A collection of observations, ruminations, predictions and random thoughts from Cornerstone Advisors.

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February 3, 2016 by Joel Pruis Joel Pruis

CECL: The ‘Blind’ Leading the Blurry?

The painstaking regulatory and reporting burden that has plagued consumer and mortgage lending for decades is coming to the world of commercial lending fast—and its name is CECL (Current Estimated Credit Losses, pronounced like the name “Cecil”).

The name Cecil means “blind,” which is ironic, because FASB’s upcoming guidance will push FIs to clarify the future performance of their loan portfolios by using models to predict CECL of all loan portfolios. Achieving this objective for commercial portfolios is virtually impossible, however—in the short term, at least—due to the lack of useable data to produce any model with statistical relevance.

The key word here is “useable.” Banks have data on their commercial portfolios, it’s just not useable because:

  • Data is captured in Word documents and Excel spreadsheets. To make this type of information useable means hiring a bunch of interns to pore through the mountains of paper documents, Word and Excel files to convert into specific data elements.
  • Metrics are not standardized. You may want debt service coverage to be 1.25, but how did you modify the formula to define it from company A to company B?
  • Current risk ratings aren’t helpful. How helpful are risk ratings as a risk assessment tool if 80%+ of the portfolio is in a single category? Additionally, the overall accuracy of the individual risk ratings given the subjective criteria such as “generally performs in line with industry” or “adequate collateral support” is suspect in many banks today.
  • Past charge offs/loss data is unavailable. How far back did the bank retain this data?

Banks need to establish plans to ensure that they maximize the value of the CECL effort. Approaching CECL from a singular vision of estimating credit losses on commercial loans for just Allowance for Loan and Lease Losses (ALLL) reporting is a waste of time. While banks will work to comply with the FASB guidance, this major effort has the opportunity to be much more far-reaching and provide greater vision and overall benefit in risk assessment and forecasting than ever before.

Maximizing the Value of CECL Models

The typical formula to estimate future credit losses is as follows:

PD (Probability of Default)

X EAD (Exposure at Default)

X LGD (Loss Given Default)

= Current Expected Credit Loss


In addition to CECL, this model can be beneficial for:

  • Loan Pricing. With greater granularity and future accuracy of the risk assessment from this model, banks can provide greater accuracy in the risk premium portion of the pricing model. Instead of just the operational cost of originating a loan and/or maintaining the relationship along with the cost of funds, bankers can layer the potential loss factor to the loan and relationship to determine pricing. Instead of just negotiating for more deposits (assuming the deposits are actually realized), banks can modify the risk factors to reduce the probability of default or improve the collateral coverage to reduce the loss given event of default.
  • Portfolio Monitoring. For credits with a relatively high probability of default, but low loss given event of default, managing the credit should always focus on the collateral first. If a bank discovers that the relationship risk has increased, the institution’s first action should be to ensure it retains appropriate perfection of its security interest and that the value of the collateral has not deteriorated. On the flip side—with a low probability of default but high loss given event of default—a credit officer’s first priority is to make sure nothing has changed with the repayment capability of the borrower, because should payments stop, the bank has major problems.
  • Risk Rating Updates. Banks have an opportunity to get rid of narrative and judgmental-based risk ratings, and more systematically update the risk assessments as new information is received. They can: 1) spread a statement, 2) update collateral value, 3) note changes in industry performance, and 4) update the value of the current estimated credit loss.
  • Stress Testing. How will the impact of declining rent/square footage rates in office space impact a bank’s commercial real estate portfolio? If the collateral value drops, impacting our loss given default, what does that do to the expected loss? For those credits where the expected loss drops too far, banks can assess their options to lower probability of default to compensate.

Getting Started with CECL

The bank’s credit group needs to lead two concurrent efforts: 1) collect the data, and 2) develop the model framework.

It’s a framework because without sufficient data, banks are left to make educated guesses as to which factors to include and the overall weight of each of the factors in calculating future estimated losses.

