Strategic Planning Archives - Young & Associates

Federal Crop and Livestock Insurance Programs and What’s Changing in 2025

Written by admin on June 24, 2025. Posted in Advice, Blog, Commercial Underwriting, Consultation, Lending & Loan Review, Management & Planning, Risk Management, Strategic Planning.

By Craig Horsch, Consultant, Young & Associates

Overview of Federal Crop & Livestock Insurance Programs

Federal Crop Insurance and Federal Livestock Insurance are supplemental insurances that cover losses which are unavoidable and caused by naturally occurring events. They do not cover losses resulting from negligence or failure to follow good farming practices related to crops and/or livestock.

Federal Crop Insurance Programs include three main programs—Price Loss Coverage (PLC), Agriculture Risk Coverage (ARC), and the Marketing Assistance Loan Program (MALP)—as well as the Whole-Farm Revenue Protection Plan 2025 (WFRP), per the USDA Risk Management Agency. These programs are briefly described below:

PLC Overview:

PLC program payments are issued when the effective price of a covered commodity is less than the effective reference price for that commodity. The effective price is defined as the higher of the market year average price (MYA) or the national average loan rate for the covered commodity. PLC payments are made to owners of historical base acres and are not tied to the current production of covered commodities. Covered commodities include wheat, corn, sorghum, barley, oats, seed cotton, long- and medium-grain rice, certain pulses, soybeans/other oilseeds, and peanuts.

ARC Overview:

There are two types of Agriculture Risk Coverage: Agriculture Risk Coverage–County (ARC-CO) and Agriculture Risk Coverage–Individual (ARC-IC).
- The ARC-CO program provides income support tied to the same historical base acres—not current production—of covered commodities. ARC-CO payments are issued when the actual county crop revenue of a covered commodity is less than the county ARC-CO guarantee for that commodity.
- ARC-IC provides income support based on a farm’s revenue from current production of covered commodities, compared with a benchmark average of that farm’s production of those commodities. However, payments are limited to a portion of the farm’s historical base acres. This page focuses on ARC-CO; the ARC-IC program has not been widely adopted.

MALP Overview:

The MALP allows producers to use eligible commodities they have produced as collateral for government-issued loans. Eligible commodities include wheat, corn, sorghum, barley, oats, upland and extra-long-staple cotton, long- and medium-grain rice, soybeans and other oilseeds, certain pulses, peanuts, sugar, honey, wool, and mohair.

WFRP Overview:

WFRP insurance provides coverage against the loss of revenue that you expect to earn or obtain from commodities you produce or purchase for resale during the insurance period, all under a single insurance policy. WFRP offers benefits such as:
- A range of coverage levels from 50% to 85% to fit the needs of more farming and ranching operations;
- Replant coverage for annual crops, except Industrial Hemp;
- The ability to consider market readiness costs as part of the insured revenue;
- Provisions to adjust the insurance guarantee to better fit expanding operations;
- An improved timeline for farming operations that operate as fiscal year filers; and
- Streamlined underwriting procedures based on the forms used for WFRP.WFRP is designed to meet the needs of highly diverse farms that grow a wide range of commodities and sell to wholesale markets. The WFRP policy was specifically developed for farms that market directly to local or regional buyers, sell through identity-preserved channels, and produce specialty crops, animals, and animal products. The amount of farm revenue you can protect with WFRP insurance is the lower of the revenue expected on your current year’s farm plan or your five-year average historic income, adjusted for growth. This represents an insurable revenue amount that can reasonably be expected to be produced on your farm during the insurance period. All commodities produced by the farm are covered under WFRP, except timber, forest and forest products, and animals used for sport, show, or as pets.It is important to understand that WFRP covers revenue produced during the insurance period. For example, if a calf weighs 800 pounds at the beginning of the insurance period and is sold at 1,200 pounds during the insurance period, the value of production will be the additional 400 pounds gained. Inventory adjustments are used to remove production from previous years and to add revenue for production that has not yet been harvested or sold.

Understanding USDA Livestock Insurance Programs

Per the USDA Risk Management Agency website, the Federal Livestock Insurance Programs are as follows:

Livestock Gross Margin – Cattle:

The LGM for Cattle Insurance Policy provides protection against the loss of gross margin (market value of livestock minus feeder cattle and feed costs) on cattle. The indemnity at the end of the 11-month insurance period is the difference, if positive, between the gross margin guarantee and the actual gross margin. The LGM for Cattle Insurance Policy uses futures prices to determine both the expected and actual gross margins. Adjustments to futures prices are based on state- and month-specific basis levels. The price the producer receives at the local market is not used in these calculations.

