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Avoid These Common Financial Misunderstandings With Your Board

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4 minute read – Most Boards look for financial ratios and other measures of success to gauge their institution’s financial health and strategic progress, but many Board members don’t understand some of the nuances of the measures, especially when the dollars and the ratios appear to be telling different stories.  Senior leaders are focused on sharpening their ability to communicate what’s really happening so the Board can see the situation clearly and focus on what’s most important.  

Having observed hundreds of Boards and conducted financial education for many of them, we wanted to share some of our takeaways.  Here are 3 points of confusion we’ve heard a lot about lately.  Proactively explaining what’s happening can go a long way toward getting everyone on the same page. 

1. Our losses are increasing too fast!  Losses may be increasing faster than planned, but it’s important that other impacts to the ratios aren’t adding fuel to the fire.  One source of confusion comes from changes in the denominator of the ratio – typically loans or assets – that can make the increases look worse than they are.  It’s not unusual in today’s environment for loans or assets to shrink.  The same dollars of losses will look worse with a smaller denominator.  Don’t assume that all Board members are taking this into account when looking at losses as a percentage of loans or a percentage of assets.  Pointing out what’s happening with the dollars and the ratios can help bring clarity. 

2. Why are operating expenses so high?  Similar to loss ratios, operating expense ratios can show increases even when the dollars are decreasing due to shrinking asset size.  Helping the Board to see the dollars and the annual percentage increases in the dollars along with the ratios provides a few different ways to interpret what’s happening.  Of course, if asset size is decreasing, it’s still a valid question to ask whether operating expense dollars can continue to increase at planned levels or if it’s hurting profitability too much.  Looking at how the other components of ROA, which we call strategy levers, are being affected can help with this discussion. 

3. Why did this ratio jump so much?  Year-to-date (YTD) ratios tend to cause confusion in the transition from 4th quarter to 1st quarter.  YTD ratios can blunt the magnitude of change throughout the year.  In times of rapid change, the 1st quarter YTD ratios will fairly represent the current ratios, but Boards need to be reminded that 4th quarter YTD numbers are not meant to represent the current ratios, rather they reflect the entire year’s performance, and Boards must be warned if a big jump is coming.

Some experienced this jarring shift in the Cost of Funds ratio after it had been on a steep climb.  Looking forward, if the current escalation in Charge-Offs continues, it could create a big jump in the Charge-Offs ratio as 2024 turns to 2025. 

Here’s an example of an institution experiencing declining ROA throughout the year.  This is the YTD ROA each month.  By December it dropped from 1.00% to 0.45%: 

What will the following January look like when the YTD ratio “resets” to only include January?  It turns out that the month-to-date (MTD) ROA was declining by 10 basis points each month.  YTD ROA jumped from 0.45% in December down to -0.20% in January: 

Preparing the Board for big changes ahead of time and explaining why YTD ratios may not be great indicators for the next year can help eliminate unnecessary surprises. 

Helping Board members avoid confusion can lead to greater fluency around the concepts, a common understanding, and better alignment.  The resulting focus on the true situation is a key step toward more productive conversations and better decisions. 

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Key Considerations for Financial Institutions Regarding ODP/NSF in Light of New Regulations

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4 minute read – Pressure on non-interest income continues to grow, particularly on Overdraft Protection (ODP) and Non-Sufficient Funds (NSF).  In 2022, many financial institutions revamped their ODP and NSF programs.  Some did this to get out in front of potential regulatory pressure and take advantage of a market opportunity.  Many others followed suit because of competitive pressure. 

Fast forward to today and the Consumer Financial Protection Bureau has been actively looking to tackle “junk fees”.  What has created additional pressure is that, for the first time, NCUA has required federally insured credit unions with assets over $1 billion to report their ODP and NSF income on the call report.   

While banks over $1 billion have also had to report, the addition of credit union data creates more awareness in general around ODP/NSF.  As a result, there are several considerations all financial institutions should think through: 

Understand the information that is available in the call report.  Think through the different ways the data can be collated and visualized.  For example, the average ODP/NSF per member/customer can be calculated as can the percentage of net income that comes from ODP/NSF.  On the former example, the pace of indirect lending can impact that number and tell different stories because indirect customers are less likely to have checking accounts. 

