The Impact of FASB’s CECL Model on Community Banks

February 3, 2016

Tomorrow, Feb. 4, the Financial Accounting Standards Board (FASB) will host a meeting at its offices in Connecticut to discuss the impending release of the current expected credit loss (CECL) model. CECL is a complicated methodology intended to calculate future expected losses on each loan booked by a financial institution. It will require the collection and maintenance of data heretofore not collected. Tomorrow’s meeting will be attended by representatives of the Independent Community Bankers of America, the American Bankers Association, all of the federal regulators, and independent bank auditors from several accounting firms. FASB will be represented by its full board of directors and likely several staff members. This meeting is extremely important for bankers, particularly for community bankers.

FASB seemingly is of the opinion that the recent financial crisis could have been avoided had CECL been in place. The reality is that CECL would have had only a miniscule, if any, effect on the financial crisis. The model appears to be based on the premise that collecting and analyzing additional data, and creating a model to run that data through, will solve all problems with the establishment of the allowance for loan and lease losses (ALLL). What FASB is overlooking is that economic forecasts are rarely accurate, and CECL is based in part on forecasts.

As a banker friend put it, FASB has become a renegade organization that is accountable to no one. It seems to have given little thought as to how CECL will negatively affect the smaller end of the banking industry. Small banks already are being sold every business day of the year, with no new banks being formed to replace them. CECL will be the last straw on the camel’s back for many of the remaining small banks, which will be driven to seek merger partners. The massive amount of regulatory burden cast upon these banks is immense, but this new effort to force lenders to comply with CECL is particularly hard to accept. Bankers can vote for or against elected officials, who enact the laws that allow regulators to draft the rules. However the FASB board is not elected by any public process, yet it can impose its will upon the financial services industry.

I have often written about the uniqueness of the delivery of financial services in this country compared to the rest of the world. We have financial services providers of all sizes and charter types, which bring a variety of business models to consumers, businesses and governmental entities. Independently owned and operated, our banks focus their efforts on their customer bases. By contrast, the rest of the world operates with a few large banks, often owned in part by the government. I struggle to understand why our legislative, regulatory and FASB-like entities continue to impose requirements which force out those smaller financial institutions that deliver the local services that help make our system unique … and our country the greatest economic engine ever on earth.

The other perplexing aspect of the CECL issue is that the ALLL system is an accounting creation intended to focus on an institution’s readiness to cover losses. However, as the financial crisis revealed, the ALLL is nothing more than an accounting exercise. Additionally the crisis reminded us that what truly matters for a financial institution to survive financial turmoil is the amount of capital the institution has. Capital is the real ALLL.

FASB is issuing CECL as a new ALLL calculation methodology that will adjust a previously created system of loss recognition that ignores the fact that capital is the only true measure of an institution’s ability to weather a bad economy. FASB should be pleased with the growth of capital in the financial services industry since the financial crisis. Instead it is unleashing a system that threatens the landscape of our unique financial services delivery system and the economic foundation of our nation.

The ray of hope for tomorrow’s meeting is that, in addition to attendance by ABA and ICBA staff, a number of community bankers also have been invited. Among those are Lucas White of The Fountain Trust Company, Covington, Indiana. White is an insightful community banker who serves as vice chairman of the ICBA Lending Committee. He also is a past member of the IBA board of directors and past president of the IBA Future Leadership Division. The Indiana banking community appreciates Mr. White’s leadership and wishes him well in this impactful meeting.

– S. Joe DeHaven

Safety in Banking Through the Decades

January 27, 2016

The Indiana Bankers Association has a rich history dating back to 1897. In its early years, the IBA’s focus was on getting banking structure law written into the Indiana Code. In the mid-1920s through the early 1930s, the focus switched to protection of bank funds and employees. IBA’s first full-time staff leader was Forba McDaniel. Among other accomplishments, such as launching Hoosier Banker magazine, Ms. McDaniel established the IBA bank guard program. With robberies escalating, she also started the “Today’s Protective Bulletin,” which was distributed to Indiana bankers to notify them of suspicious characters.

