FMS forward: November/December 2017 Issue

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A PUBLICATION OF THE FINANCIAL MANAGERS SOCIETY
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NOVEMBER/DECEMBER 2017 | FMSinc.org
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GETTING THE MOST OUT
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OF YOUR INSTITUTION’S
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DATA WITH ANALYTICS
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PULLING TOGETHER THE
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RIGHT DATA FOR CECL
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IN THIS ISSUE
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AN EXCLUSIVE INTERVIEW WITH FASB BOARD MEMBER HAL SCHROEDER
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HOW TO GET THE MOST OUT OF YOUR VENDOR NEGOTIATIONS
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Contents NOVEMBER/DECEMBER 2017 | VOL. 1, ISSUE 3
10
11
forward, a publication of the Financial Managers Society 1 North LaSalle Street Suite 3100
Chicago, IL 60602-4003
FMSinc.org | 800-ASK-4FMS
FMS EDITORIAL STAFF
DANIELLE HOLLAND
President and CEO
MARK LOEHRKE
Editor and Director, Publications and Research
AUTUMN WOLFER
Director, Marketing and Membership
DAN BOSTROM
Manager, Member Engagement
HILARY COLLINS
Assistant, Publications and Research
LYNDSEY WARNER CAULKINS
Layout and Design
2017-2018
FMS EXECUTIVE LEADERSHIP
DARRELL E. BLOCKER, CPA
Chairman
STEVEN M. FUSCO, CMA, CFM
Vice Chairman
JOHN WESTWOOD
Immediate Past Chairman
Copyright© 2017
Financial Managers Society, Inc. All rights reserved.
Features
10 DATA DUO LISTEN TO THE NUMBERS
From product pricing to customer relationships, the answers to your tough questions may be lying within your own data
11 DATA DUO THE STRAW THAT STIRS THE DRINK
If you haven’t started talking data, you haven’t started preparing for CECL
20 ACCOUNTING FOR CHANGE
FASB Board member Hal Schroeder addresses a host of upcoming accounting changes in this exclusive Q&A
24 BALANCE OF POWER
Tips to help your institution level the playing
field with third-party vendors
26 INNOVATION THROUGH COLLABORATION
Is your team getting the most out of teamwork?
Departments
8 MEMBER SPOTLIGHT
This issue’s spotlight shines on Thomas
Frese from First Bankers Trust Company
30 ON THE HORIZON
Make plans for a variety of upcoming online and on-site FMS educational offerings and chapter events
FMS forward | NOVEMBER/DECEMBER 2017 | 5
20
26


Happy Holidays
ALL THE BEST TO YOU AND YOURS THIS HOLIDAY SEASON FROM !


FROM THE CEO
BY DANIELLE HOLLAND
Dear Member,
Since 1948, FMS has provided a robust education and networking community representing the community institution financial professionals from across the country. As we approach our milestone 70th anniversary, our mission of enhancing your professional development has remained unchanged. However, our commitment to fulfilling this mission is expanding.
We are excited to announce that the Association for Management Information in Financial Services (AMIfs), the premier management accounting organization
in the financial services industry, will
be joining the FMS community. Since
1980, AMIfs has provided management information and financial risk management professionals at major financial institutions worldwide renowned education and resources on topics such as organizational and product profitability, financial risk management, and related earnings enhancement programs.
What does this mean for you? A whole lot more! As an FMS member, you
will gain access to AMIfs’ valuable
menu of member resources such as
the opportunity to attend the AMIfs Institute, a comprehensive week-long immersion program dedicated to topics in performance and profitability management. You will also have the opportunity to participate in the Certified Profitability Professional (CPP) certificate program, positioning you as an expert in the field of complex profitability measurement and risk management topics.
FMS will also be welcoming AMIfs’ 230 individual members to our FMS community. These members represent the best of their field and will further enhance your ability to share industry best practices with like- minded peers, whether at face-to-face events, or via the discussion forums on FMS Connect.
It is an exciting time to be a member of FMS. Welcoming AMIfs to the FMS network represents another step towards expanding our position as a thought leader within the financial institutions industry. A position which could not have been achieved without the unwavering collaboration of members like you.
More specific information will be forthcoming over the coming months regarding this transition and how we can help to welcome our new AMIfs colleagues. If you have any questions, please feel free to contact us at [email protected] We’re happy to help answer any questions you may have to make this transition as seamless as possible for you.
We look forward to commemorating our 70th anniversary with you as we open the doors on this next chapter in FMS history.
Thank you for your continued membership and support.
DANIELLE HOLLAND
President and Chief Executive Officer Financial Managers Society
FMS forward | NOVEMBER/DECEMBER 2017 | 7


YOUR MESSAGE, DELIVERED STRAIGHT
TO FMS MEMBERS
FMS Update
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JUNE 10 - 12, 2018
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AND NOW
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EDITOR’S LETTER
BY MARK LOEHRKE
In recent years, community institutions have endured an onslaught of new accounting and regulatory proposals, many of which hold the potential to significantly affect longstanding processes and day-to-day operations. However, after that flurry of activity and all of the impassioned back- and-forth debates, the industry today finds itself in something of a quiet valley between proposal and implementation on several major items.
The illusion, of course, is that this temporary calm doesn’t belie a coming storm. In reality, this peaceful period is (or should be) a busy time of preparation for community institutions, as those years-out effective dates that seemed so distant on the horizon way back when suddenly loom like an object in the side mirror – closer than they appear.
FASB’s Current Expected Credit Loss standard – also known in the world of four-letter words as CECL – is, of course,
one of those major initiatives that is clearly bearing down as 2018 dawns. Although implementation remains several years away for many community institutions, anyone who has really delved into the process of getting ready for CECL knows that there’s plenty of work to be done between now and then, and much of that effort will center on another four-letter word – data. In “The Straw That Stirs the Drink” (page 11), one half of this issue’s Data Duo cover tandem, we check in
with a few experts from around the industry to find out where the major data challenges lie and what community institutions should be doing to confront them. CECL is also one of the coming accounting changes that FASB board member Hal Schroeder addresses in an exclusive interview with FMS beginning on page 22.
A look at the world of data analytics constitutes the other piece of our two-part data theme. From making analytics work on a scale that befits your community institution to the notion of creating a new Chief Data Officer role, there’s much to consider in “Listen to the Numbers” (page 10). We also go beyond banking in this issue to examine how collaboration can enhance a leader’s effectiveness in “Innovation Through Collaboration” (page 26).
In several of these stories, you’ll notice references to trends and statistics drawn from our inaugural FMS research study, Community Mindset: Bank and Credit Union Leadership Viewpoints 2017. Be sure to visit FMSinc.org/Research to read the full report and a number of in-depth topical pieces to get a better understanding of the challenges and opportunities facing your peers in the industry.
As always, thanks for reading.
FMS forward | NOVEMBER/DECEMBER 2017 | 9


FMS MEMBER SPOTLIGHT
Bio in Brief
Thomas Frese
Title: CFO
Institution: First Bankers Trust
Company — Quincy, Ill.
Asset Size: $915 million
Years in current position: 11 Years as an FMS member: 11
What is the single biggest challenge facing your institution right now?
The bank continues to battle our net interest margin. With the yield curve continuing to be flat, there are not a lot of opportunities to get paid going out on the curve. Maintaining credit quality standards while trying to find profitable loan opportunities on a flat yield curve has been difficult to achieve. Lending has also been soft in our markets, which
has led to tougher competition on the deals that are available. The loan-to-deposit
ratio is lower than we would like, forcing
us to purchase more securities instead of originating loans. It’s kind of a perfect storm for margin compression.
This past year, we have challenged
ourselves to move the bank to the next level.
10 | FMS forward | NOVEMBER/DECEMBER 2017


