AtDanny F. Dukes and Associates, LLC, we believe that all financial institutions should engage in active capital planning. Recently, many external events have negatively impacted capital levels. Most notably, the two most significant influencers of capital have been the financial recession and regulatory actions. When capital levels decrease with industry losses, regulators respond immediately with regulatory orders for those institutions that are most adversely affected and though regulation, long-term. As a result, community financial institutions should be proactive with capital planning. We believe that there are three phases of capital planning.
Phase 1: Establish Long-Range Financial Goals
First, let's define long-term. This should be three or five years, preferably five years. Next, let's define the target profit goals, return on assets (ROA), return on equity (ROE). While there are many that focus on ROA as a driving gauge, the owners of an institution have profit expectations on their investments. So, ROE should be the driving force. Although both ratios should be monitored, the owners equity section is the regulatory and owner focus. Finally, at what level do you desire regulatory capital to be over then next 3-5 years?
Phase 2: Develop Annual Goals
Annual capital, ROA and ROE goals should be set for each year. A detailed, realistic budget should support Year 1 as a foundation for projections in future years. Strategic initiatives, such as boosting non-interest income or changing loan portfolio mix, can be fine tuned through future projections. This is a great opportunity to determine how a process re-engineering initiative can help improve future earnings. The key here is to stay realistic with your projections.
Phase 3: Plan for Contingent Capital and Liquidity Events The area of contingent planning has always been a great idea. However, we're not sure many would have ever assumed the worse that happen in 2008 with the big recession. However, the regulators are changing capital requirements and requiring financial institutions to shock their capital based on risks in their portfolios. Should their capital drop below minimum standards, there must be a contingent plan to regain compliance. This is true with liquidity as well.
GiveDanny F. Dukes and Associates, LLC a call to stay on top of regulatory requirements and capital and liquidity planning. Make the right decisions for your investors.
Copyright © Danny F. Dukes and Associates, LLC. 101 Avalon Ct Canton, GA 30115