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Strategic Thinking Exercise – Are the Tools for Evaluating Credit Risk Commensurate With the Environment? 

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Credit Score

2 minute read – A recent article by the Wall Street Journal, FICO Score’s Hold on the Credit Market is Slipping, raises many interesting questions surrounding the potential opportunities for a financial services industry that is perhaps less reliant on credit scores in the future.   

We encourage teams to think strategically and explore the impact and future opportunities if FICO credit scores become a smaller factor in underwriting decisions.  Below are some questions to help serve as a jump start to the thinking and dialogue.   

  • If there were no limitations, what would we ideally want to know about the customer and their creditworthiness?  
  • How could the current structure and emphasis on credit score result in missed lending opportunities?   
  • If lending opportunities are currently being missed, how can we correct course?  
  • What are other data points that can indicate a person’s creditworthiness that maybe weren’t available in the past, or better represent this new environment?   
  • What tools, systems, and resources do we have in place to incorporate our own internal data, and what needs to be outsourced?  
  • What other questions should we be asking?  

With strategic thinking exercises, the key is creativity and dialogue.  This is not about making decisions, but exploring a strategic topic in the environment or on the horizon.  This can help you think about your institution’s direction and future business model.   

c. myers live – Grow Your Top Line

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As leadership teams continue their strategic discussions, and move into their formal strategic planning process, it’s important that teams don’t lose sight of their top line.  In this c. myers live, we focus on revenue, and things to consider when discussing generating revenue, diversity of revenue, and potential threats.  

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

Charlene Leland

Charlene LelandSince joining c. myers in 2004, Charlene has become one of the most diverse facilitators within the industry, especially with regard to helping credit unions of all sizes address three necessary business objectives: relevancy, differentiation, and sustainability.  Over the years, she has honed her skills for facilitating various types of sessions, including Strategic Planning, Strategic Implementation, Member Journey and Experience Improvement, and Strategic Financial Planning.

Learn more about Charlene

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Prepare for the Impact of Big Change

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4 minute read – The following blog post was written by c. myers and originally published by CUES on June 23, 2021.

Strike ImpactWe often talk about personalization and connecting with the customer, especially as digital adoption grows, but there could be emerging opportunities that are not about forging direct relationships.

Consumer behavior continues to shift, and a noteworthy change is consumer adoption of financial services in places where financial services didn’t exist previously. Think of financing a purchase while shopping online with buy now, pay later, opening a checking or debit account through Google, Uber paying drivers immediately in the app, or Tesla offering car insurance as part of the purchase process. People like having their financial needs addressed conveniently, when they need them, without having to seek them out separately.

The adoption of ultra-convenient financial services is on a rapid growth trajectory as more fintech and other providers embed financial products into their apps. An emerging opportunity for financial institutions stems from the fact that, so far, many fintechs don’t want to become banks. They’d rather focus on their core strengths and leave the banking regulations, infrastructure and details to licensed banks and credit unions.

Thus, a potential partnership is born in which financial institutions provide the behind-the-scenes nuts and bolts of financial services like loans and accounts, and in most cases, customers assume the services are provided by the company they’re interacting with and are unaware of the identity of the financial institution.

While this could represent threats to the existing business model, imagine introducing entirely new channels that provide an experience today’s consumers are demanding. In addition to existing target markets of customers who interact directly with the institution, new target markets become possible.

People often feel uncertain and maybe a little uncomfortable when presented with such potentially impactful changes in the industry. One way to become more comfortable is to carve out time to think strategically and creatively about what the changes could mean to your organization, without the pressure of having to make any immediate decisions.

Don’t get too distracted yet by how this would work. It might involve software development, engaging third parties to link to the fintech, regulatory and compliance questions, operational changes, and on and on. Before going down that path, start with some strategic thinking about the idea.

There are many potential opportunities from banking and fintech partnerships, but let’s take one scenario as a strategic thinking exercise. Assuming the trend accelerates, could there come a day when the majority of people don’t even have a direct relationship with a bank or credit union?

It’s 2030. Your credit union is wildly successful, even as consumer preferences and expectations have evolved to the point that people don’t really think of what they’re doing as banking. Many younger consumers have a debit account with Chime, use Fidelity for investments, get their auto loan through the dealer’s app, their mortgage through Zillow, and finance large purchases through buy now, pay later options at time of purchase. Some people do not even realize what a bank or credit union is for.  

Strategic Thinking Questions:

  • What new opportunities did we take advantage of and why?
    • How did we shift our mindset?
    • When did we start making changes?
    • What were the hardest things to change?
    • What competitive advantages did we create?
  • What changes to our business model were necessary to be successful in this scenario? Key questions include:
    • Why are we in business? What is our purpose?
    • What target markets are we serving?
    • What is our value proposition for our target markets?
    • What core strengths has our organization developed that enable us to deliver the value propositions successfully?
  • What was our strategic approach to third parties?
  • How have we changed our organizational roles and structure?
  • How did we change our approach to talent management?
  • How have our major revenue sources and expense structure changed?
  • What are our new measures of success?
  • What decisions could we make today that would prepare us for this scenario, and not harm us?
  • What other questions should we be asking?

