c. myers live – Are You Getting the Strategic Progress That You Want?

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As we enter a new year with strategic plans concluded, it is now time to hit the ground running on the list of key projects that will move the strategy forward.  After receiving great feedback on this c. myers live we posted last year, we want to remind executives of a few ways to keep planning and implementation aligned with your strategic goals and continue utilizing the planning process to make sure your institution is making strategic strides in the right direction now and throughout the year.   

About the Hosts:

Brian McHenry

brian mchenry headshotBrian, one of five c. myers owners, has worked closely with financial institution 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

Dan Myers

Dan MyersSince joining c. myers, Dan has worked with scores of financial institutions 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. Organizations 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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Decay Rates – A Critical ALM Modeling Issue That Can’t Be Ignored

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5 minute read – As rates have increased materially, and liquidity pressure continues to build, leaders will continue to be faced with high-impact decisions that can have longer-term consequences.  Reliable and timely financial decision-information is a huge component of a successful decision-making process. 

This blog on decay rates is the first in a series addressing critical ALM modeling issues.  There is a lot of information here, so pull it up on the big screen for a better view.   

Problem:  When conducting EVE/NEV simulations, the focus on the relative rate environment is overrated.  This focus can result in a misinterpretation of how assumptions are being applied, and heavily influences the results. 

Solution:  Dig deep into your decay rate assumptions to ensure that the actual current rate environment, which changes over time, is being considered.  This is a hard, yet critically needed, shift in ALM modeling mindset and is only one of many examples regarding assumptions that need to be reviewed.   

This concept can be a little harder to visualize so we have added some tables to help.  Tables A and B are simple examples of the format we often see when doing model validations. 

Are the assumptions consistent?  

No.  While on the surface they look the same, if you dig deeper, they are not.  Keep in mind that as of December 2021, the current 3-Month Treasury was about 0.1%.  At the end of December 2022, it was around 4.40%.  This fact is easy to miss because there is no statement of what the current environment actually is.   

To illustrate why the actual rates do matter, we added a row of information to Tables C and D that most models don’t address.  The inconsistency becomes much clearer. 

Focus on the highlighted lines to see inconsistencies in the assumptions.  

  • For example, the December 2021 simulation shows the assumed decay rates for money markets in a +300 is 30%.  The +300 in this simulation is short-term rates at 3.10%. 
  • In December 2022, current rates were around 4.40%, which is materially higher than the simulated 3.10% rate in December 2021. 
  • Even though actual current rates are much higher, the decay rates don’t reflect the potential impact that higher rates could have on a member’s advantage to withdraw funds.  In this example, the December 2021 simulation is using a 30% decay rate for money markets in +300, but in December 2022, when rates went up more than 300 bp, the model is still using a 15% decay rate for money markets. This view helps to highlight inconsistencies. 

Just a few considerations as you review your assumptions for reasonableness: 

  • To help correct the flaw in traditional shock tables, shift the assumptions over.  Notice the red arrows in Tables E & F.  This isn’t an exact science but it will show the impact of keeping comparable assumptions that don’t contradict each other for the similar levels of rates. 
  • Liquidity pressures are increasing: take a look at FHLB advances through Sept 2022.  This is one of many indications that there is a potential for increasing decay rates in the current environment.  This potential should be factored into simulations.   
  • New assumptions should be developed as new shocks are taking rates to 5%, 6%, or 7%.  Imagine how desirable a 7% CD would be to many consumers and businesses.   
  • Don’t forget that in 2019, prior to the pandemic, a top source of concern was funding – cost and access. 

Problem:  Many decision-makers think that the decay tables used for EVE/NEV apply when simulating risks to earnings and capital.  Unfortunately, many models do not link the decay rates when simulating risks to earnings and capital, which can understate the risk.  This approach is essentially saying that the consumer does not care what rates they are paid.  This does not make sense.     

Ask yourself:  What is the rationale to incorporate decay rate assumptions when doing EVE/NEV simulations, and not when simulating risks to earnings and capital?  Remember, liquidity has become a bigger topic in many C-Suite and board discussions.  It is important to clarify for stakeholders which ALM results that you review incorporate the risk of withdrawals/decays and which results do not.   

As we said in the beginning, reliable financial decision-information is critical to thriving in this type of environment.  We run thousands of risks to earnings, capital, and EVE/NEV simulations and what-ifs each year.    

This blog just scratches the surface of considerations facing finance teams today.  Stay tuned for more tips on providing reliable financial decision-information.   

