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FMS forward Magazine: November/December 2018 Issue

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Published by fmsdesign, 2018-10-25 16:24:36

FMS forward Magazine: November/December 2018 Issue

FMS forward Magazine: November/December 2018 Issue

Keywords: Magazine,Finance

NOVEMBER/DECEMBER 2018 | FMSinc.org

A PUBLICATION OF THE FINANCIAL MANAGERS SOCIETY

GETTING READY FOR 2019

aLtOthOe mKacro landscape

1 tAheSiSmEpSacSt of CECL

hLoEwAaRndNwhy to stress test
wCitOh uNnNbaEnkCeTd and younger customers



Contents NOVEMBER/DECEMBER 2018 | VOL. 2, ISSUE 6

forward, a publication of the 12
Financial Managers Society
1 North LaSalle Street 26 POINT-COUNTERPOINT
Suite 2225 Two industry veterans trade
Chicago, IL 60602-4003
FMSinc.org | 800-ASK-4FMS perspectives on the potential impact
of CECL
FMS EDITORIAL STAFF
DANIELLE HOLLAND 22 Departments
President and Chief Executive Officer
MARK LOEHRKE Features 6 MEMBER SPOTLIGHT
Editor and Director, Louise Bonvechio of Community
Publications and Research 12 EYE ON ‘19
HILARY COLLINS John Behringer discusses what’s in National Bank talks about the
Specialist, Publications and Research importance of cybersecurity and
KIM SIMONI store for the banking industry in the information technology
Manager, Sponsorship and Meetings year ahead 8 70TH ANNIVERSARY
TAYLOR WEATHERS
Manager, Membership 16 FOREVER YOUNG Meet a few of the new members and
LYNDSEY WARNER CAULKINS How are banks and credit unions
Layout and Design leaders who will help define the next
doing when it comes to appealing chapter in the journey of FMS
2018-2019 to young people – both as
customers and employees? 34 ON THE HORIZON
FMS EXECUTIVE LEADERSHIP
18 VOLUNTARY STRESS A look at our educational lineup
STEVEN M. FUSCO, CMA, CFM
Chairman How and why to stress test now – 8
MIKE GUGLIELMO even if it’s not required
Vice Chairman
DARRELL E. BLOCKER, CPA 22 A FAIR SHAKE FOR THE
Immediate Past Chairman
UNBANKED
Copyright© 2018
Financial Managers Society, Inc. A new partnership works to bring the
All rights reserved.
unbanked into the fold

FMS forward | NOVEMBER/DECEMBER 2018 | 3

FROM THE CEO

BY DANIELLE HOLLAND The holidays are a special time of year. While the
stretch from Thanksgiving to Christmas can feel
hectic, it’s important to find time to reassess your
priorities and set new goals. Here at FMS, we are
committed to helping you achieve the goals you set
for your institution and give you a head start on the
shifting priorities of the banking world.

Looking back on 2018, we are proud of But even though the end of the year
what we as an organization achieved, offers the perfect opportunity to look
including a record-setting Forum in back fondly, it also provides a wonderful
Orlando, another successful Financial vantage point to look forward. In 2019,
Managers School in Madison, Wisconsin, we are excited to bring you even more
and considerable growth in new members. complementary webinars, immersive
We spent the year celebrating 70 years seminars, premier publications, proprietary
of industry thought leadership and research and another wonderful Forum.
premier education by welcoming over In fact, now is the perfect time to make
200 members of AMIfs into the FMS your plans to join us in Boston next June
community – helping to bring our total for The 2019 FMS Forum—register by
membership number up to 1,600 and December to take advantage of the early
now reaching more than 900 member bird rate!
institutions. Our members are taking
advantage of more education and Finally, we here at FMS wish you happy
networking opportunities than ever holidays, and look forward to another year
before, providing them a competitive edge of bringing you the tools you need to be
in the industry. successful in an ever-dynamic industry. §

4 | FMS forward | NOVEMBER/DECEMBER 2018

EDITOR’S LETTER

BY MARK LOEHRKE As you’ve probably noticed over the past In fact, this whole issue is really more of a
five issues of the magazine you’re now glimpse into the future than a rumination on
holding (or flipping through online), we’ve the past (as so many year-end publications
spent a good part of 2018 digging through tend to be). From industry veteran John
the FMS archives to find different ways Behringer’s outlook for 2019 to a piece on
to acknowledge and celebrate our 70th the benefits of setting up a stress testing
anniversary. Whether honoring longtime regimen to an insightful fly-on-the-wall
members, revisiting our bygone hieroglyphic conversation between FMS board member
logo or just getting a kick out of some of Larry Sorensen and Farin’s Rob Newberry
the anachronistic publications and images on the potential impact of CECL, we’ve put
from the past seven decades, it’s been an together a group of stories that are all about
enjoyable stroll down Memory Lane. getting your institution ready for what’s
next – as opposed to simply rehashing
But every good party has to come to an end. what’s passed.
So as we sat down to plan out this final
issue of the year, we went through several Because as every bank and credit union
ideas for how to cap our 70th anniversary well knows, while there’s certainly a time
retrospective. And although we batted and place for reflection and tradition, this
around a few possibilities for another dive industry waits for no one. As always, thanks
into the annals, it soon became clear that for reading. §
really the best way to close out the yearlong
tribute to our past was to instead look 1948 2018
forward (no pun intended).
ANNIVERSARY
That’s why our final 70th anniversary
feature in this issue features short profiles
of four professionals who represent the
bright future of FMS. From a pair of brand-
new members to a couple of new leaders
on our advisory councils, these folks honor
the history of FMS by pointing to its ongoing
vitality, and we’re certainly happy to have
them aboard.

FMS forward | NOVEMBER/DECEMBER 2018 | 5

FMS MEMBER SPOTLIGHT

Bio in Brief

Louise Bonvechio

Title: SVP, CFO
Institution: Community National Bank
– Newport, Vt.
Asset Size: $655 million
Years in current position: 10
Years as an FMS member: 14

What is the single biggest
challenge facing your institution
right now?
A quick response to this question could be
growing deposits or cybersecurity. While
both are real challenges, we have plenty of
resources and vendors – even the regulators
– with the next best solution or guidance to
help us address those challenges. We’re risk
managers – we’ll figure those things out.

But a very real challenge facing our
institution, our industry and, frankly, every
industry that I know of is attracting skilled,
talented or trainable employees. The lack of
a qualified workforce is challenging at every
level in the bank. We export our kids each
year to other states as they go off to college
and rarely find their way back home to rural
Vermont. It makes it very difficult to fill

Working for a community bank is easy,
because one of the unwritten rules we live by
is ‘we will always do the right thing.’

6 | FMS forward | NOVEMBER/DECEMBER 2018

positions with qualified workers, particularly What advice would you offer to What roles outside of accounting
in the areas of IT and even lending.
someone entering the banking and finance have you held and
Our organizational structure has also
flattened significantly, with less perceived profession? how have they helped you in your
opportunity for advancement. Management Don’t be afraid to roll up your sleeves and
succession and identifying the next group get in the weeds. There are so many aspects current position?
of leaders for the bank is a real focus for our of banking that are unique to this industry Being a community banker means
management team right now. that the only way to learn them is by doing. volunteering on boards of nonprofit
Spending time in the back office of loan organizations. While by design this means
How has your role changed over the servicing or collections will make you a giving of my time to others, I can say that I
past five years? better lender. Working as a teller is the best have been on the receiving end in many ways
With some recent changes on the as well. It has given me the exposure to other
management team, our information
technology area now reports to me. This We have to be laser-focused on what
seems appropriate, given the amount of our customers want and figure out
resources that are allocated to that area how to be more agile when bringing
of the bank – just about every new project new products to market.
now lands in IT to manage and execute.
Working closely with the IT team on costs
and priorities helps us make good decisions
and ensures that we spend our technology
dollars wisely.

Where do you expect to be exposure to the basics of both the deposit organizational environments and challenges
focusing most of your attention in and loan functions and is a great background that I may not have experienced otherwise,
the next two to three years? for a position in finance. and has afforded me the opportunity to grow
The last decade of low interest rates and as a leader in ways I never thought possible.
margin compression has required us to focus Don’t stay in one place waiting for that
on operational efficiencies and opportunities perfect career move. Take chances, apply for What do you like best about being
for non-interest income. These efforts, new positions. Also take advantage of the an FMS member?
combined with the rising rate environment, many educational opportunities available I just really value the resources available
are having a positive impact on our bottom through the bank. Do the best you can with through FMS Connect, the publications and
line. Now it’s time for us to focus our what you have where you are, and great the opportunity to attend the Forum. I also
organizational strategy toward building and things are bound to happen. appreciate that there is a regional chapter.
protecting shareholder value. As we grow our Many years ago, I attended the Financial
balance sheet, we need to continually grow a What is the best (or worst) Managers School in Madison, which provided
better balance sheet. professional advice you’ve ever great resources for my role in finance.
received?
What do you like best about Probably one of the most valuable pieces of Where do you see the banking
working in a community institution? advice I ever received was this: Becoming an industry in 5-10 years? How do you
Working for a community bank is easy, effective leader requires both performance see it changing/developing?
because one of the unwritten rules we live by currency and relationship currency. While Given that the OCC has announced that
is ‘we will always do the right thing.’ Faced performance currency is important, it is the it will begin accepting applications for
with any strategic decision, problem to solve relationship currency that will be of most national bank charters from non-depository
or opportunity to make a difference, even the value to you over the course of your career. fintech companies engaged in the business
toughest decisions become easy if you know of banking, I expect other regulators will
you’re doing the right thing. This cultural Performance currency will get you a job, but follow suit and we could see the landscape
attitude ensures that as the bank grows we relationship currency will get you a career. of banking change rapidly. We have to be
are committed to maintaining the personal I have paid attention to that, and can truly laser-focused on what our customers want
touch with our customers that differentiates say that my greatest resources are the and figure out how to be more agile when
us from the competition. relationships I have cultivated over the years. bringing new products to market. §

