Perspectives

May 24, 2017
Five Ways to Unlock the Full Value of Loan Review 
By  Ancin Cooley, Principal, Synergy Bank Consulting and Synergy Credit Union Consulting

If you grew up north of the equator, you can probably remember the excitement you felt playing in the freshly fallen snow each winter. As you bounded toward the front door, ready to throw yourself into a fluffy pile of wintertime fun, you were stopped by a parent, ready to burden you with a heavy coat, gloves, scarf and hat. As the layers piled on, you wondered who could possibly have fun in all of this. However, once outdoors, you realized that your protection made the snowy adventure even more enjoyable.

A similar analogy can be drawn about loan review. Attempting to quickly grow your loan portfolio or move into new areas of business without a fully functioning loan review program is like trying to play in the snow without a coat on. You’ll never enjoy the snow if you’re not equipped to withstand the freezing temperatures that will undoubtedly accompany it. Likewise, you’re unlikely to see the sustained growth you seek for your institution if you fail to implement key processes that protect you from the imminent pitfalls associated with growing or integrating a new loan product.

Even the most conservative institutions pin growth and profitability as primary goals. However, in order to maintain healthy growth, institutions must keep a reliable pulse on the performance of their loan portfolio and accompanying credit risk issues. Effective loan review keeps that pulse by consistently monitoring the risk management function. With a strong loan review department to keep things on track, the institution will have the freedom to explore new products and industries with confidence.

If it’s true that loan review is the key to monitoring risk, then where was it during the last major downturn? Amid the slew of potential issues that crippled loan review and lead to the last downturn, these primary issues took precedence, and in many cases their continued presence is still putting institutions in jeopardy:
- Insufficient analysis to support the risk rating
- Failure to document major issues and the answers leading to their conclusion
- Failure to discuss credit administration weaknesses
- Insufficient numbers and experience of staff
- Failure to discuss and address portfolio risks
- Organizational and hierarchical missteps
- Lack of follow-up

Today, commercial real estate levels are back to where they stood pre-downturn. Institutions that have a strong early warning system – built by loan review – are able to identify and remediate problems faster.

Once your institution realizes the full value of the protection offered by a high-functioning loan review team, you may actually look forward to having an independent group of professionals hand you a pair of gloves, fit you with a coat and wrap you tightly in a scarf before sending you off to your next deal. To make sure your institution is getting the full value out of its loan review process, be sure to pay close attention to these five practices:

Craft a Risk Appetite Statement
The risk appetite statement helps your institution determine the direction of its lending program in an effort to grow more intentional portfolios that will bolster its overall health. When crafted as part of your yearly strategic planning process, your institution will be primed to grow portfolios by aligning your goals with your unique risk appetite.

This statement serves as a crucial guide by outlining the institution’s risk appetite, risk capacity and risk profiles, driving your institution’s decision-making over the next year.

While risk appetite refers to the amount of risk your institution is willing to accept in pursuit of loan growth, risk capacity quantifies the maximum risk that the firm is able to withstand. Risk capacity is based on metrics like capital, liquid assets and borrowing capacity, among others. Target risk profile represents the allocation of appetite to risk categories (e.g., how many home equity or car loans you will grant?). Actual profile represents risks that are currently assumed.

When gathering information that will eventually become the risk appetite statement, it’s important to engage with and incorporate the input of parties such as the board, CEO, CFO, lenders and internal auditors.

Align Loan Review with Risk Monitoring
For some institutions, this maxim is already a no-brainer. While past industry-wide practices have placed loan review within the purview of internal audit, forward-thinking institutions are making the shift toward aligning loan review with risk management. In fact, loan review is increasingly being referred to as credit risk review, thus highlighting the shift in thinking about the functionality of loan review.

When loan review is repositioned within the organization’s hierarchy, this seemingly small organizational shift can have a seismic effect on the overall effectiveness of the loan review function. This is achieved through utilization of independent authorities that perform candid, unbiased reviews.

Put simply, a loan reviewer must be able to safely “speak truth to power.” The reporting structure should be organized in a manner that allows for both the formulaic testing and critical, open-ended examination allowed under risk management.

Further, compensation levels are another key component of loan review effectiveness. Because the loan review position is critical to the success or failure of a financial institution, the institution must hold it in esteem for internal controls and for external appearances. By providing loan reviewers a proper place in the hierarchy of the organization, the institution communicates the seriousness and intrinsic value of the loan review position and its responsibilities.