Crucially, financial institutions should identify what data is not available in the call report.  Examples here are checking penetration and transaction volume, two items that can influence ODP/NSF usage as can the demographic makeup of the membership/customership.  Additionally, call report information does not show how often or how active institutions are at closing accounts.  This can influence the ODP/NSF per account and per member/customer. 

Next, understand your data.  The data on the call report is a start.  Financial institutions should dig into their data to understand usage at a more detailed level. 

Doing this analysis has a twofold benefit.  First, it can help financial institutions continue to evaluate their programs and make decisions about how they want to move forward.   

Many have already lowered fees and changed the structure of when ODP is applied.  At the same time, they have also made efforts to significantly reduce NSF, viewing this fee as not really providing a service whereas ODP does.   

Many financial institutions have also been proactive in reaching out to customers to help them reduce their fees.  The response is often “thanks, but no thanks” as that is how the customer wants to manage their money.   

Regardless, financial institutions will likely need to continue thinking through ODP/NSF and making more changes.  With that comes the pressure to also think through how to make up for that revenue.  

The second benefit of doing this analysis is to help prepare messaging.  With ODP/NSF information being public, there will come a time when consumers and the media will ask questions.  As an example, Politico published a sharply worded article about California state-chartered credit unions after they were required to begin reporting this information starting in 2022.  Regardless of whether ODP/NSF information is public, financial institutions should get ahead of the curve on their thinking and messaging as consumer awareness is likely to be higher.  Financial institutions should also think about how they want to disseminate their messaging throughout the organization so employees are prepared with the right points and go-to people when questions are asked. 

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180-Second Exercise: Generational Shifts

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Every generation is different, and businesses must constantly evolve to meet changing customer preferences.  Millennials and older Gen Zs have been using financial services for a while.  For this 180-second thinking exercise, consider Gen Alpha.  Born between 2010 and the present, they will be the next big generational topic. 

As a reminder, 180-second exercises are a great way to brainstorm and help prepare for an uncertain future.  The idea is to be fast and creative – make sure analysis of your ideas doesn’t stifle your imagination.   

Set a timer for 180 seconds and have your team imagine as many unique aspects of Gen Alpha as possible.  What behaviors and preferences will this generation exhibit? 

During the debrief, identify trends in the answers.  What path will your organization need to be on to win the business of your imagined Gen Alpha? 

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c. myers live – Elevate Your Team’s Financial Foundation for Enhanced Decision-Making

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Many leaders in financial institutions are discovering gaps in their team’s thinking and decision-making processes when it comes to ALM, especially those who don’t come from a financial background.  In this episode of c. myers live, we highlight the importance of intentional ALM education and building a solid financial foundation within leadership teams.  Listen to learn how leadership can bridge these knowledge gaps and enhance their team’s effectiveness in managing financial assets and liabilities. 

This podcast references different interactive tools and resources that can be used in training for enhancing ALM understanding.  Click here to use these free tools on our website.

About the Hosts:

Brian McHenry

brian mchenry headshotBrian, one of c. myers’ owners, has worked closely with financial institution 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

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

Other ways to listen to c. myers live:

listen on apple podcastslisten on spotify

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10 THINGS THAT STIFLE CRITICAL THINKING + 5 WAYS TO HELP IT FLOURISH

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5 minute read – The following blog post was written by c. myers and originally published by CUES on May 15, 2024.

Dictionary.com defines critical thinking as disciplined thinking that is clear, rational, open-minded, and informed by evidence.  It is foundational for good decision-making.  What organization couldn’t use plenty of critical thinkers?  But there are some common stumbling blocks and some key practices to avoid them. 