Eligible producers are those who own cattle in the states of Colorado, Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Montana, Nebraska, Nevada, North Dakota, Ohio, Oklahoma, South Dakota, Texas, Utah, West Virginia, Wisconsin, and Wyoming. Only cattle sold for commercial or private slaughter—primarily intended for human consumption—and fed in one of the eligible states are covered under the LGM for Cattle Insurance Policy.
Livestock Gross Margin – Dairy Cattle:

The LGM for Dairy Cattle Insurance Policy provides protection against the loss of gross margin (market value of milk minus feed costs) on milk produced from dairy cows. The indemnity at the end of the eleven-month insurance period is the difference, if positive, between the gross margin guarantee and the actual gross margin. The LGM for Dairy Cattle Insurance Policy uses futures prices for corn, soybean meal, and milk to determine the expected and actual gross margins. The price the producer receives at the local market is not used in these calculations.

Any producer who owns dairy cattle in the contiguous 48 states is eligible for LGM for Dairy Cattle Insurance Policy coverage. Only milk sold for commercial or private sale—primarily intended for final human consumption—from dairy cattle fed in any of the eligible states is covered under this policy.
Livestock Gross Margin – Swine:

The LGM for Swine Insurance Policy provides protection against the loss of gross margin (market value of livestock minus feed costs) on swine. The indemnity at the end of the 6-month insurance period is the difference, if positive, between the gross margin guarantee and the actual gross margin. The LGM for Swine Insurance Policy uses futures prices to determine both the expected and actual gross margins. The price the producer receives at the local market is not used in these calculations.

Any producer who owns swine in the 48 contiguous states is eligible for LGM for Swine insurance coverage. Only swine sold for commercial or private slaughter—primarily intended for human consumption—and fed in the 48 contiguous states are eligible for coverage under the LGM for Swine Insurance Policy.

Policy Outlook: Projected Spending Impacts of Proposed PLC and ARC-CO Changes

In light of potential 2025 farm policy changes, the article “Spending Impacts of PLC and ARC-CO in the House Agriculture Reconciliation Bill” by Schnitkey, Paulson, Coppess (University of Illinois), and Zulauf (Ohio State University), published in farmdoc daily, offers valuable insight into the budgetary and structural implications of proposed revisions to two cornerstone commodity programs: Price Loss Coverage (PLC) and Agricultural Risk Coverage at the County Level (ARC-CO).

Key Proposed Changes

Under the House Agriculture Reconciliation Bill, four primary changes to PLC and ARC-CO are proposed:

1. Statutory Reference Price Increases:

From 2025 to 2030, statutory reference prices for major program crops would increase—for example, from $3.70 to $4.10 per bushel for corn (an 11% increase), from $8.40 to $10.00 for soybeans (19%), and from $5.50 to $6.35 for wheat (15%). Similar increases are also proposed for seed cotton, rice, and peanuts (Schnitkey et al., 2025, Table 1).

2. PLC Payment Floor Adjustments:

The bill proposes new price floors for PLC payments—$3.30 for corn and $0.30 per pound for seed cotton—to limit downside price risk. These new thresholds would reduce outlays in low-price environments by capping PLC payment escalation.

3. ARC-CO Enhancements:

Changes to ARC-CO include increasing the coverage level from 86% to 90% and the maximum payment rate from 10% to 12.5% of benchmark revenue, making the program more responsive during periods of reduced revenue.

4. Loan Rate Increases:

The bill also proposes a 10% increase in the loan rates for the six largest program crops, further enhancing the income safety net (Schnitkey et al., 2025).

Budgetary and Distributional Impacts

The authors estimate that these program changes would raise federal outlays for PLC, ARC-CO, and marketing loan programs from $46.5 billion to $76.4 billion between 2025 and 2035—a 64% increase (Schnitkey et al., 2025, Table 2). However, this increase is not evenly distributed across commodities or regions:

Southern crops—notably peanuts, rice, and seed cotton—would see the largest increases in payments per base acre. In contrast, traditional Midwestern crops such as corn and soybeans would receive more modest increases.
For farms with 500 base acres, estimated average annual payments under the proposed changes would be:
- Corn: $15,500
- Soybeans: $10,500
- Wheat: $8,500
- Seed cotton: $45,000
- Rice: $128,000
- Peanuts: $134,000 (Schnitkey et al., 2025, Table 2; Figure 1)

This disparity stems from differences in statutory reference prices across crops. Southern crops historically have higher relative reference prices, leading to larger government payments—an imbalance that would be widened under the proposed bill (Schnitkey et al., 2025).

Political and Policy Implications

To fund these increased outlays, the House Agriculture Committee is proposing spending reductions from the Nutrition Title, particularly the Supplemental Nutrition Assistance Program (SNAP). This cost-shifting pits agricultural and nutrition interests against each other and introduces politically sensitive trade-offs that could impact the outcome of future Farm Bill negotiations (Schnitkey et al., 2025).