Apply Strategy to Price Monitoring
A “one size fits all” approach just doesn’t work in the land of lending. Building a strategic pricing system through close monitoring of loan administration is critical to maintaining a healthy portfolio.

Even after a borrower has been with you for some time, things like credit worthiness, collateral values, and deposit balances all change over time, requiring a change in strategy on the part of the institution. Utilized fully, your loan review department can help keep an eye on these many changes and help steer the institution toward the best set of solutions.

Hone In on Small, Targeted Reviews
While broad, sweeping reviews are seemingly effective, getting down into the devilish details can expose smaller issues before they become significant problems. Specifically, performing deep dives into your appraisal management, special asset and loan administration function create tangible value and ROI.

Perform Post-Mortems on Large Charge-Offs
There really is no better vision than hindsight. Looking at your largest losses incurred over the last three years will allow you to identify whether there are any core themes that recur throughout. When armed with knowledge about what hasn’t worked, you can mitigate similar losses in the future. This is undoubtedly a best practice.

Before implementing these practices, make sure they are codified in a strong loan review charter or policy that is signed by the board of directors. Memorializing these practices solidifies loan review as a strategic asset, and equips the loan review team to objectively and independently unlock the strategic value of loan review.

Disclaimer: The views and opinions expressed in this article are those of the author(s) and do not necessarily reflect the official policy or position of the Financial Managers Society.

About the Author

Ancin Cooley, Principal, Synergy Bank Consulting and Synergy Credit Union Consulting
Ancin Cooley is the Principal of Synergy Bank Consulting and Synergy Credit Union Consulting, both of which specialize in loan review and strategic planning.  He can be reached at acooley@synbc.com.

May 17, 2017
Top Five Attributes of High-Performing Institutions   
By  Danny Baker, Vice President – Market Strategy, Financial and Risk Management Solutions, Fiserv

Executives, employees, customers and shareholders want it all when it comes to the management of a financial institution – high growth, profitability and efficiency. Financial managers know that there is a delicate balance required to achieve strategic growth while managing expenses, but high-performing financial institutions are successfully able to walk that line every day.  

Every organization can learn from top performers, including understanding where and why they win and what drives their profitability. What do they do better than others to balance growth with efficiency? Working with a group of industry-ranked, high-performing Fiserv clients on a daily basis and observing their challenges, opportunities and best practices, we have found that these institutions shared five differentiating attributes.

1. Forward-Looking Management
So many economic variables can affect a financial institution's future, and high performers successfully assess those factors, run multiple future scenarios and manage to those possibilities. If things change, they can more quickly understand the effects and make appropriate adjustments. Assumptions about the future underpin predicted strategies, including long-range plans and budgets. Instead of simply taking a historical view – or looking at what's happening right now – high-performing financial institutions constantly review forecasts and future scenarios to better assess their environment, customers, market and competition.

2. Strategic Planning Discipline
A good strategic process relies on data analytics and scenario creation – a forward-looking management discipline that runs multiple scenarios and analyzes the underlying drivers of success. High-performing financial institutions don't just look at superficial numbers and metrics. Rather, they consider the drivers of success and underlying assumptions and then actively measure against those assumptions. Unfortunately, many organizations employ the wrong metrics to determine if a strategy is working. Using data analytics can help financial institutions understand the market and how to measure success.

3. Effective Information Management 
Data analytics provides a wealth of insights, but organizations must determine what they really need to know. High-performing financial institutions effectively manage data and link business decisions to that information. They focus on forward-looking, prescriptive data versus information about what has happened already, constantly asking, "How can we do this better?" Just as importantly, they ensure key information is widely distributed within the organization.

4. Effective Control Structure
Are we achieving what we set out to achieve? Are we measuring and driving the right results? Establishing appropriate control structures helps ensure the desired results are achieved without destroying another aspect of performance. For example, a financial institution could meet its profitability goal, but do it in a way that doesn't best meet the needs of its customers, and in the process, damage trust, reputation and relationships.