How has your role changed over the past five years?
My position has adapted to accommodate the numerous changes in our industry. With increasing regulatory requirements, accounting standards and growing advancements in technology, such as
full electronic banking, it is imperative
that we have access to information
faster and easier – we demand it and
our customers demand it. Adapting to these advancements has led me into an increasingly managerial position. We have assembled an outstanding team of finance, technical and operations professionals to negotiate this fast-paced industry of today. This has proven to be tantamount to the success of our institution.
Where do you expect to be focusing most of your attention in the next two to three years?
When I joined First Bankers Trust in 2000, the bank was in a single market, was fourth in that market and was less than
a third of its current size. We developed
a plan that worked well and enabled us
to navigate the Great Recession, while adding markets, becoming number one in the existing market and providing record profits to our shareholders.
This past year, we have challenged ourselves to move the bank to the next level. One of our major operations goals
in the coming years is to develop a more strategic technology plan. As a community bank, we can effectively compete against any of the larger banks with regards to servicing our customers. But our biggest challenge and focus in the future will be staying competitive regarding technology.
What do you like best about working in a community institution?
The best part of working at a community bank is actually being an active member in the community. The best way to serve our customers is to know them on a personal level as we meet them in restaurants,
This is an exciting time for banking. Our customers are challenging us to deliver faster and easier service at their fingertips, whenever and wherever they choose to do their banking.
shops and churches. Our employees are also involved in community endeavors.
To be a part of a community means our employees are actively involved in events that make our town unique, working at the fundraisers, barbecues and parades. We are the faces of our communities – it’s not just about the numbers.
What advice would you offer to someone entering the banking profession, particularly at the community institution level?
Be as involved as you can in your community – you will enjoy it and make invaluable contacts. Never pass up opportunities to learn more about your community and the banking profession. If you enjoy making a difference in the financial advancement of people in your city, you cannot have chosen a better profession. I am proud to represent First Bankers Trust and enjoy serving the community through the bank.
What is the best professional advice you’ve ever received?
Early on in my career I was told to always surround yourself with excellent people, give them clear direction and allow them to pursue success. If they are successful, you will be successful.
What roles outside of accounting and finance have you held and how have they helped you in your current position?
I have always been in accounting and
finance, but I haven’t always been in banking. After starting my career with
a savings & loan, I spent ten years as a controller for a heavy construction company. I certainly learned a lot about working with the bank, versus working at the bank. I know how vital it is to have that good relationship with my banker.
What do you like best about being an FMS member?
FMS provides top-notch educational opportunities. First Bankers Trust sends our finance staff to various seminars/ conferences, and I have attended the FMS Forum for years. I have always learned something new or gotten a new perspective to bring back to the bank.
Where do you see the banking industry in 5-10 years? How do you see it changing/developing? This is an exciting time for banking.
Our customers are challenging us to deliver faster and easier service at their fingertips, whenever and wherever
they choose to do their banking. A
new generation of customers will need financial education that we will need
to provide. As the industry evolves
from brick and mortar to social media, the challenge to stay a step ahead of
an ever-increasing customer base of technologically savvy consumers is both demanding and exciting.§
FMS forward | NOVEMBER/DECEMBER 2017 | 11


DATA 00000000000010001100101001000101000101011000010001000000010001010001010110000100010000001100100101001000110010000101001000101000101011000010001000000110010010100100011000000000001000110010100100010100010101100001000100000010010001010001010110000100010000001100100101001000110010000110010100100010100010101100001000100000011001001010010010100100010100010101100001000100000011001001010010001110010010100100011001000110010010000000110100010000001011000000000000100011001010010001010001010110000100010000000110010100100010100010101100001000100000011001001010010000000001000110010100100010100010101100001000100000011000001000100000011001001010010001100000110010011101010110In this double feature, Data Duo, FMS is exploring the connectivity between data analytics and CECL data. Below, you’ll find a feature on data analytics and a feature on CECL data begins on Page 11.
THE NUMBERS
HOW DO COMMUNITY INSTITUTIONS MAKE THE HARD CHOICES? WHETHER CONTEMPLATING MARKETING, PRICING, RATES OR CUSTOMER RELATIONSHIPS, IF THEY’RE RELYING MORE ON INTUITION THAN DATA, THEY’RE PROBABLY MISSING THE BOAT. Continued on page 12 ›
DATA ANALYTICS
LISTEN TO
12 | FMS forward | NOVEMBER/DECEMBER 2017
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CECL DATA
THE STRAW THAT
STIRS THE DRINK
FMS forward | NOVEMBER/DECEMBER 2017 | 13
WHEN IT COMES TO CECL, EVERYTHING REVOLVES AROUND
THE DATA – WHAT AN INSTITUTION NEEDS, WHAT IT HAS AND WHAT IT CAN GET. DATA IS NOT ONLY THE FIRST HURDLE THAT MOST COMMUNITY INSTITUTIONS ARE LIKELY TO FACE, IN MANY CASES IT’S GOING TO BE THE MOST FORMIDABLE AS WELL, PROFOUNDLY IMPACTING HOW SMOOTHLY THE REST OF THEIR CECL STRATEGY AND PREPARATIONS ULTIMATELY PLAY OUT. Continued on page 15 ›
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If you can measure something, you can improve it.
Jeff Deppen, CIO, Orrstown Bank
Continued from page 10 ›
Are community institutions making the most of their data? When they choose to not prioritize data analytics, Joe Kennerson says they might be missing out on appropriate deposit pricing and positioning initiatives. For example, when confronted with the first rising rate cycle in over a decade, institution leaders have been faced with some tough calls on how aggressive they’re going to be.
“The question really becomes if bankers are making pricing decisions based on their gut feeling of how their customers are going to react, or if they’re making pricing decisions based on actual customer trends,” the managing director of Darling Consulting Group says.
Institutions could also be missing an opportunity to accurately evaluate the effectiveness of their strategies. While they run CD specials in a rising rate environment, they may not know whether these tactics are connecting with customers. Kennerson says data analytics enable institutions to see the bigger picture so they can better understand customer behavior and its potential consequences.
“If you’re seeing 40% of growth in a CD special just migrating out
of existing accounts into that special, that’s a lot of cannibalization that could really increase the marginal cost on the new funds,” he explains. “If you’re not looking at these types of customer data trends to be able to track migration and quantify the marginal costs of funds of these promotions, you really could be missing out on a big impact that would increase funding costs and therefore the bottom line.”
Digging deeper into the data can help an institution not only understand customer behavior, but actually build better customer relationships.
“If they’re skipping data analytics, they’re missing out on new ways of connecting to their customers,” says Jeff Deppen, CIO at
$1.5-billion Orrstown Bank in Shippensburg, Pennsylvania.
Orrstown uses metrics that record how quickly they handle a customer incident. For instance, if a customer calls with a change of address, how quickly is that change processed and completed? When the bank started tracking that process, the average time it took to change a customer’s address went from two days to five minutes.
“If you can measure something, you can improve it,” Deppen says. “The improvement might not be something the customer can see, but if nothing else we can improve the processes that help will improve their experience with us, and they’ll get better service.”
GETTING STARTED
The first step for an institution looking into data analytics is to
set some goals, advises Bryan Easley, vice president at Haberfeld Associates. He recommends sitting down to determine which issues the institution wants to address, the internal goals it’s looking to achieve and the inefficiencies it wants to eliminate before getting too deep in the process.
“Before randomly analyzing the data at your disposal, identify what you want to accomplish for your financial institution,” Easley says. “Don’t allow the sheer volume of available data to distract you from your larger purpose. Maintain your focus on appropriately using the analytics to obtain insights that will help you take directed action to materially improve your business.”
Once an institution has set its goals, it can move on to collecting the data needed to achieve those goals – a task that might be easier than it seems.
“Most institutions already have access to the data they need,” Kennerson notes. “The key data I’m thinking about is a relationship ID. In one way or another, institutions already have that, and if they don’t they can create it and then start tracking it.”
From there, data points such as relationship identifiers, customer age or preferred branch can be added to deepen the institution’s understanding of the customer. By building and expanding upon its existing data, for example, Orrstown Bank uses analytics to measure customer profitability.
“We realized we didn’t have a good way to judge if a customer was good or bad for the bank, or in a position to grow with us, so we built a metric to score them,” Deppen explains.
The Orrstown experience (as detailed in the accompanying Case Study) is a good example of using analytics to get to the root of a specific issue, as opposed to simply gathering data and trying to see if it reveals anything worthwhile. Without working out goals in advance, an institution can create metrics that are statistically sound, but don’t necessarily deliver coherent information.
“It’s important to understand that analytics can’t exist for their own
14 | FMS forward | NOVEMBER/DECEMBER 2017