FMS forward | NOVEMBER/DECEMBER 2018 | 7

70TH ANNIVERSARY

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8 | FMS forward | NOVEMBER/DECEMBER 2018

Ben Braun “I think there’s great advantage in being able to learn and gather
insight from other members, so I was hoping FMS would continue
ASSOCIATE DIRECTOR OF FINANCE – ASSOCIATED BANK to provide those opportunities,” he says. “And so far it looks like
the FMS Forum and FMS Connect are good avenues for that type of
While Ben Braun is fairly new to FMS, he’s not at all new to the interaction. It was certainly impressive to see the engagement and
philosophy and goals of a professional association. Braun came over the number of attendees at this year’s Forum in Orlando.”
to FMS via the migration of AMIfs members in late 2017, bringing
with him the ideas garnered and lessons learned over his five years But Braun isn’t satisfied to just be a passive member of FMS. When
with that organization. he talks about the need for engagement, he’s putting his time and
effort into the cause, volunteering to head up the new Profitability
“The annual conference and Risk Council. Not only will this post allow him to further explore
at AMIfs was always a one of his direct areas of interest at Associated Bank, it will also
great setting to discuss give him the chance to foster a more active and engaged FMS.
current issues with
peer banks that were “I’d like to see continued advancement of collaboration and
facing many of the engagement,” he says when asked about his objectives as council
same problems,” Braun chairman. “It’s important for members to know that they have peers
recalls. “Everyone was who are willing to help with the problems they’re facing. Not all
willing to lend a helpful institutions are in direct competition with each other, so being able
thought or perspective to share insight with a fellow FMS member can really be a rewarding
on how they handled experience for both parties.”
certain situations.”

That notion of members helping members was something that
Braun very much hoped to see carry over at FMS, and so far he
hasn’t been disappointed.

Javier Martinez Having built a career in accounting and asset-liability management
over the past decade with Intercredit Bank, Javier Martinez was
SVP, CONTROLLER – INTERCREDIT BANK eager to learn even more about ALM. So, like many other financial
and accounting professionals, he turned to FMS.

“I was attracted to FMS for the continuing professional education
and the forum discussions on different banking subjects,” he notes.

Javier joined FMS for The 2018 Forum in Orlando, spending a few
sunny days learning from industry thought leaders and connecting
with peers from institutions across the country. But he also enjoys
the opportunity to network without even leaving his office.

“The website is a great tool for research and interaction with other
members,” he says.

Javier hopes for more of the same in the years ahead, looking to
FMS to help him continue to expand his knowledge of the financial
industry and make more connections with his fellow bankers.

FMS forward | NOVEMBER/DECEMBER 2018 | 9

Dmitriy Mirchuk Although he’s been in the banking industry While Dmitriy initially sought out FMS
for years, Dmitriy Mirchuk just joined both for the educational opportunities he
VP, FINANCE MANAGER – Chemical Bank and FMS in 2018. He recalls remembers receiving through AMIfs, he’s
CHEMICAL BANK having attended an AMIfs workshop back in also interested in tapping into the well
2003, and between then and now both he of knowledge and experience among his
and the industry have seen plenty of shifts industry peers.
and changes.
“I came to FMS because of the potential
“I started my career as an analyst for to exchange information with peers,” he
a regional bank and I’ve ended up in explains. “The primary reason I joined was
management information systems and to gain that industry knowledge of best
profitability reporting,” he says. “My practices and insights, so I’m interested
experience has helped me understand in getting involved in the online forum and
every facet of a bank’s operations. Now I’m other networking opportunities.”
working to institute a profitability reporting
program at Chemical Bank that would
provide a solid framework for us to grow.”

“These are very exciting Sally Kaldas and ideas. That sense of professional give-
times for FMS as our and-take and a desire to give back to an
membership base and SVP, CFO AND TREASURER – EAST organization and industry that she feels has
membership engagement CAMBRIDGE SAVINGS BANK given her so much led to her recent decision
continues to grow. We to head up the Strategic Issues Council.
provide tremendous Like many FMS members, Sally Kaldas was Given her various roles and wide range of
resources for our members initially drawn to the association by the experiences at East Cambridge Savings
and are continuously adding prospect of timely and compelling education Bank over the years – from accounting and
more, which gives them a offerings to help her stay on top of a rapidly audit to IT and loan servicing – Kaldas sees
competitive advantage in changing competitive landscape. What she this particular FMS council as a perfect fit.
staying ahead in this ever- found was all of that, but so much more.
changing environment. “Each of the five different councils has a
Continuing to grow our “The education certainly helps keep me specific objective, but what I like about the
membership base will only up to date,” she says. “But the one thing Strategic Issues Council is that it basically
add more resources and tools I value probably more than anything else looks at every area of the institution to
for our members so they can is the networking, and the opportunity to really get an idea of the big picture,” she
expand their knowledge as communicate with different members at explains. “It’s like the umbrella that takes
they lead their institutions to different banks and share ideas.” into account all of these different areas,
higher performance.” which is why I feel that with my background
Kaldas has found those opportunities to in so many different areas of banking I
Steve Fusco, FMS Chairman be particularly abundant within the FMS can bring the benefit of those diverse
advisory councils, where she believes the experiences to the table.”
disparate backgrounds and expertise of the
members help expose her to new viewpoints

10 | FMS forward | NOVEMBER/DECEMBER 2018

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on the state of community banking 10001000010000001010100101000110AIH00NON01WE0011TXT1C1H00OL0U0IG00SSE1I0T1V0ITE0S00H0I1NES11TM00UE10ORE00VS00TIE1001OWU0100TW10O00ITF0H00Y01FO1A101US0R0B00V0B11E0ON00A0D0RO00D0R0MN100EE00G1M0OB000TE0IRA1001TH0I011OAN1L100SS10C10H000R0O0E00D001E0R00011000001001000000110000010000100000100100000000100111000100001001000001001100000011
FMS forward | SEPTEMBER/OCTOBER 2017 | 1 010010101101001000110001001101010000000000000000000000000
Community Mindset: New FMS research study reveals 0000000000000000000000000000000000000000000010001100
opportunities, challenges facing industry
JANUARY/FEBRUARY 2018 | FMSinc.org MARCH/APRIL 2018 | FMSinc.org

A PUBLICATION OF THE FINANCIAL MANAGERS SOCIETY IS IN THE K N O WA PUBLICATION OF THE FINANCIAL MANAGERS SOCIETY

18 STORIES FOR THE NEW YEAR ALM challenges and cybersecurity advice to

FromTHE ECONOMIC
OUTLOOK FOR 2018
WHAT’S UP FOR accounting changes and leadership tips, the same issues
M&A AFTER NYE?
that are important to you as an FMS member are

(or should be) just as important to your board of directors.

So give your board members access to the same great

resource you turn to for information and insight on the

crucial factors impacting your institution – FMTHSE WfoArRwFaOrRdD. EPOSITS

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C O N V E R S AT I O N

EYE ON ‘19

JOHN BEHRINGERA CONVERSATION WITH

For more than two decades, John Behringer has been a go-to source of
knowledgeable industry perspective and insight for financial institutions of all
shapes and sizes. So as 2018 winds down, we asked the partner at RSM to

share his thoughts on what lies ahead for banks and credit unions in 2019.

12 | FMS forward | NOVEMBER/DECEMBER 2018

FMS: Tax reform in 2018 started The other thing we saw come out of tax rates. Now as to how long that takes, there’s
with a substantial hit for many reform is continued pressure at the state a lot of uncertainty right now.
financial institutions, followed by level, where we see a lot of our states
mostly steady growth. What do you and municipalities struggling with their Tariffs and a potential trade war or wars will
expect the impact to be in 2019? tax revenues and receipts. Then on top certainly bear watching. You can already see
of that, the South Dakota v. Wayfair case anecdotal evidence of rising input costs and
JOHN BEHRINGER: This summer we got was decided in favor of South Dakota, general anxiety in the business sector due
confirmation from the treasury that S-corp throwing nexus into question. As more to tariffs. You see it particularly in specific
banks will in fact be receiving the 20% and more of our business is done through sectors, like homebuilders, where the cost of
deduction on pass-through income. Given digital channels, with customers that aren’t lumber was already rising before any talk of
that there was a broad exclusion for financial
services, the industry assumed that banks “As tax reform ripples through and people reassess,
would not be eligible for that pass-through institutions have to keep an eye on the breaking
rate. However, for the approximately 2,000 point where deposits become less sticky and factor
S-corp banks out of the 6,000 banks in the that into their funding strategy as they wrap up
U.S., this is great news. 2018 and plan for 2019.”