As banks start the data collection process, they will quickly realize that, in the commercial line of business, data is stored in Microsoft platforms (Word, Excel, Access), financial statement spreading platforms (Moody’s, Baker Hill), ticklers in core accounting system, and in paper files.

This makes it virtually impossible to export the data into a single platform or data warehouse. To make matters worse, banks need to link the information not only to individual borrowers but to related entities (such as guarantors, owners, and affiliated companies).

In order to incorporate the model into the daily operations, banks need to associate the CECL model with a commercial loan origination platform. That’s no easy task, either.

Loan origination platforms differ greatly in terms of functionality regarding CRM, statement spreading, loan documentation, and other functions. CECL adds another level of required functionality.

Challenge the Vendors

Banks need to challenge their vendors to develop capabilities for CECL data collection, modeling, and analytics. Banks undergoing commercial loan origination system selections should make sure CECL is part of the requirements. For banks not planning on a new commercial LOS, 2016 might be a good year to start the process given this could become the foundation for all things CECL.

The worst thing a bank can do about CECL is wait. Don’t wait for CECL to become adopted; don’t wait for some point in the future where you might have more capacity. Don’t wait for some miracle technology platform to appear that will suddenly have all the data you need. Open your eyes and get started on the hard work of data standardization and model development!

Ready to challenge your vendors?

Cornerstone Advisors can help. We’ve guided hundreds of financial institutions through technology assessmentssystem selections, and system conversions, and we have the vendor knowledge and expertise to help you make educated decisions about your commercial loan origination systems.

Contact us today to learn more.


Filed under: Consumer Lending, Mortgage Banking

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January 14, 2016 by Ron Shevlin Ron Shevlin

New Marketing Competencies for Community-Based FIs


Hey, community bank and credit union marketers: Imagine that you’re sitting in your office, and your CEO comes in and says, “Got a minute? I’m putting together a presentation for the board, and I need to tell them what the Marketing department is really good at.”

You’ve got a minute. What do you say?

I would bet that of the many possible ways you might describe what your Marketing department is good at, you wouldn’t say, “We’re really good at reflecting the organization’s commitment to the community, our genuine concern for our fellow citizens, and our professionalism.”

[You wouldn’t say that, yet, when asked what he wanted from his Marketing department, one credit union chief executive officer actually said, “I want our marketing to reflect our commitment to the community, our genuine concern for our fellow citizens, and our professionalism.”]

My guess is that your description of what your Marketing department is really good at would tend toward some generic, high-level statement like, “We’re really good at understanding our customers’ financial needs,” or, “We’re really good at creating a strong affinity for the institution among our target market.” A few marketing execs might get more granular and say, “We’re really good at getting prospects in the door.”


The inability to pinpoint exactly what your Marketing department is really good at–and perhaps, not really good at–reflects a strategic shortcoming for many community-based FI marketers. Marketing strategy isn’t simply about what projects and campaigns the firm is going to execute next year–it’s about building capabilities and competencies that will enable the successful execution of those projects and campaigns.

Yet, in my experience, nothing puts senior executives to sleep faster than talking about core competencies.

What many marketers at community-based FIs don’t recognize is that their core competency–that is, what they’re really good at–is executing traditional media advertising and marketing campaigns. The end results of those campaigns might vary–and might even be unsuccessful–but what Marketing is good at is getting them done.

In a recent survey of marketers (across industries), nearly seven in 10 thought they were effective at generating awareness. Less than half thought they were good at driving purchase.

My bet is that the percentage of financial services marketers who think they’re effective at driving purchase is way less than half.


In the past, the point of influence–not just the point of sale–was the branch. It wasn’t just where the order was taken (i.e., the account opened)–it was where the consumer actually made the decision to do business with that financial institution.

Today, it’s very different. Sure, a majority of account applications are taken in the branch. But that doesn’t mean the consumer’s decision of who to do business with is made there. Thanks to technology, that decision is often made long before someone walks into the branch.

What this means is that in the past, Marketing’s potential to drive purchase was limited. Marketing could get people in the door–but it was someone else’s job to close the sale.

Today, Marketing’s potential to close the sale is much greater.

