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c. myers live – Liquidity and Its Potential Impact On Your Institution

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Things are changing quickly since we last had conversations about liquidity.  Savings rates are dropping off, inflation is getting higher, and rates are rising.  With the environment on the move, it is a great time to think about what might happen with liquidity over the next 12-18 months and how it could impact your pricing strategies and profit potential.   In this c. myers live, we have a candid conversation about liquidity and the opportunities it can present based on your financial institution’s situation or current KPI’s. 

Rob Johnson

Rob, 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

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

Other ways to listen to c. myers live:

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Rates on the Move – 4 Scenarios to Test

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4 minute read – The following blog post was written by c. myers and originally published by CUES on April 18, 2022.

Many are celebrating that rates are finally moving up, but there is plenty of uncertainty to go along with it.  Just last September, half of the FOMC members expected a rate hike in 2022 and half didn’t.  Inflation was forecast at 2.3% for 2022.  To say things have changed is an understatement.  And with far higher inflation and a war in Ukraine, today’s expectations could be just as fleeting.

Preparing decision-makers for a range of different outcomes is key.  Here are 4 what-ifs to run (if you haven’t done so already) that capture some of the less-expected situations.

  1. Loan pricing doesn’t move as anticipated. Given all the change, many are looking at budget and other financial reforecasts and what-ifs.  Be sure to include loan pricing that doesn’t move in lockstep with market rates.  Consumer loan pricing can be influenced, not only by market rates, but also by the amount of liquidity in the system and demand for loans.  Currently, demand for autos remains high, but their lack of availability has resulted in low demand for loans causing downward pressure on loan rates.  What happens if consumer loan rates only increase 50% of the market movement or if rate increases lag for a year?  Looking at history can help reinforce the fact that market rates are not the only driver of consumer loan rates.Loan-to-asset ratios for the industry are overlaid on the graph as a proxy for how much funding is in the system; low loan-to-asset ratios indicate excess funds.
  2. Market rates decrease. One of the biggest wild cards at the moment is the war in Ukraine, which could cause far more than just unexpected market rates.  Already-disrupted supply chains are taking another hit.  Covid variants are a distinct possibility. Take some time to think through what this could look like and run some what-ifs to see how your structure holds up under those pressures.
  3. Flight to safety. The stock market isn’t as enticing these days; further deterioration is one potential cause for a flight to safety.  What would your structure and profitability look like with another influx of funding?
  4. Tight liquidity. This probably sounds refreshing to many, but it’s not too soon to think about it.  If we combine a few factors like no additional government stimulus, continued high levels of spending on goods, and having to spend more due to inflation, those fat savings accounts could get a lot thinner quickly. Gasoline was around $3.00/gallon a year ago and it’s about $4.40 today (mid-March, 2022).  Let’s estimate the impact on consumers if it goes to $5.00/gallon:For a credit union with 40,000 members, that could mean your membership has about $46 million less to save.  That’s just gas – housing is also having a large impact.  Another factor that could squeeze liquidity is how much is tied up in investments.  Over 34% of credit union investments are longer than 3 years.

 

It’s a fine balance to maintain your optimal balance sheet structure and profitability as you strive to provide members with exceptional benefit in a changing environment.  What was unexpected just a short time ago can quickly become reality.  Thinking through some of the less-expected scenarios and running a variety of what-ifs to see how your structure holds up can help you prepare for a wider range of outcomes and meet the challenges.

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c. myers live – Strategic People Planning: Why is it Important for Your Organization?

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Our world is moving fast, and it is more important than ever for organizations to be critical with their approach to people planning.  In this c. myers live, we discuss how to become more strategic with your approach to your team and give leaders the right questions to ask.

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

Dan Myers

Dan MyersDan joined c. myers in 2009 to launch our Process Improvement and Project Management Services, bringing more than 20 years of management experience which included responsibility for over 300 employees, a budget of more than $35 million, and over one million square feet of facilities.

Learn more about Dan

Other ways to listen to c. myers live:

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Data Reveals Lost Revenue Opportunities

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5 minute read – One of our podcasts focuses on the importance of growing top-line revenue.  With so many competing priorities, strategic teams need to seek balance in the initiatives they take on to ensure that revenue growth initiatives receive high priority.

Revenue growth can be generated in many ways, but one source that has the potential to pay off quickly is growing loans by booking more of the opportunities you’re already getting.  Making changes that increase the number of funded applications can make a significant impact on revenue in the short and long term.

Incomplete and Abandoned Applications

Dive into your data to investigate the points in the application where people are quitting.  This can provide great insight into the sources of friction.  Some systems and vendors make it difficult to get this information, but it’s worthwhile to push for the data.

Armed with the quit points, go through the application process yourself with a critical eye and the mindset of someone who is not an expert in financial services.  Something that is even slightly confusing can cause online applicants to jump ship for one of the many other lenders at their fingertips.

