Posts

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Strategic Planning: Areas of Focus for the Senior Leadership Team

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4 minute read – In a previous blog, we discussed shifting from the traditional approach to strategic planning toward a more continuous approach in order to help your team be better prepared for the unpredictability of tomorrow.  If you haven’t read that blog, we recommend starting there.  This blog outlines some of the important topics that have come out of strategic planning sessions in which strategic thinking has played a significant role.  The following topics are just a few sparks for conversations.  As you approach these topics, practice incorporating the mindset tips from the previous blog: 

  • Data and Business Intelligence – The world is estimated to have generated 120 zettabytes of data in 2023.  (For those of us not familiar with the term zettabyte, one zettabyte is equal to a trillion gigabytes and one gigabyte is about 350,000 emails.  That’s a lot of data.)  The average financial institution does not have access to quite that much data but compared to even just a few short years ago, we are swimming in data.  Having said that, raw data does not provide much insight so for many of our clients the focus is on how to utilize data through business intelligence.   
  • AI Governance – If you have looked at the news headlines in the last 18 months, you have probably heard about ChatGPT and know that AI has become the buzz across numerous industries.  We believe that AI is a powerful tool that can be harnessed broadly within the financial industry from in-depth Business Intelligence to enhancing call center experience. However, like any powerful tool, it is essential to establish policies, practices, and rules that govern how to manage, develop, and use AI.  While engaging in discussion around AI governance, consider bias risk, fairness, and safety.  And don’t forget that AI policy needs to include third party usage – how are your vendors engaging with AI and how do you mitigate those risks.  Keeping your organization’s purpose front and center can help you determine what policies are right for you and your consumers.  
  • Talent Development – This is not a new topic for most organizations but with the aforementioned shifts in the world of data and technology, the conversations around talent have changed.  Financial institutions are rethinking their organizational structures, taking a strategic approach to people planning, and acknowledging that the future of roles and responsibilities are open to changing along with the world at large.  Many places are approaching talent development with a focus on critical thinking and adaptability, upskilling precious talent.  No one knows what the future will bring but we do know that it will require individuals and organizations to think differently.  
  • Growth – Similar to talent, this isn’t necessarily a new topic, but organizations are changing how they approach the topic.  It has become essential that financial institutions are clear on what is meant by growth and the why behind it.  Growth can be measured in membership, assets, loans, branch, revenue, digital footprint, and more so it’s essential that organizations are clear what kind of growth is important and the implications of working towards that growth.  Consider environmental factors and the cost of growth.  The KPIs of the past ten years may not be as relevant given the rapid and complex pace of change.  Bringing stakeholders together to determine what growth looks like can help link strategy, financial performance, and risk tolerance. 

These are just a few of the areas of discussion that financial institutions have been pushing their thinking.  The crucial component to each of these discussions is to be willing to imagine and prepare for multiple futures beyond the next 12-18 months or even the next 3-5 years.  Acknowledging that how the financial industry has functioned for the past three decades is transforming, can enable the thinking behind strategic planning to advance by leaps and bounds.   

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c. myers live – AI in Your Institution: Start the Conversation Today

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Every day we see, hear, and read about Artificial Intelligence (AI) and the impact it is making on not only the financial services industry, but the world.   One common question we hear in our conversations with clients is, “How do I even get started?”  We answer this question with a quote from our founder, Cliff Myers, “The best way to get something done is to begin.” In this episode of c. myers live, we give you things to consider on the topic of AI in your institution, as you begin, or continue having these important conversations. 

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

Sally Myers

sally myers headshotSally is a founder of c. myers corporation and an owner. Driven by a deep commitment to helping financial industry leaders and regulators for more than two decades, her guidance has shaped c. myers’ focus on helping clients create opportunities and approach problem solving from a scalable perspective. She has also been a strategic force behind the development of c. myers’ financial models.

Learn more about Sally

Other ways to listen to c. myers live:

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Balancing Downward Pressure on Earnings With Strategic Progress

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7 minute read – Robust earnings eliminate a potential impediment on the road toward progress with strategic objectives.  The current environment, however, is placing pressure on earnings in a variety of ways.  Net interest margin compression, increasing operating expense ratios, higher projected reserves for loan losses, and potential decreases in non-interest income sources all seem to be impacting financial institutions (FIs) at the same time.  Nevertheless, maintaining forward progress on important strategic objectives is imperative to achieving success over the longer term, which finds leaders needing to make difficult business decisions.  

Let’s tackle 5 areas of earnings pressure to understand their causes and how to potentially improve organizational net results.  