5. Adaptable Risk Management Frameworks
Financial institutions are in the business of balancing risk – especially credit risk – and reward. The risk environment can change quickly due to macroeconomic factors, such as changing interest rates, unemployment and home values, as well as the organization's policies and appetite for risk. Effective risk management at a financial institution is closely tied to profitability. To support high-growth initiatives, risk management frameworks and accompanying strategies must be particularly adaptable to change.


Lessons from High Performers

Behind each of the five attributes that helps define and differentiate high performers are two factors: data analytics and the discipline to execute on key strategies.

If someone asked you to name your institution’s best customers, could you? Maybe you'd list those with the most money, but those may not be the accounts that are the greatest contributors to your profitability. It's very difficult to establish a good strategy – and execute on that strategy – if the institution doesn't understand what drives its profitability. High performers get it. They see the link between information, strategic thinking and the actions needed to achieve their goals.

Disclaimer: The views and opinions expressed in this article are those of the author(s) and do not necessarily reflect the official policy or position of the Financial Managers Society.

About the Author

Danny Baker, Vice President – Market Strategy, Financial and Risk Management Solutions, Fiserv
Danny Baker is the Vice President of Market Strategy within the Financial and Risk Management Solutions division at Fiserv, Inc. He is responsible for the overall market strategy and business development for the company’s risk management, performance management and enterprise financial accounting solutions.


May 10, 2017
How Risk Ratings Can Enable Optimal Growth for Financial Institutions 
By Elise Hauser, Product Marketing Manager, Sageworks

Today’s banking industry is defined by tight interest margins and increased regulatory oversight. At the same time that banks and credit unions are facing these challenges, threats from alternative lenders and mega banks make it imperative that institutions grow in order to achieve economies of scale and remain competitive and profitable. These opposing pressures mean that community banks and credit unions must optimize their opportunities to grow profitably while mitigating risk.

One way to increase profitability is to reduce the costs associated with managing risk. Banks and credit unions with efficient risk management processes will spend less time analyzing and evaluating risk in their portfolios, and thus will lower the cost of doing business. For many institutions, a best practice is a comprehensive risk-rating system, that -- when properly applied -- streamlines risk management across the institution.

Assigning a Number
A risk-rating system is deceptively straightforward: a reduction of the unique combination of risk factors on each individual loan down to one number, for example, a 3. Once a loan has been risk-rated as a 3, the institution is able to use that information to make decisions about that loan and the portfolio. This risk rating can also be used at nearly every stage of the credit process to lower the cost of managing risk. Developing, implementing and maintaining a risk-rating methodology that accurately and consistently measures risk can be challenging, but it offers tremendous payout.

Risk ratings are also useful in that they allow the bank or credit union to talk about risk in a standardized language across departments and across the life of the loan. Under a given risk-rating methodology, “a 3 is a 3,” meaning that everyone from the lending department to loan administration to those determining the ALLL have the same understanding of the risk level of a loan that is risk-rated as a 3. Distilling the credit risk of a loan into a single metric also allows the institution to track it over time and to see both the evolution of a single credit, as well as the portfolio as a whole.

One important note about risk ratings is that they are not in and of themselves a risk-reducing tool. They simply function to identify and categorize risk so that the institution can make informed decisions on pricing, terms and reserves based on its individual risk appetite. A strong risk-rating system allows the institution to optimize the balance of risk and reward that is right for them.

Ultimately, the single most important reason to make sure your risk-rating methodology is up to snuff is because risk ratings come into play at every stage of the life of the loan. If your risk-rating methodology is comprehensive and standardized, you have a powerful tool. If it is inconsistently applied or has gaps in coverage, then at best you aren’t able to use risk ratings when evaluating risk; at worst, you are making decisions based on faulty data.

How Ratings Help
To get a sense of just how crucial risk ratings are to every part of the credit process, consider a few different ways risk ratings are used at various points in the life of the loan:

Credit Analysis
Risk ratings come in handy even before a loan is booked. By assigning a risk rating to a loan during the initial spreads for a proposed loan, the analyst is able to see a holistic picture of the risk of that loan, and make a lending recommendation based on that information.

Loan Pricing
An important consideration when pricing loans is the level of risk the institution is taking on with that credit. Especially with pressures to price competitively, it is important that when the institution makes a pricing decision, it is adequately compensated for that risk. By risk-rating proposed loans, the loan officer or lending committee can make an informed decision about what price to set, or whether to walk away from the deal entirely.