We understand timing is critical and finance teams need to move fast.  Please feel free to call us if you have questions on the information provided in this blog and/or just can’t wait for our upcoming blogs.

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4 Practices of Thriving Leaders

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4 minute read – Thriving leaders embrace the fact that they are in the people business, first and foremost.   

They realize and appreciate that – regardless of the external forces they face, how advanced technology becomes, and whether they are poised for rapid growth or preparing for recession – they still need to prioritize accelerating the talent development in their organizations.  Here are 4 practices of thriving leaders: 

1. They actually have a talent strategy. Think of it as a Strategic People Plan, that gets rigorous intention and attention from the C-Suite.  This is not the same thing as the traditional training programs often seen in organizations.  It takes an intermediate and long-term view of the characteristics and knowledge that will be needed in a role.  This view is creative and reimagines what could be, instead of “Frankensteining” traditional roles and responsibilities.  

2. They require people to think.  For example, they are very selective when they tell a direct report exactly what to do and how to do it.  Rather, they create the habit of having their team members provide options for consideration along with their recommendation.   

Ideally, team members provide three disparate options with their rationale, not simply iterations of one option.  This approach is vital for high-impact decisions.    

The practice of having team members think through various options, and ultimately making a recommendation, helps leaders free up their time to think more strategically.  It also provides a wealth of information with respect to how their team members are thinking, enabling leaders to hone in on opportunities to accelerate growth by closing potential gaps. 

3.  They learn to trust using a common language.  Working diligently to help their team be clearer on decision-making responsibility and authority helps leaders gain trust over time and be more confident in what they can let go.  

This opens up their brain power and energy for them to be able to think at a higher level, so they can identify more opportunities to expand customer value and be more proactive at facing external forces.   

For example, a common language that works well includes identifying levels of decision-making: 

  • Level 1:  A decision that a person makes and does not need to tell their leader about 
  • Level 2:  A decision that a person makes on their own and tells the leader about, along with an explanation as to why the decision was made 
  • Level 3:  A decision that cannot be made without input from the leader 

Knowing the difference between the levels of decisions comes from practicing and learning with each other to understand those decisions.   

The process is not static.   

As more trust is gained, the leader and the direct report will become more confident in the level of decisions that can be made without input from the leader.  Over time, the quantity of Level 3 decisions is dramatically reduced.  

4. They avoid the “too few” syndrome, which stunts growth.  What do we mean too few?  There are many “too fews” that can damage culture, which stunts growth.  Here are just a few: 

  • When something big needs deep and critical thinking, launching, or solving, and the same few names come up to lead the charge, then you have too few. 
  • When you have many individuals that feel comfortable in silos, must always be right, or must be the star of the show, then you have too few people who know how to be part of a productive and cohesive team.  The power of a productive team is almost always exponentially higher than any one individual – even if the individual is a superstar in their specific role. 
  • When you spend most of your day buried in operations and firefighting, then you have too few hours to think and act strategically. 

Even if you implement just one of these practices, you will begin to increase your own stamina and enjoyment, which is much needed as leaders continue to thrive and embrace, head-on, the opportunities and challenges that evolve in what feels like every minute of every day.  

4 Proven Tips to Create FOMO Around ALCO Meetings

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4 minute read – The following blog post was written by c. myers and originally published by CUES on November 7, 2022.

Asset/Liability Committee meetings are an opportunity to create compelling collaborations that are interesting, relevant, and result in better member value and better asset/liability management – AND you get to check the compliance box.  If you’re not experiencing the first part of that sentence, it might mean you are thinking too much about where things have been rather than where things could potentially be – which is the fun part.

It’s important to understand where things stand, especially in relation to policy limits.  Once that is established, moving away from reporting the numbers and using them as a springboard for anticipating what the future could look like is where it gets interesting.  But it’s not just about making it interesting, it’s about engaging people from different areas, whether they’re “numbers people” or not, so they can contribute in meaningful ways.  The numbers tell a story.  Here are some things to consider as you tell that story:

 

1.       Every financial person started out as a non-financial person:

  • ALCO meetings are an opportunity to include more voices in financial discussions.  Financial discussions and member value are inextricably linked, so bringing non-financial people along in their comprehension of financial concepts and how they connect to the organization enhances the ALCO’s effectiveness.
  • The involvement of people not in the numbers every day can create observations not yet discovered.  Encouraging participants to push their thinking beyond their comfort zone will foster learning and bring new ideas to light.