Why This Matters

For agricultural lenders and risk managers, particularly those serving Midwestern crop producers, the proposed updates could affect the farm income landscape, collateral valuations, and overall credit risk. Although support increases are significant for crops like rice and peanuts, the more moderate gains for corn and soybeans mean Midwest producers may see less benefit from the bill in its current form. Understanding the potential outcomes of these policy shifts can help financial institutions refine their risk assessments and prepare clients for what lies ahead.

Staying Ahead in a Changing Agricultural Risk Landscape

As federal crop and livestock insurance programs evolve—and legislative proposals like those in the 2025 House Agriculture Reconciliation Bill signal substantial shifts in farm subsidy distribution—lenders must be prepared to navigate increased complexity in agricultural credit risk. From changes in PLC and ARC to adjustments in federal loan programs and WFRP, these developments have direct implications for borrower cash flow, collateral valuation, and overall lending strategy.

For financial institutions serving agricultural clients, now is the time to reassess risk management frameworks, update lending practices, and evaluate credit exposures in light of these changes.

Young & Associates has deep expertise in agricultural lending and credit risk analysis. Our team can help your institution proactively adapt, with services that include portfolio review, credit risk management consulting, and tailored support for ag-specific lending challenges. Whether you’re seeking to strengthen underwriting processes or prepare for policy-driven shifts in borrower performance, we’re here to help you respond with confidence.

Explore our lending and credit risk consulting services to learn how we can support your institution’s success in this evolving environment.

References

Coppess, J., C. Zulauf, G. Schnitkey, N. Paulson and B. Sherrick. “Reviewing the House Agriculture Committee’s Reconciliation Bill.” farmdoc daily (15):89, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, May 14, 2025. Permalink

Kalaitzandonakes, M., B. Ellison, T. Malone and J. Coppess. “Consumers’ Expectations about GLP-1 Drugs Economic Impact on Food System Players.” farmdoc daily (15):49, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, March 14, 2025. Permalink

Schnitkey, G., N. Paulson, C. Zulauf and J. Coppess. “Price Loss Coverage: Evaluation of Proportional Increase in Statutory Reference Price and a Proposal.” farmdoc daily (13):203, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, November 7, 2023. Permalink

Schnitkey, G., C. Zulauf, K. Swanson, J. Coppess and N. Paulson. “The Price Loss Coverage (PLC) Option in the 2018 Farm Bill.” farmdoc daily (9):178, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, September 24, 2019. Permalink

Schnitkey, G., N. Paulson, C. Zulauf and J. Coppess. “Spending Impacts of PLC and ARC-CO in House Agriculture Reconciliation Bill.” farmdoc daily (15):93, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, May 20, 2025. Permalink

The Importance of Field Examinations in Asset-Based Lending

Written by admin on June 24, 2025. Posted in Advice, Blog, Commercial Underwriting, Lending & Loan Review, Management & Planning, Risk Management, Strategic Planning.

By Ollie Sutherin, Chief Financial Officer, Young & Associates

Asset-based lending (ABL) is a creative financing alternative that will unlock additional working capital for businesses. While it appears more complex than traditional commercial real estate transactions, the appropriate training and education eliminate intimidation. Many community financial institutions tend to avoid ABL opportunities due to the perceived burden of ongoing monitoring. However, with the appropriate due diligence at the outset of a lending relationship, the process becomes significantly more manageable and efficient.

The Reality of Ongoing Monitoring in Asset-Based Lending

Having worked at a small regional bank, I experienced firsthand the detail-oriented process of handling ABL monitoring. Line of credit renewals often relied heavily on borrowing base certificates (BBCs)—many of which lacked accuracy and detail. Field examinations were seldom part of the equation, and decisions were often based on whether the BBC appeared “sufficient” to support the requested loan amount, whether payments were current, and whether principal was being retired in a frequent manner. What was consistently overlooked were several critical elements:

Early detection of fraud or irregularities
Evaluation of internal operational controls
Comprehensive and consistent collateral eligibility testing
Longitudinal trend analysis and risk monitoring

Field Exams: A Vital Tool for Risk Mitigation

In today’s competitive lending environment, speed and efficiency are crucial. However, it’s imperative not to sacrifice thorough due diligence for the sake of expediency. Relying solely on BBCs without incorporating periodic field examinations introduces significant risk—risk that could far outweigh the relatively modest cost of performing a field exam. The reality is clear: a field exam provides the lender with a deeper understanding of the borrower’s financial health, operational integrity, and collateral quality. The field exam also provides information that can be used to set appropriate advance rates for the various collateral types.