Competitors have made applying for a loan incredibly easy, asking as little as possible of their customers.  People may quit if the application goes on too long, asking too many questions.  The mindset for digital applicants is very different from the in-person applicants of the past.  A series of questions that might have felt like a conversation in person can feel tiresome and intrusive when applying digitally.

Declined Applications

Approvals and declines must happen within the organization’s appetite for risk, but the data can point out inconsistencies and missed opportunities.  Look for differences where you would expect to find similarities.  Similar loan types for similar credit scores would typically result in similar approval ratios.  Look by channel (online versus contact center versus phone), underwriter, originator, and branch.

This organization needs to understand why Branch B declines 30% of vehicle applications with credit scores of 600-679, while Branch C only declines 18% (and funds a lot more of them).  They could start by slicing the data by originator and underwriter and using that as a springboard for deeper conversations to understand the differences.

Approved Applications That Don’t Fund

After you’ve gone through the effort to approve a loan, the payback doesn’t come unless the customer says yes.  Your data can tell you how often the effort is wasted.  It can also tell you how long different phases in the process are taking, how the trends vary for different loan types, and whether correlations can be made to branches, originators, channels, underwriters, or credit score.

As you dig in, you may find some of these common points of friction:

  • Too slow to give the customer a decision for processing and funding. It has become SO easy to apply somewhere else if things aren’t moving fast enough
  • Unclear next steps
  • Difficult process, too much documentation or paperwork
  • Left a voicemail, sent an email, or communicated in some other way that this consumer doesn’t prefer
  • Offer isn’t good – rate or amount
  • Product features are lacking

See our blog on using the power of “Why?” for more ideas on identifying potential issues and capturing some of the lost opportunities.

Fixing Hiccups

Taking action on your findings is often technically simple.  Some of the biggest impacts are the result of changing old business rules that have been carried forward and providing clear guidance on steps that are no longer required.  Improving even one or two friction points can pay big dividends into the future.  Plus, the effects are near-term and may produce additional benefits like greater efficiency and improving the customer and employee experience.

As you consider using resources to work through these issues, it helps to quantify the potential for increased revenue.  Once you know your baseline performance, you can do what-ifs on approving or funding more applications.  This institution is looking at direct vehicle loan applications.  By funding 5% more of the approved applications, they could book 9% more in loan balances in this category.

Booking more of the loan applications you already receive is just one way to grow your top-line revenue.  We haven’t even touched on the vast array of other possibilities.  Spend some time thinking about this as a team and utilize your data to help with the analysis.  With so much to do, make sure enough focus is devoted to growing top-line revenue.

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Stay Forward Thinking About IRR Shocks

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3 minute read – With the Federal Reserve using monetary policy and increasing rates to combat inflation, there will be different winners and losers.  Every financial institution has a unique exposure to rising interest rates.  Some financial structures will experience an increase in earnings from higher fed funds and prime rates while others could see earnings squeezed.  

Interest rate risk (IRR) analysis can help provide insights on the financial impact of increased rates.  However, it is important to remember that as the environment changes, if rates increase, the IRR shocks themselves start to go higher, which can mean more pressure for many decision-makers.    

For example, consider a traditional IRR test of a +300 basis point (bp) rate shock.  Over the past two years, short-term market interest rates have been close to 0%.  Since the onset of the pandemic, a +300 bp IRR shock increased short-term rates to roughly 3%.  But if some of the projections come true and short-term rates are 2% by year end, the same IRR shock of +300 bps now takes short-term rates to 5%.  Both tests are for a +300 bp shock in rates, but the pressure of short-term rates at 3% versus 5% can be vastly different.  

Notice the IRR shock results for Case A and B, two financial institutions with very different balance sheet structures.   

If they both had a policy limit of 5% EVE ratio and -40% volatility, both institutions would be within their policy limits if rates stay at current levels.  However, if rates continue to increase, and therefore the shocked environment increases, Case B would be out of policy.  

The Point at Which You Address a Problem… 

…is directly related to the number of viable options you will have to solve it.  This is one of the many truisms that our founder, Cliff Myers, instilled into our culture. 

This forward view helps decision makers get an early glimpse of what may happen and help reduce potential surprises.  While both institutions are currently within their policy limits, the leadership team at Case B should start discussions to evaluate whether they would like to take actions today to reduce their risk in higher rate environments.  If they would like to reduce their risk, the next step would be to evaluate the risk-return trade-offs of different options.  There are always trade-offs to different decisions, and evaluating this earlier can lead to an increase of viable options.

We also recommend exploring different twists in the yield curve when evaluating the potential impact of rate changes.  The current environment, along with some of the expectations of where rates may go, provide a reminder about the importance of testing twists in the yield curve.  Different shifts in short- and long-term rates when evaluating rate increases may reveal more or less sensitivity to the environment.  Seeing the impact of different yield curves should be incorporated in your frequent discussions about interest rate risk.   

For more food for thought, you can listen to c. myers live – An Insightful Conversation About Inflation