1. Margin Compression: 

Funding sources have become more expensive for financial institutions as consumers seek higher deposit rates.  This has resulted in more funding coming from term deposits (CDs), borrowings, and brokered deposits.  All these sources carry a higher rate, on average, when compared to non-maturity deposit accounts, such as savings and checking accounts.  The resulting cost of funds for FIs has risen significantly, leading to margin compression.  There is an art to effective funding strategies, but even with a well-executed strategy, the cost is still higher than it was before.  One of the most effective techniques for combating this margin compression is based on being very selective in what assets you are willing to add.  This requires discipline to ensure the assets you are adding to your books provide sufficient incremental margin, after consideration of the anticipated higher cost of funds and any other related costs.  Start by asking this question:  If our organization adds this asset, will it perform well today and in the future, using a range of potential assumed scenarios 

2. Increased Operating Expense Ratios: 

Inflation isn’t just impacting consumers, it is impacting FIs as well.  Operating expense dollars, in part impacted by inflationary pressure, are on the rise.  Couple that fact with asset growth being more expensive and harder to come by, and increasing operating expense dollars could magnify the rise in operating expense ratios.  So how best to address this concern?  Some are cutting expenses, including marketing dollars, across the board, but a more strategic approach is highly recommended.  When considering a potential expense reduction, ask yourself, “How may this impact customers with our FI or the progress of our strategy in the future?” If you can answer that with minimal impact or less, then it might warrant further consideration.  It is important to maintain consistent focus in order for organizations to continue to advance strategic progress as much as possible.  Using this approach can help organizations remain viable for the longer term.   

3. Higher Expected Credit Loss (ECL) Expense: 

The relatively recent implementation of the Current Expected Credit Loss (CECL) accounting pronouncement is having an impact on the amount of loan loss reserves that institutions need to set aside.  With the possibility of an economic downturn still looming, this could compound the potential impact of CECL.  While you can’t elect to ignore CECL (even though you might want to), this too will require you to be diligent in your loan pricing process to appropriately account for this potentially higher expense in your pricing models.  As indicated in relation to margin compression, one way to combat this impact is to ensure that loan pricing properly incorporates adequate provisions for loan losses over the life of loans.   

4. Non-Interest Income Concerns: 

Regulators continue to focus on various sources of non-interest income with an eye towards placing further restrictions, which may limit the future potential of these sources of income.  The Consumer Financial Protection Bureau (CFPB) continues to focus on various fees charged by FIs.  In early March, the CFPB finalized a rule to cap credit card late fees at $8 for the largest credit card issuers, those with more than 1 million open accounts.  These companies account for more than 95% of total outstanding credit card balances.  This will also put competitive pressure on other issuers to lower their late fees as well.  CFPB also continues to focus on NSF and overdraft fees, also referred to as overdraft protection or courtesy pay, which are significant sources of income for financial institutions.  These fees are already roughly half of what they were industry-wide before the pandemic.  Some of the recent focus is considering whether these fees should be considered finance charges under Regulation Z.  Fines totaling hundreds of millions of dollars have been levied against financial institutions in relation to their NSF and overdraft protection practices.  

Interchange fee income is also under pressure with a focus aimed at lowering these card transaction fees as well.  All of this combines to emphasize the need for financial institutions to seek further diversification of non-interest income sources.  Many financial institutions have successfully done this by identifying services that businesses and consumers are willing to pay a fee for.  While this kind of transformation does not happen overnight, it is important for organizations to start working towards this objective.   

5. Asset Growth (and the requisite funding sources): 

Funding sources needed to support asset growth have become more expensive as rate levels have elevated.  Financial institutions should evaluate all forms of funding in relation to the potential assets being funded to fight against the margin compression concern discussed earlier.  Deposits are harder to come by and more expensive than they were back when rates were at or near historically low levels.  On the plus side in terms of funding sources, CDs are somewhat back in fashion with consumers, although the cannibalization of lower-cost deposits must be factored into the true cost of funds.  Strategic borrowings remain a solid option as a funding source that can be matched against many types of loans.  The key to any funding source is to identify assets that can provide the necessary return to meet your margin requirements.  

This requires a diligent approach regarding loan pricing.  Ask yourself this question:  

  • Does this loan rate properly account, over the expected life of the loan, for:  Cost of Funds, related Operating Expenses, Expected Credit Loss requirements, and any other related costs? 

With these 5 areas considered, financial institutions can have a better handle on balancing downward pressure on earnings with strategic progress.  In certain situations, it may even be acceptable for organizations to accept slightly lower earnings for a short period of time, if doing so will help them move forward with critical strategies that will serve the organization well over the long term.  The same kind of argument can be made in relation to accepting lower asset growth numbers.  However, over the long term, achieving solid asset growth helps to provide greater scale and position organizations for success in terms of advancing their products and services in a more meaningful manner for their target markets.  Challenging times demand that leaders make these kinds of complex business decisions.  The most successful leaders use wisdom to make the hardest choices in a manner that maintains the longer-term objectives front and center.  

