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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. 

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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

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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

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NCUA NEV Supervisory Test: Heads Up Now

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balance sheet

7 minute read –“Wait…What?  My balance sheet structure really hasn’t changed in the last few months, yet the NCUA NEV Supervisory Test now shows that we went from low/moderate risk to high risk, teetering on extreme.  Why is there such a dramatic shift in results?”  

This is an example of recent conversations with credit union CFOs and CEOs.  We are seeing this on a larger scale as well, our first glance at ALM results for March balance sheets* shows that on average the current NEV ratio (using NCUA deposit values) has declined roughly 1.60%, and the resulting NEV ratio in a shocked +300 is roughly 1.85% lower.   

Meanwhile, all the credit unions in this data set made money in the first quarter, adding to their dollars of net worth.   

Our recommendation to them is dig in right now and start messaging to other key stakeholders why there is such a dramatic difference in results.  

There are several points that should be included when messaging to key stakeholders to provide background, education, and knowledge.  The NEV Supervisory Test is a scoping tool to help examiners determine the scope of their exam.  If the results show extreme risk, it turns from a scoping tool into an action tool.  The NCUA will take action, refer to page 235 of this document to read more.  Your actions and ability to articulate your unique situation can heavily influence their actions.  

As a reminder, the Supervisory Test uses a combination of available information, credit union assumptions, and pre-set values to determine the economic value in the current and +300 bps environments.  More specifically, the Supervisory Test: 

  • For institutions with assets >$500M, uses discounted cashflows based on the credit union’s assumptions for loans and available information on investments to represent the current economic value of your assets.  Given where rates are today, many loan and investment portfolios show a value loss today.

Note: For institutions with assets <$500M, the Supervisory Test may assume current value of loans to be par, or use the credit union’s ALM modeling valuations if available and deemed to be reliable. 

  • Assigns a pre-set value for all your non-maturity deposits.  As a reminder, the pre-set values for NMS is 1% for the current rate environment and an additional 4% value in the +300 bps shock.

Caution:  Rates have increased, yet the NEV Supervisory Test still shows the pre-set value of NMS at 1%.  This means that in today’s higher rate environment, your NEV Supervisory Test takes the hit for asset values declining, but does not get the benefit that was applied to NMS as rates were increasing in previous Supervisory Tests.  Therefore, the starting point for the current NEV ratio is much lower in today’s higher rate environment than previous tests were showing.  This is surprising to many key stakeholders, so it’s a critical point to be messaged to and understood by key stakeholders. 

This also becomes a head scratcher for many when looking at the economic value of deposits in their non-Supervisory Test results.  One CFO summed it up when saying:  

“I don’t understand.  My average rate for my NMS has not changed.  It’s 18 bps, and 5-year borrowing rates are now over 3%, suggesting my deposits have more economic value, and yet the test does not give us any additional benefit for them.  I am confused.” 

It’s understandable that this is confusing.  Yet, the reality is that the NEV Supervisory Test is likely to get increased attention, so you need to be prepared.   

There are many ways to prepare:  

  • Understand the purpose and be able to clearly articulate why the ALM methodologies you use may show differing views as to the magnitude of risk, not to mention the direction.  For example – most often, static balance sheet analyses show no risk in a rising rate environment – as a matter of fact, for many institutions, earnings increase at a pretty decent clip, especially in later years of the analysis.  Read this if you need a review as to why this methodology would show this. 
  • Evaluate the profitability and potential exposure to net worth, keeping in mind that profitability and net worth can be very different than assumed value.  A business model and plan, both strategic and financial, that demonstrate strong earnings across a range of rates and uncertainty can provide valuable insights on potential actions to consider. 
  • Recognize that most actions to improve Supervisory Test results will cost earnings, net worth, or both, especially if long-term rates don’t increase more, or reverse direction and go back down.  Keep in mind that no one, not even the Fed, can accurately predict rates.  Remember, the Fed is trying to influence consumer and business behaviors to tame inflation while also not causing a recession.  Many are already bracing for a recession, which could cause rates to go back down, which can further exacerbate the cost of taking action today to address the Supervisory Test.  
  • Consider expanding your view of the Supervisory Test +400 bps/+500 bps to get an early warning if rates continue to go up.   
  • Collaborate with key stakeholders to reach consensus on the range of rates for which you want to prepare.  Remind them that there is not one right path.  Take the time to understand and discuss the implications of yield curve shifts.  Make sure to discuss timeframe as well.  

The one path

This conversation will help immensely in setting the foundation for decision-making and, ultimately, the financial levers you may want to pull.  To inform your discussions, use the quantification of your longer-term risks to earnings and net worth, with a focus on how much contribution you may need from your new decisions to offset risk and continue to add value to your members and business members.  Remember, they will need you to help them through these rough times. 

  • Run What-Ifs.  No doubt your conversations will result in numerous possibilities, so prioritize.  Run your options through your decision filters to help with prioritization.  Then what-if the highest priorities to understand the potential financial impact.  When you establish your decision filters, make sure to include discussing how to remain relevant to your members and your precious talent.   
  • Remember, most leaders and stakeholders have never faced the combination of external forces that are in play today.  Hunkering down in this environment may not be the best move as the world continues to change at warp speed.   

We realize there are many more considerations and questions than we have provided here.  Please feel free to call us if you would like to have a more in-depth discussion.  

*Results will change as more Balance Sheets come in.