You Don’t Know What You Don’t Know

One illustrative example comes from a colleague who shared her first field examination experience shortly after completing her training and certification. She was tasked with examining receivables for a large borrower. Drawing on the tools and methodology she had just mastered, she uncovered a serious case of fraud whereby the borrower was systematically crediting and rebilling invoices once they aged past 90 days. This practice inflated the eligible receivables reported in the BBC and granted the borrower significantly more borrowing availability than permitted.. Without the field exam, this fraud would likely have continued undetected—exposing the financial institution to considerable, non-avoidable risk.

While instances like these may not occur every day, they underscore an essential truth: you don’t know what you don’t know. Field examinations offer lenders a proactive mechanism to confirm the integrity of a borrower’s financial reporting and ensure continued creditworthiness. In asset-based lending, that peace of mind over your relationships far outweighs the small investment.

How Y&A Can Support Your Lending Program

Asset-based lending can open new avenues for community financial institutions, but it also introduces unique risks that require careful, ongoing oversight—particularly through field exams and detailed collateral monitoring. As illustrated, relying solely on surface-level reporting leaves institutions vulnerable to inaccuracies and potential fraud.

Our Y&A Credit Services team provides a wide range of solutions that support strong credit risk management, including credit underwriting, underwriting reviews, and credit administration. These services can help your institution build a solid foundation for managing more complex lending relationships like ABL.

If your team is looking to enhance credit processes, improve documentation quality, or strengthen internal controls, Young & Associates is here to help you prepare—strategically and confidently—for what’s ahead. Reach out to us today for a free consultation.

Market Shifts & Margin Pressures

Written by admin on November 13, 2024. Posted in Advice, Blog, Capital Planning, Consultation, Contingency Planning, Interest Rate Review, Interest Rate Risk, Liquidity Management, Liquidity Review, Management & Planning, Profit Planning, Risk Management, Strategic Planning.

By Michael Gerbick, President, Young & Associates

On Thursday, November 7, 2024, Jerome Powell and the FOMC (Federal Open Market Committee) announced a 25 basis point (bp) interest rate reduction of the federal funds rate just after they announced a 50 bp cut in September. September’s rate reduction was the first time since March 2020, the Fed has cut rates. Consider the last several years regarding interest rates: rates dropped to zero in the face of a pandemic, rates skyrocketed 550 bps resulting in an inverted yield curve spanning years, and now another shift in monetary policy.

To provide a visual display of this environment, please view the yield curve over the last few years and then just after the announcement of the latest rate cut on November 7, 2024. Between July 2022 and August 2024, the 10-year bond yield was less than the 2-year yield indicating an inverted yield curve. You can see in the November 8, 2024 curve, the yield on the 2-year bond below the 10-year. The shift in the yield curve has been incredible. Consider the decisions made around each of these points in time at your institution.

This rate environment and the decisions made within it are impacting banks everywhere, especially community financial institutions. Decisions on how best to retain and grow deposits have impacted balance sheets and income statements during this time. It is well-known consumers were placing their money in certificates of deposit (CDs) as rates rose and continued to move their funds to these higher yielding deposit accounts, even after the Fed’s last hike in 2023. The charts below utilize call report information from S&P Global for commercial banks and reveal the deposit mix shift from non-maturity deposits and CDs from the last year. Segmenting CD deposit data from commercial banks by asset size, one can see the shift in the deposit mix for the community banks less than $1B has been the most significant.

These CDs will mature; the following chart shows the majority of these maturities will take place in the next year (+84%), with nearly 30% maturing by year end 2024.

The deposit shift to CDs is not only more costly to community financial institutions, raising their cost of deposits and ultimately adding pressure to their Net Interest Margin, but they can also be more volatile than traditional non-maturity deposits with savvy depositors more willing to move their deposit relationship to the institution with the highest yielding return. In addition, the data in the charts show this deposit shift is more significant for the smaller community banks with less of an opportunity to reprice in the shorter term than the other community commercial banks.

Many of our community bank colleagues are very much aware of these rising costs and are actively pursuing all resources (including each other) on how best to manage this aspect of the balance sheet. In May 2024, the FDIC released its Annual Risk Review and in June 2024 the OCC released their Semiannual Risk Perspective both outlining significant trends and risks in the banking industry. Among the critical sections in each, the analysis of market risks stands out, particularly for community financial institutions. Both articles have common themes, I’ll break down some important insights from the reports and how they may impact your institution and its strategy in the coming months and years.

Liquidity, Deposits, & Funding: A Shifting Landscape

Reinforcing the analysis earlier this article, the OCC and FDIC both indicate 2023 saw an increase in the cost of funds for banks as community banks reacted to the rising rate environment and for more savvy consumers. For community banks, which typically have smaller balance sheets and lean heavily on customer relationships, the stability of insured deposits has been a positive. However, the growing trend of depositors seeking higher yields has led to a shift from traditional savings accounts to CDs and other high-yielding options.

