Gems from the Generals- Day 2 of National ALLL Conference General Sessions

Notes from the General Sessions of Wednesday, May 24, 2017: 

Session: The Board, Investors and Expected Credit Loss

Presenters: Garry Rank, MST Advisory Services; Chad Kellar, Crowe Horwath; Ben Hoffman, KPMG; Walter McNairy, DHG Financial Services

• To be effective in governing, your board needs to understand the standard. 

• The provision is going to evolve over the years and it is important that your board understands that. Also, you will need to explain to your board why your expectations are different from your peer institutions. 

• Find out if you are a Public Business Entity (PBE). It is critical to know if it applies for several reasons, including that the CECL implementation date for PBEs is a full year earlier than privately held institutions. (A full discussion of PBEs is coming soon).

• It is important to have day-one data on acquired loans as that will be needed for a compliant CECL estimate. If you’re a seller you might want to adopt early, or at least be well down the road toward transition so you are prepared to share the expected impact of your portfolio with your acquirer. 

• One of the challenges to assembling the data needed for CECL is the low number of charge-offs and lack of losses in recent years. 

Session: Bankers Share CECL Transition Experiences

Presenters: Muneera Carr, Comerica; Dave Cogswell, Chemical Bank; Mark Williams, Renasant; Hans Pettit, Horne LLP 

• Regulators want us to walk them through our implementation process and want to know how we’re going to get there. 

• Long-term loans will be considered differently under CECL. People in the bank or credit union understand that, though not why or how. 

• Need to foster a culture of collaboration not cooperation: healthy conflict, challenging your thinking. 

• Have to document thoroughly the testing you do through all the scenarios – documentation that clearly outlines the processes you’ve gone through, controls you’ve put into place, and results, then why you think it is not an appropriate methodology. 

• Loss emergence period is converging with life of loan. 

• Best advice is to give yourself the time you need to ensure you are producing the best results for your institution.

Session: Signals or Noise? An Economic Forecast

Presenters: Tom Cunningham, MST Advisory Services; Max Oberkofler, MST 

• Adjustments for economic data: Have to ensure there is actual causation between economic data and your loss experience. 

• Because of aging baby boomers, economic growth is going to be slower. Considering current productivity growth of 1% to 1.5%, the new normal is about 2%. 

• Trade deficit: what matters is the change in the trade deficit not the deficit itself. 

• Labor market: averaging a little over 200,000 new jobs per month with 120,00 people coming into the work force. But in an average month in the U.S., about five million people get a job and about five million lose a job. The 200,000 in growth represents the difference. 

• FRED database – approximately 280,000 data series (economic indicators) compiled by the St. Louis Fed, including state and city measures.

Session: Governance Best Practices

Presenters: Graham Dyer, Grant Thornton; Walter McNairy, DHG Financial Services; Dorsey Baskin, MST Advisory Services

• The governance over the process is as important as the quality of the process itself, because in the year of adoption the bank will spend as much time defending the process as it did developing it. 

• The one thing you have to rely on is the quality of your governance. Ultimately it’s not what you do but why you did it. 

• Most ALLL errors go back to a lack of controls. Use CECL to improve your controls. 

• Most common question from institutions today about CECL is, “Where do we start?” The best answer might be with the development of a steering committee. 

• CECL will be more volatile. There will be greater procyclicality: loss provisions bigger as the economy gets worse and smaller than incurred loss as it gets better.

The MST 2017 National ALLL Conference was dedicated to everything involved in transitioning from incurred loss to CECL modeling. Attendees left the conference with the information, ideas and insights that will allow them to lead the transition to CECL compliance for their institutions. From hard and fast rules to anecdotal commentary, the nation’s leading experts on the ALLL shared their knowledge and observations through three days of intense education. In this and two other blogs, we share some of the gems from each day’s general sessions.

Day 1 Session Notes

Coming soon: The MST 2017 National ALLL Conference Digest, a compilation of summaries of the conference general sessions and workshops. Make sure that you are subscribed to receive the release of the digest in your inbox.