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Strategic CFOs Lift the C-Suite To New Levels

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4 minute read – The following blog post was written by c. myers and originally published by CUES on April 14, 2022.

If you have a longer-term financial roadmap, you’re one of a growing group of institutions that have discovered the strategic benefits of this vitally important tool.  If you don’t have one, it’s a good time to consider creating one. 

Much like technology roadmaps, financial roadmaps – also called strategic financial plans – help connect strategy with future outcomes.  The costs and benefits of strategic initiatives extend beyond what is captured in a one-year budget.  Therefore, a high-level longer-term view that includes the strategy and shows potential year-by-year earnings and net worth provides a necessary preview of the institution’s financial direction.   

Most institutions would not operate without a multi-year strategy, which is why building a view of the longer-term potential financial performance of the strategy is so critical to enhancing the entire C-Suite’s full understanding of the strategic direction. 

4 keys to financial roadmap success: 

  • The strategic CFO drives the creation of the roadmap and facilitates conversations with the C-Suite as a team.  This is not an activity where the CFO produces the roadmap on their own and presents it to the rest of the team.  Collaboration and conversation are foundational to the roadmap. 
  • This is not a budget.  It’s about possibilities and alternative outcomes.  Strategic financial plans layer the big picture financial consequences and timing of the strategy over trends for the next 3-5 years.  It is not intended to be precise; it is intended to be high-level and directional.  Think of it as a strategic conversation you’re putting numbers to. 
  • The financial roadmap goes beyond ALM analysis, but ALM is a part of it.  This is especially true now that the Fed is expected to increase rates starting in 2022 through 2024.  It’s important to see how the financial structure your roadmap leads to will hold up if interest rates move more than expected. 
  • Various views are important.  Create what-ifs for variations in relevant assumptions.  This is incredibly important so everyone, including non-financial team members, can see the impact of different paths.  Some assumptions that are high on CFOs’ lists are interest rate changes, changes in loan and deposit growth, higher reliance on mortgage lending, shifts toward member CD growth, higher than expected costs for talent, housing market changes, reductions in non-interest income due to factors such as ODP regulation, and continued supply chain problems, especially their effects on auto lending. 

Combining the long-term impact from the strategic initiatives and select environmental changes may paint a picture that brings you peace or gives you pause.  Either way, it’s a highly beneficial strategic view to have.   

Engage, learn, and grow as a team: 

C-Suite members typically find the thought process that the creation of the financial roadmap entails to be engaging and illuminating.  The thought process is as important as the numbers it produces and can help your C-Suite gain a deeper understanding as the longer-term financial possibilities begin to emerge.  It often helps reveal a future that is as exciting as it is uncertain. 

This is a good time to create a financial roadmap, given the changes and uncertainties that are on the horizon.  Enhancing the C-Suite’s understanding of where your organization’s profitability and net worth could land over a longer term provides a critical early view and precious time to adapt. 

For more on financial roadmaps, click here.

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Update to the NEV Supervisory Test Framework Brings Relief and New Pressures

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6 minute read – The NCUA recently released an update to its Interest Rate Risk Supervisory Framework that specifically addresses the NEV Supervisory Test.  In short, while the update provides some relief for credit unions, it also increases the amount of judgement in the exam process.  This will require credit unions to make sure they have a strong understanding of their ALM results, earnings potential, and sources of risk. 

As a reminder, the test has created a challenge for many institutions, as rates have increased this year.  Their risk classifications increased significantly in the NEV Supervisory Test, which did not always align with the changes in their balance sheets and overall financial structures.  However, the increased risk classifications brought corresponding examiner pressure.  This was especially true for those in the extreme risk category where the NCUA manual would call for a DOR (or other supervisory action).  DORs would then require a de-risking plan.  (See:  https://www.cmyers.com/thought-leadership/ncua-nev-supervisory-test-heads-up-now/).  

In an effort to relieve this pressure, the NCUA removed the extreme risk classification (see below for updated classifications). 

The NCUA’s intention is to relieve pressure on the industry and to give credit unions time to adjust to this new environment.  However, this may cause a different pressure to emerge, as there is now more discretion in the exam process to determine the level of risk and what actions may be needed.  Indeed, many of the subtitled sections in the update speak to the increased discretion in the exam process: 

  • Providing Examiners More Flexibility in Assigning IRR Supervisory Risk Ratings 
  • Considering the Source of High IRR 
  • Assessing Risk Management and Controls 
  • Analyzing Potential Impact on Earnings and Capital 

As always, the heart of the NCUA’s concern is the risk any one institution poses, and even here there is some level of discretion when looking at the examples for when a DOR should be considered: 

  • The credit union’s level of IRR represents an undue risk to the Share Insurance Fund, and the credit union is not taking appropriate and prompt action to address its level of IRR 
  • The credit union has high IRR and has not adequately updated its approach to managing its interest rate, liquidity, and related risks for current market conditions 
  • The credit union has a material governance deficiency (identify, measure, monitor, and control) relative to its level of IRR 

The bottom line is that there is now more burden of proof on the part of the credit union.  This also comes at a time when many in the industry, examiners included, don’t have experience going through a stress event like the one being experienced today with high inflation and rising rates.  It’s easy to imagine how these factors have the potential to create misunderstandings and increased examiner pressure.  This is why it is critical for credit union leaders to understand and be able to explain their IRR position from different angles, as well as the sources of risk and the associated return trade-offs that have been taken. 