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What Comes Before AI? PI.

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6 minute read – When it comes to newer technologies in the financial services industry, the usage of artificial intelligence (AI) is front and center, but it comes with its own set of challenges including not always achieving promised performance levels and unanticipated pitfalls.  But the challenges don’t mean that the opportunities aren’t worth pursuing.  Institutions are seeking to learn faster as they take advantage of new AI capabilities and they’re finding that applying process improvement (PI) principles before implementation is key to gaining the full advantages of AI without creating unexpected issues.

AI is already commonly used in lending decisions, fraud prevention, and customer service, and as the field advances, new AI applications seem to appear daily.  While the following questions apply to AI implementations, many of them are also relevant for less-complex solutions such as robotic process automation (RPA) that simply automates manual processes.

6 PI questions to ask before implementing AI:

1.  What is the clear objective of this AI implementation?

This question isn’t limited to PI, of course.  It should be answered for almost any strategic initiative, project, or endeavor the institution undertakes.  It is especially important that the objective is crystal clear with AI implementations since there is still so much to be learned.  As you prepare to articulate the objective, it helps to ask, what problem are we trying to solve or opportunity to take advantage of?  How will this support our strategy?  What will be the tangible outcomes?  What benefits will be realized?  How will we measure success?  Starting with a clear objective and measurable success outcomes that align with the strategy is the first and most important step and is critical to hitting the mark.

2.  Are we paving the cow path?

A common pitfall is what is referred to as “paving the cow path” or automating what we’re currently doing without considering whether that’s still the best path.  When pieces of existing processes are automated or enhanced with AI, a question that sometimes remains unasked is, do we really need this step at all?  PI is used to reveal steps that are no longer necessary and highlights business decisions for reconsideration.  For example, when automating report generation, find out if anyone is still using the reports.  Or when automating the payoff of multiple customer credit accounts for a debt consolidation loan, a business decision might be made to instruct the customer to pay them off, eliminating the need for automation.

It’s tempting to think that there’s really not much harm in automating an unnecessary step since it will function on its own, but the cost of automation or AI enhancement is not limited to its initial cost.  Just like other technologies, it must be maintained with updates and any changes made to the data stream coming in or out may necessitate changes in the interface.  This creates inefficiency if the automation or AI wasn’t strictly necessary in the first place.

3.  How would we approach this enhancement or problem if AI didn’t exist?

In PI, it’s important to consider various ways to achieve the objective, so this question is extremely helpful with AI because so many new solutions are being created.  The newness and novelty make it easy for the thought process to be dominated by the capabilities of the solution rather than the problem to be solved or enhancement to be offered.  Take some time to think through other ways to achieve the benefits.  Some have identified less complicated, less expensive solutions by asking this question.

4.  What impacts might this implementation have that we aren’t thinking about?

One of the principles of PI is to seek out unintended negative effects on the customer or employee experience such as, system efficiency, time spent, or costs.  For example, an AI implementation that provides personalized customer experiences could create friction in the account opening or lending processes as they are modified to gather additional data.  Or perhaps the system slows down due to the additional demands.  PI is extremely helpful in uncovering this type of conflict, which can then be weighed carefully against the benefits or adjusted to minimize added friction.

5.  Are our sources of data and data governance policies ready for AI?

The institution’s processes for gathering, protecting, and maintaining data need to be stronger than ever.  Sophisticated AI solutions are built to learn from data without being explicitly programmed and often require large volumes of complete and accurate data to learn from.  This could be internal or external data and the potential exposures to privacy, transparency, and bias issues are magnified with AI.  In addition, regulations are still evolving for how to protect against these and other risks.

Just scratching the surface on data governance, assuming you are using a third party for the AI solution, get clear on how the third party uses data (internal and external) and whether they have adequate guardrails in place.  For usage of internal data, consider whether there is enough for the solution to learn from without creating biases or incorrect answers.  Similar to business intelligence initiatives, there is often work to be done on capturing the right data accurately and consistently as well as clean-up of existing data.

6.  Is our vendor management process up to the AI challenge?

The complexities of working with AI vendors may make this the right time to do PI on the vendor management process.  Strong vendor management can not only track how the institution is using AI, but can also help ensure that your governance policies are applied and tracked consistently.

AI is an exciting, rapidly-developing, area that holds much promise for the financial services industry.  Since it’s relatively new, there is much to learn.  Using these process improvement questions and examining the processes that AI is a part of, as well as other processes it affects, could save some headaches and put you on the road to better results for the whole organization.

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The Power of Seeing Multiple Futures

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3 minute read – While none of us can predict the future, those who anticipate various future scenarios and work through their options tend to fare materially better than those who don’t.  Utilizing scenario planning to rehearse for potential future events can boost confidence in decision-making for an unknown tomorrow, while building the strength to handle it along the way.  

