/12) • Sell > 110% or Buy > 10% and Capital Requirement will change

  13. Decisions • Expenses and Allocations • MM Rate: No more than +/- 1.5% from mkt. • Branches: Close or Open • Bus Dev Budget: Advtg (More effect on Retail) • Salary: Indicator • ROE > 20%, they expect COLA + 7.5% • Loss, they’ll take keeping their jobs….. • Percentage Effort and Allocations • Read Pgs. 74-77 closely and strategize! • Dividends: Payout 25%!

  14. Decision Mechanics#1: Pledge of Securities • Assume Public and Trust Deposits Changes: • Easy Answer 3.3  3.4 will be 3.4  4.1 • Public DD (177.393 – 179.519) = -2.216 • Public TD (430.056 – 405.514) = +24.542 • Trust Reqm’t (294.942 – 288.833) = +6.109 • Public DD 175.267, TD 454.598 • Trust Reqm’t 301.051

  15. Projected Pledge(Pg. 56 & 57) • Muni’s [.25 * 1.10 * (175.267 + 454.598)]+ 301.051 = 474.264 Munis are 469.681 – 21.333 = 448.348 Bad!! • Need to buy about 26M in 3 &/or 10 yr. Munis • Futures • (DW Value of Secs * .68 ) * 3/12 • (1029.48 * .68) * 3/12 = 175.012…so 175 contracts, but we will not take a position for this decision, so 0 contracts

  16. Projected Pledge • USTs [.75 * 1.10 * (175.267 + 454.598)]+ .15*(0*10) = 519.639 Still Held T-Bills 0 101 maturing UST 1yr 25 5 maturing UST 5yr 360 10 maturing 385 116 maturing We are currently about 135 under the pledge for USTs, and total of 161 USTs and Munis!

  17. #2: Deposit/Loan Production • Assume all deposits change by 3.3  3.4 • From text: Prime -11.678, High -18.788, Medium -11.735 due to rates and commitm’t usage. • Synd, refill; RE, Cons and CC same change

  18. #3: Balancing Assets and Liabilities through CDs & Fed Funds • Maturing CDs: 409.229 + 54.229 FF 3mo 129.229 6mo 225 1 Yr 55 • Balance from Right-side = -234.934 • Balance from Left-side = +142.047 • Need 92.887 fin’g to balance • Total = Mat’g + Bal = 463.458 + 92.887 = 556.345 • Round this total down to 556M in needed financing • If we want FF of 50M, then order 456M in CDs and let Sim cast 50M in FF and an addt’l 50M in 3 mo CDs (for a total of 506m in CDs).

  19. Decision Form RATES • Loan Rates • P 10.43%; H 11.19%; M, 12.05% • Cons 12.30% • R/E 10.78%, Sell No Old or New Loans • Maintain Loan and Letter of Credit Policies • Go Market on CC Fee, Comm’l and RegCkg Acct Chgs and Credits • CDs • 3 mo CDs $156m • 6 mo CDs $150m • 1 Yr. CDs $150m • Extra $50m added to 3 mo CDs w/ FF Pur of $50m by Sim. • MM Svgs 8.2% • Maintain Bus Dev Budget at $3.2m

  20. Decision Form • Don’t change branches • Give Salary Policy of Zero (ROE < 20%) • Don’t change Officer Effort or Time Allocations • Buy Synd Loans to Refill, $100m ($99.75m + .287m Chg. Off) • No Futures Contracts • Pay Dividend $1.20/sh. • USTs 135m; T-Bills 100m, 1yr 25m, 5yr 10m • Munis 26m = 15m 3yr & 11m 10yr Munis • No Maximum Limits • No Securities Sales

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