In 2019, we’ll continue to see banks looking necessarily limited to your branch footprint tariffs because of forest fires and diseased
at the S-corp versus C-corp option. They anymore, the question of what creates wood. The increase on the cost of lumber is
should be making that decision based on nexus will become very important. Now is around 36% year over year, in a sector of the
their long-term plan. If the plan is to stay a good time for institutions to consider that economy that’s already under-supplied and
independent and potentially do acquisitions, from a tax reform perspective.  under pressure to provide more. The same
moving to or staying a C-corp is likely the   concerns apply to potential metal and steel
right answer. Particularly if you think you’re The sneaky thing in all of this is how tax tariffs – any kind of building and construction
going to be acquisitive, you can consider an reform impacts our borrowers and customers. will be impacted. There’s a lot of anxiety from
IPO as a potential way to create liquidity. As How are their behaviors going to change? manufacturers. They want to know what will
we’ve seen in the M&A markets this year, How will savers change now that there’s a be hit by the tariffs and what won’t be. This
public banks have been at an advantage cap on state and local income tax deductions? also impacts agriculture, which was already
in using their stock as currency to fund Will highly mobile customers make different in the doldrums because of commodity prices
transactions, given the bump their stock got decisions on where they’ll be residents, for grain, livestock and dairy. This just adds to
following the 2016 presidential election. And and how will that impact their demands for that anxiety.
that bump has continued, buffered by record products and services? We should not just
earnings and bolstered by tax reform. be thinking of tax reform in terms of how it We’ve also got a very hot labor market
impacts our organizations from an operational and very low levels of unemployment, and
Even if they don’t want to launch an IPO, and financial perspective, but also thinking we’ve seen a lot of folks come back to the
that 21% rate is such an attractive long-term about how it impacts our borrowers and workforce as a result. This causes concerns
view. When you compound those earnings at depositors, our customers and clients. We’ll about the potential risk of the labor market
21% when you’re not paying out shareholder see behavior changes from them as well as overheating and pushing us into inflation.
dividends, you can see the economic engine this ripples through and takes hold.  Interest rates will be something we continue
of growth it creates. Many institutions, to watch. I think the expectation is that rates
depending on their earning stream, would FMS: What’s the outlook for interest will be higher at the end of 2019 than they
not have to wait long before they saw the rates? Are there any other major were at the beginning of the year, but you
return dwarf that of an S-corp. So I would economic factors or shifts to keep can’t look at that in a vacuum. It will depend
encourage institutions to really evaluate their an eye on in 2019? on what happens with tariffs, what happens
entity choice, looking at the sustained impact with the November elections and what
on earning tax reform will have. BEHRINGER Jamie Dimon said earlier this happens with unemployment – those will be
  year that he sees an environment in the not the three major factors that play into where
2019 is also a good time to look at your too distant future where treasuries are at rates go. The main impact of the election
investment strategies. Given the drop in tax 5%. I think we’re going to continue to see the cycle will be whether or not it changes
rates, if we were using our investment Federal Reserve focus on normalizing interest priorities for Congress and, in turn, for the
portfolio to manage taxable income, the
benefit there is certainly not what it was in the
previous environment. We’ll get an opportunity
to see what a long-term investment strategy
looks like in this new rate environment.

FMS forward | NOVEMBER/DECEMBER 2018 | 13

administration. We’ll have more clarity by comfortable outsourcing activities that people want to be in metro areas, is the
the end of 2018, but I think tariffs will be the aren’t part of their mission – the things that struggle to attract and retain the talent they
big thing – financial institutions need to be don’t necessarily give them a competitive need regardless of compensation – particularly
thinking about how their borrowers will be advantage. Because of this, I like the concept IT and compliance. These institutions should
affected by tariffs. of a succession strategy versus a succession focus on becoming more efficient, whether
plan. Historically, the finance industry it’s through technology and automation or a
As rates increase, there are two main things has focused on succession planning, and combination of that and people, or by realizing
financial institutions should be monitoring. management teams and regulators have that they may need to pay up in some of
Deposits have thus far been relatively always honed in on key executives in the those areas. You can do more with less when
sticky, so I think the concerns about what C-suite and at the board level. But today you have really talented individuals. A good
a rising rate environment would do to cost we’re seeing more of a challenge in that mid- succession strategy and a good resource
of funds has been fairly muted. However, tier talent level –compliance and risk, lending strategy will reward you when you look at the
as tax reform ripples through and people and IT have been very challenging areas for efficiency ratio.
reassess, institutions have to keep an acquiring and retaining talent.
eye on the breaking point where deposits FMS: What technological innovation
become less sticky and factor that into their We need look at this beyond the C-level and will have the biggest impact on the
funding strategy as they wrap up 2018 and talk about how we leverage technology and industry in 2019?
plan for 2019.
BEHRINGER I think payments will continue
Two, if an institution has been heavily reliant “That’s a benefit that to be the area where we see investments
on residential lending and refinancing, it has financial institutions have being made, and certainly it was ripe for
a couple of headwinds to be concerned about that cryptocurrencies innovation. Part of this is driven by blockchain
– a rising rate environment where home don’t. Institutions have a technology. We continue to hear a lot about
prices are also going up significantly because charter, they have rights cryptocurrency, but I’m still a skeptic. I have
the market is under-supplied and the rising granted by government colleagues who are crypto evangelists and
cost of actual materials. The refinancing entities and they’re they’ll tell you I’m a fuddy-duddy, old-school
market is drying up, so the real focus will heavily regulated. That is stick in the mud. But when I think about
be on new homebuyers. Consider how your a competitive advantage people and trust and their own money, I still
strategy needs to change if one of your key that’s not going to go struggle to see cryptocurrencies taking over
platforms from a lending perspective is away in the next year, in 2019 or even in my working lifetime. That’s
residential mortgage. What are your staffing nor in the long term.” a benefit that financial institutions have
needs, what are your earnings expectations that cryptocurrencies don’t – institutions
and how do you potentially redeploy capital potentially automation. I would encourage have a charter, they have rights granted
that historically would have gone into those institutions to take a holistic look at what by government entities and they’re heavily
asset classes that isn’t going to be available? they need to be really good at, allocate their regulated. That is a competitive advantage
resources and talent to those things and then that’s not going to go away in the next
As I look at CRE and lending in general, the outsource things that need to be done but year, nor in the long term. That said, there
other major consideration is CECL. Many aren’t really going to differentiate them. If they are definitely opportunities for blockchain
institutions are making loans without haven’t come up with one already, they really to fill a role, particularly on certain types
factoring in their CECL costs. When you need to have an automation strategy. To me, of transactions and around payments –
make a loan now with a seven-year tail, it’s not about cutting jobs – it’s about doing specifically for banks – but I think we’ll just
you’re going to have a cost attached to that more with less. Because when we’re at 3.9% need to monitor that for now rather than
in 2019. It should be considered from both a unemployment, man, it’s going to be tough to diving in.
risk perspective and a cost perspective, as it fill some roles with qualified individuals.
impacts your loan portfolio and customers. For community or regional institutions in
The other challenge, especially for institutions 2019, I think it’s about deciding how close
FMS: You mentioned the hot labor that are more rural when a lot of young to the bleeding edge they need to be. Most
market. Do you think we’ll continue won’t need to be there, but they should at
to see high employment numbers least consider being on the leading edge in
and difficulty landing key talent in certain areas. And I think payments are a
the coming year? good example. This is an area institutions can
enter and find a cost-effective partner, but
BEHRINGER I think financial institutions the key is understanding your demographic.
have something of a leg up over other If your goal is to keep your depositors whose
industries because they’ve always been average age is 47 versus trying to attract

14 | FMS forward | NOVEMBER/DECEMBER 2018

more Millennials and grow, your offerings are lower priority. If we have a change in control, the next cycle. BSA isn’t going away. There’s
going to need to be a little bit different. no matter how the administration feels and more of a focus on anti-money laundering and
how the agencies feel, they may not have money related to human trafficking or drug
It’s also important to understand what a the political capital to get done what they trafficking or funding terrorist activities, and
strong technological offering does to the want to get done. With that said, we may that’s not going away. CRA isn’t going away.
stickiness of your deposits. Most of our still see a lot of change effectuated through Find a way to do it so it aligns with your
institutions have thrived by being leading to the agencies themselves, and having an FDIC organization’s mission and really helps your
mature adopters rather than being bleeding chair with industry experience is a positive community and really supports your overall
edge, and I don’t see that changing. It’s about for us. Hopefully we’ll see that trickle down corporate responsibility and sustainability. If
knowing where you need to be competitive into the exam process.  you’re doing those things, you’re going to be
and doing that well and tying that back to   in a good place wherever regulations go.
your resource strategy. But there are other challenges. Let’s face
it, we’re in one of the longest expansions You also need to focus on IT and
FMS: Do you expect the trend of we’ve seen since World War II, however cybersecurity, because if you’re just meeting
regulatory easing to continue? How tepid the initial recovery was. How do regulatory expectations, you’re falling
will the progress on this front in 2018 regulatory priorities change if the numbers behind. That’s not a knock on regulators, it’s
impact institutions’ plans for 2019? just that the pace of technology is so rapid
“You need to focus on that’s it’s far ahead of everyone else. That’s
BEHRINGER I think these initial reforms have IT and cybersecurity, a good area to really analyze and see what
been positive. I think we’ve seen it benefit because if you’re just you do well and find a partner for the areas
the regional and larger institutions the most, meeting regulatory where you’re not doing well and do better.
given the relief on capital planning and some expectations, you’re Regulators are critical to your success as an
of the other things. That said, I think it creates falling behind. That’s not organization, but you should be doing things
a nice runway for other changes. In her first a knock on regulators, that make business sense as well. Regulatory
interview after being sworn in, new FDIC it’s just that the pace of reform done in the right way will help the
chair Jelena McWilliams said she was open technology is so rapid industry, but at the same time our banks
to reevaluating rules on capital, small dollar that it’s far ahead of and credit unions have done a good job of
loans, how we’re incentivizing institutions everyone else.” recognizing where they need to get better as
to invest in low-income areas and speeding well, and we need to continue that trend.
up the review of new charter applications. It start to dip a little bit? I’m thinking
would have sounded funny three years ago, particularly of what happens with tariffs, FMS: What will be the big headline
but we’ve seen this environment since 2016, interest rates and unemployment. We’ve for banks and credit unions in 2019?
and we’ve seen some green shoots and an been relatively benign on the credit side, but
uptick in new charter applications. if that changes regulators are going to get BEHRINGER The economic cycle will be
more concerned. Some of it will depend on the headline that has the biggest impact next
The other thing McWilliams said, which I the overall health of the economy, as well as year, followed closely by what happens with
thought was very insightful on her part and what the next crisis looks like, because they the elections in November. I think the biggest
reflective of her experience in the industry, hardly ever follow the same script. A lot factors in whether it’s a good or bad year
was that we need to get all of the regulators of what we’re doing today is based on the economically are tariffs, interest rates and the
on the same page. As the FDIC chair, she assumption that the next crisis looks just unemployment rate. This is wishful thinking,
can do a lot but she still needs the OCC and like the last one, but that’s not likely at all but if I’m predicting specifics, I’d like to see
SEC and all of the other agencies to agree on given the housing market today.   M&A finally happen and for consolidation
these things. Her willingness to reach out and really take hold, which in turn will lead to
realize that all of them need to come to some With that said, what should we focus on as new bank charters being issued. More than
agreement gives me hope. organizations that will make us better? Credit just consolidation, I’d like to see growth.
quality. You don’t want to be making loans
The one thing still looming over all of this that you’re going to be spending time on in I don’t know how likely that is, but I do think
is the November election cycle. Depending the real driver of headlines in 2019 will
on what happens there, you could still have be the economy. Maybe that’s a cop-out,
an administration and a Congress that are but the economy will be the story even more
very much pro-business and, in particular, than most years given where we are in the
very supportive of community financial expansion and given the late-inning boost
institutions. If we see a change in control in we’ve gotten here. That said, are we in the
the House or the Senate, I don’t think that seventh inning or are we only in the fourth?
necessarily changes but it could become a 2019 will tell us more. §

