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Add Inspiration to Your Tough Times Playbook

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6 minute read – The following blog post was written by c. myers and originally published by CUES on July 27, 2023.

Many are concerned that the next few years could be financially tough for financial institutions, even if we avoid recession.  Tight liquidity, escalating cost of funds, inflation-driven operating expense increases, and accelerating loan losses are just a few of the challenges the industry faces. 

Raise your hand if you’re tired of disruptive industry events.  OK, noted.  Now, what to do about it?  You’ve survived shocks before, probably some pretty big ones.  Take a moment to remind yourself of the takeaways from those times and how they can be used to adapt to the current environment.  That knowledge can serve as a deep source of optimism, inspiration, and energy, especially through tough times.  Read on for more ideas to add to your “Tough Times Playbook.”  

Should we adjust our strategic plan? 

Depending on your situation, plans may need to be adjusted, which can be incredibly disappointing.  The important thing is to keep strategy as the guiding light as adjustments are made.  Whatever your strategy is – perhaps it’s becoming a leading choice for payments, offering top-notch multi-channel experiences with personal guidance when needed, or building a business banking experience that rivals local competitors – continue to work toward it. 

Envision the cost of delay 

How adjustments to the plan are chosen is also critically important.  Consider these 3 decision drivers: 

  • Strategic and competitive impact in the longer term 
  • Financial position – capital and earnings 
  • Financial impact in the short term 

It’s easy to see how going full speed ahead on strategic initiatives and spending in a tough financial environment could result in an unfavorable financial position.  It’s harder to see the costs of delay.  Picture your competitive environment in 3 years.  Many others will have continued to push their strategies forward.  How do you feel about where you’ll be in comparison to the competition if you pull back or push forward?  A dramatic pullback on operating expense and strategic initiatives to wait out the storm saves money in the short run, but could cost more in the long run if it causes you to fall behind.  But it could be the right decision depending on your capital, interest rate risk (don’t forget rates can go down), and profitability.   

As you work to find the balance, consider whether the measures of success should be revisited.  For example, if continuing with strategic initiatives will result in an ROA under goal because the environment has changed, would the board prefer to accept less-than-stellar financials with great competitive positioning for the future or hit the goal and delay competitive progress?  The answer will depend on many factors, including the capital level. 

Strategic flexibility is not the same as defeat 

Strategic flexibility does not necessarily represent a drastic change in strategy – it means that you need to recalculate the route to get to the same destination.  Assuming that changes to the plan are necessary, how they’re handled is more important than ever.   

We keep hearing that the past few years have left people stressed with more fragile mental health.  Presenting the changes as a failing does not promote engagement or help with stress and mental health, but working together to overcome obstacles does.  The fact that the plan needed to change and the reasons behind it need to be acknowledged.  Stakeholders should understand the brutal facts, then shift the focus to what the organization can do and how it’s making strides toward the strategy while adapting.  Presenting the adjustments as the new battle challenge, rather than a retreat from the battle, helps energize and engage talent.   

Find the opportunities 

Tough times can present unique opportunities, too.  Think about how you can help members with advice, information, products, and services that they need and value during this time.  Brainstorm other opportunities for the organization.  Here are a few ideas to get started: 

  • Gain talent while others are cutting back (they can help the organization become stronger faster) 
  • Market when others are cutting back 
  • Implement automation, process improvements, and other projects in areas with excess capacity (e.g., due to slower mortgage and consumer lending) while those employees aren’t as busy 
  • Take time to think strategically, plan, and brainstorm – even if you can’t execute in this moment 
  • Proactively look for unique ways for your members to save money and tell them how 
  • Think of creative and intentional ways to add fun to the workplace to help offset some of the stressors in employees’ lives 

Throughout it all, report on successes.  Don’t ignore the reality of the situation, but celebrate the good things that are happening.  That’s always good practice and is especially important in tough times. 

Inspiring your team through difficult situations can be a challenge but continue to use strategy as a guiding light.  While it’s important to be realistic and adjust as necessary, find new opportunities and put the emphasis on what can be done rather than what can’t.  Many employees will relish the problem-solving mode and feel that they’re part of the solution can provide a big boost to engagement.  Even if you can’t do everything that you wanted to, highlight the successes of the new plan as you continue to work toward the vision of your future. 

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c. myers live – Make Process Improvement Your Institution’s Superpower

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Business efficiency and consumer expectations are topics we are always discussing with decision-makers.  Making Process Improvement a core competency of your institution will create a competitive advantage.  In this c. myers live, we dive into skills and structures that drive a culture of continuous Process Improvement.  

Beyond reading our Thought Leadership on this topic, many have found value in attending our Process Improvement Education.  Our Experience Improvement methodology was created for and proven in the real world of financial institutions.  For more information about our upcoming May course, click here. 