This shift puts upward pressure on interest expenses, a trend community financial institutions are already feeling. In fact, CDs accounted for 26% of median of all FDIC bank deposits at the end of 2023, compared to 19% the previous year. To remain competitive and retain deposits, community banks are raising deposit rates, which in turn increases their cost of funds.

For community banks that have traditionally benefited from lower-cost deposits, this shift represents a double-edged sword—depositors are seeking better returns, but retaining those deposits requires higher costs. The challenge will be finding a balance between offering attractive rates to depositors and managing interest expenses.

Addressing Deposit Competition

To combat this competition, community financial institutions need to focus on differentiating the value they provide beyond rates. Here are some approaches you may find value in pursuing:

Tiered Deposit Products: Offering tiered-rate accounts for different deposit levels or durations can help incentivize customers to commit their funds for longer periods while minimizing the impact on your cost of funds.
Relationship Banking: Unlike larger institutions, community banks can leverage personal relationships with customers. Offering value-added services such as financial planning or personalized advisory services can deepen customer loyalty, encouraging them to keep their deposits with your institution even if competitors offer slightly higher rates. This applies to new lending relationships too, prioritize getting the customer’s deposit relationship as the new loan is established.
Community Initiatives: Reinforce your brand of being an active member of the community. Consider leveraging the relationship banking discussed above; partner with these businesses to sponsor local fundraisers together. Consider avenues to reinforce your commitment to the community with other members of the community. This can not only build loyalty but also emphasize the bank’s role in the community, creating a compelling reason for customers to stay and others to start a relationship with you.

Increased Reliance on Wholesale Funding

Liquidity pressures in 2023 forced banks, especially community institutions, to turn more heavily to wholesale funding to meet liquidity needs. This is especially concerning for community banks that have historically relied on stable local deposits. The FDIC report noted that liquid assets at community banks declined alongside loan growth, driving a reliance on wholesale sources to fund assets. By the end of 2023, 19% of total assets at community banks were funded by wholesale sources, the highest level since 2017.

Wholesale funding often comes with higher costs and introduces funding risk, particularly in periods of market stress. Community banks need to carefully manage this balance, ensuring they have access to cost-effective liquidity while avoiding over-reliance on wholesale sources that could pose risks if market conditions deteriorate.

Net Interest Margins & Interest Rate Risk

Margin Compression & Variability Among Banks

Both the OCC’s and FDIC’s report make it clear that NIM compression is a concern. Although the median NIM increased slightly to 3.45% in 2023, this masks the deeper issue: funding costs—particularly deposit rates—are rising faster than loan yields, minimizing the yield gains on the assets. Many community banks saw margin compression as the cost of funds outpaced asset yields.

In the FDIC report it is highlighted that smaller community banks with less than $100 million in assets generally fared better than others, with 70% of these institutions reporting higher NIMs comparing 2022 to 2023. This is likely due to their ability to maintain stronger liquidity positions and avoid the sharp increases in funding costs that larger institutions faced. However, even smaller banks are not immune to the challenges posed by rising interest rates, and they may find their NIMs under pressure in the coming quarters as deposit costs continue to rise.

Strategies for Managing the Squeeze

Balancing Deposit & Loan Pricing: The traditional method of managing NIM by lowering deposit rates or raising loan rates may no longer provide the same value it did in the past. Community banks can explore variable-rate loan products with rate floors, which allow for automatic adjustments as interest rates rise and have some protection as rates decline. This provides a hedge against rising funding costs.
Dynamic Pricing Models: Incorporating dynamic pricing strategies for both deposits and loans can help strike the right balance between growth and profitability. For instance, a Midwest community bank adopted a step-up CD product, which started with a competitive rate that increased over time, providing both flexibility for depositors and predictability for the bank’s funding costs.
Strategic Use of Securities Portfolios: To manage asset-liability mismatches, community banks can strategically deploy their securities portfolios. If the bank has excess liquidity, consider investing in current higher rate securities. Many banks invested in securities prior to the most recent rising rate environment and have unrealized losses. Although realizing significant loss on the sale of your securities is not ideal, banks should have discussions internally concerning their portfolio, payback period if a loss is realized and the most prudent path forward for their institution.

Interest Rate Risk Environment Remains High

For community banks, interest rate risk (IRR) has become an increasingly critical issue. The FDIC’s report points to the elevated share of long-term assets held by these institutions, which could constrain future NIM growth. As interest rates rose rapidly in 2022 and 2023, some community banks began selling off lower-yielding securities to reinvest in higher-rate assets. The OCC reports call out unrealized losses in held-to-maturity portfolios declined in the fourth quarter of 2023, but remained elevated at 11.5 percent. This security management strategy was mentioned earlier in this article and if implemented should be tightly monitored so as to minimize the impact and risk of any realized losses on those securities.

