Posts

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Relieve Some of the Investment Pressures with Incremental Growth in Lending

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4 minute read – As many leadership teams are in the process of building their 2022 budget, a common theme is emerging and that is an expectation for lower earnings next year.  With the potential for less profit, no stone is being left unturned for important revenue generating opportunities.  

One way to increase Return on Assets (ROA) is to take on additional Interest-Rate Risk (IRR) through lengthening the investment portfolio.  While this can be a quick way to support earnings next year, there are a couple of challenges making longer-term investments a more difficult decision.  One challenge is the dollar amount often required to achieve the desired earnings impact.  To illustrate, consider a $1B financial institution that hopes to increase its ROA 5 basis points (bps).  While there are many different types of investments, the team is evaluating longer-term callable bonds.  

 As seen in the table above, $50M of longer-term callable bonds are needed to achieve the desired 5 bp improvement in ROA.  With market interest rates and investment yields still very low, a significant amount of liquidity is required for 5 bps of earnings.  While liquidity may not be an immediate concern, what if in the next year the team thinks it might need that $50M for pent -up loan growth or to absorb a potential slowdown in deposit growth? 

Beyond liquidity considerations, another challenge with many current investment strategies is the difficult risk versus return trade-off.  In the callable bond example, the institution increases ROA 5 bps. However, the +300 bp EVE/NEV volatility increases nearly 70%, changing from -11.55% to -19.67%.  In addition, the +300 bp EVE/NEV ratio decreases 0.73%.  

Because of the complex investment environment, many leadership teams are turning their attention to other areas of the financial structure.  They may ask, “What would we have to do in auto loans or mortgage loans to gain the same 5 basis points we are targeting with the investment portfolio?” 

 

As seen in the table above, only $10M of auto loans and $15M of mortgage loans are required to achieve the goal of increasing ROA 5 bps.  In addition, both have less IRR in a +300 bp shock.  It can come as a surprise that the 30-year mortgage strategy has less IRR than the 5-year callable bond strategy, but consider the difference in dollar amount.  The 30-year mortgage strategy is only $15M leaving an additional $35M in overnights serving as an on-balance sheet hedge to rising market interest rates.  

With many teams continuing to sit on a lot of liquidity, it can be easy to support deploying large amounts of liquidity towards lengthening the investment portfolio.  However, with a focus on loan processes, digital delivery, and pricing, perhaps such large investment decisions may not be necessary.  

Longer-term investments can still play a complimentary role in increasing ROA but relieve some of the pressure of having to carry so much of the burden.  While it may take time for lending to build the desired momentum or loan-to-asset to return to some semblance of normalcy, focusing on incremental victories in loans can have a better financial impact than using large amounts of liquidity to purchase investments. 

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c. myers live – Should We Hold or Sell Our Mortgage Production?

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This c. myers live was first published in August of 2020.  Although the premiums are lower than when this was originally recorded, the questions discussed are always relevant – the pandemic just raised them in a more urgent fashion.  Given recent conversations with our clients, we thought it would be beneficial to repost this podcast.

This is one of the top 3 ALM questions we get asked daily.  As we help decision-makers answer this question, we emphasize that doing the math and ALM modeling is the easier part.

In this c. myers live, we will talk through some things that you should consider when making this decision, and how it can impact your overall business strategy.

To gain more insight on the modeling of this topic, read our blog article.

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

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

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Organizational Flexibility vs Strategic Distraction

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organizational flexibility

7 minute read – It’s important for organizations to stick to their plans in order for strategic progress to occur.  At the same time, the pace of change is driving a need to adapt faster.  What’s the best way to approach decisions when faced with being flexible or staying the course?  With the appropriate information at your fingertips and asking the right questions, the decisions become clearer.

Many organizations have developed a strategic implementation process to ensure decision makers have the right information at hand as they make decisions related to the execution of the strategy, but some are stumbling on dialing in the process to serve both flexibility and progress.  Initially, teams may be so focused on getting better at implementing the strategy, that they resist any change to the plan because it feels like a distraction.