FMS forward | NOVEMBER/DECEMBER 2018 | 15

FMS RESEARCH

Forever Young

Research taken from the FMS-commissioned study Community Mindset: Bank and Credit Union
Leadership Viewpoints 2018, a survey of 400 senior executives representing community-based
banks and credit unions. For more insights from this year’s report, visit FMSinc.org/Research.
Millennials and Gen Z have been dominating market research and news cycles with their
habits and preferences for the past several years, and for good reason – appealing to this
segment grows more and more crucial every year.
The buying and spending habits of these younger generations have changed the face of many
industries, and financial institutions have not been immune. Attracting young people as both
customers and employees is crucial to every institution’s future success, and new research
from FMS provides insight into how industry leaders think they’re doing on these fronts.

Measuring Up By the Young People,
For the Young People
Attracting new and younger customers
is still a challenge for institutions: 55% Almost half (45%) of the respondents in this year’s
found it challenging in 2018, up one Community Mindset survey were 34 or younger – up
percentage point from the year before. from 37% in 2017 – making many of the very leaders we
surveyed either Millennials or Gen Z themselves.

16 | FMS forward | NOVEMBER/DECEMBER 2018

HOW BIG OF A INSTITUTIONAL APPEAL Success in appealing to Success in appealing to
CHALLENGE IS younger customers younger employees

ATTRACTING 4 5
NEW OR 17 17

YOUNGER 38 41
CUSTOMERS?

41 38

Extremely 21 Very Successful Somewhat Unsuccessful
Challenging Somewhat Successful Very Unsuccessful
Neutral

How they’re appealing to younger 19
customers and employees
Fairly 34 12
Challenging Mobile and online banking options 10
Competitive incentives and benefits
Better rates and rewards

Neutral 26 The largest banks ($5-9.9 billion) in the survey seem to have the
most difficulty attracting new and younger customers, with 28%
saying they found it extremely challenging. Overall, out of eleven
potential challenges, attracting new or younger customers ranked
as the third most challenging issue for all institutions in the survey.

Slightly 26 #1
Challenging

Not 8 Attracting and 79% believe their 73% think they’re
Challenging retaining talent was institution is successful successful competing
seen as an important in appealing to both
(Due to rounding, percentages may not always add up to 100.) factor for growth for 68% younger customers and with their peers in
in 2017, 75% in 2018 appealing to younger
younger employees
customers

FMS forward | NOVEMBER/DECEMBER 2018 | 17

F E AT U R E

VOLSUTRNETSASRY

HOW AND WHY TO
STRESS TEST NOW
(EVEN IF IT’S NOT
REQUIRED)

18 | FMS forward | NOVEMBER/DECEMBER 2018

Haberland says that while larger institutions could have significant
potential exposure to stress testing, the results could be even more
material to a smaller institution.

“While stress testing may not be a required exercise for smaller

institutions, it can provide tremendous insight into potential

exposures before they become reality,” he explains. “Take deposit

Experts consistently rail against it. Management often denies it. But pricing, for example. Determining the correct betas for the risk

whether due to a lack of ambition or a genuine lack of resources, most models is challenging, and can have a profound impact on your

institutions have to admit they’ve settled for it at one time or another. overall sensitivity to rising rates. Stressing your deposit pricing

assumptions can provide valuable information into the range of

Checking the regulatory box. exposure/benefits the institution could experience if rates must

be increased more than assumed to retain depositors or if attrition

That is, doing just enough to send the examiners home happy. In levels are higher than expected. This same logic can also be

other words, if the regulators aren’t explicitly asking for something – incorporated into your liquidity stress testing to gauge the impact

regardless of its potential business of potential deposit runoff on

value beyond the exam itself – it’s While stress testing may not liquidity levels and how the
probably not worth the time, money institution is positioned to cope.

or manpower to undertake it. be a required exercise for One could argue this is more
Among the notable victims of this smaller institutions, it can important for smaller institutions,
which often have smaller margin

check-the-box mindset, stress provide tremendous insight into for error than their larger peers.”
testing is probably high on the potential exposures before they But deposit pricing is just one
list. Because even while countless become reality.

voices from around the industry area where stress testing can
have long trumpeted the benefits provide potential insight for

of institutions having a better Mark Haberland, Managing Director– institutions, with additional

idea of how events such as rate Darling Consulting Group value coming in the form of early

shocks, economic fluctuations warning on potential problem

or specific industry triggers will loans, broader perspective on the

impact their loan portfolios and liquidity levels, many banks and overall level of loan portfolio credit risk and deeper information

credit unions – particularly those in the smaller asset ranges – have for the board to use in monitoring portfolio risk against the

tended to see stress testing as a “big institution requirement” and institution’s established risk appetite.

have thus adopted a there-but-for-the-grace-of-an-extra-few-billion-

go-I mentality. But Mark Haberland says stress testing is important “Stress testing is a way to glimpse what may happen if X, Y or

for all financial institutions, regardless of size or complexity. Z occurs,” says Mark DeBree, vice president of ALM Services at

Catalyst Strategic Solutions, where he has worked with credit

“Stress testing has often been viewed as a regulatory appeasement unions in a risk consulting role for more than 15 years. “While

exercise, but there’s much to be gleaned from proper stress-testing real-life impact may vary from the modeled or forecasted impact,

practices,” says Haberland, a managing director with Darling it allows us to plan potential action steps for certain events. And

Consulting Group. “It is important to understand the impact of if certain variables begin to line up in a particular way, we also

various stresses – whether on interest rate risk, liquidity or credit – have some idea of what may happen to our institution and can

so that we can formulate a plan to help prevent such situations from plan appropriately.”

becoming a reality. Understanding what could cause a problem, and

quantifying the size of the problem, is valuable information.” GETTING IT RIGHT

As in the case of other best practices that aren’t necessarily

So even though stress testing may seem like a daunting – and mandated by regulators, one of the excuses many institutions

potentially unnecessary – undertaking for smaller institutions, give for opting out of stress testing is a lack of resources. Even

FMS forward | NOVEMBER/DECEMBER 2018 | 19

You should be trying to calibrate the nature of the stress test to the
complexity and size of the institution. By sticking to a few well-chosen
basics, you can get some meaningful information at a reasonable and
proportionate cost.

Craig Mancinotti, Managing Director – ProBank Austin

while they can see the value of such an exercise, they simply may deposit pricing is critical to maintaining margin. So understanding
not be able to dedicate the necessary time, money or manpower the impact of higher betas or deposit attrition will be a key
required to do it right. For this reason, Craig Mancinotti says it’s component in your risk management discussion.”
important to make sure the scope of the testing is right-sized for
the institution. NOW IS THE TIME

“You should be trying to calibrate the nature of the stress test Even if they do see the potential value of stress testing, however,
to the complexity and size of the institution,” says the managing it’s easy for many banks and credit unions to put off instituting
director at ProBank Austin. “Overcomplicating the process adds a program amid what has been a relatively calm and largely
cost but doesn’t add value, so keeping things simple is important. positive span over the past several years. But Haberland believes
By sticking to a few well-chosen basics, you can get some there’s no time like the present for smaller institutions that
meaningful information at a reasonable and proportionate cost.” haven’t been stress testing to consider doing so.

Haberland agrees that if an institution can only afford to dip a toe “Stress testing is important in any rate cycle, but in this current
into stress testing, the focus should be on a few key areas that environment it is of particular focus, as bankers have gone so
could really have a significant impact; foremost, in his opinion, long without experiencing rising rates that we can forget the
are liquidity stresses and deposit assumption stress testing. impact it can have on our various risk exposures,” he says.

“Liquidity is at the forefront of regulatory exams today, and with Small to mid-size banks and
good reason,” he explains. “The expectation for a more forward- credit unions may have some
looking, dynamic forecasting process is more prevalent, and significant exposure to potential
stress testing liquidity is a key component of an effective liquidity deposit flows over the next ten
management process. It is important to incorporate stress tests years. Testing what may happen
that fit your institution to quantify the impact of what could cause a to their institutions due to a
liquidity crisis, and understand the steps you would take to alleviate sizable outflow of funds would
that stress – this is critically important today.” be very worthwhile to model.

DeBree concurs with the focus on liquidity, noting that he’s seen a Mark DeBree, Vice President of ALM
number of credit unions starting to study how they would fare under Services – Catalyst Strategic Solutions
certain adverse conditions.
DeBree agrees that stress testing is extremely important in the
“Small to mid-size banks and credit unions may have some current environment, with a number of disparate factors contributing
significant exposure to potential deposit flows over the next ten to an environment that, while placid on the surface, could be
years,” he explains. “Testing what may happen to their institutions harboring a number of potential risks.
due to a sizable outflow of funds would be very worthwhile to
model. Even if this is something that will not happen overnight, there
could be a sizable and gradual outflow over a 36-60 month period.”