Loan Administration
Throughout the life of any loan, it is important that the loan is risk-rated at regular intervals, such as annual reviews. The loan administration department plays a critical role in making sure that updated risk ratings are reflected in the management of the loan. For example, if a loan were to receive a worse risk rating at annual review, the institution may want to begin collecting additional documentation, update the terms of the covenants or make other changes to the way the loan is managed. These changes are implemented through the loan administration department, so they are also able to leverage the risk-rating on a loan to reduce risk through loan management.

ALLL and Stress Testing
When it comes to managing the risk of the entire portfolio, risk ratings come in handy in a variety of ways. Beyond just grouping loans by risk rating to stress test a particular segment, some ways risk ratings can be helpful in portfolio risk management include:
Migration of risk ratings by segment
Exposure in watch, special mention or substandard ratings
Changes in risk ratings under stress scenarios
Risk rating by loan officer

In today’s banking environment of tight margins and ever-increasing regulatory oversight, it is crucial that community banks and credit unions find ways to grow without compromising the desired risk levels of their portfolios. Risk ratings are crucial to accomplishing risk-managed growth. By implementing a robust risk-rating methodology, banks and credit unions can make credit risk management easier and more effective at every stage of the life of the loan.

Disclaimer: The views and opinions expressed in this article are those of the author(s) and do not necessarily reflect the official policy or position of the Financial Managers Society.

About the Author

Elise Hauser, Product Marketing Manager, Sageworks
Elise Hauser is a product marketing manager at Sageworks, where she manages new product marketing for Sageworks banking solutions.




MARCH 10, 2017
The Financial and Service Opportunities of Digital Lending Technology for Community Institutions
By Jeffrey Harper, President, BSG Financial Group

According to recent studies by both Goldman Sachs1 and Ernst & Young2, financial institutions stand to earn $30 billion in the next eight years by utilizing digital lending technology, which allows banks and credit unions to offer loans – for example, small business loans under $100,000 and consumer loans under $30,000 – online and in minutes from their website or via mobile phone. When contemplating this revenue opportunity, compare it to two decades ago, when NSF revenue tripled from $12 billion to $34 billion and interchange grew $6 billion to $18 billion between 2000 and 2010.

Online lenders like LendingClub and Prosper have capitalized on this market opportunity and have grown handsomely by offering the convenience of applying for loans digitally and getting funds quickly. Their focus on automating the lending process has helped them:
Outpace bank and credit union lending3
Capture the majority of unsecured consumer loans in 2015
Double their outstanding portfolio balances every year since 2000

The dramatic success of non-bank lenders, in fact, led industry advisory firm Bain & Company to say, “Banks need to accelerate investments in digital lending if they are to avoid a material decline in profits and loss in market share.” Likewise, consulting firm McKinsey; Company declared that financial institutions that do not adopt a digital lending solution could lose 60% of their retail and small business profits to non-bank entities in the next five years.

Technology Changes Everything
With digital lending, traditional loan profitability scenarios do not apply. For the past 20 years, many community institutions stopped making these loans altogether, because the cost to underwrite and service them far outweighed the income to be earned. Despite the fact that customers needed the money, it was simply not profitable, forcing account holders to seek the funding elsewhere, such as from a credit card, an alternative lender or even a competing institution.

Online lending technology changes the profitability scenario by streamlining the entire lending process – from application and underwriting to set up, review and renewal – via an end-to-end technology platform. Automating the lending process in this way can reduce the expense of processing and managing a loan from approximately $2,4004 to $1005 or less. These efficiencies can give an institution the opportunity, with only minimal effort, to re-capture loans previously lost to other funding sources, while improving customer service and reducing costs.

Additionally, with the right digital lending platform, the institution is able to utilize its own underwriting and risk-rating standards to manage risk and security. And because the institution controls the technology, it is able to keep all of the loans on its balance sheet as working assets, unlike partnering with fintech companies that typically retain ownership of the loans.

The financial opportunity that digital lending technology provides gets even better when you consider that in addition to garnering new loans and customers for your institution, it can also assist with managing existing loans. This added benefit is significant considering financial institutions currently hold more than $250 billion in small business debt that could easily and efficiently be renewed or refinanced using a consumer-friendly and efficient digital solution.

