/by

c. myers live – 3 Ways CEOs Can Create More Time to Think

,

With the growing complexity of the financial industry and the world around it, CEOs are looking for more time in their day to think strategically. In this c. myers live, we will discuss 3 ways CEOs can create more time to think and make decisions.

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

Dan Myers

Dan MyersSince joining c. myers, Dan has worked with scores of credit unions 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. Credit unions that have benefited from Dan’s expertise have ranged from $90 million to over $5 billion in assets.

Learn more about Dan

Other ways to listen to c. myers live:

listen on google podcasts listen on spotify listen on apple podcasts

/by

Think Deeper About Cryptocurrency

, , ,

6 minute read – “70% of American adults would consider buying (or buying more) cryptocurrency if they could store it in their primary bank account.” – research from The Ascent, May 2021 

Has cryptocurrency grown beyond its reputation as a vehicle for financing nefarious activities?  The 70% statistic implies broad consumer acceptance and a willingness to tie their cryptocurrency to a financial institution.  At the same time, a number of community and regional banks and credit unions have already announced their intention to be in the crypto space, as have well-known vendors. 

Cryptocurrency deserves extra thought because it’s different and it’s evolving fast.  We see it in the headlines every day.  The thinking exercise included in this blog is a good way to get started because it can help stakeholders to directionally determine whether these are areas they’re even interested in from a strategic standpoint and, if they are, identify possible next steps.   

When thinking about cryptocurrency, it’s easy to get sidetracked by potential technical hurdles, regulatory roadblocks, and the belief that this may be a fad.  Set those aside for the moment.  Start by imagining meaningful ways to serve your customers that fit the institution’s business model.  The technical capabilities are being developed and many regulatory questions are already under review.  Consider this excerpt from a November 2021 joint statement from a group of federal regulatory agencies: 

Throughout 2022, the agencies plan to provide greater clarity on whether certain activities related to crypto-assets conducted by banking organizations are legally permissible, and expectations for safety and soundness, consumer protection, and compliance with existing laws and regulations related to: 

  • Crypto-asset safekeeping and traditional custody services. 
  • Ancillary custody services. 
  • Facilitation of customer purchases and sales of crypto-assets. 
  • Loans collateralized by crypto-assets. 
  • Issuance and distribution of stablecoins. 
  • Activities involving the holding of crypto-assets on balance sheet. 

The following thinking exercise is not intended to result in a decision on strategic positioning with respect to crypto.  It is intended to foster deeper thinking. Note that the “what could go wrong” questions are last.  This is done by design to encourage more open thinking prior to considering the risks.   

The scenario:  70% of consumers are interested in using cryptocurrency through their financial institution.  This group is not avoiding government oversight and trusts their institution to ensure their cryptocurrency activities are safe and legitimate. 

Consider some of these reasons consumers are drawn to cryptocurrency.  Start by picking one or coming up with one of your own.  Then think through it by asking the questions that follow: 

  • Investing almost effortlessly for potentially big returns 
  • Gaining experience with and satisfying curiosity about cryptocurrency 
  • Buying cryptocurrency as an inflation hedge 
  • Buying merchandise and services with cryptocurrency 
  • Getting a fast, easy loan with no credit check using cryptocurrency as collateral  
  • Earning interest on cryptocurrency through a savings account 
  • Earning interest by lending to others who borrow against their own cryptocurrency 
  • Avoiding fees for check cashing, prepaid debit cards, and other services commonly used by unbanked and underbanked people 
  • Sending fast, low-fee remittances to relatives in foreign countries while also avoiding volatile local currencies (although cryptocurrencies that are not tied to the dollar have their own volatility) 

You may wish to do some focused research on a few of the reasons listed above, if they are unfamiliar.  For example, if you’re considering earning interest on cryptocurrency through a savings account, you might do some narrow research to understand how crypto savings accounts work.  You could put a time limit on the research to help keep it focused.   

Then ask strategic questions.  Use your imagination and have a working agreement with your team that the thinking is not limited to what is possible today. 

  • What products and services could we offer to help these consumers? 
  • What value proposition could we offer through these products and services? 
    • Think about why someone would come to you for this product or service instead of someone else
  • Are these consumers in our target market?
    • One thing that could provide some insight is combing your data to see how many of your customers are currently investing in cryptocurrency
  • What are some of the opportunities for our institution? 
  • How do these new products or services help our institution live its mission, vision, and deliver on its value proposition? 
  • What would need to happen before we would implement? 
  • What makes us nervous and what could go wrong?  
  • How could we mitigate the risks? 
  • What other strategic opportunities could we pursue if we don’t make crypto a strategic initiative?

Again, the above outlines just a few questions to get started.  Since the cryptocurrency arena is evolving incredibly rapidly, it is important to take time to think strategically about the role your institution wants to play, if any.  The best way to learn about something so complex is to just get started and take one bite at a time.   