The bank guard program essentially consisted of vigilante groups of armed bank guards, mostly made up of bankers themselves, to protect Indiana banking institutions. In 1925 the IBA issued 886 rifles, 1,210 revolvers and 2,000 shotguns to bankers to help them protect their institutions! At the program’s peak, there were more than 3,000 deputy bank guards assigned to 1,113 IBA-member banks. From 1926 through 1942, the IBA hosted annual shoots at Fort Benjamin Harrison to thank and recognize bankers for their participation in the bank guard program.

In 1932, the foundation of what today is the Indiana State Police was formed through legislation initiated and supported by the IBA. Working for Ms. McDaniel during this time was a young man named Herman B Wells, who later went on to become long-time president and beloved chancellor of Indiana University. In addition to his academic advancements, Wells is largely credited with the formation of the Indiana State Police. He also was instrumental in getting legislation passed to form the Indiana Department of Financial Institutions; Wells served the fledging DFI as bank supervisor and as head of its research division.

Clearly it was dangerous to be a banker back in the late ’20s and early ’30s. While it is much safer today, the threat of violence still looms. I have met too many bankers during my career who were victims of robberies, sometimes with tragic consequences.

Last Thursday, Randy Peterson, president and chief executive officer of Bank of Eufaula in Oklahoma, was shot and killed during a senseless robbery. Mr. Peterson, 64 years old, had been with the bank since 1979 and was a community leader and respected family man. While most crime against banks today occurs electronically, this horrific event serves as a reminder that armed robberies still take place. The perpetrators are generally not rational and often are quite volatile. Our thoughts and prayers go out to the family and friends of Mr. Peterson and to the town and community of Eufaula.

In Indiana, we should be thankful for the vision of Forba McDaniel, Herman B Wells and the brave bankers of the 1920s and ’30s. Our state and our nation are safer for bankers today than in decades past. The efforts of pioneering banking leaders certainly have shifted the attention of bankers back to banking, rather than serving as vigilante guards. Events such as last week’s tragedy in Oklahoma, however, remind us that an element of danger continues to exist for bank employees. As leaders of the banking industry, we must never take lightly our duty to maintain proper training and precautions to safeguard at-risk bankers and customers.

– S. Joe DeHaven

The Decline of De Novos

January 20, 2016

During the recent financial crisis, one class of banks that suffered failure at a disproportionately high rate was that of the de novo (newly chartered) banks. Newly chartered institutions, from the mid-1990s through the time that the crisis hit, did not fare well. Indiana, however, was an exception. Thanks to solid, conservative leadership of the Indiana Department of Financial Institutions ‒ which continues to this day ‒ de novo applications in Indiana were screened properly. This was not the case in many other states, for example Georgia and Florida, that did a poor job of screening applications. It seemed that nearly anyone who could raise $15 million in capital could obtain a charter, regardless of the quality of the business plan. Shame on those directly responsible for their lack of due diligence, and shame on the Federal Deposit Insurance Corp. for insuring those deposits without adequate review.

The result of these poor decisions is that all of the diligent banks and state departments lost billions of dollars, plus felt the sting of eroded public confidence and tarnished reputations. This is a cause-and-effect that has never been thoroughly studied or reported, which I find baffling.

Regardless, we now find ourselves subject to a pendulum that has swung too far the other way. The story of de novo banks during the past 20 years is truly a tale of two extremes. From 1996 through 2007, the United States averaged 129 de novo banks annually. Undoubtedly this was too many, since so many of them failed. In 2008, when the crisis fully unfolded, the number of de novos dropped to 73. In retrospect, few of those should have been chartered. In 2009 there were only 20 de novos. Most recently, during the six-year period from 2010 through 2015, there have only been four new charters granted throughout the nation.

What might be the reasons for this drastic pendulum swing? I suspect there are several. First, the banking regulators have been beaten up by Congress over the financial crisis so badly that they are afraid to make any decisions that could be criticized later. Second, Congress has passed a litany of laws, including the Dodd-Frank Act, that have increased the regulatory burden to where it is extremely difficult for any bank to make a profit that will attract investors in the capital markets. This particularly affects small community banks ‒ which is how all banks start out. Third, anyone who is willing to start a bank today has to have a very good, specific reason for doing so. Otherwise, why would anyone subject themselves to this level of scrutiny for such a small return?

