Strategic Planning Tips:
Ideas for “What-if’s” for Projections 2017-2020

Bill Goedken, MBA CPA CMA CGMA idea5 Discoveries, Strategic Planning 0 Comments



Ideas for “What-if’s” for Projections 2017-2020
Bill Goedken, CEO, idea5

As banks and credit unions begin to wrap up their Strategic Planning season for 2016, I am often asked by the C suite “Bill, what type of what-if’s should we be running in our projections/ALM model?” This is a very valid question, as financial institutions look ahead and want to know what they would look like if their goals and strategies are implemented and successful.

Suffice it to say, you can go crazy with all of the possible scenarios that come up in Planning. However there are certain “standard” scenarios I like to have their CFO/Finance function run in the projection/ALM models to help determine the potential impact the planning ideas would have on the financial institution. After running the scenarios, this is an excellent topic for a few “lunch and learn and let’s discuss the impact” meetings. Below I list some of the more common scenarios:

1. Use a 3 to 5 Year Time Horizon
A mistake I often see is the financial institution using only a one year+ time horizon. For example, the projection period (if done in October 2016) would be to the end of calendar year 2017. The excuses used for this short time frame are effort and the “unknown” beyond one budget year. Recently I heard a CFO complain that the CEO of the institution “did not care beyond one year.” Really?
To do Strategic Planning correctly, I strongly suggest a longer time frame, such as the end of 2019, 2020, or 2021. Spend the time to get it right. The advantages are many and include:

  • Fully seeing the impact on multi-year growth campaigns
  • Giving the board and staff a high-level look at what is possible at the financial institution. Think “wow, are we really going to reach $1 billion in assets in 2020?” This can be a great motivator.
  • Give an “early warning” indicator on many of your balanced scorecard items such as capital to assets, loans to deposits, efficiency ratio, etc. If long term it looks as if you are going in the wrong direction because you have done long term projections, then you have time to correct your plan.

2. Consider Higher Loan Loss Provisions and Delinquencies
It is common to look at a worst-case scenario for credit losses (i.e. Credit Risk modeling.) You could also do this what-if for a possible recession. Further, this type of projection would also serve to see the impact of CECL – an issue which is still in flux, but something we might have to keep our eye on sooner rather than later. Recently, a client CEO, CFO and I were talking about this exact scenario, and the financial institution decided to raise their projection of Loan Loss and Delinquencies starting in the latter half of 2017 through 2020 “just to see the impact” in a “what-if” model.
Note they were normally projecting regular experienced credit losses; this was just a “what-if”. After the “what-if” was run, they evaluated and discussed the impact on all of their Balanced Scorecard items – including credit risk measures. For this client, the example “what-if” formulas they used were:

  • 2017 – 50% increase in the provision and delinquencies from the 2016 levels starting in July 2017 through December 2017.
  • 2018 – 100% increase from the 2016 levels.
  • 2019 and 2020 – 200% increase from the 2016 levels.

3. Organic Versus Merger Growth
Another common “what-if” is to first model organic growth. A low growth, a most-likely, and a higher growth scenario could be modeled – strictly with organic growth in mind. However many institutions also “layer” on a potential merger down the line – even though there may be no merger candidate at present. Recently I was at a $1.5 billion institution that has a history of absorbing smaller $30 to $80 million dollar shops from time-to-time. A “what-if” they considered was a $150 million dollar merger – larger than their normal merger – just to see the potential impact on the institution. Logistics of a merger aside – sometimes a merger may be a very good deal given the financial and market impact and it would be good to know that strategy.

4. New Locations, New Markets
Recently I conducted a Strategic Planning session at a financial institution that was strongly considering entering a new market approximately 100 miles from their nearest branch in the state. Reason? One of the board members went “to high school there” and “thought it would be a great place to expand.” Is that really a valid reason?
First, you need to do a thorough demographic, competitive and economic analysis of the area. We at idea5 can greatly help with this analysis. (OK, that was my shameless plug for our Market Services at idea5.) Second, you need to look at a minimum, a low, a most-likely, and a best case projection of what your financial and customer impact will be. Costs, loans, deposits, timing, and many other factors need to be considered – and considered for the longer term. Your projection/ALM model can help here as well.

5. Benefit and Cost of a Major Marketing Campaign
Similar to opening a new location in a new market, a large marketing campaign in your existing market can also be modeled. Recently a financial institution did a “friends and family” loan promotion and the impact on loan volume was even larger than their original “best case, high growth” projection. The CFO, CMO and CLO were constantly revising their projections upward and modeled how their campaign was impacting all financial and risk measures.

6. Up and Down Rate scenarios
OK, being an ALM guy in my past life (being the former CEO of Profitstar), I had to mention this. This is pretty standard stuff, and some examiners are asking for a +500 basis point scenario now. Yes, that was not a typo. At the very least you should do this once a quarter, but the point is that a longer-term look (at least 3 years’ out) will show your Interest Rate Risk effect over the long term on earnings and capital. It’s best to be prepared!

Bill Goedken

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