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Six Questions CFOs Are Asking About Liquidity

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Consumer confidence hit a nine-year high in November as consumers’ views on both economic conditions and the labor market improved (Source: Wall Street Journal). Many credit unions have enjoyed increasing loan-to-assets, as have their competitors. Even if interest rates don’t increase, many decision-makers with high loan-to-assets are grappling with questions such as:

  1. Do we have sufficient and cost-effective liquidity options to continue to handle robust loan demand?
  2. How tight is liquidity for our geographic and digital competitors?
  3. If our competitors’ liquidity is tightening, how can that impact our ability to attract cost-effective funds? How can it impact our interest rate risk?
  4. If we use CD promotions to meet liquidity needs, how much cannibalization are we willing to accept?
  5. Now that liquidity is tightening, how comfortable are we with our intended deposit strategy if rates were to rise?
  6. What do we need to do now to dust off the cobwebs and get great at attracting sufficient, cost-effective deposits?

It is not too soon to begin strategizing about this. Make sure to test various options and understand the interest rate risk impact as well as the marginal cost of funds. Keep in mind, your liquidity planning can be disrupted by desperate competitors.

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Know Your Numbers: 4 Questions You Should Answer About Your Lending Experience

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Interest rates may go up and interest rates may go down, but a laser focus on your member experience is essential, regardless of what interest rates do. Just about every credit union has easy access to the data needed to answer the following 4 key questions about the lending experience:

  1. Are we attracting enough of the right types of lending opportunities? In other words, is our appetite for credit risk aligned with our marketing efforts? Quality applications from identified target markets outweigh volume
  2. From the consumer’s perspective, how long does it take before they get a decision? Auto-decisioning is not being fully utilized in the industry. Remember auto-decisioning is not just saying yes. Often, credit unions that auto-decline actually fund more of the loans that they approve because they have more time to devote to the loans they want to make
  3. What is our look-to-book by branch and digital delivery channels? It is not uncommon to see that the digital delivery channel is not truly “owned” in the credit union. Service level agreements and processes are not clear
  4. What are our funding rates for applications taken outside of normal business hours? Credit unions that study this metric find huge opportunity to increase funding. The digital world increases expectations exponentially. Waiting to get a decision on Monday for a loan application submitted on Saturday will not cut it

The questions above simply scratch the surface. Credit unions have access to high-quality data. Credit unions that turn this data into easily digestible, actionable business intelligence enjoy higher funding ratios. Equally important, their member experience is truly rewarding.

You can’t control interest rates but you can control your member’s experience. Maintaining a laser focus on that experience is a key to success in every rate environment.

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Happy Thanksgiving!

On behalf of all of us at c. myers, we wish you a wonderful Thanksgiving holiday.

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Focus on Frictionless

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Your competition is not standing still. They are making it faster and easier for a consumer to open an account and get a loan by removing friction in their processes. More and more consumers are getting spoiled by how fast they can now do their banking, and they are telling their friends.

You can easily start removing friction from your processes today. Fortunately, you have data at your fingertips that can be quickly turned into actionable business intelligence. You can use this business intelligence to make the right decisions to streamline processes so they are not only easier for your members, but also for your staff. Wouldn’t it be great if making loans faster and easier – without taking additional credit risk – led to even more loans!

Learn more by watching this interview of our President, John Myers, after he spoke at the CUES CEO/Executive Team Network Conference last month: Watch Now.

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6 Dos and Don’ts of the NCUA’s NEV Supervisory Test

Consider the following as you implement the NCUA’s NEV Supervisory Test:

DO make sure to understand your answers by running NEV with the non-maturity deposit caps the test uses (currently 1% and 4%) before NCUA comes into your credit union.

DON’T forget why NCUA decided to standardize. One of many reasons is that there is “a significant amount of uncertainty surrounding valuation methods” for non-maturity deposits. If you are going to continue to use results of core deposit studies to determine non-maturity deposit values, it will be critical for your board and management to be absolutely clear on how these results will be used, if at all, in decision-making. For example, when testing what-ifs, which assumptions set will drive decisions if one set gives the green light and the other the red light?

DO make sure your policy represents your credit union’s appetite for risk. NCUA has clearly stated this. Avoid saying in policy, “We will accept a moderate level of risk using the thresholds identified in NCUA’s supervisory test.”

DON’T stop your asset/liability management (ALM) at the NEV supervisory test. By definition, any type of standardization means that the unique risks of an institution are not captured. To help with standardization and comparison across credit unions, the new NEV test treats all non-maturity deposits the same, credit union to credit union. As a result, the standardization ignores each credit union’s pricing, not to mention ignoring the pricing on each category such as regular shares, checking, and money markets.

DO remind your board and management that NEV does not quantify profitability (earnings) or risks to profitability and net worth. Earnings do matter. Earnings are what credit unions need to pay for products, services, and delivery channels that will keep them relevant. A simple way to remember that NEV does not quantify profitability is that it does not factor in non-interest income and operating expenses.

DON’T forget that the timing of earnings and risks to earnings matters. NEV collapses all future cash flows to represent what the value would be today if shock interest rate environments were to occur. By definition, this can’t show decision-makers the timing of risks to earnings and, ultimately, net worth.

The world is becoming more complex. This complexity can bring opportunities and risks. The most important thing to remember is that ALM can and should be used to provide decision-makers with actionable business intelligence. The new NEV supervisory test is not designed to provide actionable business intelligence; it is simply a scoping tool.