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Liquidity Takes Center Stage – 5 Questions to Ask Yourself

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5 minute read – Feast or famine.  It was only a couple of years ago that deposits were coming in a deluge, but things change quickly and the need for liquidity is now top of mind for many. 

It’s not that deposits have dried up.  Balances are still far higher than they would have been without the unusual influx seen in 2020 and 2021.  But deposit growth has slowed and the focus is shifting.  Liquidity has never left the radar – deposit and payments strategies have been major topics in planning sessions, and liquidity analyses and what-ifs have been discussed all along, but it’s clear that the urgency has increased. 

The systemic effects of scarcer liquidity, such as pricing pressures, tend to affect everyone whether your liquidity position is tight now or not.  Getting clarity around these strategic liquidity questions will help your organization mount a well-thought-out and cohesive response: 

  • What’s happening beneath the surface for your customers?  Digging into trends surrounding average deposit balances can provide insights into what people are experiencing and inform relevant responses.  For example, how much of the growth over the past few years has come from higher average balances and how much has come from new accounts?  What’s been happening more recently?  Average balances that are coming down could be people having to spend more to compensate for inflation, or it could be outflows to other institutions, the market, or cryptocurrency.  Can your data tell you this?  More insights can be gained by understanding whether lower average balance accounts or higher average balance accounts are experiencing outflows.  Customers who are having to spend more and simply don’t have the money to deposit, is a situation that calls for a different response than customers who are finding better returns on their money. 
  • What is your deposit and payments strategy?  Get clarity on your ideal sources of liquidity.  Many business models depend on building deposits through checking/spending accounts, which are generally less expensive than other forms of liquidity.  Other business models regularly rely on borrowings and are built to cover the higher costs.  Take a clear-eyed view of how successful you feel the strategy will be going forward and whether more needs to be done to ensure access to funds. Once you are clear on what your ideal sources for liquidity are, it’s time to consider the next question. 
  • What levers are you willing to pull to bridge liquidity gaps?  Sometimes your ideal sources of liquidity aren’t enough.  Proactively thinking through which actions you’re willing to take, and in what order, can help ensure there is consensus when gaps need to be bridged quickly.  Be sure to take into account the amount of time it takes to pull different levers.  Some options require significant lead time to get set up.  Also factor in how long they can be sustained.  Common sources to consider include: 
    • Promotional rate CDs – usually pull in “hot money” while also shifting less expensive existing deposits to more expensive products 
    • Borrowings 
    • Brokered CDs 
    • Selling investments – many are at a significant loss 
    • Slowing lending or certain types of lending – could also help rebalance the loan portfolio 
    • Selling loans through participations or in the secondary market 
  • How could your response to tight liquidity affect strategy and goals?  As an example, when market rates rose, some institutions experienced fast loan growth because their loan rates remained lower than market for a time.  While this likely helped meet lending goals, adding loans at low rates while utilizing more expensive sources of liquidity to meet asset growth goals or loan demand might result in an undesirable profitability picture.  Goals are not made to be changed lightly, but keep in mind that rapid changes in market rates, consumer behavior, product pricing, and liquidity costs could cause some goals to become detrimental to the overall financial picture, at least in the short term.  Good analysis and conscious decision-making on how to adjust, if necessary, is key. 
  • Are your sources of liquidity still valid?  It’s a good idea to dust off the plan and confirm that borrowing sources are still in place.  It’s also a good idea to test the emergency funding plan.  Bear in mind that in bad financial times borrowing capacity is sometimes reduced by suppliers, so include that possibility as you think through meeting liquidity challenges.  Consider collateral and how selling loans or investments could change borrowing capacity.  Also think through what options you’ll have if promotional CDs are not as effective as you thought or demand for participations decreases. 

Staying a few steps ahead of liquidity needs is always a good idea, but it’s especially important now.  As you think through your options, consider a range of what-ifs to help prepare for a variety of scenarios. 

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c. myers live – Using Talent as Your Institution’s Competitive Advantage

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One of the most talked about topics in the financial industry is talent.  In this c. myers live, we take the talent conversation to the strategic level and give you ways to use it as a competitive advantage.  This is crucial for any business model and can make a huge impact on your institution and the talent you attract and retain.  


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

Other ways to listen to c. myers live:

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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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Solving the Puzzle: Understanding Short-Term Impact VS. Your Long-Term Business Model

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3 minute read – The list of pressures on revenue and earnings seems to grow by the day.  There are many different drivers of inflation right now, such as food prices, supply chain issues, and wage growth, each of which brings their own unique impacts.  Rising rates, recession concerns, and tightening liquidity bring additional pressures like margin compression and credit risk.  Not to be forgotten in all of this is CECL, which goes into effect at the start of next year.