The United States is unique in the world because of our diversified financial services industry. We have banks that serve small communities, we have banks that serve midsized regions, we have banks that serve entire states, we have banks that serve the country, and we have banks that serve internationally. Since the financial crisis, many banks have failed, and many more have merged. The outcome is that banks are getting bigger, and there are fewer of them. Consequently many communities are no longer served by a locally owned bank, and some communities are no longer served by any bank. Sadly, those communities are dying.

The only hope of retaining our unique financial services structure, which has made the United States the most financially powerful country ever on earth and the envy of the world, is to roll back the regulatory burden so that small banks can survive, and so that regulators can find the right formula to allow de novo banks to once again be chartered regularly. Let’s hope that message reaches the powerful people in Washington, D.C., before it is too late.

– S. Joe DeHaven

Dodd-Frank ‒ The ‘Gift’ That Keeps on Taking

January 13, 2016

An issue related to the Dodd-Frank Act that has received little discussion to date is a requirement that the Federal Deposit Insurance Corp. impose a surcharge on banks over $10 billion in assets, once the fund reaches 1.15 percent of insured deposits, to boost the fund to 1.35 percent of insured deposits by Sept. 30, 2020. The FDIC has sought input from the banking industry and public at large regarding methods by which to meet this requirement. Not surprisingly, the industry is divided on how to best accomplish this mandate.

The FDIC has suggested that perhaps the surcharge be assessed over eight quarters. While many banks agree with that time frame, the American Bankers Association, the Clearing House Association and the Financial Services Roundtable have recommended in a joint comment letter that the timing be stretched out over 14 quarters. The organizations did note in their letter that about 60 percent of their member respondents support this time frame, leaving 40 percent that favor some other option. Some of the larger banks favored a one-time-only charge. One bank specifically favored a one-time-only charge, to be assessed in 2020.

The Independent Community Bankers of America has indicated in a comment letter that the eight-quarter period seems reasonable, but that it favors a four-quarter period. Small banks will be able to utilize credits once the fund reaches the 1.35 percent target; those credits are a reward to smaller banks for helping to replenish the fund. Thus, the sooner the fund reaches 1.35 percent, the sooner small banks can use their credits.

Yet another opinion has been voiced by the Mid-Size Bank Coalition of America, which represents banks between $10 billion and $50 billion in assets. This group is asking the FDIC to impose the surcharge only on the highly complex banks, contending that the current proposal “places a disproportionate amount of responsibility on mid-size banks for subsidizing the cost of bank failures.” The argument seems valid, considering that $10 billion banks are being treated the same as trillion-dollar banks.

The Dodd-Frank Act is the gift that keeps on giving ‒ or in the case of banks, the gift that keeps on taking. It punishes all banks of different sizes and business structures and charters at different times, on different issues. There still remains about 25 percent of the act to be promulgated through rule-writing. In July we will hit the six-year mark since DFA was signed into law by President Obama. Perhaps lawmakers will have it figured out by the time Dodd-Frank turns 10 years old!

The board of the FDIC certainly has a big decision coming up soon on this surcharge, as it appears that the 1.15 percent of insured deposits level will be met during 2016. As that time draws nearer, this topic will surely be debated by bankers throughout the country, representing institutions of all different sizes.

– S. Joe DeHaven

How Did We Do? A Review of Last Year’s Wishes

January 6, 2016

Happy New Year! My first blog last year was a top 10 wish list, along the lines of David Letterman, for the banking industry. I clarified that it was a list of wishes, not resolutions, since we had little if any control over the outcome. Nevertheless, it seems appropriate to revisit the list to see how many wishes came true, and the results follow:

No. 10: FASB simplifies the rules for financial accounting by banks and recognizes that the banking industry is already heavily regulated and examined. Result: FASB seems to have gone the opposite direction, with proclamations that it will cast its current expected credit loss mandated calculation upon banks.

