Olson Research Associates, Inc.
Asset/Liability management solutions for community banks...manage your bank, not your model.

Modeling Process

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Effective Date: 04/01/2008

The process starts by collecting three critical pieces of information.
  1. First is the bank’s current FFIEC call report which is sent to us via electronic file generated by the client's software.
  2. Second is a detail loan data file. Federal and state examiners have approved a standard loan file definition to be used for off-site examinations. From this file we capture each loan individually to more accurately model its cash flow structure (all customer sensitive data must be removed prior to uploading the file.)
  3. Finally we capture current relevant market rates from the Federal Reserve's web site. We use quarterly yield curve averages for reporting purposes and monthly yield curve averages to determine discount rates. We also use monthly averages to forecast market rates and pricing spreads.

We recommend the bank provide a detail investment data file from its bond accounting system. From this we can capture each bond individually to more accurately model its cash flow structure (including calls, MBS prepayments, etc.)

We also suggest the bank supply a Service Kit to supplement the call report and loan data file with items such as prepayment speeds, cash flow analysis of CDs, core deposit balances & expense breakout, core deposit beta factors & decay assumptions, detailed term & structure (& optionality) of FHLB advances, a budget forecast including balances & non-interest items, etc.

The data is allocated from these various inputs into a standard chart of accounts. In general, cash flows (maturities, amortizations, & repricings) for all assets and liabilities are modeled based upon information from the call report, the loan data file, and when provided, the detail investment file and service kit assumptions. We model core deposit accounts using beta factors and decay.

Absent a budget forecast in the Service Kit, we use a flat balance sheet forecast which assumes all maturities from current balances will be replaced within the same portfolio. We use the last historical period as a guide for new term structure and pricing spreads. The future balance sheet is balanced using fed funds sold or purchased as necessary. Finally we stress-test the projection using an instantaneous, parallel +/- 100, +/-200 and +/-300 basis point shocks to market rates and the yield curve.