10 Things that Stifle Critical Thinking: 

  1. Unclear objectives – lack of clarity around the purpose of the discussion, desired outcomes, or the decision being made 
  2. Hidden biases, assumptions, decision filters – being unaware of these (which we all have) and therefore, not considering their validity 
  3. Not questioning others – deference to authority, taking things at face value, groupthink  
  4. Not looking for unstated challenges and opportunities – assuming that everything will work out fine and that the necessary thinking has already been done 
  5. Defensiveness – needing to be right 
  6. Seeking input from those who won’t disagree – avoiding alternate opinions  
  7. Lack of the tendency to embrace change – not having an open mind, avoiding the discomfort of change 
  8. Lack of information or misinformation – assuming all needed data/information has been supplied and that the data/information is right, not doing a reasonableness check  
  9. Waiting until the last minute to make a decision – working with limited options due to time constraints 
  10. Not assessing whether past decisions were good or not and why – no feedback loop to improve critical thinking in the future 

5 Practices to Help Critical Thinking Flourish: 

  1. Seeking clarity on the objective of the discussion or decision at hand.  Ensure that the participants are clear on what you’re thinking critically about and why.  Ask them to state their understanding of the desired outcomes of the discussion.  This sounds incredibly simple yet is often misaligned.  Clarity on the objective must occur before productive conversations can occur. 
  2. Cultivate genuine curiosity.  Participants need to believe that they have a responsibility and a right to fully understand, ask questions, and question each other.  Encourage creativity and practice “Why to the power of 5,” asking “Why?” at least 5 times to get to the root of the problem.  This also applies to data and other types of information that have been supplied.  Ensure it is fully understood by applying common sense and asking questions.  Try approaching data and information as though there is a mistake that must be found. 
  3. Surface biases, assumptions, and decision filters.  Human brains are made to rely on shortcuts based on past experiences when full information isn’t available.  The challenge is becoming aware of them so they can be examined.  There are many books and articles written on this, but a simple way to start is to ask people to intentionally consider what assumptions, biases, and decision filters are at work that have not been stated. 
  4. Authentically consider other options.  There are usually multiple solutions available and being open to those options and understanding the tradeoffs leads to better decisions.  Debate is an excellent tool for creating an atmosphere that embraces challenges to ideas as a thought exercise rather than a personal attack.  Have people debate in favor of an idea that is not their own.  Being open to change and assuming there are better ways to achieve the objective are helpful mindsets. 
  5. Blend data with instinct.  Colin Powell’s famous 40/70 rule says that leaders need at least 40% of the available information to make a decision, but not more than 70% because the opportunity may pass you by.  Where data is lacking, we must blend data with instinct.   

Building critical thinking skills takes practice.  Some of the behaviors and mindsets that help critical thinking may not be typical within your organization.  One way to approach that challenge is to start by creating working agreements that pertain only to the meeting or discussion at hand and ensuring everyone is on board at the start of the meeting.  Example working agreements could include, We must identify at least 4 solutions to our problem or Everyone must ask “Why?” at least once.  A leader can also help others think critically by ensuring objectives are clear and asking specific questions related to the above.  Help your team start building critical thinking skills and reap the rewards with better decision making. 

Events

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NAFCU Risk Management Seminar

Innovative Approaches to Asset Liability Management

Finance leaders are adopting new techniques and tools to address interest rate risk and liquidity pressures, enhancing traditional ALM practices. Learn how improved communication with stakeholders can lead to a better understanding of challenges and opportunities and how this translates to faster and better decision-making. Gain insights to advance ALM, considering risk culture and the overall risk management framework, and acquire innovative techniques and tools for understanding and communicating interest rate risk and strategic liquidity pressures.

C. myers will be speaking on Wednesday, August 16 at 8:30 am ET.

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Strategic Leadership Immersion – Alumni Only – FULL – CALL FOR OPTIONS

Hundreds of individuals have attended our Strategic CFO Immersion and Senior Leadership Immersion courses over the years.  Many have shared how this has not only immensely impacted their professional career, but also their life.  This Strategic Leadership Immersion Alumni course is an opportunity to continue the momentum of the work they have done in previous leadership immersions.  

The Alumni Immersion consists of one phase that includes three days of experiential learning focused on deepening leadership competencies and strategic thinking while addressing the realities facing the workplace.  Participants can attend onsite at c. myers’ offices in Phoenix or virtually.   

Participation is limited in order to blend group learning with individualized development.    

Contact us for pricing.   