It’s important to understand that analytics can’t exist for their own sake. Focus on making sure that your analysis is structurally sound, specific to the area it is designed to address and, perhaps most importantly, that it’s comprehen- sible to the right people.
Reid Simon, Manager, RSM US LLP
sake,” says Reid Simon, a manager at RSM US LLP. “Focus on making sure that your analysis is structurally sound, specific to the area
it is designed to address and, perhaps most importantly, that it’s comprehensible to the right people.”
To Simon’s final point, Deppen stresses the importance of presenting your data findings in visual form. Even simple graphs and dashboards can go a long way to making data meaningful to leadership and other departments.
“A huge percentage of our brain is geared toward visual processing, so
it makes sense to take advantage of that,” he says. “We dashboard an awful lot of things, because it’s amazing how much more people pay attention when something is presented in a graph as opposed to a report.”
Case Study: Orrstown Bank
Orrstown Bank, a $1.5-billion community bank in Pennsylvania,
has been committed to data analytics for around four years now. Orrstown CIO Jeff Deppen came to the bank from JP Morgan Chase, along with EVP of Operations and Technology, Ben Wallace.
“We quickly realized that it’s difficult to differentiate at the community bank level,” Deppen says. “You can’t really differentiate your products or rates or even services, because there will always be someone out there offering a better price. So we realized where we could differentiate was by being very customer-focused and relationship-focused.”
While terms like “relationship-focused” and “data analytics” may not seem like natural bedfellows, Deppen and Wallace saw a big opportunity to work toward the differentiation they believed Orrstown lacked.
“We figured there’s gold in the data, that there’s something in there that we can use to start inferring information about our customers, and maybe anticipate what they need,” Deppen explains. “We knew there was magic in there.”
Acting on that belief, they worked with a partner to create a system that builds customer relationships around data analytics. Using the data, they built talking points for each customer, so now when a customer contacts the Orrstown Customer Service Center, the representative
can hit a button and receive three tailored talking points, ranging from things as specific as their CD is about to mature next month, maybe they want to renew to things as simple as make sure you thank them, they are a highly valued customer. Though these calls often generate sales, that’s not really the focus. The overarching goal is to create a unified, personal customer experience no matter the medium.
“Our goal is to get a consistent message across the whole bank in terms of how we talk to our customers, whether they’re contacting the call center or walking up to the teller line or talking to a technician deep in the back-office end like me,” Deppen says. “We just want them to have a general conversation, and it’s really interesting to see all of the referrals that come out of those conversations.”
In doing so, Wallace stresses the importance of creating a framework for customer interactions – using data as a means to better personal connections and a more meaningful customer experience. Used correctly, data analytics can increase customer loyalty and change the institution’s cultural tone.
“To me, what we’re doing here has a much larger brand and culture meaning than simply using data to drive behavior,” he explains. “That’s a long way of saying let the experiences and the data inform you, then perhaps you may discover that the most appropriate action is calling a customer simply to say thank you. We thought we were going to do one thing with our customer data, and now we’re doing something a little different.”
Orrstown recently began using its talking points to drive outbound engagement calls, in addition to using them to open conversations on inbound calls. Even so, the bank works hard to walk that fine line between being good stewards of its customers’ information and making sure it protects their privacy.
“I still feel that not enough people view their financial institutions as good advisors and stewards,” he says. “It may be an industry problem and I don’t think we’ve fully changed it yet, but Orrstown is working toward that,
Wallace has a story of his own on this point. When Orrstown was moving ahead with attempting outbound calls with personalized talking points, he wanted to see what a call under this strategy would be like. So he called a long time customer whose data showed she was about to pay off a loan.
“My intent was to thank her for her long term relationship, and to discover if she needed any assistance or options as she paid off a fairly sizable loan. But before I could really get into that line of conversation, she was so overwhelmed and pleased that her bank would actually call her and thank her for paying off this loan and for being a great customer for twenty years, she actually began a conversation about how Orrstown could help her in some longer-term financial planning.”
FMS forward | NOVEMBER/DECEMBER 2017 | 15
ANALYTICS IN ACTION


The good news in all of this is that in addition to already having access to the data they need to start moving forward, many institutions already have access to the people they need as well.
“Every department already has a go-to person for analytics,” says Michael Florea, the Chief Data Officer at $1.3-billion Columbia Credit Union. “Most departments have already fostered their own spreadsheet guy or their own database guy that they go to. A lot of the benefits come from just getting those people in the same room and letting them talk and compare notes and start digging.”
Florea adds that tapping people who already have a deep understanding of the institution is a huge benefit in its own right, and Kennerson agrees that people with historical knowledge of the institution will be able to add a qualitative perspective to the quantitative approach.
“The quantitative approach is the simple part, as long as you have your data – it’s running the regression and doing the math,” Kennerson says. “The qualitative approach is being able to take a step back and see if these trends make sense to build into our models today. Having someone who knows the historical trends is absolutely critical.”
START SMALL, START NOW
Reflecting on his own experience with data analytics at Orrstown, Deppen has a word of advice for other community institutions: don’t be intimidated.
“I want to be really clear about this – community institutions can do a lot of the small data stuff, and they should focus on the data they have,” says Deppen. “They should look at the little things they can do, like put some dashboards together and get people in the institution used to seeing those, then get the operational metrics going, and once they build some trust they can really start swinging for the fences.”
ANALYTICAL THINKING
of the 400 community institution executives surveyed in the FMS research study Community Mindset: Bank and Credit Union Leadership Viewpoints 2017 were either very or somewhat satisfied with their institutions’ positioning on data analytics.
Source: Community Mindset: Bank and Credit Union Leadership Viewpoints 2017
“Avoid an overemphasis on sophistication,” adds his Orrstown colleague Ben Wallace, EVP of Operations and Technology. “At the end of the day, you go from having nothing to having something,
and maybe it’s not perfect, but it’s a meaningful change. Even if you start with a spreadsheet of some data that could help inform some behaviors, don’t be afraid to start small and be incremental about it.”
While starting small is fine, Easley says working to build and find the correct balance for your organization is essential.
“If you underspend, you risk implementing an effort that yields no measurable benefit,” he says. “On the other hand, if you overspend, your costs could skyrocket and negate any positive benefit the analytics generate.”
The important thing is to simply get started, because institutions that continue to put off data analytics run the risk of being outperformed by competitors that have already taken the plunge and are starting to see measurable benefits as a result.
“The impact of data analytics is best understood not as the emergence of a given tool or technology, but as a fundamental change in how business takes place, akin to large-scale electrification at the turn of the 20th century,” Simon believes.
For community institutions, it’s a fundamental change that will eventually touch every corner of the industry – no matter how big or small. The only institutions that should be eschewing data analytics at this point in time, Easley says, are those that don’t care about growth and profitability. Kennerson agrees that there’s no time like the present.
“I’ve been bringing this proverb up a lot – when is the best time to plant a tree?” he asks. “The best time to plant a tree was twenty years ago. By the same token, it would be great if you had twenty years’ worth of beautiful data to parse out. But do you know the second-best time to plant a tree? Today.”§
of those who weren’t “very satisfied” considered it important to improve their data analytics processes. However, over a quarter of all respondents reported not being completely satisfied with their data analytics, yet also didn’t seem to prioritize improvement.
16 | FMS forward | NOVEMBER/DECEMBER 2017


