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c. myers live – Prioritizing Strategic Conversations About Liquidity – A Few Reminders

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The spotlight on liquidity seems to be growing as the environment shifts before our eyes.  While it may be tempting to immediately dive into solutions mode, taking a step back to view the bigger picture can be more beneficial for you and your institution in the long run.  In this c. myers live, we will remind you of ways to look at current liquidity issues through a strategic lens, while taking talent, deposit acquisition and retention, and data optimization opportunities into account.  

About the Hosts:

Adam Johnson

Adam, CEO and one of five owners of c. myers, leads a client focused team of 50+ professionals who are passionate about helping our clients position themselves to remain relevant, sustainable, and differentiated.  In his 20+ years at c. myers, Adam has been a key contributor to the philosophy and design of c. myers’ proprietary financial models and ALM processes.  He helped design c. myers’ approach to assessing business models and strategic planning processes.

Learn more about Adam

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 financial institutions 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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Board Succession Planning: An Opportunity for Strategic Progress

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4 minute read – The following blog post was written by c. myers and originally published by CUES on March 20. 2023.

Succession planning is like exercise.  Everyone knows that they SHOULD do it and that it helps prevent future problems, but it can be hard to prioritize.  NCUA is working to provide some motivation.  If the proposed rule passes, it will require federal credit union boards of directors to establish and adhere to processes for succession planning for key positions.  This includes members of the board itself. *

Regardless of regulation, board succession planning is incredibly important.  At its worst, a lack of succession planning can result in onboarding a poor fit with their own agenda that causes disproportionate levels of chaos.  (If you haven’t experienced this, take a moment to be thankful.)  But at its best, good succession planning represents an opportunity to become the high-performing, strategic board you want to be.

That’s a strong statement, but setting a good foundation for succession not only results in recruiting board members that are a better fit, but it also establishes a path for board development.

Before jumping into creating job descriptions or recruitment strategies, there are some important steps you need to take to define the board you want to be.  This essentially describes the board’s vision for itself:

  • Desired characteristics and competencies of the board as a whole.  This will (hopefully) include being strategic and could also include such descriptors as champions that represent the membership, positive influence in the community, collaborative, or diverse (be specific – generation, work and life experience, etc.).  This should be a prioritized list of the key items.
  • Desired characteristics and competencies of board members.  Recognizing that not all board members need to exhibit all of the characteristics/competencies, this would include a prioritized list of the items that the board values as most essential for fulfilling the board’s vision of itself.  Examples include strategic thinker, good communicator, comfortable with financials, connected in the community, willing to learn new things, or prior board experience.
  • Desired dynamics of board interactions.  These can take the form of working agreements that members agree to abide by, such as openly and respectfully speaking their minds, engaging in creative disagreement as part of reaching consensus, being prepared for board meetings, being engaged in discussions, or staying at the strategic level.

With these three elements, the board should have a solid vision of what it wants to be and is ready to take steps toward succession that align with this vision.  For example, if the board desires to be diverse in terms of representing various generations, any gaps are apparent.  The desired characteristics become a clear guide when it comes to recruiting and vetting candidates.  And when creating the job descriptions and interviewing interested parties, the desired dynamics can provide clarity for potential candidates.

These foundational steps can set the board up for successful transformation into the board it wants to be, but they’re just the beginning.  Recruitment is often a challenge, especially if it becomes clear that previous recruitment methods are not effective in building a board that supports its vision.  New, more intentional recruitment methods can be put into place that will better support it.  Onboarding and ongoing board development activities are also guided by the vision.

For boards who have defined their vision and established strong succession processes, the future of the credit union is on much more solid footing.  Doing what you can to build a high-performing board is a big responsibility and a huge advantage for the organization.  Take steps now so you can rest easy knowing that it’s going to be in good hands.

* officers of the board, management officials, executive committee members, supervisory committee members, and (where provided for in the bylaws) the members of the credit committee

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Multipronged Approach to Process Improvement

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Process Improvement

3 minute read – Strategic initiatives that include process improvement as a key component are highly prevalent.  Some institutions set out to use process improvement to build a more efficient organization, better customer and staff experiences, or higher loan funding ratios.  In addition to improving specific processes and metrics, more and more organizations are working to create a culture of continuous process improvement so the efficiencies, experiences, and ratios they’ve achieved continue to improve into the future.   

Attaining an organizational culture that is focused on ever-better processes requires more than a few isolated efforts toward process improvement.  Teams that are working to establish the practices that will lead to a culture of continuous process improvement should consider consistently using a combination of the approaches below to gain the most traction, rather than a singular approach: 