The OCC’s report discusses the uncertainty of the rate environment and depositor behavior prior to the Fed acting and reducing rates. It states:

Uncertainty regarding the rate environment and depositor behavior over the next 12 to 24 months increases the importance of stress testing and sensitivity analysis of deposit assumptions. Given uncharted depositor behavior and rate sensitivity observed during the recent increasing rate environment, prudent risk management would include interest rate risk and liquidity stress-testing scenarios that assume higher than expected deposit competition, resulting in higher-than-expected deposit pricing regardless of rate movement direction.

Well-developed assumptions are key to IRR management and modeling. With a declining rate environment community, banks may want to assume more conservative betas in their repricing assumptions.

Strategic Takeaways for Community Banks

So, what can community financial institutions do based on the data in the OCC and FDIC’s Reviews?

Diversify Funding Sources: The increasing reliance on wholesale funding is costly for community banks. Banks may focus on exploring alternative funding sources or solidifying relationships with local depositors may help mitigate future liquidity pressures.
Focus on Asset-Liability Management (ALM): With interest rate risk remaining high, it is critical for community banks to develop more dynamic asset-liability management strategies. Refining the ALM modeling deposit beta assumptions and monitoring the shift of the deposit mix can help to improve forecasts and reduce the risk of negative financial impact. In addition, reinvesting proceeds from lower-yielding securities at higher rates can help but must be carefully managed to avoid significant losses.
Manage Interest Expenses: Even with the Fed reducing rates a total of 75 bps in the last few months, the competition for deposits remains fierce, and many community banks will need to continue offering higher rates to retain customer funds. While this will delay the full impact of cost relief from the Fed’s rate reduction, thoughtful pricing strategies and maintaining a strong loan portfolio could help offset these expenses.

From Stress to Success: Stay Agile, Stay Informed

As community financial institutions adjust to the Fed’s 50 bps and 25 bps rate reductions and face the challenges outlined in both the FDIC’s 2024 Risk Review and the OCC’s Semiannual Risk Perspective, it is clear that agility and innovation will be key to success. The market risks—ranging from deposit competition and NIM compression to liquidity pressures—are significant, but with strategic thinking and proactive management, community banks can navigate these challenges and continue to thrive. With proactive strategies focused on liquidity management, asset-liability alignment, and cost control, community financial institutions can navigate these turbulent waters and position themselves for success in 2024 and beyond.

For community banks, the key takeaway is clear: stay agile, monitor funding costs closely, and adopt risk mitigation strategies that balance growth with stability. By doing so, these institutions can continue serving their communities and remaining resilient in the face of economic uncertainty.

For over 45 years, Young & Associates has guided community financial institutions through shifting market risks. Whether it’s capital planning, liquidity management risk reviews, or interest rate risk management reviews, our team is here to ensure your institution stays agile and ready to adapt to evolving market conditions. Contact us to learn more about how we can support your success.

Bridging the Small Business Lending Gap

Written by admin on November 13, 2024. Posted in Advice, Blog, Consultation, Lending & Loan Review, Management & Planning, Strategic Planning.

How Technology Shapes the Future for Community Financial Institutions

By Ollie Sutherin, Chief Financial Officer, Young & Associates

The challenges posed by the COVID-19 pandemic are no surprise to anyone in the financial services industry, least of all to the small business owners across the country. However, concerns around small business lending were growing well before the pandemic and continue to rise, particularly for community financial institutions (CFIs). The evolution of technology has introduced a unique set of challenges and opportunities for CFIs, often seen as a double-edged sword: it both undermines the traditional values CFIs are known for and opens up a vital path to remaining competitive.

Historically, community financial institutions have built their foundation on personal relationships and tailored, customer-first service. It’s this “high-touch” approach that has endeared CFIs to their communities. However, as a new generation of small business owners emerges, so too does the demand for efficiency, automation, and immediate access to capital. In today’s fast-paced business environment, entrepreneurs are less interested in handshake deals and more focused on solutions that save them time and hassle. This shift in expectations is being effectively capitalized upon by fintech companies and larger financial institutions.

The Rise of Technology in Small Business Lending

For many entrepreneurs, the path to success hinges on one critical element: access to capital. Yet, what was once a deeply relational process—built around trust, face-to-face meetings, and careful consideration—has been revolutionized by technology. Today’s small business owners want quick answers. They want the loan process to be as streamlined and efficient as possible. Fintechs and large banks have answered that call by offering tech-driven solutions that not only provide rapid loan decisions but also reduce administrative burdens on both sides of the equation.