Continued from page 11 ›
FASB’s Current Expected Credit Loss (CECL) standard is the kind of once-in-a-career shift in process and philosophy that has the distinction of having inspired not one but two major bouts of hand-wringing among community institution professionals.
The first came throughout the initial proposal phase, the ensuing long
and heated debate and the eventual issuance of the final standard, which was ultimately approved in mid-2016. The second, meanwhile, came as those same professionals began to grapple with the reality of trying to get their institutions ready for the actual implementation of CECL – which, as the cosmic odometer flips to 2018, is as close as just two calendar years away for public filers. And when pinpointing the one aspect of those preparations that has them most concerned, the answer is almost uniformly the same.
“Data is pretty well at the top of the list of things to be addressed for CECL,” says Chad Kellar, a partner with Crowe Horwath LLP. “The risk in the portfolio drives the data you need, the data
then tells you what
kind of methodology
or models you can
put into service and
the models dictate
how you incorporate
current condition
adjustments or
forecasts – they’re
all kind of hinged on
each other. So starting with understanding what the risk is in the portfolio and then verifying that you have the data to be able to adequately segment and analyze the portfolio is extremely important.”
Indeed, the data an institution has or can get will ultimately determine not only the type of model it can use for CECL, but
also how it confronts several other facets
of the standard. For example, one of the components of CECL changes what type
of historical information is required to compute the allowance, as it now goes
from a historical loss concept to a historical lifetime loss concept, requiring an institution
to have much more data that is accurate and complete from much further back in history than they have had to use before.
“Not only do they need to ensure their loan pools in the portfolio are appropriately grouped by risk or type, but they then have to determine the estimated life of each of those pools and determine what period in the past they need to harvest their data
to build that historical lifetime loss rate,” explains Debbie Scanlon, a partner at BKD,
but it’s very hard to complete the decisions around modeling without first understanding the data side of things,” says Ed Bayer, a managing director at KPMG LLP.
Data Challenges
One of the first things many institutions have discovered as they’ve assessed their data situations with respect to CECL is that they can’t necessarily go in the direction they had hoped, either due to a lack of good data, not enough good data or data that exists but is simply inaccessible.
“There’s a difference between an institution thinking it has the data versus that data actually being available,” Bayer points out. “It’s important to recognize the difference between having the data and actually being able to get to it.”
Some of the main challenges community institutions are likely to encounter will likely revolve around how far back they
can go for data – an issue that in many cases is closely tied to their affiliations with third-party vendors. For example, with
life-of-loan being the
driving force of the CECL calculation, many institutions are going to be looking at a longer-term horizon than what’s done today, going from aggregate
Call Report-level information for the incurred-loss model to trying to
gauge where a loan is in its life and the probability of losses under CECL.
“That longer period of time can be problematic for community institutions, largely because a lot of them use core service providers that essentially will only keep records for two or three years before putting the information into cold storage that’s not readily retrievable or accessible,” Kellar says. “We’re seeing institutions
that can only go back to 2012 or 2013 on their closed loans, and under CECL they’re really focusing on the good performers
– the good part of the portfolio is really the focus, the loans that are really going
A lot of institutions have immediately jumped on the idea of changing models, but it’s very hard to complete the decisions around modeling without first understanding the data side of things.
Ed Bayer, Managing Director, KPMG LLP
LLP. “This is the first of the three prongs
of the CECL calculation, so if an institution doesn’t have a handle on the data accuracy and completeness and what data fields it does and doesn’t have, it will not have an appropriate foundation on which to build the other two prongs, which are current conditions (economic factors) and the forecast of what will happen in the future.” In other words, data needs to be the starting point for institutions as they begin delving into CECL preparations, lest they run the risk of having the tail wag the dog.
“A lot of institutions have immediately jumped on the idea of changing models,
FMS forward | NOVEMBER/DECEMBER 2017 | 17


to perform out over the course of their contractual life. That analysis tends to drag you further back in time, and in many cases the closed loans that performed
out – those that you really want to be able to capture – are the hardest to get a good observation on if your history is truncated.”
Even if the data goes back as far as it needs to, institutions will need to scrutinize the accuracy of that historical information as well.
“One thing we’re finding as we talk with institutions is that many are not completely sure that all of their data fields have always had the focus to ensure they
were accurate and complete at all times,” Scanlon notes. “Thus, there is some concern as to how reliable some of that historical information may be.”
To this last point, both Kellar and Bayer note that loan origination and charge-off dates, for example, are a couple of particularly significant data points that may not always be what they seem within an institution’s archive. Considering their importance in many model types, these are exactly the kind of situations that will demand further scrutiny before forging ahead.
“It’s important to understand what the fields in your system really mean, and how they’re being processed,” Kellar explains, offering origination date as an example. “Are there renewal date fields in the system that are equally or more important than that origination date field? At a lot
of community institutions, there may be one loan record for a particular borrower, who has maybe renewed three, four or five times over the course of 15 or 20 years. So that origination date in the system is really depicting 15 years ago when the customer first came in, but then there’s a renewal field that the institution file-maintains
and updates for the most recent renewal. If that loan field, that renewal date, has just been continually overridden and you don’t have a snapshot of the portfolio
that goes back 15 years, it looks like that loan has only been outstanding since the last renewal, and you’re missing the fact that it performed out under contractual terms maybe four or five times historically. So by using that same loan record with
the overriding pieces, it really paints a different picture than the reality of the performance of that loan.”
MODELING CONSIDERATIONS
If there’s one common theme that runs through most discussions about CECL, it is this – data and modeling go hand-in-hand. However, as they grapple with the chicken- and-egg question of which needs to come first – data gathering or model selection
– institutions should be cognizant of the relationship between the two.
“Depending on how the key CECL stakeholders look at it, they may see CECL as an opportunity to limit volatility by the choices that they make, or see it as an opportunity to be as prudent as possible in maximizing their reserves, or they may be looking to mitigate the expected allowance increase as much as possible,” he explains. “It may take a consideration like that to help limit the available inventory of models they want to look at. Once they see which models fit with their approach, they can start to look at the data they’ll need to line
The overarching goal is to think about how to align business practices with the methodologies you deploy.
Chad Kellar, Partner, Crowe Horwath LLP
“When identifying data elements for model consideration, it’s important to conduct a gap analysis to identify what models you may be considering, along with what data elements are available or could be generated at the same time – it can be a challenge for institutions to try to use one of those two categories to drive the other,” says Mike Riechers, a director at KPMG LLP. “For example, if an institution selects a model first, out of desire for some particular characteristic, it may find itself challenged to build enough asset-level data at a granular enough level over a long enough history to allow that model to function properly. It goes the other way too. If an institution wants to have all kinds of data available so that it has a wide variety of models from which to choose, it may take unnecessary steps to backfill data that may never be used, creating more work than necessary. That’s why those two things should be examined in parallel as part of a gap analysis.”
Bayer adds that the kind and amount of data an institution can get its hands on is but one consideration that should go into the decision of which model to use for CECL. In some cases, an institution’s CECL strategy may point in the direction of a specific type of model.
up with that approach. But this is just one possibility – there are many different ways to approach it.”
In echoing this point and summarizing the data-model connection, Kellar adds “The overarching goal is to think about how to align business practices with the methodologies you deploy.”
TAKING ACTION
While most community institutions have likely taken some steps in preparation for CECL – whether through data collection or model research or resource assessment
– not every institution is probably sitting exactly where they’d like to be as 2018 approaches. As the implementation dates of 2020 (for public filers) and 2021 bear down, there are several areas related
to data to which they should be paying particular attention:
Address Your Data Gaps
If an institution finds gaps in its
data, Scanlon says it’s time to start warehousing information on a monthly or quarterly basis in the format that aligns with its CECL model calculations. This
is also the time to strengthen internal controls around the input of data so personnel in these roles understand
the importance of what is considered
18 | FMS forward | NOVEMBER/DECEMBER 2017