This is where there is some silver lining to the new pressures created by the update.  The NCUA has, in many respects, provided a roadmap (and the impetus) for credit unions to be more prepared for their exams and, more importantly, better equipped for this environment.  

As a first step toward becoming better equipped, ALCOs should be highly engaged.  Committee members should be asking more questions and having deeper discussions about the institution’s structure, its sources of profitability and risk, and the risk/return trade-offs of different decisions.   

As part of these conversations, it could be helpful to ask:  Do we need to broaden our view of where rates will go?  Primarily focusing on rising rates can cause the organization to lose out on opportunity if rates go down.  This is where it’s helpful to turn the focus from one rate environment (think +300 bps) to a range of rate environments and think of optimizing for that range.  Expanding conversations in this way will help during the exam, as leaders will have a deeper understanding of IRR and their institution’s approach. 

Ensure that the focus is not limited to NEV, rather, the discussions should focus on understanding the impact to earnings and net worth.  This is especially true if there are concerns around insolvency.  In essence, the key is to show that even with high-risk NEV Supervisory Test results, the institution will remain a going concern, assuming it can demonstrate an ability to generate earnings and build or protect net worth.  Even in cases where an institution has negative earnings, it can often identify ways to protect net worth and remain solvent while it addresses its earnings issues.  A key to this is to have sufficient liquidity, so as to not have to turn unrealized losses into realized losses.  Testing and understanding liquidity strength along with contingent options is critical if the risk profile is tight.  Liquidity risk can change quickly, especially as institutions have seen assets lengthen and some have seen deposits decreasing. 

Internally, institutions may also face questions and pressure from different decision-makers, as there is no ‘right’ answer to appetite for risk.  Some may not like the level of risk indicated in the NEV Supervisory Test and push to de-risk.  It can be easy to request that risk be reduced quickly, but there are always trade-offs. Whether for the examiners or internal pressure, taking steps to de-risk can cost millions of dollars in earnings and net worth.  This is where it is important to have the board and ALCO understand the risk/return trade-offs so they can make informed decisions that help move their strategy and financial structure forward. 

Without understanding the risk/return trade-offs, decisions could be short-sighted, unnecessarily restricting earnings and impacting net worth levels.  This could then interfere with strategic initiatives and moving the business forward.  This is why decision-makers, with different areas of responsibility, will want to take the time to build a solid understanding of ALM, have productive conversations, and connect the decisions to the potential financial and strategic impacts.

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Linking Revenue Opportunities with Appetite for Risk

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3 minute read – With inflationary pressure and rapidly changing interest rates creating a lot of earnings uncertainty, leadership teams are laser-focused on increasing revenue streams to help support the bottom line.  As important revenue opportunities are explored, frequently refreshing and assessing where to potentially take more risk will be key. 

A helpful exercise is to survey decision-makers individually on the level of risk they perceive the institution is currently taking in specific areas and their desired level or appetite for risk in those same areas.  A rank of 10 indicates a high level of risk and a rank of 0 means low risk. 

As individual responses are averaged, clarity and alignment will begin to take shape for the leadership team.  A next-level discussion is to dig into the range of individual responses to gain a better understanding of each individual’s perspective.   

In the example table below, the average risk rank for Risk to Revenue is currently at 6.2 out of 10.  This is the highest risk rank, meaning it is the top concern for this group.  Comparing this to the average of 3.5 on appetite for risk is an indicator that the team wants to lower their Risk to Revenue. 

So where is there potential opportunity to do so?  Are there other areas of the business or structure that could be leveraged to decrease the pressures facing revenue?

As seen in the table below, the team’s appetite for credit risk is almost the same as the current level of risk.  However, both interest rate and liquidity risk reflect an appetite to take more risk.  These results often stimulate thought-provoking discussions around questions like how much, and in what range of rates.

With greater clarity, different departments can take action and begin implementing tactics to take advantage of the opportunities.  For example, Finance might decide to deploy short-term liquidity into longer-term investments to increase revenue, since there is appetite for more interest rate risk.  This may mean there is room to portfolio mortgages, instead of selling, to steady the revenue stream over time.