Digital is Key
Meeting consumers’ ever-increasing digital demands with an online lending solution just makes sense. A study by MagnifyMoney found that financial institutions with the highest digital adoption scores grew their assets 16 times faster than those less likely to adopt new digital technologies.

Further, banks that score highest in digital excellence measurements have reaped the lion’s share of financial rewards, according to BCG Perspectives in its 2016 Retail Banking Excellence (REBEX) benchmarking study. The report cited a 50% higher average pretax profit per customer than the median, while operating expenses per customer were 30% less. These impressive numbers are probably why more than 70% of financial institutions worldwide say that redesigning or enhancing the customer’s digital experience is one of their top three strategic priorities in 2017.6

Today’s consumers, especially millennials, seek easy, quick solutions. They use their phones to
accomplish the majority of their daily activities, and they will readily switch banks if they have a poor digital experience. With digital lending, your institution can reap the financial rewards of offering accountholders the ability to apply and get approved for the funds they need from their internet-enabled phone or desktop computer... anytime, any day, and all in less than three minutes.

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of the Financial Managers Society.

1https://www.scribd.com/document/268857182/Goldman-Shadow-Bank-Report-May-2015

2http://www.ey.com/Publication/vwLUAssets/ey-alternative-lending/$FILE/ey-understanding-alternative-lending.pdf

3  http://newsroom.transunion.com/transunion-analysis-finds-fintechs-outpacing-traditional-lenders-in-personal-loans-issued-to-near-prime-and-prime-borrowers

4  BAI Banking Strategies (https://www.bai.org/banking-strategies/article-detail/making-small-business-loans-profitably)

5  R.C. Giltner & Associates, LLC

6 Digital Banking Report (http://onlinebankingreport.com/subscriptions/browseresearch.html)


About the Author

Jeffrey Harper, President, BSG Financial Group
Jeffrey Harper brings more than 25 years of industry experience to his position as president of BSG Financial Group, where he heads up the Sales and Marketing divisions of the company.




FEBRUARY 15, 2017
Analyzing Your Institution’s Portfolio Risk Within Your ALLL  
By  Jamie Buzzerio, Sageworks

The allowance for loan and lease losses (ALLL) for financial institutions is typically viewed as a compliance requirement, with a prominence in external audits and examinations that demands that calculations and data be scrutinized to ensure accuracy and transparency. However, astute institutions should also consider evaluating how the information contained within this allowance function can be leveraged for other strategic insights. 

For example, the following four scenarios are ways that management can use existing allowance-calculation data to better understand the risk in their portfolio and provide even more risk intelligence.

Track movement of loans by segment
to identify trends in portfolio growth
Institutions can review growth patterns of the loan portfolio by looking at their segments and by reviewing their balances. If a specific segment has grown significantly, the institution can begin to identify and document the reasons for changes in loan demand and supply. 

On its own, this data may not tell the institution precisely where to focus its growth efforts, but it can certainly be a starting point in understanding where lenders are seeing the most success, or perhaps where the most time and resources are being allocated. If the results do not align with management expectations, the lending strategy may need adjustment. 

This type of analysis can also be extending to cover trends in delinquencies, restructuring of problem assets and concentrations. In combination with growth patterns, these trends show where the institution’s growth has been healthiest.

By collecting and archiving loan data each period, all of this information is available for detailed review and trend analysis. The more granular the data (i.e., monthly instead of quarterly) the faster the institution can begin to identify critical trends, and it goes without saying that the integrity and accuracy of the data are paramount. 



Measure overall asset quality
Asset quality indicators that are used in loan-level ALLL calculations can also be used as a benchmark for portfolio credit quality over time and for comparison to peer institutions. A few commonly used ratios that capture portfolio performance as it relates to the allowance include:

■ Allowance to Total Loans
■ Allowance to Net Losses
■ Allowance to Nonaccruals
■ Recoveries to Total Loans
■ Net Losses-Earnings Coverage Ratio
■ Nonaccrual Loans to Total Losses

Details from the ALLL and benchmarks like these are an important part of the management reporting process, and can provide clues to both the board and examiners regarding the health of the institution. 

During the business cycle, the collectability of certain loans may change in light of changing economic conditions. If an institution grants loan concessions without accurate exception reporting as part of ALLL, what will happen if those loans take a turn for the worse? The loss needs to be recognized immediately, as opposed to reserving specific dollar amounts over an allocated period of time. This is where the FASB’s current expected credit loss (CECL) model becomes relevant, by requiring institutions to set reserves for the full life of their loans.