2.       Re-imagine the meeting:

  • Define the objectives for each meeting.  Go beyond creating an agenda and articulate what the ALCO members should walk away with, such as awareness of a trend, specific decisions, robust conversations around a particular opportunity or risk, or good old- fashioned strategic thinking without the pressure of having to make a decision.
  • Determine how the meeting time will be divided, including how much will be devoted to decision making, education, emerging trends, strategic thinking, etc.

3.       Get to the point:

  • There is no need to read every number.  Dashboards can help quickly cover the overall current state so you can move on to meaningful conversations about trends, events, and situations that need attention.
  • Use business intelligence to add depth to discussions.  For example, if deposits are slowing, are there decreases in high-balance accounts, low-balance accounts, or slower member growth?
  • Focus on what the future may hold.  For instance, as payments behaviors continue to shift due to technologies and high inflation, what trends is your membership showing and what could happen if it continues?
  • Include relevant what-ifs to beef up the discussions.  Changes in payments and deposit behaviors, interest rate changes, and recessions can often be anticipated months before they show up in the numbers.
  • Plan for the critical discussions that must be had.  Encourage people to get out of their own lanes and participate.  The ALCO’s decisions span the organization, and every member should be connecting those decisions to their impact in other parts of the business.

4.       Bring in multiple perspectives for balance:

  • The ALCO’s purpose – bringing value to the membership consistently over time – needs to be top-of-mind.
  • Consider both opportunities and risks when making decisions.  Decisions to control risk or capitalize on opportunities rarely exist without trade-offs.
  • Alignment with strategy is key.  Connect the ALCO’s discussions and decisions to strategy.

ALCO isn’t just about the numbers themselves.  The numbers are a reflection of everything the institution has been working toward.  Loan balances, for example, are the culmination of the efforts of a vast array of employees, from Marketing to IT, and beyond.  If the numbers are a boiled-down version of all of the employees’ efforts, combined with the environment, ALCO’s job is to take those numbers and layer on future possibilities in order to make insightful, informed decisions so the institution can thrive.  When you think of it that way, who would want to miss out?

Road Trip to Sustainable Leadership

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3 minute read – When the going gets tough, the tough get going, but the tough might also be getting tired.  Knowing that the world isn’t slowing down any time soon, it is essential that you are taking actions to ensure that you can sustain your leadership team and your financial institution through the next set of challenges on the continuous road to success.

Like any good road trip, the path to sustainable leadership requires strategic planning, a well-matched group of people, and snacks, of course.  There are a few key elements to keep in mind in order to map out the optimal path.  Consider the following questions as you evaluate how well your leadership team has been setting themselves up for sustainable success:

  • You are the Chief Mood Officers, setting the tone of the ride for your organization. Are you excited for the challenges ahead?  Or are you dreading the potential potholes along the way?  How each of you shows up helps determine how well you are able to overcome unexpected roadblocks.  Consider what ground rules you have established to hold each other accountable.  Inevitably, the perpetual motion wears on everyone in the car – do you have a plan for rectifying a foul mood?
  • You have your hands on the wheel, aiming towards your destination.   Are you clear on where you want to go?  How do you prioritize where your attention lands?  Are you allowing yourselves to get distracted by the billboards along the way?  Or caught up in the bickering in the backseat?  Being able to prioritize the high impact items will lead you towards your destination.
  • Even the most talented drivers need a breather from behind the wheel.  Knowing the strengths and weaknesses of each person on your road trip can facilitate the best journey;  That also means knowing when you need to share responsibilities.  How are you delegating to those around you?  Be wary of dangerous signals such as, “It’s easier if I do it myself” or “I’ll just figure it out.”  Make sure you have built a leadership team that trusts each other behind the wheel.  Similarly, don’t be afraid to listen to each other.  Strive to cultivate a team who can give fresh insight and is willing to call out a wrong turn.
  • Consider the pressure points in your institution.  Who seems to be depended upon the most?  While it can be tempting to ask IT for a six-lane expressway in this digital world, explore what a two-lane highway might allow you to do with less dependency on IT.  Bigger is not always better if you are strained for resources.  Consider how you can fine-tune or modify elements of the financial institution you have already developed;  You don’t have to buy a brand-new car because the gas tank is empty.
  • Lastly, make sure you celebrate successes.  Remember, you are the Chief Mood Officers, and a road trip should be fun.  Allowing moments to celebrate what has gone well and soaking in the sights along the way, will help you sustain yourselves for the long haul.

There is no one path to success since the future is full of unknowns, but an exhausted driver is not a sustainable driver.  Taking steps to ensure you’re set up for longevity not only means being ready to go the distance, but the ride might be more enjoyable, too.