About the Hosts:

Brian McHenry

brian mchenry headshot

As one of five owners of c. myers corporation, Brian works daily with CEOs and C-Suite teams to help them identify and prioritize necessary changes to continuously adjust their business models and remain highly competitive. When working through the strategic process, CEOs regularly praise Brian’s calm communication style and ability to authentically engage anyone he interacts with.

Learn more about Brian

Lisa Camper

Since joining c. myers in 2014, Lisa has helped propel financial institutions forward to reach their organizational strategic goals.  She regularly takes on key roles in a wide range of engagements with clients as they move their organizations forward through endeavors, such as Process Improvement, Strategic Leadership Development, Strategic Implementation, and Strategic Planning.

Learn more about Lisa

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Pricing Considerations in a Tight Liquidity Environment

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6 minute read – For many C-Suites, discussions around loan and deposit pricing, and funding strategies are now beyond the short-term band-aid.

Leadership teams are expanding their views to grapple with the inevitable – What may the future hold when our shorter-term funding band-aids peel off?

There is no one answer to this question.  That is why there needs to be diligent focus on thinking through options and modeling potential financial results.  This process enables decision-makers to see, in advance, a range of financial outcomes related to the strategic options they are considering.

As leadership teams work through discussions and financial modeling they typically identify and prioritize their options and the actions they will take.  This advanced thinking helps them better articulate what success looks like as they implement their prioritized options.  If forecasted results don’t come to fruition in the desired timeframe, they are prepared with more options to put into play.

As you do your financial modeling:

  • Don’t forget as you simulate potential financial outcomes, to test rates staying about the same, rates going down, and rates going up.  This helps decision-makers see how various options can help or hurt depending on rate movements.
  • It can be helpful to remind decision-makers and Boards that there are very few high-impact decisions that help regardless of what rates do.
  • Keep in mind that even if rates stay the same, it is highly likely that your Cost of Funds will increase.

Many financial institutions have experienced 10% or more decrease in savings accounts.  To make the math easy, let’s assume that the savings accounts had an average rate of 1% and the money moved to CDs paying 5%.  All else equal, this shift in deposits would hurt the current ROA by 40 basis points.

The cost of liquidity has increased dramatically, as evidenced by the chart below that shows the historical Cost of Funds for all U.S. Banks and Credit Unions compared to the 3-Month U.S.  Treasury rates dating back to the last time short term rates hit 5% levels.

Note how Cost of Funds continued to rise after short-term market rates stabilized and began to decline. This may require organizations to consider a variety of changes in lending and deposit pricing as well as investment strategy to support liquidity and cash on hand needs.  In addition, when evaluating your deposit pricing strategy, it is important to consider the potential impact on your relevancy with customers in the short- and long-term.  Liquidity challenges are expected to continue for some time, so it is essential to continue to sharpen your skills in this area.

 

The following questions are designed to help stimulate the discussions.  As always, more questions will be raised as the strategic discussions progress.  Ultimately, there is not one solution or one right answer.

Questions to Consider – Not in priority order as this is a non-linear discussion:

  1. How does your organization define short-, intermediate-, and longer-term?
  • It is important for everyone to base their recommendations and timing of action using the same definitions.
  1. What are your strategic lending objectives and desired positioning in your competitive space?
  • Consider how the answers to this question can result in competing priorities over your defined intermediate- and longer-term horizon.
  • Make sure to agree, and if so how, to factor in potential increasing credit risk and the implications for loan volumes.
  • Have frequent discussions regarding how operational costs to originate loans (including dealer fees) impact loan pricing, and profitability.
  • Once you understand the net yield on loans, consider comparing that to available alternative investments and/or loan pool purchases.  This can help decision-makers better understand the giveback to your customers should your organization’s loan pricing strategy result in lower net yields.
  • If your plan includes selling some of your loan production, be sure to help those involved in pricing decisions to have a clear understanding of the pricing levels necessary to achieve your desired return on sale.
  1. How much and what type of funding do you need to support your lending and growth objectives?
  2. How does your deposit strategy impact your non-interest income, fee income, customer stickiness, and customer growth?
  • This is also a good time to discuss and reconfirm your target markets and your value proposition for them.
  • If your funding needs are lower and your organization can allow some deposits to migrate to other financial institutions’ make sure to have healthy discussions around your level of concern about the potential longer-term implications if those depositors were to never return.
  1. For your strategic options around deposit and funding strategies, how sustainable and affordable are each of the options?  What external forces could severely threaten sustainability and/or affordability?
  • For example, what could be the impact on your Cost of Funds if many of your competitors need liquidity such that their pricing becomes irrational?
  1. What role does your investment portfolio play?
  • Discuss what portion should be allocated to support current and future liquidity needs versus investment return.
  • It is important to view this in light of lending and deposit objectives as well as emerging external forces.

