We’re continuing our Industry Podcast Series with a dive into the current opportunities and challenges specific to financial institutions. The Current Expected Credit Loss (CECL) Accounting Standard ushered in a new era for financial institutions that they are still grappling with, but the industry’s recent focus has shifted towards discussions about liquidity after the failures of Silicon Valley Bank and others.
Join our financial industry experts Jeff Burleson, CPA, and Josh Bowen, CPA, CGMA, CAMS, CITP, as they discuss the evolving landscape for financial institutions and the continued influence of CECL, as well as strategies for driving stability, growth and adaptability in the face of change.
Special Guest: Justin Headley, CISSP, CISA, CDPSE, CRISC, member of the firm’s Risk Advisory & Assurance Services Group
In this episode, you’ll hear:
- Discussion surrounding CECL and its implementation
- How the 2023 failures of Silicon Valley Bank and Signature Bank led to shifts in liquidity management
- Information about how economic uncertainty has led to the tightening of lending practices
- The importance of third-party risk management within a financial institution’s cybersecurity policy
- Strategies to help financial institutions manage staffing levels
Resources for additional information:
- Blog: Don’t Turn Your Back on CECL
- Blog: Current Expected Credit Loss (CECL) Standard Update: Best Practices for Implementation
- Blog: What is Enterprise Risk Management?
- Blog: The Biggest Cyber Risks for Your Company and How to Manage Them
- Previous Podcast Episode: Employee Retention and Recruiting in Today’s Competitive Environment
- Event Invitations: Subscribe to receive invitations to future Bank and Credit Union Roundtables.
Commentators (0:02): You’re listening to The Wrap, a Warren Averett podcast for businesses designed to help you access vital business information and trends when you need it. So, you can listen, learn, and then get on with your day. Now, let’s get down to business.
Paul Perry (0:16): Hello, everybody. Welcome back to another episode of The Wrap, a Warren Averett podcast. We’re happy to have you with us here for the next episode. Today, we’re going to be talking to some of the financial institution experts within our firm about some of the opportunities and challenges that they’re seeing when they talk to their clients. We are happy to have some of our own experts here with us, but also with us is a new co-host for our podcast: Jessica Juliano out of our Birmingham office and in our Staffing and Recruiting Division. Jessica, welcome to The Wrap, and I’m glad to have you as a co-host.
Jessica Juliano (0:53): Absolutely. I’m glad to be here. Thanks for having me, Paul. I’ve been with the firm almost 11 years now, which is kind of hard to believe. But yeah, I started in audit and decided to retire and recruit CPAs instead.
Paul Perry (1:10): We’re glad to have you with us today.
Jessica Juliano (1:12): Happy to be here. We’ve got Jeff Burleson, out of our Birmingham office, and we have Joshua Bowen from our Montgomery office here today. Welcome, gentlemen.
Jeff Burleson (1:23): Glad to be here on the podcast. So, I worked in CPA practice and then also in a family business, but I worked 14 years with an international accounting firm. In between, I worked in a family business. I’ve been at Warren Averett since 2010, and the whole time when I was with a public accounting firm and currently, I’ve been in the Financial Services practice, and I’m glad to be part of the podcast.
Joshua Bowen (1:49): Yes, so I’m in the Financial Services group as well and started with the firm back in 2005. straight out of Troy. My wife and I moved to Birmingham. That’s where it all began. I did go to work at a couple other firms in the process. But back in 2017, I had the opportunity to come back to Warren Averett and move back home closer to family. We jumped on that opportunity, and it’s been a blast ever since. So, here we are today.
Paul Perry (2:21): We are happy to have both of y’all with us today and look forward to this discussion. Let’s jump right in. Jeff and Josh, you both deal strictly with financial institutions, so you’re inside their offices and talking to them all the time. What challenges and opportunities are organizations in this industry facing? We know it’s a much more regulated industry than most, and there’s probably a lot of very unique challenges. Can you touch on some of those and what you’re seeing, Jeff?