Evaluate loss experience to identify trends

Begin by reviewing charge-offs based on different characteristics, such as location, NAICS, MSA, loan size, type of loan or loan officer. Because charge-offs and recoveries are tracked quarterly, if not monthly, this information is available for use in different reports. Information from the pooled loan summary can allow an institution to use these specific charge-off characteristics to examine the loan portfolio in more detail as such:

■ The location and size of charged-off loans can help determine which geographic areas may be presenting the most issues, as well as the extent of those relationships
■ Segment data can reveal if a certain concentration is causing more issues than others 
■ Loan officer information can highlight if individuals are making riskier loans and how rates are priced based on risk

Loans should also be reviewed by segmentation to determine which loans show the best source of repayment. This includes the review of workout experiences and loan liquidations, which can help in evaluating expected recoveries, as well as enhancing future lending policy and potential covenants for new loans.

Create a stress test to bolster the institution’s risk management framework and supplement ALLL
An institution estimating loss rates by pool within the allowance can use these loss rates as the framework for portfolio-level or top-down stress tests, with existing loss rates as the baseline scenario. With data from the ALLL, the institution can: 

■ Stress test the ALLL to ensure adequacy of the allowance
■ Identify key factors used for stress testing
■ Modify qualitative adjustments
■ Provide supporting documentation 
■ Expand concentration stress testing

Risk can be identified by understanding trends and shifts in loan concentrations, delinquencies and other areas. Understanding the risk in a portfolio will help the institution modify its lending strategy, whether by a shift in concentration or an overall policy change.

Loss experience and historical data that is collected as part of the ALLL can provide direction for an institution’s credit risk analysis and subsequent action plans for risk management. In addition to these specific exercises, a data-driven ALLL also improves data-collection practices at the institution, a strength that will be all the more important under the coming CECL model.

Disclaimer: The views and opinions expressed in this article are those of the author(s) and do not necessarily reflect the official policy or position of the Financial Managers Society.

About the Author

Jamie Buzzerio, Senior Risk Management Consultant, Sageworks
Jamie Buzzerio is a senior risk management consultant at Sageworks and is responsible for working with financial institutions with their ALLL and stress testing processes. Jamie has twenty years of experience in the financial industry, and has served in a VP role for several positions as an impairment manager, credit administration manager and portfolio manager.



FEBRUARY 2, 2017
The Business Case for Streamlined Reconciliation   
By Eric Werab, Global Product Line Manager, Financial Control Solutions, Fiserv

How much time have you wasted attempting to manually combine spreadsheets and data from across your institution? Hours? Days? Weeks? With today’s digital resources at your fingertips, would you even consider spending hours manually searching through printed documents to ensure you have an accurate view of the balance sheet? Think about it. You don’t manually search through a catalog to find books at the library or wait two weeks to develop film from a camera. Why would you still use an outdated method for reconciliation? 

Yet more than half of North American companies surveyed in a 2016 study by the Financial Executives Research Foundation still reconcile accounts manually. The same study also uncovered the amount of time spent on this pursuit – accounting and finance managers work an average of 46 hours per week, peaking at month- and quarter-end. Respondents reported that trying to modernize systems to allow existing workers and resources to do more with less, harvest data and create efficiencies with technology are among the most common challenges facing senior-level financial executives today.

These challenges certainly come into play for community institutions. CFOs and finance professionals need to have access to a single view of an accurate and updated balance sheet at any given time. However, multiple systems and various teams managing the reconciliation process can cause delays and allow for human error across the accounting record.

Automating and streamlining the reconciliation process, on the other hand, can save valuable time and increase the likelihood that errors are identified and rectified quickly. Implementing a robust, accurate reconciliation process also ensures that organizations have the ability to stay ahead of the competition and remain compliant with industry requirements, while continuing to deliver a high level of service to customers.

So where do you start building a business case to achieve these potential benefits?

Step 1 – Determine the Total Cost of Manual Processes
The first step in implementing an automated reconciliation process is to realize the true projected cost for a manual system, which includes not only hard costs, but also the soft costs associated with maintaining the status quo. 