Here are four keys to ensuring your strategic implementation process provides the right people with the right information so the right questions can be asked:

The Team

The strategic implementation team includes those responsible for strategic planning, usually the C-Team, representation from the project management office, and sometimes others who are drivers of the strategy.  A good strategic implementation process makes room for flexibility by regularly providing the team with a high-level view of strategic projects, so they can easily hold new ideas up against what is already being worked on and discuss the situation with a strategic planning mindset – meaning a future-focused approach without silos because this team is responsible for the institution’s strategic progress.

The View

It’s essential that the view provided for the strategic implementation team is kept high-level:

  • Include strategic/enterprise level projects. Clearly define what a strategic/enterprise level project is.  Focus on the strategic projects that come directly out of planning, and projects that are high impact enough (in terms of income, expense, hours, number of departments, etc.) that the team wants them on their radar.  It must be clear which are strategic and which are just high impact.  There should not be very many strategic/enterprise level projects
  • Do not include departmental projects (unless they have met the strategic/enterprise definition)
  • The objectives statement for each project should always be included in the view. Good objectives statements identify what the projects are really trying to accomplish from a strategic point of view, which is why they should be in front of this team at all times
  • The team must be able to easily see and understand project progress at a high level

The Meetings

The strategic implementation team should meet regularly (monthly is typical) on strategic progress.  The purpose of this meeting is to refocus on overall strategic progress, ask any questions about progress updates, and address decisions like whether to take on a new opportunity or how to respond when a strategic project goes off track.  This builds a less siloed approach and helps keep the organization’s strategic progress top of mind across all fronts.

Be clear on the strategic implementation team’s role and responsibilities.  Carefully craft an objectives statement for these meetings and create working agreements.  Show these at the beginning of every meeting to help keep it at the strategic level.

The Decisions – Flexibility or Distraction?

Armed with this process and view, the team is well-positioned to discuss new opportunities and direction changes.  Every business must make progress toward their plans while continuously considering the changes all around them.  Rapid change can require rapid action.  At the same time, shiny objects can hold great appeal.  This is why taking a team approach with a strategic planning mindset, and having the right information, sets the team up for better decisions.  It may take some practice to find the best balance between sticking to the plan and acting on new opportunities.  Every team member must enter discussions with an open mind and be willing to hold each other accountable when necessary, even if it’s the CEO bringing up the new ideas.

Here are some questions the team should be asking:

  • Will this move an existing strategy forward or does it represent a new strategy?
    • If it’s new, do we need to involve the Board?
  • Putting ourselves into a strategic planning mindset, how would we prioritize this new idea in relation to what is already on the strategic plate?
    • Consider always asking whether this represents flexibility or distraction
  • Does this new idea change the significance of any of the other strategic projects?
  • If you decide to take on this new idea or change direction on an existing strategy, how will it affect other strategic projects? Consider timing, resource draws, training demands, marketing, etc.
    • There will be more room for new ideas if the plan does not max out resources at the beginning of the plan

Note:  Whether new ideas are taken on or not, there is an important piece that is often missed in strategic implementation – monitoring the success of the strategic projects to see if they brought the strategic progress that was intended at the outset.  It may take months to implement a strategic project, but the objective may not be fulfilled until much later.  Consider the example of implementing a new chat feature with the objective of reducing calls and improving the net promoter score.  Getting the chat feature up and running is important, but meeting the objective may take much longer.  The strategic implementation process must include this tracking so the team has an accurate picture of true strategic progress and has the opportunity to address unfulfilled objectives.

The strategic implementation process requires a balance between executing everything that has been planned and making room for agile reactions to new developments.  A solid strategic implementation structure sets the team up for success in allowing flexibility while minimizing distraction.