Devoting thought to cryptocurrency sooner rather than later is beneficial because it can take some time and effort to bring everyone up to speed and, more importantly, it seems it is rapidly moving into the mainstream. 

/by

c. myers live – 2022 Trends in Financial Forecasting

, , , , ,

With budgeting season coming to an end, 2022 financial trends and opportunities have been a big discussion.  In this c. myers live, we discuss how to navigate these opportunities in light of your financial structure.

About the Hosts:

Brian McHenry

brian mchenry headshotBrian, one of five c. myers owners, has worked closely with credit union 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

David Loftus

David LoftusSince Dave joined c. myers in 2005, he has become well-known and well-respected by scores of credit unions in every corner of the country. Dave has worked on many complex modeling and consulting projects that c. myers has undertaken – he is always looking for a challenge. He most enjoys facilitating sessions for management teams as they work to make tough financial decisions, while at the same time running “what-ifs,” real-time, to help inform decision-making.

Learn more about David

/by

Three CECL Considerations For The C-Suite

, , ,

8 minute read – The following blog post was written by c. myers and originally published by CUES on December 9, 2021.

The world is a vastly different place than when CECL was first imagined.  At the time CECL was introduced, many in the industry raised concerns about the unintended consequences.  The stakes are even higher today.

The following excerpt from the NCUA final rule on CECL and the material decline in net worth ratios punctuates this point.

“While the report affirms the Department of the Treasury’s support for the goals of CECL, it also acknowledged that a ‘definitive assessment of the impact of CECL on regulatory capital is not currently feasible, in light of the state of CECL implementation across financial institutions and current market dynamics.’”

The following shows the average net worth impact for institutions in each of these categories,

December 2019 vs June 2021.

As of June 2021, 17% of credit unions over $10 million in assets had net worth ratios below 8%, including 7% of credit unions over $1 billion.

Now is the time to encourage all stakeholders, as data, methodologies, and the technical aspects are put into place, to reevaluate potential strategic implications of CECL for their unique business models.  As you do so, keep the following in mind.

ONE

A Mindset Shift Will Be Required.  Don’t Let CECL and a New Accounting Rule Undermine the Strategic Focus of Your Business

One of the biggest challenges will be communicating what the transition will bring, both pre- and post-implementation, in a clear and easily understood way.  There are many things about CECL that are not intuitive and, if not understood, can unintentionally change the strategic focus of your business.

If you want a more in-depth explanation of the following points read Life After CECL.

  • Loan growth can actually hurt ROA and net worth in the short term. The strategic positioning with respect to credit risk can exacerbate this issue.  It is essential to focus on lifetime net yield to avoid an unintended change in strategic focus.
  • Loan growth toward the end of the year can hurt the current year’s financials more than growth earlier in the year. It would be good to remind your team to not get discouraged if that wildly successful loan promotion toward the end of the year hurts profitability. It’s just a timing issue.  This means the next point should certainly become a way of life.
    • The traditional one-year financial view can lead to missed revenue opportunities and diminished relevance. Longer forecasts are needed to see the benefits of loan growth.

  • CECL can cause volatility in ROA and net worth. Traditional KPIs may not provide the appropriate balance of strategic progress, relevancy, and risk tolerance.

Remember, CECL stands for current expected credit losses.  As your expectations for credit risk change, so will your CECL calculations.

A prime example is that no one really knows how credit risk will play out over the next few years because of the pandemic, supply chain issues, and the threat of sustained inflation.  It can be beneficial to keep this in mind as you are assessing the initial CECL impact to net worth.  Past experience, current conditions, and future predictions should all come into play.

TWO

Communication of Impact on Net Worth and Strategic Net Worth Requirements

Make sure to include the initial estimated impact to net worth in your assessment and ongoing communication of strategic net worth requirements.  Discussions focusing on strategic net worth requirements are key to strategic momentum and optimizing opportunities and risk tolerance.

The finalized rule on the phase-in allows federally insured credit unions to spread the initial hit to Prompt Corrective Action (PCA) net worth over 3 years.  For those who will experience a significant jolt to net worth from the initial shift to CECL, this buys welcomed time to rebuild, especially after the net worth-stressing asset growth experienced by so many during the pandemic.

With the phase-in, the credit union’s financials will show the full impact on Day 1, but NCUA will phase-in the impact on PCA net worth over 3 years.

The phase-in is not available for early adopters but is also not optional for those who adopt CECL for fiscal years beginning on, or after December 15, 2022.  We encourage you to read the final rule for more detail.

For the first 3 quarters after transition (2023 for most), NCUA will include 0% of CECL’s impact on PCA net worth.  Starting in Q4, it will include 33%.  In Q8 it will include 67%, and in Q12, 100% of the impact will be included.

This will be confusing if the institution’s financials show one capital classification while NCUA is showing another.