Jeff Burleson (2:52): Yeah, sure. Probably one of the biggest changes in the financial institutions practice—I mean, it applies to various entities—but it is what we call CECL, which is the Current Expected Credit Loss. It changed how financial institutions accounted for the allowance for loan loss, and now it’s an allowance for credit loss. For public companies, it was adopted several years or a handful of years ago. For calendar year companies (12/31), they adopted it as of January 1, 2023. It actually changed the accounting from an incurred model to an expected model. FASB issued this at the time based on the recession in 2008 and 2009, and it’s generally applicable to loans and held to maturity securities. For instance, like loans held for sale—that’s not applicable to those because they were accounted for differently—anyway, for loans and held to maturity securities. One of the items that is not in the new standard is the OTTI (Other Than Temporary Impairment) on available for sale securities. That went away.
Another item that went away and is not in the current standard is the termination of impairment. There’s different ways and certain situations where that may be considered but generally speaking, impairment is not included in the current standard. Also, the intent in the standard was to not have an unallocated portion. In the incurred model, you know, you have your quantitative and then your qualitative amounts, but then there could also be an unallocated amount. But the intent was to not have an unallocated amount. However, if you look in the OCC handbook from April 2021, it is included in there. And also, currently on the call reports, there is an unallocated component that’s included in the allowance. We were at a recent conference—Josh, you want to elaborate on this a little bit?
Joshua Bowen (5:05): Yeah, absolutely. Thanks, Jeff. So, it seemed like every conference we went to last year, there was always discussions of M&A. It seemed to be the hot topic, and it has been for a while. But this year, we’re seeing a change in what we’re hearing at conferences, and it started at the beginning of the year. We thought that we were going to have a pretty simplistic year like—adopting CECL? That’s probably going to be the most complex, but then we had a little bank failure, and then another little bank failure. So, there were some issues as it comes into this topic of liquidity. So, Jeff, do you want to start us off on talking a little bit about Silicon Valley Bank?
Jeff Burleson (5:46): Sure. In March of this year—as many of you know that have listened to the podcast, especially on the financial institution side, you’re pretty familiar with Silicon Valley Bank, Signature Bank and First Republic Bank and what occurred—but basically starting back from Silicon Valley Bank, there was a run-on deposits. There were various causes of this. One of the things that has been looked at since then is: okay, who’s to blame for this? Well, there’s plenty of blame to go around. Even if you’ve listened to some of the testimony with the regulators, the FDIC and the Federal Reserve, they’ve accepted some of the responsibility for it, but management was responsible for it. It really stemmed from a mismatch on the balance sheet and managing that balance sheet with the change in the interest rates. As many of you know, as interest rates increase, the value goes down. It has an inverse relationship. If you have available for sale securities, that change is running through equity and not through the income statement. So that does effect a large unrealized loss position, and that’s what was recurring. When this occurred in March of this year (2023), one of the things that we did on our audits that were ongoing at the time—since then, we’ve actually incorporated different audit procedures—is to put some effort towards this and the uninsured/insured deposits and how the financial institutions are carrying those deposits.
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Joshua Bowen (7:45): Yeah, so watching this unfold, we started getting a slew of calls. Jeff, we were talking multiple times a day, and we were just trying to digest all of the information as we were receiving it. This actually spread to our non-banking clients within the firm, because obviously if you’re holding cash in your financial institution—you have to question: am I about to lose my money? We were assisting other CPAs and advisors throughout the firm on their questions as they were receiving them from other clients. Luckily, it was very targeted. Obviously, there are some differences in how those banks operated and how most community financial institutions are operated. Fortunately, I think what we’ve seen—and it still holds true today—is that our financial institutions are sound, and they’re stable. We’re hearing that from the top regulators down. As we perform our procedures—whether that be on the external audit side or internal audit procedures—over asset liability management, interest rate risk and liquidity procedures, we’re seeing that that our banks are definitely well positioned. We’re very thankful for that. A few things to think about though. Obviously, as we mentioned earlier, we saw this shift where it seems like liquidity is the number one topic and rightly so. These were very significant failures in our banking system. It’s been a while. Jeff, during the downturn during the great recession, we were used to sitting back on Friday afternoon and waiting on the email from the regulators to say what banks failed, right? It was just every single Friday, it seemed like we were getting a listing. It’s been a while. So, we’ve had one here, one there and then all of a sudden, we get these very large institutions. Then, First Republic comes along not long after that, so it seems like this is systemic throughout the financial industry.
Jessica Juliano (9:56): How do the complexities and the challenges that both you and Jeff have brought to the attention of this audience—how have those impacted or will impact the overall business strategy for these institutions?
