written by Josh Beaird
Last month, I attended the PKF Financial Institutions Forum. The Whitlock Company, is a member firm of PKF North America, which is an association of independent professional service accounting firms. This network provides members access to specialized knowledge and expertise that exists throughout the 103 participating firms. The Financial Institutions Forum gathers annually for member firms with financial institution practices to learn about emerging trends in the industry, with specific emphasis on community banks. We covered many areas including current economic conditions, regulation and accounting rules.
The conference started with a presentation from Rob Strand, Senior Economist at the American Bankers Association. Economic growth has been slow and steady, as evidenced by metrics such as retail sales and industrial production. His belief is that, moving forward, Washington and the Federal Reserve will be most concerned with addressing unemployment and income inequality. The unemployment rate has steadily decreased since 2010 and is currently around 6.1%. However, underemployment remains elevated, around 12.1%, and is higher than historical norms.
Much of this is due to job losses in construction and manufacturing, not yet being recovered. Most job gains have been in the lower paying service sector, leading to great income inequality. The focus on unemployment has caused the Fed to be less concerned with inflation; therefore, it is expected that interest rates will remain low into 2015. Lastly, he touched on the enactment of Dodd-Frank. There is still approximately one-fourth of the law to implement, so some impacts will not be known for several years. The most obvious effects have been the growth in staff at regulatory agencies and increased compliance costs for banks.
Another session included a panel discussion with regulators from the Federal Reserve, FDIC and OCC. Some current areas of regulatory focus include:
- Reverse provision for loan loss – Consensus was, in most cases, banks that are booking a reverse provision will not have a regulatory problem, as long as there is adequate documentation and justification for the recorded amount.
- Other Real Estate Owned – It is important for banks to have an accurate fair value of their ORE property. This is especially significant if the bank will be financing the sale of ORE property.
- Model risk management – Regulators believe that it is important for banks to clearly identify and validate all models. Banks should review, at least annually, each model and determine that it is working properly and that validation activities are adequate. Models would include Asset/Liability, Allowance for Loan Loss and Liquidity Stress Testing.
- Interest Rate Risk – Due to improving asset quality and the current rate environment, interest rate risk has become a key exam focus. Management should be closely monitoring this area and already have plans for when rates begin to rise.
As has been discussed for several years, the credit loss calculation will be changing from an “incurred loss” model to an “expected loss” model. This will require that all contractual cash flows over the life of a financial asset be evaluated for impairment at inception. The final standard is expected before year end and would be phased in over three to four years. The most likely outcomes from the standard are that banks will need to broaden the range of information collected to measure the allowance for loan loss and the amount of the allowance will increase. The increase has been estimated at an average of fifty percent.
This article provides only a summary of emerging topics for community banks. If you would like further information about any of these subjects from our experienced community banking professionals, please contact us at 417-881-0148 or www.whitlockco.com.