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The Power of Working Agreements

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working agreements

4 minute read – When we work with leaders and teams, one of the most effective practices we use is working agreements.  Often, people have unspoken expectations for their interactions with others, and when these expectations aren’t met, it can create unnecessary frustrations or inefficiencies.  A solution to combat this issue is to create a set of agreements on how people will work together for a meeting, as a team, in a manager/direct report relationship, etc.  These working agreements are part of a living document that can be modified and adjusted over time and should include input from everyone.

The power of working agreements is incredible.  It not only helps create clarity for all parties involved about what is expected of them, but gains buy-in as every person involved is part of creating and accepting the working agreements.  This process, and the agreements themselves, produce greater accountability as individuals have a framework for how to show up, give in-the-moment feedback, and provide assessments to others.

Many have been in meetings where people are multi-tasking and not fully tuned into the discussion.  The costs of that are obvious:

  • Ineffective meetings that do not meet success measures and objectives
  • Lack of critical thinking and exchanges of ideas
  • Time wasted having to rehash decisions and information over and over
  • Unintentional messages that the subject matter is not important
  • Contagious disengagement of other participants

Now imagine being in a meeting where there is an agreement and accountability of staying present.  As this agreement becomes habit, the effectiveness of the meeting increases, and the sharing of information is enhanced.  It also gives meeting participants permission and makes it easier to call on each other if they are multi-tasking and not living up to the agreements.  A quick review in the beginning helps remind everyone of the expectations, and a review in the end gives time to reflect on how they showed up in light of the working agreements.

Here are a few more common working agreements used among teams in the current hybrid work environment:

  • Preferred method of communication – the number of communication channels has increased because of virtual and hybrid environments.  This means that important information can be missed if a leader is not constantly checking all channels.  Setting an agreement around the type of information and preferred channels helps ensure that leaders don’t miss key information.
  • Use video – you could not hide your face from others when working in the office, why do it while working remotely?  Having the agreement to use your video when communicating helps not only with keeping employee engagement but also allows for more direct and effective communication.
  • Hold yourself and others accountable for project roles and tasks – holding yourself and your peers accountable ensures that everyone on the team is effectively playing their role to get the job done.
  • Adhere to deadlines – when the team has buy-in on a timeline it means taking deadlines seriously and keeping projects and initiatives on track.  In instances where a deadline can’t be reached, be sure to communicate ahead of time and with the right people to avoid unintended messages that the deadline was not important.
  • Speak up – when discussing projects and initiatives, it’s important to speak up about any relevant concerns regarding decisions and directions.  Make sure to seek full clarity on the project objectives and expectations.  Getting this out in the open and addressed will help the team stay aligned.

Again, the concept of working agreements is simple.  Yet, as many have found, the power of them is immense whether you are using them for big planning meetings or with smaller teams.

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c. myers live – Five Characteristics of Critical Thinkers

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Many CEOs are saying there is a need and growing opportunity to cultivate more critical thinkers in their organization in order to move their business forward.  In this c. myers live, we discuss five characteristics of critical thinkers, and give examples of how those characteristics support critical thinking.

About the Hosts:

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

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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Events

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NAFCU 2017 Board of Directors & Supervisory Committee Conference

C. myers will present 2 sessions:

General Session – Asset/Liability Management:  What a Board Needs to Know About Optimizing Financial Risk/Return

As the world continues to change at lightning speed, decisions have become more complex and far-reaching.  A/LM can be a source of actionable business intelligence, helping decision-makers navigate this complex environment.

During this session participants will explore examples of how credit unions are readily identifying and optimizing financial risk/return trade-offs.  A prime benefit of this optimization is more effective allocation of financial resources which can support enhanced member experiences.

Breakout Session – 6 Questions Strategic Boards Discuss During the Budgeting and Forecasting Process

As the pace of change accelerates, strategic boards find that the questions they are discussing during this critical process need to evolve.  Session participants will discover how asking these 6 questions can help boards successfully connect budgeting and forecasting with their credit union’s unique strategy.

Please join us!