complete and accurate for each type
of loan, as well as to update policies to include specifically what data collection will be required for each loan.
“In the meantime, while they are building current data, they can also use external data to help them fill in the gaps as they move through the process of selecting the models they will use for each pool,” she adds.
Assess Your Risks
What are your credit metrics when
you’re originating a loan? What kind of information are you looking for to recreate or re-analyze the credit and monitor it going forward?
“Understand the risks in the portfolio and how those processes and business
practices define that risk,” Kellar says. “Make those decisions first and then decide if you need the data for it. Let the risk drive the data that needs to be captured, and let the data dictate what kind of models you can use.”
Define Your Process
Who in the institution owns the CECL process? If it’s mostly finance and accounting or credit and risk personnel driving the bus, it may be time to stop and pick up a few more people.
“In many institutions, the data team and
IT folks aren’t entirely aware of what’s happening with this process, and they need to be brought up to speed,” Bayer says. “By the time a lot of these institutions
finally get everyone together and talk about what’s going to be needed, it’s kind of an ‘aha’ moment, and usually not a
good one. So you have to get everyone on the same page to recognize the impact of CECL and the difficulty it’s going to take to complete this transformation. Without that awareness and education, I don’t think any other preparations can really take place.”
It’s certainly not too late to enact these steps and start working toward a robust CECL data initiative, but Bayer thinks it’s getting there.
“If an institution is not having these conversations right now, they are likely behind their peers and are probably looking at a significant uphill battle to be ready for CECL.”§
THE DATA DILEMMA
When the subject of CECL was considered among the 400 community institution executives surveyed for the recent FMS research study Community Mindset: Bank and Credit Union Leadership Viewpoints 2017, issues surrounding data requirements and availability topped the list of concerns.
of respondents are very or somewhat concerned about finding the right variables to help forecast expected losses
Source: Community Mindset: Bank and Credit Union Leadership Viewpoints 2017
of respondents are very or somewhat concerned about having enough of the right data
FMS forward | NOVEMBER/DECEMBER 2017 | 19
CENTRAL
YOUR ONE-STOP SHOP FOR ALL THINGS CECL
Whether your institution is deep into CECL preparations or just getting started, the latest member resource from FMS is here to help. CECL Central is an online collection of insightful articles, handy FAQs and helpful tips from sources around the industry designed to provide you with the latest and greatest thought leadership on the new standard – all in one convenient place.
Visit fmsinc.org/CECLCentral to check it out.


CDO
WHAT DOES A
Whether looking to leverage analytics or simply dealing with the mounting demands of a new forward-looking loan-loss calculation, the trend is clear – the ways in which data is gathered, governed and utilized is growing into a bigger strategic issue for banks and credit unions than ever before. But even though that trend may argue for increased attention and representation in the executive suite, many community institutions likely haven’t taken the leap of committing resources to a dedicated Chief Data Officer (CDO) position.
After starting with Columbia Credit Union in Washington eighteen years ago as an IT network manager and working his way up to CIO, Michael Florea stepped into the new role of CDO at the $1.3-billion institution just about a year ago. In his view, the beauty of having a CDO is being able to centralize the data within the institution and build a strategy around it – going beyond dashboards to truly develop and pursue a data governance strategy.
“If you’re interested in bringing on a CDO, you’ve already decided that you are, or want to be, a data-driven organization, and corporate culture is a key determinant in the success of that endeavor,” Florea says.
Florea’s brief career as CDO at Columbia has thus far been overshadowed by a core conversion, but his goal is to move the credit union from the kind of operational, reactive data analysis it has been doing into more predictive, strategic forays.
“We’re very skilled at reporting and analysis, but it’s all in retrospect and we want to take that to the next level,” he explains. “We hope to use machine learning algorithms to analyze our point-of-sale data and find correlations for the next best product. We want to create drip campaigns that can use those prescriptive analytics so we can set it and forget it – the Ronco of big data if you will.”
So what exactly does a CDO do, and how is it different from the CIO? Florea says that while the CIO controls the infrastructure of technology – where the data lives – the data and the information itself falls under his purview as CDO so that he can take a strategic,
rather than operational, view. Another benefit of having a designated CDO is having someone to do the work of gathering and overseeing all of the data in the institution, which can be daunting.
“Community institutions rely on so many third parties and there are so many repositories of data throughout any organization that no one person really knows how it all fits together, or even where it all lives,” Florea explains.
If you’re interested in bringing on a CDO, you’ve already decided that you are, or want to be, a data-driven organization, and corporate culture is a key determinant in the success of that endeavor.
Michael Florea, Chief Data Officer, Columbia Credit Union
Even if many community institutions, especially smaller banks and credit unions with limited resources, may not be ready to take the plunge of adding a new C-suite position focused solely on data, Florea believes they can still start taking meaningful steps towards using their data more strategically.
“Inventory your data and prioritize any immediate concerns, like confidentiality, integrity or availability,” he says. “Collaboration and interdepartmental communication are the first steps, and someone should be put specifically in charge, since it’s hard to hold a team accountable. You need someone who loves this stuff, who can sit down and start digging into it with a brain that loves to find patterns and correlations. That’s a special type of person.”
BRING TO THE TABLE?
20 | FMS forward | NOVEMBER/DECEMBER 2017


C M Y CM MY CY CMY K
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Get involved with FMS locally!
FMS Chapters offer fantastic education and networking in your
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Members of an FMS chapter can deduct $75 from their FMS national membership dues when they present a copy of their chapter dues receipt!
Find a chapter near you and connect with other FMS members at:
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ANNIVERSARY
THE
FORUM
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Have an idea for a 2018 FMS Forum program? Submit a program proposal for The 2018 FMS
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FMS forward | NOVEMBER/DECEMBER 2017 | 21
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CONVERSATION
..........ACCOUNTING FOR CHANGE
22 | FMS forward | NOVEMBER/DECEMBER 2017
HAL SCHROEDER
FASB Board Member
....

IN AN EXCLUSIVE INTERVIEW, VETERAN FASB BOARD MEMBER R. HAROLD (“HAL”) SCHROEDER EXPLAINS THE REASONING BEHIND SOME OF THE ORGANIZATION’S MOST SIGNIFICANT UPCOMING STANDARDS CHANGES.
The past few years have seen a remarkable number of proposals from the Financial Accounting Standards Board (FASB), several of which have
the potential to significantly impact the way in which community institutions conduct business. With implementation deadlines for several of these standards now in view, FMS reached out to Hal Schroeder for his thoughts on FASB’s revenue recognition, lease accounting, hedge accounting and credit loss (CECL) standards – including the intent behind them, the benefits the Board expects to see and a few helpful tips for community institutions making the adjustments.
REVENUE RECOGNITION
On the primary goal or intent behind the standard.
Revenue is one of the most important measures used by investors in assessing
a company’s performance and prospects. However, previous revenue recognition guidance differs between Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standard (IFRS) – and many believe both standards needed improvement.
The new guidance enables organizations to report useful information about the nature, timing and uncertainty of revenue from contracts with customers to users of financial statements.
On the benefits the Board expects to see from adoption.
The new guidance removes inconsistencies and weaknesses in existing revenue requirements. It also provides a more robust framework for addressing revenue issues, and improves comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets.
On the benefits the Board expects to see from adoption.
The leases standard improves financial reporting about leasing transactions for companies and other organizations that lease assets such as real estate, airplanes and manufacturing equipment.
The new standard will require organizations that lease assets – referred to as ‘lessees’ – to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases.
Under the new guidance, a lessee will be required to recognize assets and liabilities for leases with lease terms of more than 12 months.
The leases standard also will require disclosures to help investors and other financial statement users better understand the amount, timing and uncertainty of cash flows arising from leases. These disclosures include qualitative and quantitative requirements, providing additional information about the amounts recorded in the financial statements.
A few key points community banks and credit unions should keep in mind as they prepare.
For public companies, the leases standard will become effective for periods beginning after December 15, 2018. For all other organizations, the guidance will become effective for periods beginning December 15, 2019.
Community banks and credit unions should have sufficient resources available to implement the leases standard in a timely and effective manner. They should be aware of the possibility that their customers, particularly borrowers, will have significantly greater assets and liabilities on their balance sheets as a result of their leasing activities. Many of these activities were previously ‘off- balance sheet’ in situations in which leases were classified as operating.
CREDIT LOSSES
On the primary goal or intent behind the standard.
The credit losses standard improves financial reporting by requiring timelier
FMS forward | NOVEMBER/DECEMBER 2017 | 23
The revenue recognition standard also provides more useful information to users of financial statements through improved disclosure requirements. Lastly, it simplifies the preparation of financial statements by reducing the number of requirements to which an organization must refer.
A few key points community banks and credit unions should keep in mind as they prepare.
Public companies should apply the new revenue standard to annual reporting periods beginning after December 15, 2017. For all other organizations, the guidance will become effective for annual reporting periods beginning after December 15, 2018.
Depository institutions, including community banks and credit unions, perform a variety of activities and earn a variety of fees for those activities – some of those activities are in the scope of the revenue recognition standard.
For example, the new revenue guidance provides a framework for accounting for deposit-related fees, which is an area that current GAAP is lacking. In many cases, the revenue recognition standard may
not affect the timing of the recognition and measurement. However, depository institutions are subject to disclosures for revenue streams that are in its scope.
LEASES
On the primary goal or intent behind the standard.
The new guidance responds to requests from investors and other financial statement users for a more faithful representation of an organization’s
leasing activities. It ends what the SEC and other stakeholders have identified as one of the largest forms of off-balance sheet accounting, while requiring more disclosures related to leasing transactions.
The guidance also reflects the input we received during our extensive outreach with preparers, auditors and other practitioners, whose feedback was instrumental in helping us develop a cost- effective, operational standard.