Jeff Burleson (10:14): Okay, Jessica. I think with CECL, is how it was adopted and how it affects the financial statements. Actually, when it was adopted, recording the effect of it—whether it’s a hit or a pickup to the allowance, it actually goes through equity. From that point forward, it goes through the income statement. Also, if it’s a pretty significant entry to equity, the financial institution can apply a transition method over a three-year period. But, as mentioned earlier, we had several financial institutions where it was no effect. Naturally, they would not apply any transition method because there would be nothing to apply. With regards to the liquidity crisis and how that’s going to affect banks? As we had mentioned, at a conference that we were at, the thought was—like on the CAMELS ratings, a rating that the banks get—the main focus going forward (or at least in the near term) is going to be on liquidity and management.
Paul Perry (11:25): That’s it. That’s interesting. Jeff, Josh, I want to go back to where you were talking about liquidity. I’m assuming the banks are feeling like there’s a concern with liquidity. I think you’ve talked about it, but we’ve been seeing a lot of activity from the feds with rates. I assume, as those go together, so can you unpack how that changes the business strategy for banks?
Joshua Bowen (11:49): Yeah, thanks, Paul. So, you know, for most of our financial institutions, we’re seeing that they’re still pretty strong from a liquidity standing. No major concerns there, although the regulatory concerns are heightened. We’ve seen a new financial institution letter is interagency that just recently came out. It’s requiring some changes to the contingency funding plan, and so forth. It’s something that all financial institutions should review. But because of the economic uncertainty, we’ve got large unrealized losses that are tied to the balance sheet and a lot of investments that can’t—well, you could sell them, but you probably don’t want to lock in those losses—coupled with the potential for regulators wanting more on-balance liquidity. It can reduce some of that future availability and current availability of liquidity that banks may be willing to put out, which could in turn reduce the amount of loans that they may be willing to originate. What we are seeing is that when you add that along with the potential uncertainty in the economy, we’re seeing financial institutions be a little bit choosier on the loans that they’re originating. Not all are that way, but every financial institution has their own strategy when it comes to managing their assets on their balance sheet. We are seeing some of those pressures come out that business owners and consumers may start to feel. Actually, something that the Federal Reserve, I think, are relying on to some degree, as they’ve begun to spread out how quickly or how often they increase rates. Obviously, as financial institutions are not lending as much, then that puts a little bit more pressure on the spending in the economy as well.
Jessica Juliano (13:49): I think it would be interesting to take a little sidestep here. Guys, we’ve talked about pressure. Staffing is a very hot topic as well, and we’ve talked a lot about regulations and things. But for these institutions, what would you say is going to be the biggest thing that they’re going to be focusing on? Because the June jobs report came out, and it was not what we expected but what we expected all at the same time. What are your thoughts on the staffing climate for this industry?
Joshua Bowen (14:26): Yeah. We’re seeing, like in so many other things, a trickledown effect. As COVID-19 hit our financial institutions, we started seeing a lot of the big banks start putting minimum wage minimums out there that are pretty tough for some of our community financial institutions. So, we’re seeing more and more pressure, obviously, as wages continue to go up. There’s a requirement there. We couple that with the fact that a lot of our financial institutions are not in Birmingham, Atlanta or Tampa, so the labor pool for those areas can be a little bit tougher to fill certain positions. So, we are seeing where financial institutions are getting more creative. Back in the day where you may have someone in operations—whether it be a loan officer or a deposit officer—you may be sitting right in the main bank headquarters. Now, some are thinking, “Well, we have a branch in Huntsville, or we have a branch in this city. So, can we hire in a city that has more talent in that population, and let them sit there or even let them just work remotely in general?”
Jessica Juliano (15:44): That’s right, and we are seeing a compromise. You know, obviously, COVID—there’s a significant portion of industries that outside of those industries that just couldn’t do business without their people being physically on site, we’ve come to terms that hybrid is the compromise. We’re seeing a lot of that. As long as companies and these institutions can access and have the technology to reach the talent, they’ll be successful, but it is cooling off significantly. We’ll see. I don’t know what other challenges you guys are going to anticipate.