Equally critical, Haberland says, is an institution’s deposit sensitivity.

“If you do nothing else for stress testing, it makes sense to “From the rapid growth in technology to the impending retirement of
incorporate looking at the impact of stressing your deposit Baby Boomers to the eventual huge wealth transfer from those Boomers
assumptions for betas,” he says. “As rates continue to rise and to their heirs, the level of uncertainty regarding the future is significant,
deposit pricing lags the market, your ability to effectively manage which strengthens the need and importance of stress testing.” §

20 | FMS forward | NOVEMBER/DECEMBER 2018

STRESS DO keep your stress testing reasonable and relevant in order to
TESTING
TO-DO get the most out of it.
(AND Mark Haberland says there is often a lack of expertise within institutions to understand
DON’T) just what should be run for viable stress tests, such as whether a stress test should be just
LIST different assumptions or a “break the institution” type of scenario. As a result, he says the
stresses that are run often do not end up providing much useful information.
Just as no two
institutions are exactly “Even if stresses are run only once or twice per year, pick a key assumption or two – such
alike, no two stress as deposit pricing and liquidity – and incorporate them into your risk management process,”
testing programs will he says. “The stress test should be relevant to your institution and provide stakeholders
be identical. But there with valuable information to help prevent the stress from occurring down the line. It’s more
are a few things that important to include impactful stresses and actually utilize the information than to try and
almost every bank or overcomplicate the process.”
credit union should
keep in mind as it DON’T throw in the towel early just because all of the data you
heads down this road.
need isn’t readily available.
Understanding some of the relationships between certain economic conditions and the
specific impact on an institution’s members or customers may require a significant amount of
data and some strong statistical analysis that isn’t necessarily at the ready.

“Begin saving data now and prepare for the future,” Mark DeBree advises. “We all know
there will be another large-scale event that will place credit unions and banks under enormous
stress, but we don’t know exactly where or when.”

DO pay close attention to pre-tax, pre-provision earnings in your

stress testing model.
Craig Mancinotti says that when an institution enters stressed times it will have higher costs
associated with managing non-performing assets. In addition, if things start to go south it
might start to de-leverage by pulling back the reins on lending and growth and shrinking the
balance sheet to help the capital ratio.

“When you’re starting to take actions like these, the impact on the institution’s current level
of core earnings can be significant,” he says. “So you need to have some methodology for
estimating where pre-tax, pre-provision earnings will be in those stressed times.”

DON’T disregard an analysis simply because it does not fit

what you “expect” to happen.
Stress testing is often a mix of some unrealistic events occurring. So while you may want to
model and capture the expected future, it’s important to have a plan for when things really
start to break out.

“Many banks and credit unions tend to look at stress testing results and think ‘well, that isn’t
realistic,’” DeBree points out. “But we have to plan for the unlikely scenarios – those are the
ones that close down financial institutions.”

DO incorporate your stress testing results into key strategic

discussions going forward.
“Use the information to help facilitate strategic discussions at your ALCO meetings, and make
sure to consider including stress testing as a key component of all of your risk models (IRR,
liquidity and capital),” Haberland says.

FMS forward | NOVEMBER/DECEMBER 2018 | 21

F E AT U R E

UNBANKEDA FAIR SHAKE FOR THE

Earlier this year, the Federal Reserve released a study on the
economic well-being of U.S. households that found 23% of Americans are
either unbanked or underbanked. Though a relatively small percentage (5%) is
unbanked, it nevertheless adds up – 13 million American adults don’t have a
checking, savings or money market account.

Looking to reverse this trend, a bank and a A PROMISING START what could be done to help address the
non-profit in the Twin Cities have teamed up financial inclusion gap in the state.
on a new approach called the FAIR (Financial FAIR is the brainchild of community leaders
Access in Reach) Financial Solution. in Minnesota, including Dorothy Bridges, The foundation appointed a team to
Whether reaching out to the unbanked, former senior vice president of community brainstorm options, and ended up handing
the underbanked or the ex-banked (those development, outreach and public affairs the baton to Prepare + Prosper, a non-profit
blacklisted by ChexSystems, for instance), at the Minneapolis Federal Reserve in the Twin Cities known primarily for its
they’re helping previously excluded people Bank. During her time on the board of the free tax preparation services.
to enter the traditional banking system with Northwest Area Foundation – an organization
a new suite of products. dedicated to reducing poverty and promoting “We officially acquired FAIR in 2014 with
prosperity – Bridges found herself wondering

22 | FMS forward | NOVEMBER/DECEMBER 2018

a Northwest Area Foundation grant,” says account, a savings account and a credit- FAIR concept, they had to find a financial
Anne Leland Clark, the director of financial builder loan. institution to partner with to help make it a
capability and learning with Prepare + reality. After consulting with the Center for
Prosper. “Our work is with people in the The checking account has a $3 monthly Financial Services Innovation and mapping
community, and we listened to underserved service fee, but no account overdraft and the feasibility and long-term sustainability
customers who essentially built the FAIR no minimum balance requirement, and is of the concept, in 2016 they partnered with
concept. This initiative was developed hand- available to people regardless of their credit Guaranty Bank to test the model. But after
in-hand with consumers.” history or banking record. The savings Guaranty was shut down by regulators,
account is a basic, interest-earning account Prepare + Prosper regrouped.
THE IDEAL CANDIDATE with no minimum. The credit-builder loan is
Northwest Area Foundation considered a small loan of $500 that is dispersed to an “We retooled, and we are now officially
Prepare + Prosper the right organization 18-month CD. The FAIR borrower pays off signed, partnered, and built out with Sunrise
to carry the torch on this effort thanks in the loan in $30 monthly installments and, Banks,” says Leland Clark. “We’re currently
large part to the group’s record of helping upon repayment, has 18 months of on-time in pilot phase, doing some testing with
underserved consumers reenter the payments on his or her credit report, as well about 100 consumers. In early 2019 we will
traditional banking system. Since 1971, as a $500 CD. be going out to an even broader group.”
when Prepare + Prosper was founded by a
group of accountants who volunteered their These products were created for the Prepare + Prosper has been negotiating
time and expertise to help people file tax financially underserved, but are available partnerships with banks and credit unions
returns, the organization has grown into a to anyone. The only thing that would bar for years to offer products to their tax-filing
broader mission. someone from the credit-builder loan would customers, but finding a partner for the FAIR
be active bankruptcy, and the only thing initiative was a much bigger ask. Sunrise
“We capitalize on the tax return moment that would prevent them from getting the Banks was willing to bring their operational
as a way to get our customers to really FAIR checking or savings account would be and technical savvy to the table to help
think about their financial health,” says an instance of actual fraud, such as identity underserved communities move away from
Leland Clark. “We’ve been partnering with theft, on record. the expensive and potentially seedy world
banks since 2006 to offer products like of payday loans, money orders and check-
low minimum or no minimum accounts and “Let’s face it, there are a lot of people who cashing services. Not only that, but Sunrise
we’ve enrolled hundreds and hundreds of aren’t unbanked, but are certainly unhappily saw an opportunity themselves.
our clients in accounts with credit union banked,” says Leland Clark. “They keep
partners, community bank partners and big getting stuck in an overdraft cycle, or they’re “Sunrise ran the numbers to determine
bank partners in the past.” paying a monthly fee because their income feasibility and scaling, and they found that
doesn’t allow them to maintain the minimum not only were they not losing money, they
Using the tax time discussion as a balance in their accounts. These accounts were coming out slightly ahead,” says
starting point to help people work toward can serve as an entry point into the banking Leland Clark. “Imagine that you take out all
financial well-being and offer them the world, or they can function as a kind of of the lead generation and costs of acquiring
opportunity to route some of their return credit rehab.” new customers, which is hard for banks
into a traditional financial product like a in this market – we take care of all that.
savings account has put Prepare + Prosper The FAIR suite is a la carte, and customers Not only are we going to provide guided
in the role of a trusted facilitator between can choose one, two or all three products onboarding to find the right fit for each
unbanked customers and mainstream – whatever combination best suits their customer’s financial life, but we’ll be there
banking. And because of the organization’s needs. Another important component of to support them in making the full switch
history of serving as the link between the FAIR products is that each one comes with to the FAIR account and use them to reach
underserved and traditional institutions, personalized financial coaching through their financial goals.”
Leland Clark and her group were excited to Prepare + Prosper.
take the reins on the FAIR initiative. As financial institutions worry about the
“The beauty of what we bring to this is stickiness of deposits, Leland Clark argues
THE FAIR SUITE the relationship with the customer, the that Prepare + Prosper is creating a sticky
After speaking to 150 individuals about onboarding and the guidance up front,” customer with the FAIR accounts, as well as
what they personally wanted from a bank says Leland Clark. “They’re not going to teaching that customer good financial habits.
account, Prepare + Prosper had a good sign up without really understanding what Sunrise found the argument convincing.
idea of what unbanked and underbanked they’re getting into.”
consumers were looking for. In 2016, the “The main compliance consideration we
organization realized its vision of FAIR as a AN IDEAL PARTNER faced was ensuring all inviduals of every
three-product suite, made up of a checking Once Prepare + Prosper had created the level understood clearly what the products

FMS forward | NOVEMBER/DECEMBER 2018 | 23

could for them and how they would the products are sustainable to the bank and “I really think that a combination of the right
consistently function for them,” says Prepare + Prosper.” product design and distribution that improves
David Reiling, CEO of Sunrise Banks. “We the customer experience can rebuild a lot
worked closely with Prepare + Prosper in Sunrise Banks is not only a great partner for of fractured trust between underserved
not only providing our written disclosures the present, but they will be a part of Prepare communities and banks,” says Leland Clark.
and explanations, but one-on-one + Prosper’s big plans for the future. Selected “That customer experience will create a
assistance at opening and individualized in part because of their national charter, financial behavior change that will capture
financial coaching beyond the initial Sunrise Banks is able to offer accounts to loyalty and eventually profit. That’s the
account offering.” underserved consumers all across the country. equation we’re working on together.”

