NEW YORK–Credit union CFOs here were told their job is about more than just crunching numbers and, much like marketers, they also have a job to do in telling a story.
Jerry Boebel of ProfitStars told the CUNA CFO Council’s annual meeting during a session on budget planning, “The budget is not just an income statement and a balance sheet you come up with after three or four months. The budget is a process. The budget is about how do we keep it between the bumpers as we move through the period and come up against negative variances? Does everyone in the organization understand what it takes to get back on track? If we are ahead with a positive variance, what is our plan?”
Boebel said CFO’s are more than just numbers-crunchers who insert inputs in spreadsheets.
“The larger part of your job is your leadership and communicating your vision across the organization. When off track, what are your priorities to get back on track? That’s what strategic budgeting is.”
Three Truths
Boebel offered three Financial Performance Truths:
One: Operational Performances are fixed and continually increasing.
- Operational expenses as a dollar amount are increasing 5%-7% annually.
- Efficiency ratios do not tell the whole story. “A credit union should not equate large expenditures with poor management,” he said.
“Can you leverage the growth in expenses to similar or greater growth in income?” asked Boebel. “Expense ratios below peer in the current environment of consolidation are not a sustainable advantage. Try not to focus too much on peer comparisons or one period. Focus on the longer term.”
Two: Net Worth Growth is a Requirement
Asset growth is inevitable, said Boebel. “Net worth ratio must be maintained within the regulatory range. To maintain net worth ratio, the numerator must grow at the same speed as denominator,” he said, adding, “Shrinking assets to maintain net worth is not sustainable in the long term.”
Three: Income Growth Must Be Faster Than Asset Growth
To feed net worth, there must be revenue growth, and it must grow faster than assets to maintain that ratio, said Boebel. “Income growth is required to cover the expense growth. Net interest margin makes up 100% or ROA.”
The Story
Net Revenue is not actually the most important thing, said Boebel, but it is a very effective way for a CFO to tell a story.
“What do you do when the facts you use don’t tell the story you’re trying to tell,” asked Boebel. “You come up with a different way to tell the story.”
In telling that story, he said CFOs tend to focus too much on net interest margin (NIM).
“We try to get our clients to focus on this,” said Boebel. “Managing net income by reducing operating expenses is not sustainable. There are only so many places to cut.”
Boebel told the meeting strategies for growth of non-interest income have many benefits.
“They are another form of diversification. Strategies based solely on NIM can lead to compromises in asset quality, interest rate risk and liquidity risk,” he said. “By not relying 100% on NIM, you can focus more on product strategy and you can make optimal pricing decisions.”
Product Mix and Pricing Vs. Level of Rates
Urging CFOs to avoid certain practices, Boebel said the typical budget process keeps balance sheet mix constant and adjusts market rates in anticipation of economic forecast.
But he said rate forecasts are less than reliable, and the bad consequences of a NIM-only strategy are many, including trying to manage NIM by forcing down funding costs. “It’s hard to push down funding costs when you are close to zero.
“You can’t go back and undo last year’s pricing decisions, so focus on the ones you’re going to be making,” advised Boebel.
Better Way to Budget
Instead, credit unions should build budget strategy around an intentional pricing process, said Boebel.
The questions/points to ask/remember as part of that process include:
- What are all the costs/revenue/risks of each product?
- Products are not profitable or profitable; members are.
- In determining what a profitable members looks like; CUs must have loan balances priced to cover the cost of funding/credit risk.
- Transaction costs can quickly wipe out benefits of large deposits; non-interest income can mitigate suboptimal pricing decisions.
“Does your pricing strategy incent improvements to member profitability,” asked Boebel.