Because this requires another mindset shift, it can be helpful to provide decision-makers with alternative views.  For example, showing the view with and without the phase-in can help non-financial decision-makers keep the full estimated initial impact top of mind as they are contemplating strategic decisions.

As we approach CECL implementation, using visuals to illustrate can promote deeper discussions and enhance communication.  Click here for examples of how to communicate impact to strategic net worth requirements from the initial impact of CECL.

Three

Find Opportunities

While CECL potentially creates a strategic distraction and volatility in traditional financial reporting, it can be a great motivator to uncover the opportunities.  The following are just a few thoughts.

  • A big opportunity is to turn all the work you have done with aggregating and analyzing CECL data into decision-information by syncing your learnings with your loan pricing, risk management, and packaging strategy. In other words, don’t just keep the CECL calculations in a silo to satisfy requirements; truly incorporate them into your decisioning.
  • Leverage the need for longer-term forecasting to really hone your strategies by linking your strategic considerations with a financial roadmap. You and your team may discover you have more strategic capacity than you originally thought.
  • Think critically about consumer markets that competitors may ignore or exit because of lack of understanding that CECL is a timing issue and traditional views of financial success must change. It is often eye-opening when having intentional and thought-provoking discussions around opportunities to serve these markets.

As with any rule change with potentially high impact, it can take time to adjust mindset and thinking.  This is why it is essential to have discussions and decisions viewed through a strategic lens so that an accounting rule change does not unintentionally drive strategy.

/by

Is Secondary Capital a Good Strategic Fit for Your Credit Union?

, , , , ,

4 minute read – Many CFOs and leadership teams of eligible credit unions are evaluating whether secondary capital might be a strategic fit for their business models.  

Here are two scenarios to consider: 

Scenario 1 – We want to continue to grow and expand our markets 

Consider a credit union that has robust growth in their current markets and has a strategic plan that includes extensive market expansion, either through digital delivery or physical presence.   

In this scenario, secondary capital could be used to support additional growth, while allowing the credit union to maintain an acceptable level of net worth.  

In a situation like this, being positioned to add profitable business is critical to the success of the strategy.  So, how do you get your arms around how profitable the new business needs to be, especially since profitability can change as the environment changes?    

We recommend first framing the answer from a strategic perspective.  If the high-level range of answers is acceptable, then more detailed scenarios could be explored taking into account the expenses, income, and the type of growth you are expecting.  This will help decision-makers understand how profitability and risk profiles could be impacted as rates change. 

The following example is based on a $1 billion credit union with an 8% net worth ratio and a 1% ROA.  The table below assumes that the loans would earn 3.5% after provision, while the cost of funding the asset growth is at 0.40%.  While 0.40% as a cost of deposits might seem high in the current rate environment, a credit union planning to grow the balance sheet may need to pay a little more for funding.  The $20 million in secondary capital is at an interest rate of 4.0%.  The overnight rate is assumed to be 0.15%.   

If the credit union is able to loan out the funds, the earnings increase.  

A risk though is that the credit union is unable to loan out the funds or generate the expected level of revenue.  For example, what if the additional assets end up parked in overnights?  In this scenario, overnights would come on at negative net yield after accounting for the cost of funds and decreasing ROA.

Scenario 2 – We need to buy time to rebuild our core net worth ratio

In this case, a credit union may be worried about having a net worth ratio that is lower than desired.  In the previous scenario, the credit union was looking to utilize secondary capital to allow for faster growth while keeping net worth within their comfort level.  In this case, secondary capital could provide a cushion that would give the credit union time to rebuild their own core net worth.

If the same $1 billion credit union with an 8% net worth ratio took on $20M in secondary capital at a cost of 4.0%, this would increase their net worth ratio to 9.80% overnight but reduce earnings 10 bps (assuming the money was placed into investments earning 15 bps).  The additional capital materially increases the net worth, but it comes at a cost.

Risks

Secondary capital is long-term subordinated debt, and while the maturity must be at least 5 years at inception for it to count as net worth, at some point the principal must be paid back.  One of the main risks is that a credit union is unable to successfully leverage the secondary capital, and has not increased their core net worth sufficiently to be in a strong position to pay it back once repayment starts.  In this circumstance, there is no guarantee a credit union would be allowed to renew their secondary capital or take on additional capital.  This could potentially create a scenario where at the end of the term the credit union’s net worth situation is worse off than before.

Finally, the secondary capital cannot be paid off early without NCUA approval.  The NCUA wants to make sure that the credit union is safe and sound and no longer needs the support of the secondary capital.  This means that, depending on the situation, a credit union might determine it is better to pay off the capital early, but be unable to do so.

Conclusion

Secondary capital can be a powerful tool if implemented appropriately.  If your institution is considering secondary capital, make sure that key stakeholders have a good understanding of the risk/return trade-offs.