Leland Clark emphasizes that the FAIR “We’re building a branchless banking model GETTING A CHANCE
initiative is intended to benefit the for the underserved customer,” says Leland The underbanked and unbanked often feel
consumer, but when an unbanked customer Clark. “What’s out there right now is very that the banking system is set up to kick
is successfully transitioned to a banking
relationship, all parties benefit. A robust I really think that a combination of the right
legal agreement supports the partnership, product design and distribution that improves the
and Prepare + Prosper works closely with customer experience can rebuild a lot of fractured
Sunrise Banks’ compliance team. trust between underserved communities and
banks. That customer experience will create a
“A successful partnership is all about financial behavior change that will capture loyalty
setting it up so that from structuring the and eventually profit. That’s the equation we’re
legal agreement to actually making it working on together.
happen, you’re in constant communication,”
says Leland Clark. Anne Leland Clark, Director of Financial
Capability + Learning – Prepare + Prosper
MAKING IT HAPPEN
No matter how great the idea and how much for Millennials and digital natives. them when they’re down, and many feel
strong the partnership, such partnerships We want to build this as a scalable model intimidated by a system that won’t give them
can quickly fizzle out in a highly regulated for the underserved, so that community a second chance. However, those who have
industry where any new product or service organizations, non-profits and employers FAIR accounts have found that they can make
has to withstand heavy scrutiny. The FAIR can distribute this in their communities.” their way in the traditional system.
initiative had the extra hurdle of having to
cater to a demographic that were wary of the While Sunrise is certainly not averse to “The feedback we hear over and over again
banking industry. turning a profit, they say that’s not what is that it’s so nice to have accounts that move
they’re looking for in this program. with me and not against me,” Leland Clark
“Most of the issues in our first go-round says. “They feel like somebody in the ‘real’
were technical and operational,” says “Beyond ensuring the sustainability of the banking system is giving them a chance.”
Leland Clark. “For instance, the online program, return on investment is not the
account opening process could be clunky.” goal,” says Reiling. “We want to make sure Their customers also voiced gratitude for
we are offering tools and resources that are the guidance and basic financial coaching
The partnership with Sunrise allowed Prepare actually useful.” that Prepare + Prosper provides.
+ Prosper access to a solid technological
foundation. Sunrise Banks’ embrace of Instead, Reiling sees FAIR as a way “We hear a lot about how nice it is to have
technology and commitment to bringing the to start a long-term journey with the someone sit down and walk them through
best solutions to their customers were other participants, where the end-goal is all of this so it’s not so intimidating,” Leland
factors that made them a great choice to financial wellness. This partnership serves Clark says. “People are very relieved when
bring the FAIR initiative to life. as a way to not only rehab one’s credit, they can get a checking account and rid
but the relationship between banks and themselves of the stigma of operating
“When we began working with Prepare + their communities. outside of the mainstream banking world.” §
Prosper, our main goal was developing an
offering that provides a fair and low-cost
option to the community,” says Reiling.
“Our main challenge was making sure we
accomplished those goals while ensuring

24 | FMS forward | NOVEMBER/DECEMBER 2018

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POINCTOUNTERPOINTTÊTE-À-TÊTE

TWO INDUSTRY VETERANS
TRADE PERSPECTIVES ON THE
POTENTIAL IMPACT OF CECL

26 | FMS forward | NOVEMBER/DECEMBER 2018

BACK IN JUNE AT THE 2018 FMS FORUM IN ORLANDO, FMS BOARD MEMBER LARRY SORENSEN PRESENTED A SESSION ON CECL. FAR FROM THE
STANDARD RUNDOWN OF MODELING OPTIONS OR DATA REQUIREMENTS, HOWEVER, SORENSEN WAS GOING FOR SOMETHING VERY DIFFERENT
IN HIS PRESENTATION; THAT IS, A LOOK AT WHAT LIFE WOULD HAVE BEEN LIKE AT WASHINGTON TRUST BANK (WHERE HE SERVES AS CFO) DURING
THE FINANCIAL CRISIS – HAD CECL BEEN THE ACCOUNTING STANDARD OF THE DAY. THE PURPOSE OF THE EXERCISE WAS TO BE ABLE TO GET A SENSE
TODAY OF CECL’S LIKELY IMPACT AT HIS $6-BILLION INSTITUTION WHEN 2021 ROLLS AROUND, AND HIS TEAM’S FINDINGS HELPED CLARIFY WHAT
SORENSEN SUSPECTED GOING IN – THAT CECL WOULD INDEED HAVE A SIGNIFICANT IMPACT AT WASHINGTON TRUST IN THE AREAS OF FINANCIAL
MANAGEMENT, PERFORMANCE AND CAPITAL STRATEGY.

IN ADDITION TO GENERATING A FAIR AMOUNT OF BUZZ IN THE ROOM, SORENSEN’S SESSION ALSO INSPIRED LIVELY CONVERSATIONS WITH SEVERAL
OTHER PRESENTERS AND ATTENDEES – SOME OF WHOM WEREN’T IN COMPLETE AGREEMENT WITH HIS ASSESSMENT OF THE IMPACT OF CECL, AMONG
THEM A HANDFUL OF TEAM MEMBERS FROM FARIN FINANCIAL RISK MANAGEMENT. SOME OF THOSE CONVERSATIONS, IN FACT, WERE ALMOST AS
ILLUMINATING AS THE PRESENTATION THAT INSPIRED THEM, WHICH IS WHY WE DECIDED TO GET LARRY AND FARIN’S ROB NEWBERRY TOGETHER
ON THE PHONE A FEW MONTHS LATER TO DIG DEEPER INTO THE QUESTION THAT SO MANY INSTITUTIONS ARE ASKING IN THE RUN-UP TO CECL – JUST
HOW BIG OF A DEAL IS THIS STANDARD GOING TO BE WHEN WE ACTUALLY START WORKING UNDER IT?

WHAT FOLLOWS IS AN EDITED TRANSCRIPT OF THEIR WIDE-RANGING AND FREE-FLOWING CONVERSATION.

LARRY SORENSEN School of Banking in Madison, Wis.) and talking a little bit
Because CECL seemed like such a profound change in approach about CECL, but more about expected loss rates and how to
to credit loss recognition, we took a run at what our experience build losses into pricing, and how you account for cost of funds
might have been through the Great Recession if CECL were the in a rising-rate environment. It’s a very similar concept. And to
accounting standard at the time. To simplify our analytics, we your point, Larry, it depends on where you are in the cycle. If
assumed perfect knowledge. The results were eye-opening you’re in an improving cycle and have based your forecast on
as to the impact of CECL and the implications for the financial a look-back you’re going to be a little misguided. I think that’s
management of a bank across an economic cycle. what you’re getting at – when I’m basing my future forecast,
it really has an impact on where we are in the economic cycle,
From our analytics, a number of things became clear to me, one of whether we’re improving or declining in a recession. I could be
which is that I think CECL will accomplish a significant build-up in understating or overestimating my losses if I just look at a pure
the allowance position to a greater degree than the incurred loss loss history.
model, because its life-of-loan construct accelerates all future
credit losses into the current accounting period. Under CECL, a So there are multiple methods you can use. For example, using
bank’s ALLL position will be heavily impacted by the required a loss rate with an expected default frequency, your losses
forecasts – both their content and length – especially as a recession are going to be a little low compared to where you think you
becomes clearer. But I think where CECL might be misguided is all might be in a recession. And if you’re coming out of a recession
of the focus on the forecast and the belief that management will and use that same model, your losses are probably going to be
be able to take action sooner than they might have otherwise – I’m higher than they should be because when I look back, things
just not sure that’s going to be accomplished in the real world. were moving and I shouldn’t have those losses. So there’s still
Recognition of a severe downturn will likely be late. that lag effect that we have to deal with, whether you’re doing
your reserve the current way or you have migrated to the CECL
I think you’re still going to be at the inception of a recession – method. And I think you hit the nail on the head – it’s really about
with recognition from any individual management team or en how you’re developing your future forecasts and the length of
masse among the entire industry that a recession is coming – time those pools are going to be around.
and CECL will accelerate multiple years of expected losses into
today’s reporting period through provision expense and allowance One of the arguments we make here is that if you want to
builds, and that’s going to result in a lot volatility in earnings minimize the impact of CECL on your capital, you really have to
and volatility in capital that I think is going to be challenging for look at your pooling methodology and try to limit the contagion
institutions in the moment. So in advance of that, management of losses from one pool to others. So looking at how you
better be prepared to navigate through the downturn – both from currently pool in a perfect knowledge scenario, the losses
a financial perspective and a regulatory perspective. would accelerate wildly. What I would argue is if you can pool
differently and limit the contamination of losses into other pools,
ROB NEWBERRY you might be able to limit the impact of your losses based on your
Interestingly enough, I was just teaching at GSB (the Graduate future forecast.

FMS forward | NOVEMBER/DECEMBER 2018 | 27

SORENSEN volatile. And to the extent that earnings flow through to capital,
Fair enough, but sooner or later it becomes a question of timing. it will make capital more volatile as well. So when a recession
You will have losses – they may or may not align well with your becomes more imminent and the forecast turns negative and
forecasts, but sooner or later you’ll have them. What CECL expected losses are brought forward to today’s reporting period and
does, though, by disconnecting expense from the timing of the provision expense is required to build your allowance to cover those
actual loss, is to bring all the expense forward to today. CECL expected losses, you’ll end up with earnings volatility and capital
takes us from a “pay-as-you-go” model, to a pre-pay model. And volatility, and in that moment it will be too late. To me, then, one
the revenue from the moment you are recognizing those future of the insights from our analytics was that CECL will become a de
losses in your provision expense until that loan actually defaults facto capital buffer, and I think people are going to need to factor
(if it does) one, two, three years or longer into the future is not their emergency capital-raising options and opportunities into their
available to offset credit expense until future periods. capital planning.