The ability to upload financial documents, run credit checks, and aggregate tax returns through automated platforms has cut out many of the manual processes that used to consume weeks or even months in the lending cycle. Fintech innovations use predefined input criteria to spread tax returns, perform credit analysis, and score loan requests—almost instantly. These advances have reduced the reliance on human loan officers and credit teams, who once reviewed each file manually, often delaying decisions and requiring more information from business owners. This high-tech, low-touch approach is particularly appealing to time-strapped small business owners.

The Technology Investment Gap

While fintechs and large institutions are surging ahead, many community financial institutions are lagging behind in terms of technological investment. A significant factor is the stark difference in budgets allocated to technology. Reports indicate that many CFIs dedicate only 3-5% of their total budget to tech solutions, compared to the 10% or more that larger institutions consistently invest. This discrepancy is further widened when considering that large financial institutions often invest in proprietary technologies that require ongoing development and maintenance, allowing them to stay on the cutting edge.

Fortunately, this doesn’t mean community institutions are left without options. Many vendors now offer solutions tailored specifically to CFIs, and these technological tools can be integrated as add-ons to existing products. These systems give CFIs the ability to provide faster decisions, greater transparency, and a smoother experience for small business clients—all without requiring massive investments in proprietary systems.

The Path Forward for CFIs

So, where does this leave community financial institutions in the rapidly evolving small business lending landscape? The answer lies in striking a balance between the traditional values that define CFIs and the technological advancements necessary to compete in today’s marketplace. CFIs possess a unique advantage that fintechs and large banks cannot easily replicate: a deep connection to their local communities and a personal touch that resonates with customers.

By leveraging technology to streamline processes while preserving the relationship-focused nature of their services, CFIs can offer the best of both worlds. Automated loan processes reduce friction and save time for both lenders and borrowers, but the human element—offering personalized advice, local expertise, and building trust—remains critical. This “high-tech, high-touch” approach enables CFIs to retain their core values while meeting the evolving demands of small business owners.

Conclusion: A Double-Edged Sword

Ultimately, the gap in technological investment presents both a challenge and an opportunity for community financial institutions. To remain competitive in today’s lending environment, CFIs must embrace technology without abandoning the personal service that sets them apart. The future of small business lending will depend on the ability of community institutions to wield this double-edged sword—combining the efficiency of streamlined processes with the warmth and trust of personal interaction. By doing so, CFIs will not only bridge the technology gap but also deepen relationships with their clients, ensuring they remain a trusted partner in their communities for generations to come.

If you have questions or would like to discuss how Young & Associates can help your institution tackle its lending challenges, contact us today. Together, we can find the solutions that best fit your needs and ensure your continued success.

How Strategic Planning Drives Effective Change Management

Written by admin on October 19, 2023. Posted in Advice, Change Management, Consultation, Human Resources, Management & Planning, Strategic Planning.

By: Michael Gerbick, COO

Change is an undeniable aspect of the modern financial world. To stay competitive, thrive in a dynamic marketplace, and satisfy the demands of both customers and regulators, banks and credit unions must embrace change management as an integral part of their strategic planning process. But how can financial institutions seamlessly integrate change management into their strategies while ensuring their governance processes remain robust enough to meet regulatory requirements? Understanding this symbiotic relationship and how to strategize for achievement is vital.

The Unavoidable Reality: Change in the Financial Sector

The significance of change management in the bank and credit union industry has gained even more prominence in recent times. In the Fiscal Year 2024 Bank Supervision Operating Plan released by the Office of the Comptroller of the Currency Committee on Bank Supervision, change management takes center stage. The plan underscores the importance of banks implementing significant changes in various aspects of their operations, from leadership to risk management frameworks, and even in their use of third-party service providers that support critical activities.

The operating plan emphasizes the role of examiners in identifying these financial institutions and evaluating the suitability of their governance processes. This includes assessing whether the acquisition or retention of qualified staff aligns with the changes undertaken by the board or management. These changes can arise from a variety of factors, including mergers and acquisitions, system conversions, regulatory requirements, and the implementation of new, modified, or expanded products and services, such as cutting-edge technological innovations.

This regulatory focus underscores the critical nature of integrating change management into the strategic planning process for banks and credit unions. It is not just about responding to the evolving landscape; it is about proactively steering the ship towards a brighter, more competitive future. Change is a constant in the financial sector. Market dynamics, technological advancements, shifting customer expectations, and regulatory updates all contribute to the perpetual evolution of this industry.

For banks and credit unions, change should not be a reactive response; it should be a proactive strategy. Strategic planning, often seen as the roadmap for an organization, is the mainstay that can help financial institutions navigate these uncharted waters. However, the true synergy lies in integrating change management into this planning process.