  • Incremental Improvements – When processes need obvious tweaks, isolated improvements can be made without reviewing the entire process if vetted carefully for unintended domino effects to the upstream and downstream parts of the process.  The ideas for these tweaks are often the result of someone identifying a pain point, either through the normal course of business or by polling employees for their ideas, which is a good way to uncover previously unknown process weaknesses and give employees a voice.  Improvements that are suited for the quick wins approach are simple changes that are welcome or won’t invite resistance.   
  • Strategic Improvement – This is a more holistic approach that includes reviewing and improving an entire process from beginning to end.  This is most effective as a collaborative effort that brings in people involved in all phases of the process to pool their knowledge, identify issues, design creative solutions together, and champion the resulting improvements.  Viewing an entire process reveals a bigger picture that makes it easier to accomplish the objectives of the process improvement, and will often lead to more and higher impact improvements than when doing bits and pieces.  This approach requires good facilitation led by in-house personnel or consultants.   
  • Transformative Improvement– This is a variation of the comprehensive approach that is used when truly new thinking is called for, such as when an entirely new process is being created or an existing process is opened up for a complete redesign.  The team is asked for not only creativity, but altogether new ways of thinking about the process in order to meet identified objectives.  Good candidates for the transformative approach are processes surrounding a new core system, to avoid projecting old thinking onto the new system.  This is also an ideal approach for newly digitized processes, instead of simply adjusting the old process and missing potential gains from the new technology. 

Consistent efforts and consciously choosing and using a combination of approaches as appropriate for various circumstances will improve the chances for success.  It will help build a mindset where employees think about processes from new perspectives and are always looking for ways to strengthen them.  When talent throughout the institution embodies this mindset, they will embrace and help drive a culture of continuous process improvement and the organization can realize all the benefits that come with it. 

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5 Practices to Be a Better Peer

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5 minute read – There are countless references today to the “lone wolf” – the person who stands alone and doesn’t need anyone else to be successful, individualism marked as the key characteristic to success.  But the “lone wolf” is a temporary status because even the powerful and intelligent wolf depends upon the pack for survival.  It isn’t the lone wolf, but the pack who trusts each other, that survives and flourishes.   

It can be easy to silo ourselves and fall into the dangerous, “I’ll do it myself” mindset or the belief that it’s a sign of weakness to not have all the answers.  These challenges often stem from a more basic issue – lack of trust.  Perhaps we (unintentionally) fail to trust someone else to complete a task to our standards or we choose to not share ideas because we do not trust the reactions of our peers.  Here are a few tips for breaking out of singularity and embracing the power of collaboration and unity by focusing on the importance of trust:  

  • Build a foundation of trust.  Trust is a feeling that follows actions which demonstrate sincerity, competence, and reliability.  It can be helpful to shift your thinking about trust beyond the narrative of ethics and morality to a more grounded definition.  Approaching the idea of trust with curiosity may enable you to dig into why you trust or don’t trust yourself or a peer.  What biases or assumptions are influencing your evaluation of trust?  How can you get to the root of an issue in order to form a stronger foundation?   
  • Developing trust isn’t only about relationships with others.  Being consistently competent and demonstrating reliability requires honesty with oneself.  When we are used to being fiercely independent, we risk saying “yes” even if we do not have the capacity to meet the request.  This does not mean you shouldn’t push yourself to grow your skills and capacity!  More so, pause and consider resource allocation and get clear on a person’s request.  Are they really asking that you personally need to fulfill the request?  Or can you use your resources to ensure the request is fulfilled, on time, and with quality?  There are also moments when you may need to counteroffer on the timing and/or scope of the request.   
  • Clarify expectations.  In the process of building trust and moving out of your silo, it is important to be clear about expectations around roles, both yours and others’.  We often think we have mutual understandings but walk away from meetings with different interpretations.  Develop a common language.  Asking questions helps to close any gaps.  Provide and/or seek clarification.  If there is an expectation of a deliverable, make sure you agree on the date.  Unspoken expectations or assumptions can unintentionally result in unmet expectations, and ultimately chip away at trust.  Repeat back what you heard, checking that it is in alignment with what the speaker intended.  Taking small steps to establish more clarity in communication can mean fewer breakdowns or blunders across departments and stakeholders.   
  • Keep self-accountability top-of-mind.  It is one thing to set clear expectations around roles, it is another to create an environment in which people can assess the process and performance to determine how to be better going forward.  As a team, determine how to address accountability;  Incorporate opportunities to debrief and evaluate takeaways that fit with your values.  This includes self-accountability, stepping back and asking yourself how you could have shown up different.  Focus on accountability as a tool for growth and learning, not as a “gotcha” – you have a common goal of the betterment of the company, and helping individuals show up as their best selves adds up to this GOAL.    
  • Assume positive intentions as you champion discomfort.  Building trust around expectations and accountability often flies in the face of how we have learned to speak with our peers.  It will probably be a bit uncomfortable as you institute working agreements and norms around communication with the intent of building trust, self-accountability, and peer accountability.  Embrace the discomfort.  Like most skills, when we are beginners, we are often pretty bad – think of the first time you rode a bike.  If we give up because it’s hard or uncomfortable, we risk never growing our skills.  Be brave together and assume positive intentions as you grow your capacity for trust, expectations, and accountability.   

Unlike the lone wolf, the pack relies on its strength in numbers to face even the harshest conditions.  Lean into your team, embracing strengths and acknowledging weaknesses.  Compassion and empathy towards each other and yourself go a long way in developing trust, clarity, and a culture of collaboration.  And, while the financial institution may not quite be the tundra, leaning into the power of a well-developed team can take you to the next level. 

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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 are faced with hard and timely decisions.  We feel reposting our blog on decay rates will help decision-makers keep critical ALM modeling issues top of mind.  The weight of important decisions is always present – don’t lose sight of it in this crazy environment.

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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