So there’s an important shift in timing of expense, without any NEWBERRY
shift in revenue. That disconnect will bring new challenges to That’s actually a really great point. So for instance if you want
the financial management responsibilities of the CFO, executive an 8% capital buffer based on your risk profile, you’re absolutely
management and board of directors that is going to be very tricky. correct in that maybe your capital ratio should be at 10% instead of
8% just because of the impact that CECL could have based on your
NEWBERRY concentrations and your forecasting.
Right – so it’s expanding it from a 12- or 18-month look-forward to
the life of the loan. SORENSEN
And it doesn’t just map to capital. Say you do your capital planning
SORENSEN and you recognize that CECL may bring volatility to earnings and
Life of the loan and the length of the forecast. capital and maybe you factor in a capital buffer. When recognition
of a recession becomes clear and CECL then becomes a significant
NEWBERRY force in your financial performance, it may compel other things
True. beyond simply pulling the capital contingency plan off the shelf. It
may result in a curtailment of lending or a change in underwriting
SORENSEN standards or loan pricing. And don’t forget dividends. Will the
Another thing is when you talk about factoring into the impact regulators be wild about dividends when earnings get crushed by
of CECL loan pricing, maybe what CECL does is it creates that an acceleration of provision expense? There are a lot of mitigating
warehouse of strength on the balance sheet. Because if all you do steps that management might take that could be accentuated by
is risk and return and you price up your loans for risk and that flows CECL because it brings volatility to financial performance.
through the earnings, and instead of letting that find a permanent
home on your balance sheet in either a capital or allowance NEWBERRY
position, instead it gets paid out in dividends or re-leveraged in Absolutely. Obviously you can’t use your capital buffer for
the balance sheet, you may have gotten paid for your risk but you lending, so it pulls powder out of the institution’s lending ability
didn’t maintain strength on the balance sheet for the day that risk which will have a negative impact on earnings. So I would agree
comes home to you. with that statement.

NEWBERRY SORENSEN
Another point to consider is that when I took an informal survey at It will be interesting to see how the regulators ultimately adapt to
the GSB, while every bank is a little different, most of the 200 or so and respond to CECL. So far, they’ve been advocates for the industry
students in the room agreed that about 70% to 80% of their reserve to get their implementation squared away and on schedule. Then
today is based on the qualitative factors and not actually representing more recently, there may have been a recognition by the regulators
true loss rates. So it seems there’s already a cushion there based on that the financial impact of CECL could be significant, and therefore
what’s actually happening from a loss perspective and what banks they came out with a proposed regulation to, in essence, do a three-
are forecasting. So if you really only have losses of 20 basis points but year phase-in – the idea being to dampen the impact of CECL on
you’re reserving 100 basis points, changing pooling methodologies, regulatory capital, while also giving the regulators a little more time
consistently assigning credit risk, and understanding the average life to try and figure out how to adapt regulatory capital standards to
of your pools, can’t we limit the increase in the reserve to not double that potential impact.
or triple and have such a huge impact on capital?
NEWBERRY
SORENSEN That’s another good point, Larry. GAAP’s been around forever from
Sure. And I think CECL will have a significant impact on an the reserve perspective – at least 10-15 years – yet even with GAAP, I
institution’s capital planning, because it will make earnings more seldom see financial institutions reserve the same way. They all have

28 | FMS forward | NOVEMBER/DECEMBER 2018

little nuances and how they account for pooling or adding buffers. So or I can put in 100 basis points, based on what I think I’m going to do
you can imagine how complex it gets when you add in the additional and my loss history.
component of the future forecasts on top of that, and how challenging
it will be for examiners to not only understand an institutions pooling SORENSEN
methodology but also the documentation around those forecasts. How But let me make just one point here. I agree with you that that same
do you make that consistent from institution to institution? variation exists today in the incurred loss model, but because the
incurred loss model is supposed to be incurred and observable today
So that seems like one of the bigger struggles. Will the banks that – and maybe there’s a little bit of fuzziness around that based on the
have better models and documentation be able to live with a smaller size of the qualitative and whatnot – CECL is life of loan, and CECL
reserve than banks that don’t have that same level of sophistication? may have a 1-, 2- or 3-year forecast by management, which means
I’ve had two conversations with former regulators and they would CECL will then accelerate to today expected losses one, two and
get frustrated with why banks that look similar in the same peer three years out. So I think that difference is going to be accentuated
group would have wide differences between what they’re reserving. more under CECL than under the incurred loss model.
Shouldn’t they all be right around the same number? And I think
CECL will accentuate that problem a little bit when we add in the NEWBERRY
forecasting element to this. So I think there is a little risk there – Right – because of the length of the forecast. So it will be
how do you hold institutions consistent based on the risk and not highlighted because instead of 18 months it’s four years. I totally
based on the sophistication of their models and their expertise? understand that point. The interesting thing is that much like how
DFAST for stress testing works, they test the big banks and say
“(With CECL), there’s an important here’s our economic forecast in the two or three scenarios. It will be
shift in timing of expense, without any interesting for the future based on region or something if examiners
shift in revenue. That disconnect will will put out some type of forecast that helps banks somewhat get
bring new challenges to the financial on the same page versus living in their own little areas that might
management responsibilities of the accentuate the problems you just mentioned.
CFO, executive management and
board of directors that is going to be SORENSEN
very tricky.” It’s interesting that you bring up the notion of a stress test. One
of the issues that I know has been raised with the regulators is
Larry Sorensen, CFO – Washington Trust Bank the idea of what happens in a stress test context if CECL is the
accounting standard of the day. Because in a prescribed stress
SORENSEN test by the regulators, you have perfect knowledge of economic
Yeah, and I think that’s one component of variation across firms, and credit conditions for the next nine quarters, and you need to
and I think you’re spot-on there. Another component is going to reflect in quarter one your expected losses given those economic
be the forecast. So if there’s a broad range of perspectives on the conditions. That’s a very different stress test than what exists
future course of the economy and future credit conditions across the today because of the disconnect of expense from revenue and the
industry, then the leverage of the forecast on your allowance position inability to kind of pay as you go, which the incurred loss model
could vary significantly. And if 25% of the industry has a relatively allows. Instead, you’re going to accelerate nine quarters of losses
benign or favorable view of future economic and credit conditions and into quarter one, and then spend the next eight quarters earning it
25% of the industry has serious concerns, you could have the same back. So that’s an example of how CECL is going to bring volatility to
credit risk profile and two dramatically different allowance positions earnings and capital.
– not just because of sophistication and modeling and controls, but
because of the difference in their outlooks. And the regulatory capital standard gives precious little credit to
your allowance position – it only appears in total risk-based capital,
NEWBERRY and only to 125 basis points. So you could have followed that
Yes, but that’s similar to how the incurred model works today with prescription and you could have an allowance position that’s 300
the qualitative factors, right? So I can either put in 50 basis points or 400 basis points or more, and have drained that balance sheet
strength from capital and relocated it on your balance sheet as
your allowance, but you still have a regulatory capital problem even
though balance sheet strength has not changed – it’s just that the
geography has been relocated.

NEWBERRY
Yeah, it’ll be interesting. We’ve talked to a few clients about that
1.25% of risk-weighted assets – that’s almost your ceiling unless they
change the capital requirements. If you go above that, you’ve done

FMS forward | NOVEMBER/DECEMBER 2018 | 29

something wrong because you don’t get to use that overage in some NEWBERRY
capital ratios. So regulators are going to have to change that buffer It also changes maybe where the reserve is done. For many
to a higher number if at the end of the day they feel you should have financial institutions today, the reserve is done at the chief credit
more reserves than that based on future forecasts, or you’re going to officer level; maybe the CFO has a little bit of oversight, but
have institutions just holding higher capital rather than putting into the most of the mechanics are done on the lending side. And I think
reserve and saying that based on their risk appetite here’s what they CECL is really going to migrate this into a CFO function, which
have for CECL – the rest of the risk they’re holding just as plain capital means there’s going to have to be a lot of joint effort back and
as a buffer, and they’ve moved their capital target from 8% to 9%. A forth. So that makes it even harder for community institutions to
lot of this gets into the capital planning stage for institutions. implement, because you’re trying to get mindshare of multiple
groups for a function that used to be done largely by one person.
SORENSEN So I think there are going to be some struggles on that side as
I think it will result in some tricky conversations with regulators, and well, because today the chief credit officer doesn’t really care
it’s going to put the regulators in something of a quandary where about the financial reporting. But this really moves it over to the
your regulatory capital may not be adequate by all reasonable CFO’s area.
judgment, but if you add your allowance position to the conversation
of capital adequacy in some fashion, now maybe you can make a SORENSEN
case that you do have sufficient loss-absorbing capacity to navigate Instinctively, I’m inclined to agree with you, Rob, that CECL will
a downturn. So that will end up being a tricky conversation. move the responsibility for the allowance position more toward
the CFO. I believe that’s true. And it’s also true that historically
NEWBERRY the allowance position in most banks has almost entirely been
Yeah, I think what you’re really driving at here is that there are many the domain of the chief credit officer. So there’s almost certainly
other tentacles reaching out of CECL that impact financial reporting, going to be a shift, and we’ll just have to see how it sorts itself
capital planning, funding strategies – it touches a lot of other areas out over time. Because institutionally and culturally at most
other than just the reserve discussion. places, this is going to be a big change in terms of not just how
things are done, but who’s doing them.
“There are many other tentacles
reaching out of CECL that impact NEWBERRY
financial reporting, capital planning, And it should tie into your ALM forecast as well. When you talk
funding strategies – it touches a lot about future forecasts, today credit guys are doing their stress
of other areas other than just the test, ALM is doing theirs – it’s all in silos and they never really
reserve discussion.” meet. So it gets into more of an enterprise risk management
function, where the institution should be using that same
Rob Newberry, SVP – forecast across not only CECL, but its ALM and liquidity tests
Farin Financial Risk Management as well. It really forces that ERM framework that not every
institution is ready to handle right now. So it definitely changes
SORENSEN how you would implement some of your forecasting strategies.
It does. And that’s been part of my frustration with the focus of
the conversation over the past three or four years. It’s almost SORENSEN
all been implementation – and perhaps rightly so, because CECL I think you’re right. Whether it was intended or not, I think it’s
is a challenging standard to implement – but there are financial actually a positive for the industry to assess the risk profile
management consequences that finance teams and executive of the organization in a more holistic way, where in the same
management and boards and the regulatory bodies are going to conversation you’re talking about what’s happening with the
have to figure out. How do we assess the safety and soundness economy, interest rates, credit conditions, liquidity needs, capital
of an institution and the accuracy of its capital position relative to adequacy – all of those things have to come together, even if
risk with CECL? Because I think you end up with a very different they’ve tended to be compartmentalized in the past. So if in part
picture than you do under the incurred loss model – especially in spurred by the recession and in part by CECL, those things start
the depths of a downturn. to come together a little bit more, that’s a good thing in general.