recording of credit losses on loans and
other financial instruments held by financial institutions and other organizations.
Current GAAP requires an ‘incurred loss’ methodology for recognizing credit losses
that delays recognition until it is probable a loss has been incurred. This model has been criticized for restricting an organization’s ability to record credit losses that are expected, but do not yet meet the ‘probable’ threshold.
The global financial crisis only underscored those concerns. In the lead-up to the crisis, financial statement users were making estimates of expected credit losses using forward-looking information and devaluing financial institutions before accounting losses were recognized. This highlighted the fact that the information needs of users differ from what GAAP requires. Similarly, preparers expressed frustration during this period because they could not record credit losses that they were expecting because the probable threshold had not been met.
conditions and reasonable and supportable forecasts. Credit losses are estimated as of each reporting date for all financial assets measured at amortized cost, as well as net investments in leases and certain off-balance- sheet credit exposures. Financial institutions will now use forward-looking information to better inform their credit loss estimates.
A few key points community banks and credit unions should keep in mind as they prepare...
For public companies that are SEC filers, the ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. For public business entities that are not SEC filers, the ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. For all other organizations, the ASU is effective for fiscal years beginning after December 15, 2020, and for interim periods within fiscal years beginning after December 15, 2021.
the historical loss data that is maintained by the institution for its various portfolios. If historical loss data is periodically ‘purged,’ or there are missing data elements, action should be taken now to retain data (or collect data not currently captured) that may help make the current expected credit loss estimation process easier.
Some organizations have found it helpful
to prepare mock credit quality indicator disclosures disaggregated by year of origination (vintage), consistent with what will be required under the new credit losses standard. Preparing these mock disclosures now can help identify data gaps and can help senior management understand how these new disclosures may be used by investors going forward.
RECOGNITION AND MEASUREMENT
On the primary goal or intent behind the standard...
Before the global financial crisis that began in 2008, both the FASB and the International Accounting Standards Board (IASB) began
a joint project to improve and to achieve convergence of their respective standards on the accounting for financial instruments. The global economic crisis further highlighted the need for improving the accounting models for financial instruments in today’s complex economic environment.
As a result, the main objective in developing the new recognition and measurement standard was to enhance the reporting model for financial instruments to provide users of financial statements with more useful information.
On the benefits the Board expects to see from adoption...
The new guidance provides users of financial statements with more useful information on the recognition, measurement, presentation and disclosure of financial instruments. It also improves the accounting model to better meet the requirements of today’s complex economic environment.
A few key points community banks and credit unions should keep in
........A potential early action item (for CECL) is to understand the historical loss data that is maintained by the institution for its various portfolios. If historical loss data is periodically ‘purged,’ or
there are missing data elements, action should
be taken now to retain data (or collect data not currently captured) that may help make the current expected credit loss estimation process easier.
On the benefits the Board expects to see from adoption...
The credit losses standard aligns the accounting with the economics of lending. It requires banks and other lending institutions to immediately record the full amount of credit losses that are expected in their loan portfolios. This provides investors with better information about those losses on a more timely basis.
The credit losses standard requires an organization to measure all expected credit losses considering historical experience, current
Community financial institutions should
read the core Current Expected Credit Loss model guidance (22 pages plus 25 pages of implementation guidance and illustrations) to ensure they understand what is (and is not) required by the new guidance. Implementing the credit losses standard will require input from a cross-section of stakeholders across the institution (e.g. finance, accounting, credit risk and senior management). Key internal stakeholders should be aware of their role during implementation.
A potential early action item is to understand
24 | FMS forward | NOVEMBER/DECEMBER 2017


mind as they prepare.
The standard on recognition and measurement will take effect for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. For private companies, not-for-profit organizations, and employee benefit plans, the standard becomes effective for fiscal years beginning after December 15, 2018, and for interim periods within fiscal years beginning after December 15, 2019
Available for sale classification is eliminated for equity securities. This means that under the new guidance, equity securities that have a readily determinable fair value will have changes in fair value recorded in earnings each period. Additionally, institutions should consider how the accounting may change under the new measurement alternative
for equity securities without a readily determinable fair value.
For public companies, the disclosure of loan fair values is required to be an exit price under the new guidance, as opposed to an entry price which is commonly used in current practice. There are several other changes to guidance, primarily in the presentation and disclosure area, that may affect community financial institutions.
HEDGING
On the primary goal or intent behind the standard.
Through its outreach activities, the FASB observed two primary concerns.
First, financial statement preparers have expressed concerns over the difficulties associated with applying hedge accounting and its limitations for hedging both nonfinancial and financial risks. Second, users of financial statements have expressed concerns over the manner in which hedging activities are reported in the financial statements.
On the benefits the Board expects to see from adoption.
The hedging standard better aligns the accounting rules with a company’s risk management activities, better reflects the economic results of hedging in the financial
statements and simplifies hedge accounting treatment. The hedging standard refines and expands hedging accounting for both financial (e.g., interest rate) and commodity risks.
The hedging standard also create more transparency around how economic results are presented, both on the face of the financial statements and in the footnotes, for investors and analysts. Specifically, the amendments permit more flexibility in hedging interest rate risk for both variable- rate and fixed-rate financial instruments, and introduce the ability to hedge risk components for nonfinancial hedges.
A few key points community banks and credit unions should keep in mind as they prepare.
Companies and investors alike have expressed overwhelming support for this long-awaited standard, and many are interested in early adopting. Early adoption is permitted in any interim period after issuance of the hedging standard.
For public companies, the hedging standard is effective for fiscal years beginning after
December 15, 2018, and interim periods within those fiscal years. For all other organizations, the hedging standard is effective for fiscal years beginning after December 15, 2019, and interim periods beginning after December 15, 2020.
There are several new measurement methodologies and hedging strategies that will now be available to community banks. These methodologies and strategies can help community banks better reflect the effects of their risk management activities in their financial statements.
DEFINITION OF PUBLIC BUSINESS ENTITY
Although issued in 2013, there still seems to be confusion about this definition for non-SEC registrants. Did the Board intend to sweep in community financial institutions? PBE status for community financial institutions is based on the facts and circumstances of each organization.
For example, for community financial institutions that are not SEC registrants, a key factor of determining whether they are a PBE or not are the types of securities they have issued.
Criterion D of the PBE definition was intended to be narrow, such that only issued securities that are traded, listed or quoted on a public market would make an organization a PBE.
A public market is one where information on trading, listing or quoting activity is made publicly available (for example, OTC Pink Markets). Criterion E of the PBE definition generally impacts institutions that do not meet criterion D, but are subject to Federal Deposit Insurance Corporation Improvement Act requirements to make GAAP financial statements publicly available.
The definition is intended to be applied on an organization-by-organization basis. For example, a holding company could be a PBE and the bank subsidiary may not be (and vice versa).
Additional information and implementation guidance on all of the above standards is available on the FASB’s website at fasb.org. §
FMS forward | NOVEMBER/DECEMBER 2017 | 25