The Power of Change Management

Change management, at its core, is about guiding an organization through the transition from its current state to a desired future state while minimizing disruptions and ensuring that the change is well-received by employees and stakeholders. In the context of banks and credit unions, effective change management can manifest in various forms, such as:

Digital Transformation: Embracing new technologies to enhance customer experiences and operational efficiency.
Compliance Updates: Adapting to evolving regulatory frameworks to avoid penalties and maintain trust.
Cultural Shifts: Fostering a culture of innovation and adaptability among employees.
Product and Service Enhancements: Continuously improving offerings to meet customer demands.
Proactive Risk Assessment and Management: Identifying, mitigating, and seamlessly integrating risk management to safeguard against potential risks and challenges.

The crucial role of change management in this industry cannot be overstated. It enables financial institutions to execute their strategic visions successfully, transforming conceptual ideas into concrete actions.

Incorporating Change Management into Your Financial Institution’s Strategic Planning

To weave change management seamlessly into your strategic plan, consider the following steps:

Establish a Clear Vision: Clearly define your strategic objectives and the desired outcomes of the change initiatives. Ensure that your team understands and is aligned with this vision.
Identify Key Stakeholders: Recognize the individuals and groups affected by the proposed changes. Engage with them early to gather insights, address concerns, and gain their support.
Create a Robust Governance Framework: Robust governance processes are essential for change management in banking. This includes defining roles and responsibilities, establishing decision-making processes, and setting up regular progress tracking mechanisms.
Develop a Communication Strategy: Effective communication is the backbone of change management. Craft a comprehensive plan to keep stakeholders informed, engaged, and motivated throughout the change journey.
Build Change Champions: Identify and empower individuals within your institution who can serve as change champions. They can help drive the transformation and inspire their colleagues.
Monitor and Adapt: Regularly assess the progress of your change initiatives and be ready to adjust your strategies as needed. Change is iterative, and adaptability is key to success.

Incorporating change management into strategic planning is critical. By establishing a clear vision, engaging key stakeholders, creating a robust governance framework, crafting effective communication strategies, building change champions, and embracing adaptability, your financial institution can navigate change seamlessly and achieve its strategic objectives.

Governance Processes: Meeting Regulatory Requirements

Incorporating change management into your strategic plan does not mean sacrificing regulatory compliance. In fact, it can enhance your ability to meet these requirements effectively. Here is how you can navigate this regulatory landscape while optimizing your change management efforts:

Risk Assessment: Conduct comprehensive risk assessments to identify potential compliance gaps and challenges associated with your proposed changes. Address these issues proactively and effectively to minimize regulatory risks.
Regulatory Engagement and Collaboration: Establish open and constructive lines of communication with regulators and examiners. Keep them informed of your change initiatives, seek their insights and guidance on change management strategies, and demonstrate your commitment to compliance.
Documentation and Reporting: In line with regulatory requirements, maintain meticulous records of your change management efforts, including compliance measures. Thorough and accurate documentation can simplify examinations and audits, making the process smoother and more efficient.
Training and Education: Invest in training and educating your staff on regulatory changes and their implications. Knowledgeable employees are your first line of defense against compliance issues.
Continuous Improvement: Remember that change is perpetual. Continuously assess and adapt your change management strategies to stay ahead in a rapidly evolving industry.

By following the strategies outlined above, you can navigate the complex regulatory landscape while optimizing your change management efforts and harmonizing change with compliance. Embrace these practices, and your organization will not only thrive in the face of change but also meet regulatory demands with confidence and efficiency.

Embracing Proactive Change Management

Change management is a function of an effective strategic plan. The symbiotic relationship between them is the cornerstone of success in modern financial institutions. Embracing change as an opportunity, rather than a challenge, is crucial. Integrating change management into your strategic planning process, establishing robust governance procedures, and ensuring regulatory compliance are the keys to thriving in an ever-evolving industry.

Remember, change is not a one-time event but a continuous journey toward a brighter future for your institution and stakeholders. Align your strategic planning with regulatory directives and embrace change management as a proactive strategy to not only meet regulatory demands but also position your institution as an industry leader in the dynamic financial landscape. Embrace change, and let it steer your institution toward success.

Young & Associates: Your Partner in Change

Y&A is here to support financial institutions as they navigate the ever-evolving landscape of the financial industry. With our team’s extensive experience in regulatory compliance, risk management, and strategic planning, we stand ready to assist you in successfully embracing, harnessing, and facilitating change. With over 45 years of proven experience as a trusted ally to financial institutions, you can rely on Y&A to guide through the financial sector’s changing terrain. Get in touch with us to learn how we can help.