We have always been impressed by Brett Martinez, and his team at Redwood Credit Union.  The consistent strength of their performance in delivering for their members, their community, and their financials, is impressive.  There are many factors that led to the success they have created, one of which is their relentless focus on scenario planning.  The message that Brett brought to the Governmental Affairs Conference (GAC) is one that can benefit the industry.   

If you didn’t have a chance to hear Brett speak at the GAC in early March, we thought you would appreciate the opportunity to read an article published in CUtoday that summarizes his message.  Click here to read the full article.   

We know that Brett, like us, has been passionate about scenario planning for years.  We are equally as excited to see financial scenario planning gain traction across the industry, making its way into more and more strategic discussions.  In addition to the summary of Brett’s message, we gathered a few more resources to help decision-makers approach scenario planning and alternate paths. 

Consider starting with the exploratory scenarios that the Fed released last month.  These scenarios are designed to test the resiliency of the banking industry and take a different path than their typical supervisory stress test for large institutions.  The exploratory scenarios can be found here. 

In response to the Fed’s Exploratory Analysis, we recorded a new episode of c. myers live, where we discuss our takeaways from this report, and how it can help any institution prepare for the future, regardless of their size.  Click here to listen.  

You might also find this blog helpful, where we dive into the 4 main components of scenario planning and its importance, as decision-makers plan for a future they cannot predict.  Scenario planning should cover a wide range of environments and combinations of events to understand potential challenges and opportunities.  We agree with Brett, “it’s never just one thing,” and until we perfect our ability to see the future, we will continue encouraging the industry to proactively embrace scenario planning.   

Events

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NAFCU CFO Summit

Finance at the Forefront of Merger & Acquisition Opportunities

Finance has always been an integral part of the M&A process.  However, until relatively recently, that role for many finance teams has been primarily focused on performing financial due diligence and integrating financial systems.

As creating scale and optimizing the financial structure are increasing in importance, many CEOs are leaning more heavily on finance teams to be at the forefront of identifying and presenting strategic opportunities of M&As that align with the credit union’s strategy and decision drivers.  This session is designed to help those who want to elevate their approach and contribution to their M&A process.

This session is designed to help those who want to elevate their approach and contribution to their M&A process.   Key points will include:

– A process for prioritizing areas to scale and needs for optimizing the structure

– How to evaluate and identify the financial structures that may be the best fit for your organization

– Questions to consider when evaluating potential opportunity costs and possible new strategic initiatives and/or delays of current strategic initiatives

C. myers will be speaking on Tuesday, September 20 at 1:15 pm ET.

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Cultivating Talent

Take your supporting talent to the next level by developing them to be solutions-driven which builds bench strength, and frees up time for executives to think and act strategically more often. 

This course is designed to jump start an individual’s development with focus on communication, critical thinking, and leadership presence. 

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 
  • Sharpen their ability to navigate quickly in the gray and become more comfortable with identifying solutions for problems that are not black and white 

The Cultivating Talent 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

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 in Cultivating Talent 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. 

Fee: $3,000 for each participant. 

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Cultivating Talent – FULL – CALL FOR OPTIONS

Take your supporting talent to the next level by developing them to be solutions-driven which builds bench strength, and frees up time for executives to think and act strategically more often. 

This course is designed to jump start an individual’s development with focus on communication, critical thinking, and leadership presence. 

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 
  • Sharpen their ability to navigate quickly in the gray and become more comfortable with identifying solutions for problems that are not black and white 

The Cultivating Talent 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

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 in Cultivating Talent 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. 

Fee: $3,000 for each participant. 

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CUNA Finance Council Conference

Engaging the Board in the “So What” of Financial Discussions 

Knowledge and financial acumen are critical, but today’s financial leaders must broaden their skills to help equip board members to have better financial discussions and make more informed decisions.  In this session, we will share experiences and proven approaches to help financial leaders address a range of topics, such as: 

  • Effective ways to educate and improve board comprehension  
  • Compelling and relevant messaging so that board members with diverse backgrounds want to listen with an open mind to the good, the bad, and the ugly 
  • Determining what the board is looking for to advance their knowledge 
  • Questions the board should be asking  

C. myers will be speaking on Tuesday, May 24 at 1:45 pm PT and 3:30 pm PT

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CUNA HR & Organizational Development Council Conference

5 Essentials to Elevate Executive Succession Planning  

Building and cultivating a team of high-functioning executives is the number one priority for many organizations.  CEOs and boards recognize that leadership is a key differentiator as they seize countless opportunities and tackle relentless pressures, including the loss of key executives.  This session covers 5 essentials to advance one of the most precious resources in any business, leadership talent. 

C. myers will be speaking on Tuesday, April 26 at 2:00 pm ET and 3:45 pm ET