BALANCE OF POWER
In the recent FMS research study Community Mindset: Bank and Credit Union Leadership Viewpoints 2017, vendor relationships weighed heavily on the minds of the 400 community institution executives surveyed:
• 72% of all respondents said that getting more value from existing IT and vendor relationships was important, good for third overall among a selection of IT priorities
• Among a list of several cost management opportunities, 17% of all respondents saw renegotiating vendor contracts as their top priority
• Cost took the top spot of vendor issues institutions are facing, with 42% of respondents listing it as most important; responsiveness and service came in second at 33%, and 25% cited the ability to renegotiate or make adjustments to the relationship as their needs change
However, despite their ever-growing reliance on third-party vendors – and their keen awareness of the costs associated with that reliance – many community institutions don’t necessarily feel they can reasonably affect the terms or conditions associated with those relationships. But two veteran consultants to the industry say there are steps that community banks and credit unions can take to help level the playing field and restore the balance of power in negotiations with their third-party partners.
26 | FMS forward | NOVEMBER/DECEMBER 2017


Bob Roth
Partner – Cornerstone Advisors
As the former CIO of a midsize bank, Bob Roth knows a thing or two about dealing with third-party vendors – a wealth of experience
that he now shares with his clients at Cornerstone Advisors. While Roth believes that these relationships should indeed be true partnerships, he is both straightforward and unapologetic when it comes to his advice for community institutions preparing for contract negotiations – he frequently refers to philosophies espoused in Sun Tzu’s Art of War.
In addition to emphasizing service levels and working hard on cost-of- living adjustments, Roth offers the following top five tips for vendor negotiations:
F Don’t accept discounts at face value
“A 20% discount in banking technology could still leave you 15% to 20% above market. If you take anything away from this list, it should be this – the variances in pricing for banking technology are not rational.”
F To the extent you can, save your new product purchases until renewal time
“Buying in bulk will give you leverage with your vendor to compress your current prices.”
F There is nothing like issuing an RFP at renewal time to get a vendor’s attention
“Vendors are only going to negotiate aggressively with those clients who show signs of being serious about leaving – issuing an RFP is the clearest of signs.”
F Align your termination dates
“Everything added during a term should be set up to terminate at the same time as the master agreement. Leverage only comes IF you can move your services. If your termination dates are strung out, it becomes much harder to convince the vendor that you COULD move.”
F Get some help
“This is a very opaque market, and it’s going to be that way for the foreseeable future. Your only recourse is to enlist the help of someone that can see behind the curtain.”
Adam Mustafa
Managing Partner, Client Delivery and Development – Invictus Group
With a broad background in the financial services industry, Adam Mustafa has seen plenty of contract negotiation
opportunities that community banks and credit unions either didn’t recognize or didn’t think they could capitalize upon. His five tips are focused on trying to remedy that situation and building a bridge between institutions and their third-party providers.
F Build relationships with your vendors
“While there’s nothing wrong with negotiations and leverage, you do not want to start a new relationship with a vendor on the wrong foot. You should have chemistry with the key people you deal with at your vendor and get to know them. Little things like telling them thank you or recognizing in an email to their boss how great a job they did pays off in spades. The stronger the relationship, the less aggressive the vendor will be on terms and conditions at renewal time.”
F Don’t be afraid to be an early adopter
“When you take a chance on a young company, you not only get a great price, but you may provide your institution with a competitive advantage. The tradeoff is that you have to be flexible and understanding while the vendor works out their kinks.”
F Always have a backup plan
“The better the backup plan, the more leverage you have
and the more terms become available to negotiate. This is Negotiating 101, but many management teams fear rocking the boat in the short term for the benefit of the long term.”
F Don’t negotiate in a vacuum
“Understand how this contract can affect your overall big picture. For example, if there is a chance you could sell the institution within the next few years, you shouldn’t enter into long-term contracts with big breakup fees. Likewise, if you plan to be an acquirer, negotiate the integration fees up front.”
F If you’re satisfied, offer to serve as a referral, give a testimonial or even proactively recommend the vendor’s services to your peers
“Vendors – especially startups – will often agree to price breaks. Customer acquisition costs are their biggest expenses and there is no better marketing piece than word of mouth. I’ve even heard of situations where your cost can be reduced each time a referral leads to a sale.”§
FMS forward | NOVEMBER/DECEMBER 2017 | 27


INNOVATION THROUGH COLLABORATION
IN THE BANKING INDUSTRY AND BEYOND, THE TRENDS ARE UNMISTAKABLE. PROBLEMS ARE MORE COMPLICATED, CHANGE IS HAPPENING FASTER AND PEOPLE ARE MORE DIVIDED THAN THEY WERE BEFORE.
When problems are being created and knowledge is expanding at
an ever-faster pace, simply keeping up with the changes can make it difficult to focus on innovating and moving ahead. However, several leadership experts believe the answer lies in a focus on more thoughtful and effective collaboration, which they say can provide the boost that community institutions need in order to move from reacting to leading.
DEFINING COLLABORATION
Heidi Gardner says it’s almost easier to define collaboration in the negative than in the positive.
“A common problem we see is that people confuse all kinds of other interactivity for smart collaboration,” says Gardner, a distinguished fellow at Harvard Law School who researches leadership and collaboration. “Collaboration should not be confused with other kinds of feel-good participation. If what you’re after is creating a more cohesive culture or engaging people by being more transparent with your objectives or simply socializing to strengthen interpersonal bonds, those are all legitimate reasons to bring people together, but I don’t want anyone to think it’s the same thing as collaboration.”
Likewise, run-of-the-mill meetings are often mistaken for collaboration, but serve a fundamentally different purpose.
“In a meeting, you are reporting on what’s occurring in your functional area of expertise, and though you might reach across the aisle to exchange information with a colleague, it’s a very defined methodology and outcome the organization is seeking, rather than a collaborative effort,” says Julia Johnson, a senior manager at Wipfli LLP.
So if collaboration is not team-building and it’s not meeting updates, what is it? Gardner has a definition for what she calls “smart collaboration”: combining highly specialized expertise in order
to solve complicated problems. Johnson’s definition builds upon Gardner’s ideas, but adds the concept of innovation.
“In a collaborative effort, there is a problem or issue to be address, but the outcome might not be known, and that’s where the power of ideation and innovation come in,” she says.
A NECESSARY CHANGE
Gardner argues that there are two accelerating trends driving
the need for collaboration – the specialization of expertise and
the increasing complexity of problems. As the amount and the accessibility of knowledge available in every specialty increases, the trend of specialization will continue, and the degree of separation
28 | FMS forward | NOVEMBER/DECEMBER 2017


between experts will increase. In essence, Gardner says, people will continue to become narrower but deeper experts. As for her second trend, cybersecurity provides a good example – a problem so complex that it requires an organization to draw on the expertise of almost every department.
“It’s a great example of many of the problems businesses face today, in that it is both incredibly pressing and inherently multi-disciplinary,” she says.
Collaboration is often the best way for organizations to effectively address these types of knotty issues. Johnson believes that it is, in fact, the only way for financial institutions to remain competitive in the face of a rapidly changing industry.
“In order to be a high-performing institution and to remain responsive in an industry that continues to experience consolidation and nontraditional competitors, institution leaders need to challenge themselves to think differently,” she says. “Collaboration is a powerful way to engage people with the intent to build upon each other’s thoughts and ideas. When I think of collaboration, I think of synergistic thinking and behaviors resulting in an outcome that is greater than the sum of the individual parts.”
THE CULTURE OF COLLABORATION
One of the biggest determinants for whether an institution will be
able to foster effective collaboration is the organizational culture. Cultures that are too passive or too aggressive will have a more difficult time with collaboration, and may require some recalibration before attempting it.
“If a culture is too aggressive, people in the organization may attempt to compete with each other instead of collaborating,”
says Johnson. “They’re used to a win-lose framework, which is
not conducive to collaboration. Similarly, if a culture is too passive, people might defer to those above them in the hierarchy, which leads to a lack of individual initiative and creativity.”
Gardner adds that teamwork can also be difficult to achieve on an interpersonal level.
FMS forward | NOVEMBER/DECEMBER 2017 | 29
When I think of collaboration,
I think of synergistic thinking and behaviors resulting in an outcome that is greater than the sum of the individual parts.
Julia Johnson, Senior Manager, Wipfli LLP