One of the easiest hard costs to quantify is the cost of the manual work required to compare and reconcile data from different systems, manage the exceptions and certify the results. To do so, most organizations will start by calculating the number of hours spent on reconciliation each month, time that typically includes allocations to some or all of the following activities:

■ Collecting and aggregating data from
   multiple systems
■ Preparing reconciliations
■ Matching balances and transactions
■ Managing exceptions
■ Printing reconciliations
■ Reviewing and approving reconciliations
■ Tracking approvals
■ Reporting on approvals status
■ Retrieving reconciliations for auditors

Once the total number of hours is calculated, it is multiplied by twelve to represent hours for an entire year period and multiplied by the average fully loaded cost (salary plus benefits) of a full-time-equivalent (FTE) employee working on the reconciliation and certification process. This calculates the annual hard-dollar expense (labor) of managing the current process.

After this calculation, other hard-dollar costs – including write-offs due to unresolved exceptions, annual audit fees and document storage fees – should be added in. Together, the sum gives the institution a good snapshot of the current hard costs of the process. This calculation should also include estimates of softer costs such as the cost of errors, late closings or the costs related to being out of compliance with corporate policies, industry financial standards or having to reissue financial statements to the market.

Step 2 – Outline the Benefits of Implementing an Automated Solution
Once the cost of the current approach has been fully tabulated, the next step is to understand the potential advantages of moving to a more modern, end-to-end reconciliation solution. The ability to bring transaction-level and balance-level data together in a single system allows the institution to see detailed information on why exceptions have occurred and how they can be resolved. Workflows are used to fully automate the process, including a series of automated checks that ensure organizations remain compliant with corporate and industry requirements. 

By automating the end-to-end reconciliation process, companies can quickly and cost effectively track exceptions through to resolution, and realize the following potential benefits:

■ Major increases in operational efficiency from centralizing the reconciliation process through a single service model
■ More accessible, accurate and compliant balance sheets
■ Reduced compliance and reputational risks
■ A better customer experience, thanks to an effective, real-time service whenever they demand it
■ A focus on more profitable activities throughout the organization, thanks to the time saved on closings, exception management, routine compliance and financial governance activities
■ Though harder to quantify, an increased level of confidence among staff and executives, thanks to the greater accuracy of the institution’s financial reporting

Step 3 – Choose the Right Technology
and Partner
Step 3 – Choose the Right Technology and Partner
Individual systems often contribute to disjointed reconciliation processes, which is why choosing a technology solution to combine all of them, including the general ledger system, is vital. The solution an institution chooses needs to meet the demands of providing a single version of its accounting records.

In addition, ongoing reconciliation management will require updating from the management of manual processes. Reconciliation specialists from across the business should establish a set of rules that remain consistent across all aspects of the reconciliation process, and define these rules using comprehensive process templates to ensure clarity and transparency across the entire business.  

The scope of a reconciliation system and the scalability of the model are additional factors to consider. The flexibility to meet any change in transaction size is essential, as is having the ability to easily integrate new acquisitions or business lines into the system. 

Finally, the solutions partner an institution ultimately chooses should be one that focuses on client feedback and market trends, caters to the individual challenges and needs of the institution and continues to make significant investments in its product line.

The culmination of this process should ultimately be a more efficient, accurate and standardized end-to-end reconciliation process for your institution, ensuring streamlined operational efficiency and regulatory compliance. 

Disclaimer: The views and opinions expressed in this article are those of the author(s) and do not necessarily reflect the official policy or position of the Financial Managers Society.

About the Author

Eric Werab, Global Product Line Manager for Financial Control Solutions, Fiserv
Eric Werab is Global Product Line Manager for Financial Control Solutions at Fiserv. He works with global clients to understand their internal control needs and directs Fiserv strategy for reconciliation and financial control solutions to meet these needs.




FEBRUARY 2, 2017
FOMC opts to hold steady amid improving conditions  
By Robert B. Segal, CFA, Atlantic Capital Strategies, Inc.

Following a two-day policy meeting in Washington, Federal Reserve officials unanimously held their benchmark rate steady in a range between 0.50% and 0.75%, while noting in a statement some recent improvements in the economy.

The Fed provided little direction on when it might next raise borrowing costs, as officials debate the impacts of policy changes with the new administration. The central bank currently projects three rate hikes for 2017, though committee members differ on how proposed tax cuts and regulatory changes may boost growth and inflation.

