It is often assumed that actual bank data is always better than “modeled” data. While we agree that this is true for most modeling assumptions, it is not necessarily the case for the Prepayment Assumption used for Interest Rate Risk. The reasons are as follows:

•  Actual Prepayments infer a rate scenario based on the actual data (and the rates movements that have occurred as the actual data was collected) which may or may not apply to a “base case” scenario.
•  Actual Prepayments are often overstated when LOC and other non-traditional loans are present in the data set, as these instruments can (and often are) funded and paid off several times in the course of their contractual term. 
• It is difficult to interpret historical data for changing rate scenarios in the future. For example, what would be the factor for converting historical prepayments to a +/- 100 bp’ scenario? +/-200? Etc. Historical “actual” data does not translate easily to future rate scenarios.
• Models have already been developed and tested in the MBS markets to track prepayments in both rising and declining rate environments. And while these are not perfect (we use a “factor” to adjust these prepayments based on the loan type) they are considerably more reliable than actual prepayment history tends to be.

For these reasons, we have elected to keep the “standard” prepayment methodology using the prepayment models currently being used

The difference between the two numbers is the gap report restricts the repricing balances to those that will reprice in 90 days AND that mature > 3 years.  This is because the gap simulation goes out to 3 years, and maturities that will occur within that 3 year horizon will be captured as a maturing balance, and will therefore be excluded from the repricing balances.

GAP Rules dictate the balances be captured to EITHER the repricing date OR the maturity date, but not BOTH.  

The Repricing Schedule picks up all repricing balances regardless of their maturity date, as it is not restricted by the EITHER/OR rules applied to the GAP Reporting structure.

Yes, bank management can provide user-defined assumptions for any assumption in the model.

Betas:  There is a built-in beta calculator in the model detailed in the Addendum.  If there are enough data points for statistically valid assumptions and a correlation (R-squared) of at least 65 percent, the model then can be set to use Actual betas.  However, if the bank specific data does not have a strong enough correlation, the default assumption is used, unless Management overrides the assumptions with a user-defined assumption.  The default assumption is based on the average beta calculated from all clients on the BancPath® system.

NMD Life (duration) :  Bank management provides deposit detail, which includes deposit balance, account number, and account open date, every time the model is run that allows the BancPath® model to calculate the weighted-average life of all deposits in the bank on a dynamic basis.  This method allows us to capture the movement of dollars within each deposit account over a period of time.  The calculated weighted-average life of deposits is then adjusted by a retention factor, which measures how well bank management is able to maintain deposit relationships.

Until a bank has been on the BancPath® model for a minimum of three years, the retention rate will default to the FDIC experience of deposit retention of failed institutions, which is 33 percent.  However, management can provide a user-defined retention rate, or provide a listing of accounts from a minimum of three years ago to calculate bank-specific retention history.  The longer the history provided, the more reliable the retention rate.  (Note: core processor changes and bank acquisitions can skew data.)  Once a client has been on the system for three years, the retention rate is calculated by comparing the current database to the base year database to track the percentage of accounts closing over time.  The retention calculator will go back as far as five years assuming a client has been on the system that long.

The BancPath® model also calculates a balance decay percentage on individual accounts as an option to the retention rate to use as the adjustment factor to the weighted-average life.  This method looks at the balances in each account based on depositor account number in the base year and compares it to the balance in those same accounts in the current time period.  The results of the balance decay methodology are provided in the Addendum.  A negative percentage change indicates decay whereas a positive change indicates growth.  A comparison between the balance decay methodology and the account retention methodology is included in the Addendum.  The retention methodology will generally result in a shorter duration of deposits versus the balance decay methodology

The BancPath® model analyzes each individual asset based on its unique pricing characteristics.  For example, each loan by loan number is analyzed based on its pricing structure and its amortization schedule, calculated by analyzing the payment amount and frequency.  This method of analysis allows for a more granular and more accurate measurement of interest rate risk versus grouping like-type loans and then performing the analysis.  Additionally, the information that is collected allows us to analyze pricing decisions made by management.  This collected information allows us to calculate offering rates, which are used as the discount rate for each loan type when calculating the Market Value of Equity (MVE) and for calculating Net Interest Income (NII) when a loan reprices in the short-term.  Securities are analyzed using Bloomberg cusip level data.

Yes, floors are capture from analyzing the loan data file provided by management.  Evidence of the floor capture can be illustrated in the Variable Rate Loan report found in the Loan Management report section.  Additionally, a bank with a significant number of variable rate loans with floors will show more interest rate risk in a rising rate environment when the rates are ramped over time compared to when rates are instantaneously shocked up.  This variability is due to a shocked rate will pierce more floors sooner allowing for the loans to reprice more favorably for management.

Yes.  The model performs six different stress-tests on the critical assumptions in the model.  The details of the stress-tests are outlined in the Addendum.  Additionally, management has the ability to determine the level of the stress factor for the assumptions.

Although there is no regulatory requirement on a time frame for certification, it is generally accepted that the model should be validated whenever there is a "significant" change to the modeling process. AMG is currently comitted to updating the certification on a regular basis (annually), however we reserve the right to modify that schedule as needed. We do comitt however, that we will always provide the most recent Model Certification in the Addednum to your BancPath Reports.