Strategic Net Worth Analysis

What is ALM First’s Strategic Net Worth Analysis?

A Quantifiable Solution to Determine the Right Level of Capitalization

ALM First’s comprehensive Strategic Net Worth Analysis helps institutions develop a strategic growth road map, prior to being officially required to submit capital plans and perform capital stress tests, that includes capital adequacy and identifies potential risks.

What are the Benefits of a Strategic Net Worth Analysis?

Capital is the core of an institution’s ability to grow and succeed yet answering the question of “How Much Capital Does Our Institution Really Need?” remains a common challenge for industry leaders.

Partnering with ALM First’s team of experts will provide the insights and quantitative analysis needed to understand how operational and credit risks could impact the balance sheet and income statement, enabling your depository to determine the appropriate amount of capital.

Whether the risk is increased defaults due to COVID-19, cybersecurity failures, or natural disasters, the potential financial impact can be clearly modeled to help your institution prepare.

How Does it Complement Existing Risk Management Plans?

Our Strategic Net Worth Analysis was designed to complement your existing Enterprise Risk Management plan and assist your institution in determining how much capital would be needed to survive severely adverse scenarios such as a severe recession and more specific scenarios such as operational failures or data breaches. The results will provide CECL guidance and may significantly reduce the opportunity costs associated with over-capitalization.

Key Elements

  • A deep dive into the data ensures a full understanding of your institution’s potential risks.
  • Using a 12-month budget, we layer in base credit losses and expectations across portfolios.
  • Depending on your unique risks, we layer in as many additional scenarios as needed.
  • Projections include potential impacts and the amount of capital required based on the likelihood of each negative event.

The Process

ALM First will:

  • Understand the Data – A deep dive into the data, including loan level analysis, ensures a full understanding of your institution’s potential risks.
  • Assess Expected Results – Using a 12-month budget, we layer in base credit losses and expectations across portfolios.
  • Analyze Specific Risks – Our team of experts will run as many additional scenarios as needed based on your institution’s specific risk factors.
  • Deliver Actionable Insights – After the complete universe of risks for your institution is identified, we’ll project their potential impacts and the amount of capital required based on the likelihood of each negative event.

Get Started Now

Contact us today to ensure you have the essential planning tools.

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Learn more about Strategic Net Worth Analysis

How do you develop idiosyncratic risk scenarios?

To develop  the idiosyncratic scenarios, ALM First works with individual clients to determine their specific concerns. Idiosyncratic scenarios can expand beyond on-balance sheet risk and can involve occurrence of natural disasters like hurricanes or earthquakes which cause significant damage to branch networks, failures in cybersecurity or other components of operational infrastructure, and global considerations like the projected impact of a pandemic. Once a scenario idea has been established, ALM First runs numerous analyses through econometric models to estimate the sensitivity and exposure to the event in question and layers the results into the Strategic Net Worth Analysis.

What is different between regulatory CPST reporting and Strategic Net Worth Analysis?

Strategic Net Worth Analysis is not a regulatory requirement. Strategic Net Worth Analysis is performed over a short time period and the degree of input required from the institution can vary based on the desired report(s). While ALM First utilizes the scenarios provided by the Federal Reserve to guide Strategic Net Worth Analysis, ALM First can be more flexible in scenario creation due to the lack of regulatory requirements

Can Strategic Net Worth Analysis help other aspects of the institution?

ALM First’s Strategic Net Worth Analysis utilizes a probability of default-loss given default model (PD-LGD) in order to project potential losses. The PD-LGD model also stands as an acceptable model for CECL. In performing Strategic Net Worth Analysis, an institution would be able to simultaneously utilize results to validate CECL results. Further, Strategic Net Worth Analysis would be able to inform an institution of any particular credit concentrations that exist. Such information gives an institution the ability to confirm its concentration policies.

Why the heavy focus on net worth?

Capital represents the portion of a financial institution’s balance sheet that is not legally required to be repaid to anyone. It is a foundation of the balance sheet and must be able to withstand major economic movements. These stress tests evaluate capital strength.

  • Capital belongs to the stakeholders: shareholders and members
  • Capital is first in line for losses and first in line for profits
  • Capital is a type of funding that an institution uses to finance the purchases of assets and the making of loans
  • Capital designates the percentage of assets that a financial institution can stand to lose without becoming insolvent
  • Strong capital promotes public confidence, both in the institution and in the financial system as a whole

How much net worth should my institution hold?

Like with many questions, the answer is “It depends.” The institution needs sufficient capital to protect itself from negative events, to prove its health and long-term viability, and to meet regulatory, rating, and investor-determined requirements.

However, excess capital is a bad idea. It is expensive; it carries more risk for investors than debt securities or deposits; a financial institution holding excess capital must earn higher profits, all else equal, to generate the same return on equity for capital providers; and the government’s deposit guarantee makes excess capital less valuable and transfers risk from the government to the investor.

The best way to determine a proper capital holding requires a solid understanding of your current position, smart planning, and strong analytics.

All investing is subject to risk, including the possible loss of the money you invest.

“ALM First” is a brand name for a financial services business conducted by ALM First Group, LLC (“ALM First”) through its wholly owned subsidiaries: ALM First Financial Advisors, LLC (“ALM First Financial Advisors”); ALM First Advisors, LLC (“ALM First Advisors”); and ALM First Analytics, LLC (“ALM First Analytics”).  Investment advisory services are offered through ALM First Financial Advisors, an SEC registered investment adviser with a fiduciary duty that requires it to act in the best interests of clients and to place the interests of clients before its own; however, registration as an investment advisor does not imply any level of skill or training.  Moreover, ALM First Financial Advisors, LLC (“ALM First Financial Advisors”), an affiliate of ALM First Group, LLC (“ALM First”), is a separate entity and all investment decisions are made independently by the asset managers at ALM First Financial Advisors. Access to ALM First Financial Advisors is only available to clients pursuant to an Investment Advisory Agreement and acceptance of ALM First Financial Advisors’ Brochure. You are encouraged to read these documents carefully. Balance sheet advisory services are offered through ALM First Advisors.  Financial reporting services, loan introduction services, and other special project services are offered through ALM First Analytics.  Neither ALM First nor any of its subsidiaries provide legal, tax, or accounting advice.

INVESTMENT PRODUCTS ARE: • NOT FDIC INSURED • NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY • NOT A DEPOSIT OR OTHER OBLIGATION OF, OR GUARANTEED BY, ALM FIRST OR ANY OF ITS AFFILIATES • SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.