It’s not too early to start thinking through the potential opportunities and threats that widespread growth and adoption of these emerging capabilities presents. Spending time with stakeholders thinking about the possibilities and philosophical questions, while staying out of the weeds initially, is a productive way to begin the conversations that will help determine the institution’s ultimate direction.

c. myers live – Strategic Insight into Industry Trends and Topics

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As we’re helping clients navigate changes in the environment and impacts to the industry, we’ve been having invaluable, strategic conversations on a wide range of topics.  In this c. myers live, we have a free-flowing discussion on some of these latest trends and topics, and why they are so important. 

About the Hosts:

Rob Johnson

rob johnson headshotRob, one of five c. myers owners, has a reputation for deep, original thinking on asset/liability management and every conceivable modeling methodology, as well as analysis of investments, liquidity, aggregate risk, concentration risk, and other related topics.  While Rob is a familiar face to the managements and boards of many of the largest credit unions, he has helped credit unions of all sizes tackle some of their toughest challenges, such as rebuilding capital and navigating safely and soundly with the smallest of margins. He has become quite familiar to many leaders in the regulatory world, both as an educator and a thought leader.

Learn more about Rob

Brian McHenry

brian mchenry headshotBrian, one of five c. myers owners, has worked closely with credit union Boards and managements of all sizes in a variety of capacities.  As a strategic planning facilitator, CEOs regularly praise Brian’s industry knowledge, calming communication skills, ability to authentically engage anyone with whom he interacts, and ability to keep discussions focused on linking strategy with desired measures of success.

Learn more about Brian

Sally Myers

sally myers headshotSally is a founder of c. myers corporation and one of five owners. Driven by a deep commitment to helping credit union leaders and regulators for more than two decades, her guidance has shaped c. myers’ focus on client support and leadership development. Sally has facilitated hundreds of strategic planning, governance, and business model evaluation sessions, and has spoken at countless national and regional industry conferences.

Learn more about Sally

Other ways to listen to c. myers live:

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Avoid Label Risk When Making Investment Decisions

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4 minute read – We often see that people focus on investment labels (e.g., 3-year callable bond, 5-year callable bond, or 15-year MBS) when making investment decisions.  This blog contains food for thought as you consider different investment alternatives.

As we have said many times, your individual investment decisions should always be made in light of your overall investment strategy, and how your investment strategy can support optimizing your balance sheet and desired strategic flexibility to serve your customers.

To illustrate, the table below contains two different investments – investment strategy #1 and investment strategy #2.  While the investment descriptions or labels have been intentionally removed, each strategy’s current yield, value change, and risk vs. return trade-offs are shown.

As noted below, the risk vs. return trade-off ratio represents the change in volatility for every 100 basis points (bps) of current yield.

Risk vs. Return Trade-off Example 1

Based on the results in the table, have you been able to determine the type of investment behind strategy #1 and #2?

It may come as a surprise, but strategy #1 is actually a 5-year callable bond with a 1-year lockout and strategy #2 is a 15-year mortgage-backed security (MBS) passthrough.

There are many different types of callable bonds, each carrying with it unique risks.  However, there is often an assumption that a 3-year final term, or in this example a 5-year final term, doesn’t have much interest rate risk.  Or at least, surely as market interest rates rise, there is less risk than an MBS with a final maturity 15 years from now.  This assumption is often referred to as label risk.  While it’s true that the 5-year callable bond has a shorter final maturity than a 15-year MBS, the amortizing nature of the MBS can result in similar changes in value in a +300 scenario.

After considering the current yield of strategy #1 and #2, the +300 risk vs. return for every 100 bps of yield is more favorable for this specific MBS.

Risk vs. Return Trade-off Example 2

This is not to suggest the team should only focus on MBS investments.  There are unique risks that come with MBS, such as premium risk, making it important to test a range of prepayment speeds.

Understanding risk vs. return has always been important, but narrowing margins have made it more crucial.  Another example that has come up recently for many decision-makers relates to the importance of revenue/yield.  In the previous example, the callable bond had a less favorable risk vs. return trade-off compared to the MBS.  However, how does the same 5-year callable bond compare to a 3-year agency bullet in a +300 bp rate shock?

Risk vs. Return Trade-off Example 3

The table above helps show that the callable bond has nearly double the +300 decline in value, but earns an extra 65 bps today.  This results in a much more favorable +300 risk vs. return ratio compared to the 3-year bullet.  While revenue is important, careful consideration is required.  Being potentially locked into longer-term investments comes with a risk that might not fit the risk appetite for every team.

The goal with the examples above is not to advocate for a particular investment type, but rather to remind teams that investment labels often don’t tell the whole story.  Take the time now to test, strategize, and form a clear picture of how different investment strategies can support optimizing your balance sheet – not only for today, but for potential environments in years to come.

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