30 | FMS forward | NOVEMBER/DECEMBER 2018 Shifting gears a little bit here, Rob, what’s your assessment of
the community banking industry’s readiness for CECL in terms of
implementation, and knowledge or awareness of CECL from an
impact and financial management perspective?

NEWBERRY
I think the attitude of a lot of community banks is still to

maintain a wait-and-see approach for now. There have been information that you can compare from CECL to an incurred model.
some delays already, so they’re a little gun shy about moving Because I’m guessing that a lot of institutions probably don’t
too fast. It’s like a game where everyone is in a kind of safety break their pools based on loan product type today, where in the
zone – you don’t want to be the first one to run out because future for CECL, based on the average life of the pools they may
you’ll probably get shot. So I think everybody is waiting to see want to change how they’re doing that. So it actually adds a lot of

“Whether it was intended or not, I think it’s actually a positive for the industry
to assess the risk profile of the organization in a more holistic way, where in the
same conversation you’re talking about what’s happening with the economy,
interest rates, credit conditions, liquidity needs, capital adequacy – all of those
things have to come together, even if they’ve tended to be compartmentalized
in the past. So if in part spurred by the recession and in part by CECL, those
things start to come together a little bit more, that’s a good thing in general.”

Larry Sorensen, CFO – Washington Trust Bank

who moves first and what happens. A lot of what you hear from complexity to the notion of even running dual or parallel systems
these folks is that they hope they have enough information to in this off cycle before it’s required.
run what they want to run when the time comes, because if you
wait until 2020 to start implementing, you’re probably going to SORENSEN
end up causing yourself a lot more work and expense to get the Sure. And an unanswered question is how an auditor or regulator
data you need. So I guess the best way to describe what I’ve comes in and passes judgment on a forecast as being reasonable
seen is kind of a ‘ready-alert’ status. and supported, and nobody really knows what that audit program
looks like. So as a 2021 shop, we’ll have the benefit of the larger,
SORENSEN publicly traded organizations and their auditors having gone through
What you described resonates with me somewhat. We’re a 2021 a year of reporting cycles. But this will be kind of an unfolding
institution, so our plan is to start running parallel in 2019 and drama, and I don’t know that anyone has real clarity on what these
have twelve to eighteen months under our belt before we have to audit plans are going to look like.
implement. But there are two tricky components to that. One is the
data/mechanical side – do we have control of our data, and can we NEWBERRY
calculate the quantitative portion of our allowance position? But the Yeah, I can see that first time being not really a free pass, but more
trickier part for us at this point is trying to figure out the qualitative of a dialogue to get a baseline. I think there’s a phase-in cycle where
piece – what’s the extent of certainty and linkage that we’re going they’ll give you a list of things to fix, but there will be a few years to
to be held to both by our auditors and regulators? So someone is fine-tune things.
going to have to sit in a room and develop a point of view or forecast
for future economic and credit conditions that’s supposed to be SORENSEN
reasonable and supportable. Then we have to map that somehow to I tend to agree with you, but I think the experience will vary across
expected credit losses and have that be a defensible portion of our the industry. We may have more latitude to get it close the first year
allowance position, and that gets tricky. and work on tightening things up in years two and three, let’s say,
but the larger publicly traded firms may have a rougher ride because
NEWBERRY the expectations are higher for them. So I think you’re generally
It does, and what we’re recommending to a lot of our clients right, but I think the experience is going to be different across the
is that they may want to be a little more sophisticated in spectrum of institutions that are out there.
their pooling methodology because of the future forecasting
component. But you’re going to have to have the systems and the NEWBERRY
data in place to run different pooling and different mathematical Even some of the guidance that’s out there now talked about how
calculations all on the same base loan datasets to even get a lot of institutions should be able to tweak their existing incurred

FMS forward | NOVEMBER/DECEMBER 2018 | 31

models to account for the future forecasts and use those for a CECL NEWBERRY
approach. But one of the concerns I have for some of the smaller That’s a really interesting question – on a couple of fronts. Because
institutions is that they’re going to implement a model that they we’re starting to see a rising-rate environment, so the problem is that
don’t really understand, so when they try to explain some of the there’s a disconnect between how institutions want to manage their
math to their examiners they’re going to have a difficult time. For risk and what customers really want. In a rising-rate environment,
the bigger institutions this probably won’t be as much of a concern, customers want to go long – they want a 10- or 15-year fixed rather
but for institutions under maybe $1 billion, they sometimes don’t than a 3- or 5-year balloon. And from a pricing perspective, the one
have the technical expertise to pull off some of those sophisticated thing banks can manage is interest rate risk. You can go out long
models, and then they just wind up at the mercy of their vendor to and cover that interest rate risk, but what you can’t manage is your
help them figure it out. customers’ credit risk. The risk of going short, on the other hand –
even if CECL makes you want to go short so you don’t have to do
SORENSEN the future forecast – is that you’re putting all of your credit risk in
So in many ways we agree on a lot of this stuff, but what about the the hands of your consumers, and if rates go up 300 basis points all
overall impact of CECL? Because I think we diverge a little bit there. of a sudden they can’t make their payments. Now your CECL is out
of control and you’re in a spiral, versus going out a little long and
NEWBERRY controlling some of that credit risk. So when we put it in price, we
From a reserve perspective – not a financial reporting perspective, know what the price is to go long – we know what the future cost of
because you have some good points about that, Larry – but from a funds will be if we go to 10 years. Can we protect some of that credit
pure number perspective as to the impact on capital in the initial risk, even though on a future forecast we might have a longer pool
conversion to CECL, I think most financial institutions are over- because your credit risk would be lower on that pool?
reserved today already. So if they look at their true loss history and
through changes in their pooling methodology, they’ll be able to SORENSEN
mitigate a huge capital infusion to hit their CECL target. As I think about it, will CECL – by bringing forward to today life-of-
loan expected credit losses – incent the institution to shorten up
SORENSEN the term on the loan it’s willing to offer? And if you lay that across
I think your answer is highly dependent upon economic and credit a commercial real estate portfolio, that means instead of having
conditions at the time of implementation. So if 2021 when we 10-year maturities you maybe have 5-year maturities. And now
implement looks like the fall of 2008 or the spring/summer of 2009, you’re concentrating more maturities across the industry in any
my belief is that you’ll be wildly wrong. If on the other hand when given year, and if those maturities happen to coincide with a market
we implement in 2021 credit conditions look like they do in 2018, environment that looks like 2009, suddenly those concentrations
I think you’ll be correct. And I think that’s part of the volatility and could exacerbate the impact of a recession.
leverage that the forecast and the life-of-loan calculation bring to
your allowance position. NEWBERRY
And that’s exactly the point with respect to credit risk. You’re
NEWBERRY significantly increasing your credit risk by that strategy. You’re
It all comes down to those qualitative environmental factors – what managing your interest rate risk and maybe the impact on your
I call the soft side of the reserve, or the subjective components of capital from CECL, but you’re trading a known for an unknown.
the reserve. Depending on when a recession hits and what kinds of Institutions should be taking a pool of their A credit loans and going
concentrations you have and what part of the country you’re in, that long on them. So do a $50-million pool of A credits and do a 15-year
could all have an impact. My biggest concern as to the size of the fixed and lock them in and make sure you manage your interest rate
reserve when you implement is preparation – if you just wait until risk on those deals, versus doing everything at a 5-year balloon.
the last minute and use the same pools and slap in some models,
you’re going to get toasted pretty bad and see a high impact. But if SORENSEN
you do a little legwork and get some pre-payment studies and do And you’re not doing your client any favors.
some pooling methodology changes, you’ll definitely be able to limit
the capital impact. NEWBERRY
Exactly. And some banks are going to figure this out. As soon as
SORENSEN they offer some long-term products, they’re going to be able to steal
Let me throw one last item on the table here before we sign off. You everybody’s A credits, and those competitors will be stuck with
match CECL to pricing, Rob – do you also believe that CECL may have B and C credits because they couldn’t go out and refi anywhere
an impact on structure? That is, given CECL’s life-of-loan construct, else. So in a rising-rate environment, what percentage of that rate
do you think it will incent the industry to shorten term on various increase can you pass through to the client? It depends on the
loan products? quality of the credit. §

32 | FMS forward | NOVEMBER/DECEMBER 2018

TM

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