With the many changes in the environment, it is important for leaders to step back and understand potential short-term impacts to revenue and earnings vs. long-term business model sustainability.    

While in-depth analysis and modeling are helpful, leaders can start high-level and think in terms of the 5 Strategy Levers of ROA. 

Walking through the different pressures and concerns, leaders should discuss and quantify at a high level the potential impact to each lever and the resulting bottom-line impacts.  This will help paint a picture for leaders to evaluate whether the earnings pressure is a shorter-term hiccup, or a longer-term business model issue. 

Below is an example of how that might go.  The columns highlighted in red show the current strategy lever numbers.  The columns highlighted in gray show the results of the discussion of the different pressures.   

In this example, leaders might conclude that the margin compression is painful but short-term while they wait for the existing loans to be replaced, but that slow loan volumes and higher operating expenses are likely to continue, requiring no real change in strategy but a renewed focus on loan growth.  Alternatively, they may decide to revisit their deposit pricing strategy of always being in the top 3 in their market. 

Other pressures that could be explored are the costs of different funding sources to address tightening liquidity, increased credit risk due to a recession, or reductions in non-interest income due to regulation and competition.  The key is having the discussion and understanding the possible impact to ROA. 

Once this is done, leaders can then step back and determine if the ROA impacts indicate a longer-term business model issue.  Questions to think through are: 

  • Is this a timing issue due to environmental changes or a weakness that has been exposed in our financial structure? 
  • Do we need to change our strategy as a result of what we’re seeing? 
  • Are the economic engines driving the business model still viable long-term?

Walking through this process can help leaders have more clarity, especially when there is so much uncertainty in this environment.  This can also help leaders determine where their focus needs to be and what their next course of action should be.

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4 Steps Toward Efficiency and Scale Using Effective Software Management

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4 minute read – Why do you want to grow?  Financial institutions have many different reasons, but one of them is almost always for scale.  Digging deeper, they want to get the boost that size can give in terms of making it easier to grow revenue faster than expenses.   

Ironically, one of the most important areas that makes scalability possible is frequently rife with inefficiencies.  Software is an asset that can often be used to support higher volumes of business with little or no increases in cost.  But the explosion in the sheer number of software packages that must be managed has contributed to the inefficient usage of the software and the resources used to obtain it.  This is an area with so much room for creating an efficient foundation for scale that it deserves special focus. 

Here are a few common areas of opportunity: 

  • Purchases – Make sure there is not already similar software in place prior to signing a contract or purchasing to avoid the additional expense, tracking, and maintenance of near-duplicate software.  Preventing this requires a central repository of the software that is in use, a repository owner, and a specific step in the software selection process that comes before signing the contract.  Features that are available, whether in use or not, should be tracked from the initial implementation forward to provide a complete picture of what the existing software can do.   
  • Customization – Weigh this carefully and get clarity on what it means for future upgrades to the software.  A key question is, are we customizing in order to preserve an old, familiar way of doing things when we would be better off changing? 
  • Implementation Phases – With complex software, there is often agreement to implement certain features initially and add more in later phases.   Getting around to those subsequent phases can be a struggle if they are not prioritized, leaving capabilities on the table that are not put to good use.  The features that will be implemented later should be decided on with the initial implementation. 
  • Upgrades and New Features – Each software package needs a clear owner that ensures that upgrades and new features are vetted timely by a subject matter expert and IT.  If implementation requires significant effort, it should be added to projects for prioritization.  

If features, upgrades, and even updates are put off or shelved because there is too much else going on, you might find that “suddenly” a few years later the software is hopelessly out of date and there is a search for new software going on.  It’s like you bought a car and customized it to get the CD player rather than the Bluetooth stereo.  The dealer offered to install upgraded aftermarket speakers and the nicer wheels you wanted, but you never got around to going back to the dealer.  Later, when they asked to apply a fix to the air conditioning to make it work better, you were too busy.  And now you’re driving a car you don’t really like and… it feels like it’s time for a new one. 

Getting the full potential from software investments requires effort over time, not just with initial implementation.  Recognizing this can help with the realistic prioritization of resources.  Intentional focus on the right things is key.  Features and upgrades that are not implemented should be the result of a conscious choice rather than lack of ownership or falling through the cracks.   

It’s possible that some of the shiny new things can wait while you focus on getting the most out of the software investments you’ve already made.  Enhanced management of your software packages can lead to better expense control, improved efficiency, and a foundation for attaining scale.  

For more thoughts on this subject, listen to our podcast Using Scale and Automation to Control Expenses and Grow Revenue.