In many community-based FIs, however, Marketing isn’t good at doing that. That has to change. Whether it puts you to sleep or not, Marketing must develop new competencies to succeed–and help its FI to succeed.


There are three competencies Marketing at community-based FIs needs to succeed in banking today: 1) activity-based marketing, 2) customer journey mapping, and 3) customer data management.


If you think about it, most traditional marketing happens outside of the actual process the marketing activity is trying to influence. We’re watching our favorite TV program when a commercial for a bank comes on and tries to convince us to switch banks. Or we’re sitting on a train, commuting to work, reading a newspaper (probably online), when a banner ad flashes in our face, trying to get our attention to tell us we should be banking with them. We weren’t exactly thinking about banking at those times.

If you’re good at getting people’s attention when they’re doing other things and getting them to think about marketing, good for you! Keep it up!

But increasingly, as mobile technologies like the smartphone and tablet assist us in everything we do, marketers will need to develop tools and capabilities (i.e., mobile apps) that shape and guide those activities, and influence consumers to do business with that marketer.

That’s what activity-based marketing is: marketing within the context of an activity being performed by a customer or prospect.

There are a number of great examples of financial institutions doing activity-based marketing:

1) USAA. USAA’s Auto Circle app changes the car buying process by providing car shoppers with an app that lets them search for the type of car they want, track those cars for future reference and comparison, get a loan for the car when they’re ready to buy it, and insure it as well. Transformation of the car-buying activity or process.

2) Commonwealth Bank. This Australian bank’s Zillow-type app manages the home buying process. It uses augmented reality technology to let a user “take a picture” of a home or building, determine the location, access the Realtor Database, and display the price and details of the home if it’s for sale. This app enables Commonwealth to identify potential mortgage customers long before it was able to do so in the past. I don’t know if Commonwealth does this or not, but the app could give other marketers interested in reaching new movers–who typically spend thousands of dollars in the six months after moving—an opportunity to reach prospects even before they move, enabling Commonwealth to generate advertising revenue.

3) Caixa Bank. This Spanish bank has developed a mobile app that transforms the ticket-buying process for events like movies, sports, and concerts.

20160114 Gonzo post ABM


These FIs aren’t simply trying to influence who a customer applies for a loan with, or which payment mechanism a consumer uses to pay for something. They’re using mobile technologies to change the entire process–not just the banking part of it. By doing so, they’re creating awareness of what the FI has to offer, generating positive affinity by creating a superior experience, and driving the final purchase (or application).

Although many community-based FIs will say they don’t have the resources to develop these kinds of mobile apps, gaining a competitive advantage through traditional media (TV, radio, direct mail) advertising–that is, relying on traditional competencies–is unlikely to work. Large FIs are just as good at it and have a lot more money to spend on it.


To be proficient at activity-based marketing requires a lot more than just mobile technology development capability. In fact, it doesn’t even require that at all, since that’s easily outsourced.

What community-based FIs must be good at–in order to be proficient at activity-based marketing–is customer journey mapping. This is the process by which marketers understand what actions consumers take in an activity like car shopping or home buying, what consumers are thinking about during the process, what they’re feeling, and–this is the important part–what opportunities the FI has to add value and gain a competitive advantage.

Journey mapping requires data about customers and prospects. Which is why customer data management is the third new competency community-based FIs must have. If you think you know a lot about your customers/members today, we think You Don’t Know Jack.


Writing in-depth about journey mapping and customer data management would turn this post into a white paper. To learn more about the new marketing competencies for community-based FIs, join me at Deluxe Exchange 2016 on February 10, where I’ll be presenting these ideas in detail.




Filed under: Marketing

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January 4, 2016 by Emily Waite Emily Waite

Collaboration: The New Competitive Weapon

151217aIn an industry where the top five institutions control more than half the market share, it amazes me how few of the 6,000 other banks are taking advantage of shared insights and resources to compete. There is strength in numbers, and there’s absolutely no reason for community bankers to try to compete against players a hundred times bigger on their own.