“Even people who don’t believe their colleagues would deliberately sabotage them can worry about losing control or not getting enough credit,” she says.
One way to facilitate collaboration in a culture that is not naturally geared toward it is to explicitly outline the process. Johnson recommends inviting people to participate in collaboration by setting ground rules and explaining to the group why each person is there. “They should share the reason they’re meeting, define what collaboration means, identify what they’re trying to achieve and establish expectations,” she advises.
The essential collaboration, the kind that leads to innovation, does not always take place across disciplines, but rather across both sectors and generations. If the senior partner isn’t willing to listen to the junior, innovation doesn’t happen.
Heidi Gardner, Distinguished Fellow, Harvard Law School
“Make sure you show individuals how collaboration benefits them and their own work goals, not just the overall organization,” Gardner agrees.
FINDING COLLABORATORS
Another potential hurdle for would-be collaborative institutions is determining who to bring to the table, a problem that requires a deep investigation of the problem to fully understand it.
“The single biggest barrier we see to effective collaboration is not knowing the full suite of available services and expertise needed to solve these complicated problems,” says Gardner. “Once you understand the root causes of the issue, you can stop treating the symptoms and address the foundational issues with a much clearer idea of what kind of expertise you need.”
While it may be tempting to build a team of people who think and work alike, the promise of collaboration lies in trying to resist that impulse. Collaboration should focus on bringing different expertise and methods together, rather than simply convening a group of like-minded people.
“Leaders should collaborate with people who cause them to think differently or more broadly to reduce the tendency toward group- think or idea stagnation,” says Johnson.
In pulling together this group, it’s also important to avoid adhering to a strictly hierarchical view and thus overlooking younger or junior employees and eliminating some potentially important perspectives.
When dealing with social media or operational issues, for example, younger employees and front-line employees may have valuable insight or a crucial point of view to bring to the table.
“Leaders need to be very thoughtful about engaging deep in the organization and not confusing hierarchical positions or roles with expertise,” says Gardner. “Stories abound of people who are relatively junior in the organization who actually have expertise in an area that would be incredibly valuable to a particular initiative and they’re overlooked.”
Some smaller community institutions, meanwhile, may grapple with simply not having the necessary expertise for in-house collaboration.
“People in smaller institutions might not be carved up into enormous departments with different reporting lines, and are more likely to have personal relationships to help them overcome some of the usual barriers to collaboration,” says Gardner. “For them, it’s less about breaking down silos internally and more about where to access and how to harness third-party expertise efficiently and effectively.”
A PEOPLE PROCESS
Generational differences often play a role in effective collaboration. For example, younger employees may bring in a natural understanding and expertise in technology or social media while also benefiting enormously from having mentors with experience and a broader perspective on the industry.
“The essential collaboration, the kind that leads to innovation, does not always take place across disciplines, but rather across both sectors and generations,” says Gardner. “If the senior partner isn’t willing to listen to the junior, innovation doesn’t happen.”
More seasoned employees in these situations not only get the benefits of a fresh, tech-savvy point of view, but they have the opportunity to create a legacy by developing and working with the next generation of leaders.
“Highly effective leaders want to leave a legacy, and leave it in hands more capable than their own,” says Johnson. “In order to do so, they should be preparing the next generation to do great things, to take what they started and to build it and make it better tomorrow than it is today. I think collaboration gets us there.”
Besides the direct benefits of collaboration – solving the problems you brought the team together to solve – Johnson believes there
are a number secondary benefits as well, including employee engagement, better partnerships and teamwork and higher levels of efficiency and productivity. Gardner adds that not only will people on the inside of the organization benefit from collaboration, customers too are likely to see the benefits.
“In serving people today, you have to come up with ways to do things far better, faster and cheaper, ideally in a way that makes the customer feel special,” she says. “All of those things require specialization and collaboration.”§
30 | FMS forward | NOVEMBER/DECEMBER 2017


CENTRAL
CECL Central is your one-stop comprehensive portal dedicated to all things CECL!
Featuring links to current articles and research on the FASB's Current Expected Credit Loss (CECL) standard, CECL Central is a hive for new viewpoints and a great place to start your CECL planning.
Get your full CECL coverage at: FMSinc.org/CECLCentral
FMS forward | NOVEMBER/DECEMBER 2017 | 31
INSPIRING CPEs FOR BUSY PROFESSIONALS!
Timely and effective content that you can plug straight int o your career.
Check out our schedule of upcoming FMS webinars:
HAPPY BIRTHDAY DAILY DIVIDEND!
My, how it’s grown! With over 300 posts since its launch in November of 2016, we’re excited to announce that your FMS blog – The Daily Dividend – is celebrating its first birthday. If you haven’t checked it out, now is the time to start reading for:
• The latest industry news
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• In-depth analysis of the important issues facing your community institution
Get your daily dose of must-have information on your FMS blog:
FMSinc.org/DailyDividend
Nov 15, 2017
Year End Strategies for 2018
Dec 12, 2017
Finance Revolution: Technology Map for Tomorrow’s CFO
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Make plans for the remainder of 2017 and the early months of 2018 with these great FMS education opportunities.
CFO ROUNDTABLE
YEAR END STRATEGIES FOR 2018
FINANCE REVOLUTION: TECH MAP FOR TOMORROW’S CFO ALM FOR THE BOARD OF DIRECTORS
5300 CALL REPORT FOR CREDIT UNIONS
CALL REPORT BOOT CAMP FOR BANKS AND THRIFTS FMS-AMIFS ANNUAL CONFERENCE
THE 2018 FMS FORUM
FMS-AMIFS INSTITUTE 2018
November 9, 2017 November 18, 2017 December 12, 2017 January 23, 2018 March 5-6, 2018 March 5-6, 2018 April 18-20, 2018 June 10-12, 2018 July 22-27, 2018
CHICAGO, IL ONLINE ONLINE ONLINE ORLANDO, FL ORLANDO, FL TEMPE, AZ ORLANDO, FL ST. LOUIS, MO
UPCOMING CHAPTER EVENTS
BOSTON CHAPTER
November 28, 2017
Emerging Leaders Session + Toys for Tots Drive Waltham, MA
December 13, 2017
TBA Windsor, CT
January 23, 2018
Real Estate Update – Bring a Friend Waltham, MA
February 7, 2018
TBA Windsor, CT
NEW YORK/NEW JERSEY
November 14, 2017
Half-Day Seminar with NJ Bankers Iselin, NJ
December 5, 2017
Holiday Party Wood-Ridge, NJ
January 17, 2018
Mini Session & Dinner Meeting Hackensack, NJ
January 23, 2018
Central NJ Breakfast Meeting Freehold, NJ
February 21, 2018
Mini Session & Dinner Meeting Hackensack, NJ
PHILADELPHIA CHAPTER
November 8, 2017
Dinner Meeting: Most Expensive Mistake You Make with Vendors
Blue Bell, PA
December 7, 2017
Holiday Dinner Philadelphia, PA
January 10, 2018
Dinner Meeting: Tax Update King of Prussia, PA
February 14, 2018
Dinner Meeting: Accounting Panel Blue Bell, PA
WISCONSIN CHAPTER
November 2017
Annual Tax and Accounting Update Milwaukee area
This list includes just some of the upcoming chapter events that may be taking place in your area. Don’t see anything local? Start an FMS Chapter of your own! For more information, contact Autumn Wolfer, Director, Marketing and Membership at [email protected] FMSinc.org.
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