Many of our clients have found that these types of questions, considerations, and discussions, supported by financial modeling, accelerate their leadership teams’ and Boards’ appreciation for the complexity and interdependence of pricing decisions.

The result is a much more cohesive and strategic approach to pricing decisions versus having to make quick reactive decisions, without having time to absorb the potential intermediate- and longer-term implications.

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3 Strategic Questions You Should Be Asking as Credit Risk Builds

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4 minute read –  Over the last 18 months, the conversations we’ve had with management teams and board members across the United States have focused on concerns around interest rate risk – rates sat at or near 0% for so long that most people in leadership positions were not in decision-making positions the last time it was relevant to look at up-rate and down-rate environments.  We have also been privy to hundreds of conversations around liquidity risk – rare is the institution that hasn’t witnessed material outflows of NMDs.  But as we’ve looked at balance sheets over the last several months, we’ve noticed an increase in indicators of credit risk.  

We anticipate that credit risk is going to increase for many institutions in the next few months for a number of reasons.  Federal student loan payments are scheduled to resume for tens of millions of Americans starting this fall.  Coupled with the lasting impacts of inflation, there is reason to anticipate this will increase pressure on many household budgets.  Additionally, for many the stimulus money is mostly gone, Americans’ credit card debt has hit a trillion dollars, and the possibility of recession still looms.  There is also concern that commercial real estate may not bounce back with work from home becoming the new norm for so many.  And we’ve yet to see the ripple effect of the change in credit rating of the U.S. and several larger banks. 

While none of us can predict the future, we can ask strategic questions to help prepare for the potential consequences of these and other impacts to consumer expenses, while continuing to cultivate relationships with individuals and the community in which we work.  These questions are a place to start the conversation, but just as important as the “what” to discuss is the” who” – who should be part of these conversations.  We see it happen again and again, strategic conversations about pressing issues that take place in silos, missing voices and perspectives that can help paint a more nuanced picture of what is happening across the organization.  Making sure you are asking the right questions with the right people in the room can help you navigate this unpredictable environment. 

The following are questions that can be used to spark discussion around credit risk as environmental factors influence larger economic trends: 

  • What is the likelihood your strategic target market will be impacted by these economic factors?   
    • Understanding how your target market may or may not be impacted might color your discussions about raising credit quality standards or taking on more risk to support those who might be in need. 
    • What data are you leveraging to better understand your target market?  There may be benefit in looking beyond the last 3 or 4 years to before the pandemic influenced deposit rates and budgets. 
  • How might different components of your loan portfolio be impacted differently?   
    • For example, commercial loans tied to real estate may have elevated losses if they are impacted by lower occupancy rates.  Asset values for auto and real estate loans may decline after values jumped significantly after the pandemic.   
  • How are you linking risk and strategy? 
    • For example, how are policies, underwriting, risk appetite, etc. synced with your long-term strategy?  What-ifs can help you model possible scenarios – trying different variables in your numbers and exploring the potential impact of changing repayment speeds or increased delinquencies and charge-offs – and link today’s decisions with a variety of potential futures.  This can also be a tool to help understand how potential risks are connected and where there may be opportunities as you discuss balancing credit risk with other risks like interest rate risk or liquidity risk. 

While your institution may not yet be feeling the consequences of continued pressures on household budgets, it is important to engage in discussion on credit risk as part of your strategic conversations.  Understanding how your target market is affected and thinking through different scenarios can help you draw connections across your organization and get prepared for future possibilities. 

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c. myers live – 3 Ways CEOs Can Create More Time to Think

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With the growing complexity of the financial industry and the world around it, CEOs are looking for more time in their day to think strategically.  After receiving great feedback on this podcast, we have decided to repost it to remind decision-makers how important it can be to prioritize strategic thinking time.  In this c. myers live, we will discuss 3 ways CEOs can create more time to think and make decisions.

About the Hosts:

Sally Myers

sally myers headshotSally is a founder of c. myers corporation and one of five owners. Driven by a deep commitment to helping financial industry leaders and regulators for more than two decades, her guidance has shaped c. myers’ focus on helping clients create opportunities and approach problem solving from a scalable perspective. She has also been a strategic force behind the development of c. myers’ financial models.

Learn more about Sally

Dan Myers

Dan MyersSince joining c. myers, Dan has worked with scores of credit unions helping them to develop quick and efficient processes, as well as organize and manage portfolios of projects to maintain relevancy, keep costs down, and create more rewarding member and employee experiences. Credit unions that have benefited from Dan’s expertise have ranged from $90 million to over $5 billion in assets.

Learn more about Dan

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