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CUNA Finance Council Conference

Advanced Interest Rate Risk Concepts to Support Big Decisions

Join c. myers in this CUNA hosted event as we explore the topic of Interest rate risk and the cost of liquidity.  The financial and strategic trade-offs are weighing heavily on many decision-makers, putting finance teams at the forefront of providing relevant decision information to their Leadership team and Board, and fast. During this session we will:

  •  Help participants dig into high-impact modeling assumptions that need to be reviewed to help ensure they are providing reliable information to support the big decisions that need to be made
  • Work through considerations for offsetting margin compression in light of an organization’s strategy, measures of success, and KPIs
  • Provide alternative views of how to approach ALM policy so that Leadership and the Board can have more strategic and financial flexibility as external forces continue to unfold

C. myers will be speaking on Tuesday, May 23 at 1:45 pm PT

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Cultivating Leadership Presence

This course is designed to accelerate an individual’s development with the primary focus on leadership presence and communication.  The secondary emphasis includes a combination of advancing critical thinking and financial acumen, using real-world situations.   

Why:

Taking your supporting talent to the next level by helping them become more solution-driven builds bench strength.  As they develop their abilities, it frees up time for executives to think and act strategically more often. 

The focus of this experiential learning includes helping participants:  

  • Explore, using awareness accelerating techniques, how they are intentionally or unintentionally showing up to others and develop practices that can help make desired adjustments 
  • Strengthen the ability to critically think through opportunities and solutions by asking and seeking answers to thought-provoking questions 
  • Advance their willingness and ability to have uncomfortable conversations with peers and other team members in a timely manner 
  • Learn to communicate more effectively and across departments to better engage peers and team members in order for the organization to be operationally successful 

The Cultivating Leadership Presence course will consist of the following:  

  • 3 days of experiential learning – either onsite at c. myers’ offices in Phoenix or virtually  
  • A pre-engagement telephone call with the participant and the participant’s executive sponsor
  • Identified next steps for the participant to share with their Executive Sponsor 

Learning will be in a group setting working with a limited number of participants.  Experiential learning allows the participants to step into real-life situations, work through the challenges, and reflect on their learnings. 

Some of the experiential learning exercises include: 

  • Role-playing a variety of real-world scenarios 
  • Critical thinking challenges 
  • Think-fast exercises

Throughout the event, participants will work to create an initial development plan that helps them build on their learnings and desired growth. 

This course includes a 1- hour group call on Tuesday, October 1 at 11:00 am.

Fee: $3,300 for each participant. 

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Cultivating Leadership Presence – FULL – CALL FOR OPTIONS

This course is designed to accelerate an individual’s development with the primary focus on leadership presence and communication.  The secondary emphasis includes a combination of advancing critical thinking and financial acumen, using real-world situations.   

Why:

Taking your supporting talent to the next level by helping them become more solution-driven builds bench strength.  As they develop their abilities, it frees up time for executives to think and act strategically more often. 

The focus of this experiential learning includes helping participants:  

  • Explore, using awareness accelerating techniques, how they are intentionally or unintentionally showing up to others and develop practices that can help make desired adjustments 
  • Strengthen the ability to critically think through opportunities and solutions by asking and seeking answers to thought-provoking questions 
  • Advance their willingness and ability to have uncomfortable conversations with peers and other team members in a timely manner 
  • Learn to communicate more effectively and across departments to better engage peers and team members in order for the organization to be operationally successful 

The Cultivating Leadership Presence course will consist of the following:  

  • 3 days of experiential learning – either onsite at c. myers’ offices in Phoenix or virtually  
  • A pre-engagement telephone call with the participant and the participant’s executive sponsor
  • Identified next steps for the participant to share with their Executive Sponsor 

Learning will be in a group setting working with a limited number of participants.  Experiential learning allows the participants to step into real-life situations, work through the challenges, and reflect on their learnings. 

Some of the experiential learning exercises include: 

  • Role-playing a variety of real-world scenarios 
  • Critical thinking challenges 
  • Think-fast exercises

Throughout the event, participants will work to create an initial development plan that helps them build on their learnings and desired growth. 

This course includes a 1-hour group call on Wednesday, May 29 at 12:00 pm.

Fee: $3,300 for each participant.