Today, bank executives are struggling to stay current in an industry growing ever-more complex with increased regulation, changing customer expectations and digital disruption. Threats to the banking business model are coming from new, unanticipated competitors. Unfortunately, amidst all the chaos, many bankers are failing to leverage their most effective competitive weapon: collaboration.

As consultants, we haunt the halls of industry conferences. We see the types of content being shared through social media. For the most part, these channels are flooding executives with high-level “what” observations and doing nothing to help them make strategic “how” decisions or adopt new operating tactics.

Creative collaboration among bankers can be turned into collective intelligence. As bankers build bonds with peers through collaboration, they open up new opportunities to jointly invest capital in new ventures and strategies. They share insights as to what works and what failed miserably. They find new opportunities to accelerate development and drive stronger performance in areas like mobile technology, business intelligence, shared back-office services and cybersecurity.

In our business, we’ve seen what can happen when executives get together and share challenges, identify opportunities and develop strategies to enhance their performance and improve their bottom lines. At recent GonzoBanker Roundtables, numerous examples emerged of bankers collectively working to strengthen their competitive position:

  • 151217bCEOs identified board risk appetite statements and risk indicator dashboards as a key priority. They shared the content and format of their policies to identify best practices.
  • Tackling the topic of digital signatures, CIOs developed a specific action plan for incorporating Docusign technology into the commercial lending process.
  • Chief retail officers explored new strategies for acquiring small business relationships to effectively grow core deposits.
  • Retail executives collectively evaluated their Retail organizational structures to determine the most productive distribution of departmental ownership and experience management.
  • Bankers shared tactics around e-marketing and social media that resulted in new ideas for marketing campaigns to help with payment growth initiatives.

By committing to a discipline of peer collaboration, bankers are able to create a trusted network that can be tapped into on a regular basis. This network means dozens of sharp and experienced peers can act as real-world consultants in a way that more bureaucratic large banks cannot emulate.

When bankers can get together and share first-hand experiences, when they can be brutally honest with each other and build mutual trust – remarkable things happen. Your peers just may have the answer to this year’s growth and earnings challenges.


Let’s shake things up!

Looking for a great way to share information, insights and ideas with peers? GonzoBanker Roundtables are the place for like-minded bank and credit union executives to hone their collaboration strategies. Check out our 2016 schedule below. Email Emily Waite for more information.

GonzoBanker Bank CIO RoundtableScottsdale, Ariz.Mar 20-22
GonzoBanker Bank Chief Risk Officer RoundtablePhoenixApr 3-5
GonzoBanker Bank CFO RoundtablePhoenixMay 15-17
GonzoBanker Bank Chief Retail Officer RoundtableSan DiegoMay 22-24
GonzoBanker Bank CEO RoundtableSan DiegoJune 5-7
GonzoBanker Bank HR Executive RoundtableMiddleburg, Va.June 12-14
GonzoBanker Bank CIO RoundtableNew OrleansSep 25-27
GonzoBanker Bank Head of Payments RoundtableScottsdale, Ariz.Nov 2-4
GonzoBanker Credit Union Consumer Lending Officer RoundtablePhoenixMar 13-15
GonzoBanker Credit Union Retail Executive RoundtablePhoenixMar 23-25
GonzoBanker Credit Union CEO RoundtablePhoenixApr 17-19
GonzoBanker Credit Union CIO RoundtableChicagoMay 1-3
GonzoBanker Credit Union CFO RoundtableSan DiegoSep 11-13
GonzoBanker Credit Union HR Executive RoundtableScottsdale, Ariz.Sep 18-20
GonzoBanker Credit Union Marketing Director RoundtablePhoenixOct 2-4
GonzoBanker Credit Union CIO RoundtableScottsdale, Ariz.Oct 9-11
GonzoBanker Credit Union ERM Executive RoundtablePhoenixOct 16-18
GonzoBanker Credit Union Head of Payments RoundtableScottsdale, Ariz.Nov 13-15

Filed under: Best Practices, Branch Sales & Service, Cards & Payments, Consumer Lending, HR & Training, Information Technology, Retail Banking, Risk Management, Strategy, Web & Mobile Banking

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