Looking Ahead
“Measures of consumer and business sentiment have improved of late,” the Federal Open Market Committee said in its statement Wednesday. Policy makers reiterated their expectations for moderate economic growth, “some further strengthening” in the labor market and a return to 2% inflation.

The FOMC also repeated that it anticipates interest rates will rise gradually. The statement said job gains “remained solid” and the unemployment rate “stayed near its recent low,” a tweak from December’s language that the rate “has declined.”

“Inflation increased in recent quarters but is still below the committee’s two percent longer-run objective,” the Fed said. Market-based measures of inflation compensation are “still low,” the central bank said, after suggesting in December that such measures had “moved up considerably.”

The committee left unchanged its stated intention to continue reinvesting its maturing debt holdings until “normalization” of the benchmark rate is “well under way.” The Fed’s balance sheet stands at about $4.5 trillion.
Fed Chair Janet Yellen, who didn’t have a press conference scheduled after this meeting, will have the opportunity to discuss the decision further during her semiannual monetary-policy testimony to Congress in mid-February. The FOMC next meets on March 14-15.

Before the latest statement, investors saw a roughly 38% chance that the first rate increase of 2017 would come at the Fed’s March meeting, based on trading in federal funds futures. The odds rose to about 52% for the subsequent gathering in early May and 75% for mid-June. The market forecast is currently calling for two hikes in the next two years and one in 2019. This would bring the overnight rate to 1.12% for December 2017, 1.62% at year-end 2018 and 1.87% for 2019. 

Tough Decisions
With bond yields still near historic lows, investors in fixed-income securities face a dilemma. Short-term bonds offer sub-par yields, but provide reinvestment opportunities in a rising rate environment. On the other hand, longer-term bonds secure a higher yield, but present larger losses if market rates rise.
 
Ten-year Treasury notes currently yield about 2.50%, not a great return given the interest rate risk in holding the security over the next decade. If yields were to climb 100 basis points to 3.50%, the price would drop almost 9%.  In this scenario, a five-year Treasury issue yielding 1.9% would lose 4.6%, and a 1.2% two-year note would drop 2%.  Even if bonds are held to maturity, experiencing price losses only on paper, the investor still foregoes the opportunity to earn higher returns if yields rise. 

The opposite would occur if rates fall, resulting in a sharp rally and producing sizeable unrealized gains. If this were to happen, the investor benefits from having locked in above-market yields. The investor is faced with the challenge of managing a portfolio structured to perform in either scenario.

One solution is to create a “bond ladder.” A laddered portfolio consists of securities that mature in successive years, starting in a few years and extending out to five years or longer. Assembling a stable basket of cash flows avoids locking in all of one’s funds at “low” yields, while enabling the investor to pick up some additional income. 

The benefit of a ladder is that as rates move higher, bonds coming due in the near term can provide funds for reinvestment when the alternatives may be more attractive. Depending on the investor’s preference and individual situation, the principal can be put to work at the desired maturity. If current yields are higher than the bonds rolling off, the investor is able to increase overall returns and boost portfolio performance.

At the close of every year, it seems the market prognosticators predict higher rates for the ensuing twelve months. Heeding these warnings, many investors flock to ultra-short-term bonds, sacrificing income. According to academic studies, by investing the bulk of the portfolio in short-term, low-yield bonds, investors are exposed to a different risk over time: earning low yields. There is an opportunity cost of sitting at near zero and waiting for higher rates, as the conventional wisdom about bonds does not always play out. Just as a well-balanced portfolio consists of several types of investments, so too should it contain a well-structured schedule of maturities.

Disclaimer: The views and opinions expressed in this article are those of the author(s) and do not necessarily reflect the official policy or position of the Financial Managers Society.

About the Author

Robert B. Segal, CFA, Founder/CEO, Atlantic Capital Strategies, Inc.
Robert B. Segal, CFA is founder and chief executive officer with Atlantic Capital Strategies, Inc. Bob has been in the banking industry since 1982, having worked in several community banks with roles in mortgage banking, sales and trading, and asset liability management. He is a frequent speaker at industry events and contributes to many regional and national finance publications. His firm provides investment advisory services to community-based institutions. Bob can be reached at bob@atlanticcapitalstrategies.com or 781-276-4966.







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