No. 9: The federal government balances its budget, bringing stability to the economy and creating an environment in which our children and grandchildren can succeed. Result: Did not even come close.

No. 8: Banks once again become authorized to make credit risk decisions, instead of tying up time and talent trying to evaluate regulatory risk. Result: There was some minor success in the highway bill, but much work remains to be done.

No. 7: Banking takes back the payments system. Result: Not yet!

No. 6: The Federal Reserve Board moves up interest rate levels to be more in line with historical norms, allowing banks to once again enjoy interest rate spreads. Result: The Fed moved up levels by 25 basis points; it is a start.

No. 5: Loan demand, particularly commercial loan demand, returns to normal levels, as business owners and managers detect more certainty in the future. Result: Some improvement noted, but far short of normal levels or future certainty.

No. 4: Government and businesses, including banking, align to combat cybersecurity threats, eventually eliminating cybercrime altogether. Result: No progress, as retailers continue to duck responsibility for their inadequate security systems.

No. 3: A regulatory relief bill passes that: simplifies the overly complicated and burdensome mortgage compliance process; reigns in, eliminates, or at least places a governance board and congressional budgetary constraints on the Consumer Financial Protection Bureau; and provides relief from additional overkill in the Dodd-Frank Act. Result: Most disappointingly, we failed to move the needle on this one.

No. 2: Reign in the Farm Credit System banks from predatory pricing by making them pay state and federal taxes at the same rates as banks and thrifts, and subjecting them to the same regulatory compliance as banks and thrifts. Result: Did not succeed in these areas specifically, but did get an oversight hearing before the House Agriculture Committee at which the FCS had to defend its predatory actions and failure to meet its mission. This hearing was a huge victory for banking advocates, since it had been over a decade since FCS went before Congress to report its activities.

No. 1: Credit unions, regardless of charter, pay state and federal taxes at the same rates as banks and thrifts, and are subject to the same regulatory compliance as banks and thrifts. Result: We had no success in getting a level playing field with credit unions. In fact the credit union regulator, the National Credit Union Administration, is even attempting to widen the gap through regulatory processes.

While 2015 was not a successful year regarding these important issues, we must continue the fight. The banking business is essential to every business and consumer in this great country, and we have to make sure that we sustain an environment in which banks can provide those needed products and services. Thus the fight goes on into 2016 and beyond ‒ and your Indiana Bankers Association will be leading the charge.

– S. Joe DeHaven

Reg Relief Fails Again

December 23, 2015


One of the more frustrating experiences in life is to spend hours and hours working on a project, but failing to get it finished. Even if there are valid reasons for the incomplete, it still chalks up as a failure. The barriers to success may be out of your control, yet the failing leaves an indelible mark. Sports brings these lessons to all of us by the basketsful.

These failings take much time to heal. Such an event occurred last week. After working countless hours, days and weeks over the course of several years, this was supposed to be the year that we would finally gain meaningful regulatory relief for banks. It seemed the stars had aligned to make it happen, and stayed lined up just to watch us celebrate. But there is no joy in Mudville. The might Casey has struck out. Despite the diligent efforts of thousands of bankers and industry lobbyists working their grassroots networks, regulatory relief did not pass Congress. I could hardly believe that all we got was a study for Basel III and the few important, but minor, relief items that came at a high price in the transportation bill a couple of weeks ago. The high price was the confiscation of about $20 billion of Federal Reserve funds and the reduction in the interest paid on mandatory reserves held by banks over $10 billion in assets at the Federal Reserve. Effectively, this is an additional tax on banks, while credit unions remain tax-exempt, and the Farm Credit System continues to enjoy significant tax advantages.

Throughout the year, we were confident that 2015 would be our year. Sen. Richard Shelby, chairman of the U.S. Senate Committee on Banking, Housing & Urban Affairs, passed a bill out of his committee that provided the desired regulatory relief that the banking industry had been crying out for the past several years. We believed we had finally persuaded Congress that banks have become unable to satisfactorily serve their customers. In other words, the problem is how Congress’ continued burdening of banks is affecting customers, who are also voters. This was not some slick PR campaign. It was real stories from real bankers from throughout the country.

