What are your short- and long-term strategies, and what questions must you answer to support and achieve those strategic goals?
Creating data analytics and reports alone are not the strategies; rather, they are the critical inputs to assist decision-makers in developing and executing those strategies.
Staff producing the reports must communicate with management and inquire what management wants to glean or achieve from the data insights. A pertinent question could be: what critical questions do you need to answer? Then, determine which reports/insights can answer those questions and better inform decisions.
The goal isn’t the production of reports but producing insights and information that are critical to developing and executing strategy. It’s providing the decision-makers with meaningful insights so they can execute appropriately.
For example, say your management and board’s strategy for the upcoming year is to grow the CRE loan portfolio by 10%, and the institution needs to consider expanding into new markets to achieve this goal. Before finalizing this goal, management should consider the following:
- Historical trends
- Current CRE concentrations
- Market analysis
- Loan pricing considerations
- Real estate industry performance and
- Peer comparisons.
Reports, insights, and data analytics that will assist management in determining whether this is a viable strategy include:
- Historical CRE growth trends over the last five years, further segmented by industry, collateral type, and location. Analyzing this data will set the stage for the institution’s expectations for the 10% growth (e.g., is past performance a good indicator of future performance, and what needs to be adjusted if growth has not met expectations historically?)
- CRE concentration report. Analysis should be performed on concentrations, as a percentage of capital, in terms of:
(1) Collateral type such as multifamily, retail, office, etc.
(2) Owner versus non-owner occupied, and
(3) Individual or related group of borrowers.
This analysis will identify CRE types where the institution may be already bumping up against its in-house policy concentration limits. Management may need to adjust its strategy to grow within areas where there is still room for growth without jeopardizing these limits.
- CRE geographic heat map. Where are the majority of your borrowers and collateral located, and where should the institution concentrate its marketing efforts?
- CRE portfolio credit attributes. These should include historical interest rate and credit performance trends (e.g., how has this portfolio performed over time, and has the pricing reflected the risk taken?)
- Industry borrower data. How has the commercial real estate market performed, and how it is performing today by collateral type in your region/market? Decisions that can be gleaned from industry data include areas in which to focus your growth as well as loan decisioning, such as loan pricing, based upon industry performance and level of risk determined by a review of this information.
It’s not enough to produce the above analyses. The institution should prepare a formal written report that interprets the above insights and compares these insights to the growth strategy. The report should include a conclusion as to if this CRE growth strategy is viable AND how management plans to achieve this growth.
Consider interrelated goals to fine-tune strategy using data
Another constructive approach for ensuring you have the right data insights to identify and support strategic initiatives is to evaluate the financial institution’s goals/issues as a whole by ranking them and considering how they are interrelated. This exercise may reveal the need for bigger-picture data analysis.
Start with an Inventory of your goals/issues and rank them in descending order. Identify any interrelated goals or issues, then determine the data analytics that will provide the insights. For example, your top goal for next year might be to expand your lending geographic footprint. Be very specific regarding this goal, including the targets for particular percentage growth, loan types, industries, and locations. Another goal that should go along with this goal to expand is to identify funding sources (e.g., add the FHLB or focus on certain types of deposits and/or on the depositor base by offering deposit incentives). Obviously, these two goals are interrelated – without excess liquidity, the institution will need to provide additional funding to meet the target to expand the lending footprint.
So, in this situation, the institution will add reports showing the makeup of deposits (e.g., core vs. non-core, migration of deposits from core to transactional accounts, any trend in movement of funds out of the institution, top 10-20 depositors and associated volatility, borrowers without deposit relationships, etc.).
From these reports, the institution can determine whether it makes more sense to gather deposits and how to do it through incentives or better technology, for example, or whether the institution needs to target alternative funding sources.