Consciously choosing to take more risk in specific areas is one avenue for increasing revenue streams.  Of course, policy limits must be taken into account, along with a combined view of other risks the institution has accepted.  Frequently performing risk level assessments like the exercise above, while also quantifying risks in aggregate against capital, can help decision-makers feel more comfortable with their choices.

Note, the table above is an excerpt of the categories that you will want to consider.  It is good to have the categories cover the different parts of your business model, as this can help bring more clarity to your team.

For more resources, our Strategic Capital Requirement tool can be found here.

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c. myers live – Take Crypto as a Learning Opportunity for Your Institution

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It is no secret that the world of crypto is constantly changing and challenging decision-makers to think outside the box.  Amongst this new terrain, there is a multitude of learning opportunities to better understand this complicated market and its impact on financial institutions.  Joining us to share her expertise is special guest, Patti Wubbels, from SRM (Strategic Resource Management).  Patti is the SVP of SRM and a member of the Digital Assets (Crypto) Advisory Services Team at SRM.  

For over 30 years, SRM has helped 1,000+ financial institutions add more than $5 billion of value to areas such as payments, digital transformation, digital assets, core processing, and digital information.  Their Digital Assets Advisory Services educate financial institutions on digital assets and assist with strategic advice on vendor selection and compliance considerations.  

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

Patti Wubbels

Patti Wubbels is Senior Vice President and member of the Digital Assets (Crypto) Advisory Services Team at SRM (Strategic Resource Management), an independent firm that advises financial institutions in executing business strategies and strategic sourcing initiatives. 
 
At SRM, Patti’s responsibilities include speaking engagements and educating financial institutions around the growing ecosystem of digital assets. This includes Distributed Ledger Technology, Blockchain and Smart Contracts, and of course, Cryptocurrency.  
 
Patti helped launch SRM’s Digital Assets Advisory Team, delivering education and strategic planning services for financial institutions integrating cryptocurrency and blockchain concepts and technology. She is a Certified Cryptocurrency Expert (CCE) via MIT Media Lab and the Blockchain Council.  
 
Patti also advises on strategies for cost savings, revenue opportunities, and process efficiencies when it comes to vendor selection. She has over 20 years of business development experience, with 17+ years in the banking industry. 

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Connecting Strategy, Measures of Success, and Actions

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4 minute read – The following blog post was written by c. myers and originally published by CUES on June 1, 2022.

It can be a struggle for boards and other stakeholders to consistently connect the organization’s actions and measures of success to its strategy.  The strategy that was decided on during planning may become only tenuously connected to the measures of success and actions being taken as the year progresses.  This can leave people feeling unsure of what is being done toward achieving the strategy and whether it is successful, even if everything is on-track. 

Ideally, the high-level strategy is developed which then drives the choice of measures and actions to be taken to support the strategy.  They are directly connected and usually crystal clear coming out of planning, but in practice the metrics are often reviewed on their own and their relationship to strategy can be lost.  The same thing can happen with the major projects or strategic actions that are undertaken to support the strategy. 

Why are you measuring what you’re measuring?   

Most organizations have scorecards or key metrics with goals that are reviewed regularly to track success.  A helpful exercise is to take a deeper dive to ensure everyone understands the purpose of each measure.  Consider doing this each year to refresh memories and introduce any new measures that reflect fresh strategies: 

  • Why is it important?  How does it connect to our strategy? 
  • If it’s not directly connected to our strategy, why are we tracking it?  (e.g., general financial health) 
  • What does it mean and how is it calculated? 

Measures are always an imperfect representation of what you’re actually trying to accomplish.  Some things that are very important are also very hard to measure.  So getting clarity on the measures, especially the reasons behind them, is critical. 

Create a consistent connection 

Reviewing scorecard measures or strategic actions on their own without relating them to strategy is like starting a book in the middle.  Referencing the “whys” behind the measures and actions reminds everyone of those early chapters and tells a better story.  For those who are steeped in implementing the strategy, the relationships may seem obvious, but building the habit of using the strategy for context can be very effective in bringing along those who are more peripherally involved.   

  • Even simple reminders of the connections to strategy during conversations about measures and actions can go a long way. 
  • The depth of detail should be appropriate for the audience.  Boards typically would focus on the high-level scorecard and strategic-level actions.  A department would drill down into departmental measures and projects. 
  • In written communication, an abbreviated version of the strategic plan containing only the key elements of the strategy is easier to remember and more likely to be read and referred to than a long and detailed version.   
  • Visual representations can also help people organize their minds around the elements of the strategy.

In this visual, stakeholders who know that strategic-level projects are underway, but might be fuzzy on why they have been undertaken, are provided the connection to the strategy at a glance.  Measures are also put into the context of the strategy rather than being viewed as stand-alone. 

Helping the board and other stakeholders maintain the connections between strategy, measures of success, and actions is key to their understanding of true progress toward the strategy.  One effective way to accelerate this is by intentionally creating habits that consistently put the measures and actions into the context of the strategy.