We’ve all had them…those days when you have more questions than answers. Artisan Advisors wants to help. Introducing Ask Artisan – a new complimentary service that allows you to get expert advice from the battle-tested banking industry veterans at Artisan Advisors.
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Dan Kadolph responds: In general, the banking industry handled the rush to remote work in an adequate manner. Many years of business continuity planning and testing paid dividends. Some of the bumps in the road include inadequate number of software licenses, insufficient portable devices (laptops or tablets), and inconsistent network security. These bumps in the road were manageable and remedied quickly avoiding materials interruptions in daily operations based on our discussions with a variety of banks.
Jim Adkins responds: From Artisan’s point of view, the regulatory agencies have been accommodative during the pandemic and rightfully so. The pandemic-related loan modification guidance was very beneficial to the banking industry and more than likely prevented a bad credit quality situation from becoming a credit quality catastrophe. The regulatory agencies are now gathering and interpreting loan modification data to determine their next course of action. We at Artisan think that the regulatory agencies over the next 12 months will focus on credit quality of each bank’s pandemic-related modified loan portfolio and look for hidden loan losses and, hence, charges to capital. Documentation of pandemic-related loan modifications will be key.
Dan Kadolph responds: Prior to beginning the strategic planning process, Artisan encourages clients to review its current strategic plan and budget to identify variances driven by the pandemic and identify those that were one-time, recurring, or permanently expenses or elimination of revenue stream. As Covid-19 related loan modification periods ends, asset quality monitoring practices should remain robust. Once an institution has assessed what has impacted results, it is then to begin the process of strategic planning. 2021 Strategic Plans will need to recognize and begin addressed intermediate and long-term shifts in business model. Revenue generation warrants considerable attention in order to be able to make immediate and longer-term expense decisions. The number, staffing and configuration of banking footprints may warrant attention. Some banks will need to focus on loan workouts and will incur additional direct and indirect expenses. 2021 Strategic Plan likely will be materially different than in recent years and the process needs to be collaborative at the levels of management, board of directors, and other stakeholders. More time, resources, and challenging discussions need to be considered in the process.
Kathy Marinangel adds: I believe that two to three 2021 strategic plan budget scenarios should be developed.
The first 2021 strategic plan would reflect doing business as normal before the pandemic. Then the bank should be using “what-if” scenarios and run calculations based on Covid 19 conditions continuing at 100% of the same variances as in 2020 and perhaps a “what-if” at 50% of the same variances – depending on how these line items have been improving or deteriorating. Of course, assumptions based on the regulatory announcements would be outlined to explain any changes to the effect of the 2020 operations after March 15th.
A second 2021 strategic plan could be run utilizing all of the variance factors due to normal circumstances from the 2020 budget and assuming that all of the negative effects will continue through 2021. This would be based on assumptions that no improvements could be made.
A third 2021 strategic plan could be run utilizing all of the variance factors due to normal circumstances from the 2020 budget and forecasting improvements that can be accomplished by the management team.
Any of these new proposed 2021 strategic plan budgets could then be maneuvered again by the “what-if” scenario method of changing one general ledger line item at a time to see the effects and then many of the lines that are deemed to be appropriate.
Utilizing the 2020 strategic plan is a good base tool for analysis of the forecasting of the 2021 strategic plan.
Peter Fotopoulos suggests: You might want to emphasize the need to perform a pro-forma on the long term impact of Covid-19 modifications on Capital, Liquidity and Earnings as the very first step in the planning process. Based on 388 public banks that have reported Covid-19 modification (that are not part of multi-bank holding companies), the banks in that group are showing outstanding modification $’s averaging over 100% of Tangible Equity + LLR.
One bank in Illinois has already implemented the sale of one of its divisions and is planning on closing 20% of its branch network.
John Hecht wraps up: The primary risks to a bank’s strategic plan have clearly changed due to the pandemic. Each of the primary risks should be revisited and re-assessed in the pro forma. Strategic planning must be linked to the bank’s risk management and capital planning process. Boards must respectfully challenge management assumptions and recommendations.
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