In all fairness, Sen. Shelby’s bill was not popular among many Democrats. However, four Democrat senators understood the reality that banks are being hamstrung from serving customers. Among those statesmen was our own Sen. Joe Donnelly who, along with like-minded Democrat senators, worked closely with many Republicans, from Memorial Day until a week ago. While we deeply appreciate the huge efforts made, particularly by those four Senate Democrats, we are left with a hollow feeling of failure. Why can’t all of the Democrats see that many of these regulations are holding back the full potential of economic recovery? Why can’t the Republicans take half a loaf, rather than hold out for the whole thing? Did we, as leaders of the effort to get regulatory relief for our members, leave some stones unturned? Where did we fail, and why?

So far the answers to these questions are unclear. Over time we will find some answers and adjust our strategy to go back into the ring for yet another fight. One thing that is clear is that those of us who lobby on behalf of banks and bankers sincerely feel for those banks and bankers. Our understanding and appreciation for what bankers do every day for their customers and communities make us want to to pick up the sword and go back to battle. We share your frustration and will keep giving 100 percent of our efforts until you are once again able to serve your customers and communities appropriately.

– S. Joe DeHaven

IBA’s Winning Team

December 16, 2015

Like many people, throughout my life I have always enjoyed watching awards shows. It doesn’t matter if it’s the Academy Awards, the Emmys, the Tony Awards or the Country Music Association Awards ‒ mix some glitter and glamor with healthy competition, and I’ll take the time to watch. The difference, though, between watching awards shows as a teenager and watching them today is that I used to know who the nominees were. Now, more often than not, I am unfamiliar with the actors, the movies, the entertainers and the songs.

The banking business has its share of awards programs, too. Recently in this blog I wrote about Old National Bank, Evansville, and Ben Joergens winning top national awards at the American Bankers Association annual convention for their impressive consumer education outreach. A couple of years ago, The New Washington State Bank, Charlestown, won a top national award from the Independent Community Bankers of America for the bank’s heroic response to deadly tornadoes in southern Indiana. American Banker newspaper in recent years named Mike Kubacki, former president and CEO Lake City Bank, Warsaw, as Community Banker of the Year. These accolades are proud moments for the recipients and reflect well on the full Indiana banking community.

Staff members of the Indiana Bankers Association are no strangers to winning awards. Each year since 2002, the Indiana Society of Association Executives has hosted an annual “STAR Awards” ceremony. Each year since 2003, the IBA has been honored with at least one STAR Award. The many Indiana trade associations represented compete for awards of excellence in categories such as Outstanding Convention or Outstanding Website. Other STAR Awards recognize individuals, such as Association Professional of the Year or Association Executive of the Year.

Last week the 2015 Awards ceremony took place. Once again, IBA was well recognized. IBA won in the category of Outstanding Individual Program/Event for creating a successful Future Leadership Division “Day at the Statehouse” program. Kudos to Dax Denton, Christina Bennett and Josh Myers for the planning and execution of what will now be an annual event. IBA also won in the category of Outstanding Non-Dues Revenue Program, in recognition of the IBA Marketing Packages for associate members. The Marketing Package concept was created by Paul Freeman several years back, and is now ably managed by Rod Lasley and Susan Clark.

A particularly proud moment, however, was the selection of Amber Van Til, IBA executive vice president, as 2015 Association Professional of the Year. This individual award is presented annually to a non-CEO in the association business. What makes Amber’s win so impressive is that she is the sixth IBA officer to be so recognized in the award’s 14-year history. I am not aware of any other organization that has won the Association Professional of the Year award more than once, yet six of our professional staff have been honored: Paul Freeman, Laurie Rees, Christina Bennett, Laura Wilson, Dax Denton, and now Amber Van Til. Bankers in Indiana are well served by the dedicated professionals of the IBA.

I am extremely proud of the IBA staff and the accomplishments they achieve year after year on behalf of our member banks and bankers. Thanks to the inspiration of our membership, IBA staff has worked hard and has been blessed with awards for accomplishments achieved throughout the year.

– S. Joe DeHaven




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