Prepare For The Unexpected

Financial Partners tests ideas against different scenarios to map out a strategic plan that will withstand regulator scrutiny and economic hardship.

 
 

NOT LONG BEFORE the financial crisis hit in 2008, Financial Partners Credit Union ($805.8M, Downey, CA) reduced its subprime consumer loan ratio from 28% to 8%, a decision that seemed nothing short of prophetic when the economy sailed off a cliff later that year. But at the time, there was nothing prescient about the decision. It was simply a natural consequence of the strategic plan the credit union had conceived three years earlier.

The move to shed subprime loans is a testament to the power of a well-crafted strategic plan. Here, Financial Partners CEO Nader Moghaddam, who helped the credit union develop the plan upon his arrival during a robust economic climate, breaks down how Financial Partners’ strategic planning process works and how the credit union prepares for the unknown. As it turns out, the process is a bit like buying a used car: It’s easier to spot a clunker of an idea after an initial test drive.

How does Financial Partners prepare for its planning sessions?

NM: Senior management does a lot of prep work for the board, thinking of all the variables in the economic and regulatory environments. We do worst- and best-case scenarios. We review each of our product and business lines, and I write a whitepaper about the economic and regulatory conditions and opportunities. That whitepaper, along with the scenarios, goes to the board in advance. We hold an advance meeting for the board of directors and another for senior management. The main planning meeting only lasts about a day and a half. We have it down to a science.

CU QUICK FACTS

  • FINANCIAL PARTNERS CREDIT UNION
  • HQ: DOWNEY, CA
  • ASSETS: $805.9M
  • MEMBERS: 50,307
  • 12-MO SHARE GROWTH: 2.32%
  • 12-MO LOAN GROWTH: 2.57%
  • ROA: 0.78%

What do you mean by scenario planning?

NM: We usually look at two environments, economic and regulatory, but recently we added technology. A good strategic plan performs well when you test it against all the different scenarios you envision for each of those environments, from worst- to best-case.

You want a strategic plan that tolerates the two extremes. In the best of times, if the economy is running on all cylinders, what does this plan mean for the credit union? And in the worst of times, when the economy tanks or there is significant regulation, what does it mean? We identified nine scenarios, three for each environment.

A good strategic plan performs well when you test it against different scenarios, from worst-to best-case.  You want a strategic plan that tolerates two extremes. 

How far is your outlook?

NM: It’s a five-year outlook, but we fine tune along the way. Every five years we go through the whole process and lay out all the scenarios. Our strategic plan needs to align with our vision, which is building financial partnerships with our members from the day they’re born to the day they die.

Although our vision lays out a certain direction for us, our strategic plan gives it texture.

You once attributed your reduced exposure to subprime loans in 2008 to your strategic plan.  What in your plan prompted you to take action?

NM: We put together the outline of the plan in 2005. At the time, one of the key things we considered was our lending and credit quality strategy. We had been in an uncontrolled subprime lending environment, and when we went through our scenario planning, the worst-case scenario called for avoiding subprime loans and reducing our exposure to them. It was an aspirational statement within the strategic plan, which laid out a number of things we needed to do to get to that point. We were just following through.

prepare-for-the-unexpected
Click on image for full graphic (pdf)

What are some of the big decision or issues your credit union's strategic plan has tackled in recent years?

NM: The biggest issue is our growth plan. We’re an aerospace credit union, but with the aerospace industry shrinking in California, we decided to pivot to health care and not be so focused on aerospace. That decision has had ramifications from products to marketing to methods of delivery. Generating off-balance sheet income was another strategic initiative.

We have an investment advisory business that contributes approximately $2 million to our bottom line, and we’re in the process of acquiring an insurance agency. Another component is business banking. We sell some loans, and we’ve gone back into the credit card business, which generates interchange income.

How do you keep your planning sessions strategic and out of operations?

NM: Early on we had some moments where folks veered off on the tactical side, but 98% of the time our board and management team stays on strategic issues. Part of it is the way we’ve gone about these meetings. We agree on what strategic planning is and how we will use the time. Along the way, self-checks take place where someone usually puts up a hand and asks, “Is this strategic or tactical?” Whatever is strategic prevails.

How do you measure your plan's progress?

NM: At the end of the day the proof is in your bottom line. We have approximately $800 million in assets. We might not have had the biggest growth in assets over the past few years, but we have managed our capital well, with more than a billion dollars in total loans serviced and more than half a billion in mortgages that we’re servicing for others. We’re like an iceberg.

There’s more to us under the surface of the water that you can’t see.

Even the best-laid plans sometimes go astray. How has your plan gone wrong, and what did you do about it?

NM: I don’t know that it went wrong; it just defied our imagination. In 2005, our worst-case scenario for home values dropping in California was 25%.

Instead they dropped 50%. Had we laid that out as one of our scenarios, we might have created some different options. Our financial strength took another unexpected turn. We wanted our net worth ratio to be between seven and eight, and although we never dropped below seven, which is still well-capitalized, we got a little bit uncomfortable. I think we bottomed out at 7.20 or something. Right now we’re comfortably over nine.

How do you adopt a plan that is flexible enough to meet changing conditions but not so flexible that you lose sight of your goals?

NM: Your vision is your north star. You can make tactical shifts in your strategy every year because business plans are one-year focused and change depending on the environment. My master’s degree is in planning.

Blueprints are the least flexible plans while incremental plans are pretty loose. I think a blend needs to be there. If your vision is your north star, that’s your blueprint. To stay on course, you might need to make incremental changes through your business plan. If your strategic plan, your business plan, and your budget are all moving in the same direction, you’re going to have a successful outcome no matter what you encounter along the way.

 

 

 

July 15, 2013


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