Jeff Burleson (16:24): Hey, Jessica, I think another thing is looking at the talent pool. If you’re looking at people that have, you know, maybe they were retired or maybe displaced or whatever. You know, late 50s and early 60s. They’re great talent, but they don’t want to work full time. That’s a great talent pool to pick from. Generally speaking, you know, they’ve had their career, and they’re really not wanting to climb the corporate ladder. There’s not that pressure or drama internally, but that’s a talent pool that we’re seeing being looked at pretty significantly now.
Paul Perry (17:01): Gentlemen, I know that there’s another topic that always comes up when we talk about the challenges that industries face, specifically financial institutions. That’s technology and security. I know that y’all can answer the question, but I wanted to bring in another colleague of ours, Justin Headley, who is with our Risk Advisory and Assurance Group within the firm. Justin, welcome. Welcome to the podcast, we’re bringing you in to talk about financial institutions. When you’re out there talking to those institutions, what are you hearing from a technology perspective? What are the examiners focusing on? What are those hot, quick topics from a security perspective that people need to be focused on? Again, welcome to the podcast.
Justin Headley (17:46): Thank you for having me. This is a very interesting topic for financial institutions. While the FIC has guidance and their information security handbooks on what best practices should be in place, we do see that examiners and regulators have focus areas that they key in on and have a higher focus on. We also hear a lot of these things when we host our banking and our credit union roundtables for clients, and we see what they’ve been through and experience. There are two things I want to briefly mention, and these are hot topics that we’re seeing. The first one is third-party risk management. This is not necessarily something that’s new for financial institutions, but it’s an area we continue to see increased scrutiny on. I think the reason is because we’re continuing to see large scale, third-party data breaches almost every day. The very recent MOVEit breach that we’ve all been seeing and hearing about has been very interesting. We’ve seen millions of customer records that have been exposed already, and many more companies are finding out, “Hey, I’ve been impacted here.” This has included a lot of banks and credit unions that are dealing with this. Making sure that you have a well-functioning third-party risk management program that you’re continually assessing is key.
It is critical to think about that. You can outsource that service to a third party. But that responsibility is going to rest squarely with you. If you experience a breach, as a result of a third-party issue, your customers are going to look at you. They’re not going to look at that third-party. That responsibility, unfortunately, sort of lives with you. Your internal risk is always changing and so are your third parties. Staying on top of that is essential.
The second area I want to cover briefly is incident response. This is no surprise, but we’ve seen incident response at financial institutions be sort of an afterthought and something that gets baked into your disaster recovery and your business continuity plans. Obviously since data breaches are so mainstream, you have to make sure you have a completely separate incident response plan that goes into detail on how you’re going to respond to incidents. Along those lines, you have to make sure that you are testing that incident response plan regularly. Just like how you would traditionally test your business continuity plans: prepare a tabletop exercise, get the leaders of the organization around the table and walk out how would you respond to a ransomware scenario, for example. Make sure you’ve got your ducks in a row. Recently along the lines with incident response, we’ve seen both the FDIC and the NCUA provide guidance and rules on how you are to notify and respond to an incident. Making sure that you have a good well-functioning incident response program is key. Those are just two areas that I’d say to be on the lookout for. But those are two things that you need to make sure you’ve got good controls to cover those risks.
Paul Perry (20:39): Justin, thank you for calling in and giving us some of those insights on cybersecurity as it relates to financial institutions. We appreciate your time today.
Justin Headley (20:46): Thanks for having me, guys.
Jessica Juliano (20:47): Thank you so much, Justin. You know, we brought several different topics. I’d be interested, Jeff, Josh, how should the business leaders in this industry respond to these various dynamics to position themselves and their organizations to succeed in these various environments? What do they need to do for the immediate future?
Jeff Burleson (21:12): For the immediate future, it’s probably just continued focus on credit management and liquidity management. I mean, that’s what they do anyway, but just continued focus on that. Josh can elaborate on this, but with regards to liquidity management being such a big topic now…It’s making sure that the board or the audit committee is also knowledgeable and taking responsibility for that.
Joshua Bowen (21:38): Yeah, I completely agree. At the end of the day, we have to remind ourselves that financial institutions and bankers are managers of risk, right? This is what they do every single day as they continue to expand their business strategies. For most of our financial institutions, we’re seeing that they’re in great shape. They’re not like the Silicon Valley, and they’re not running their financial institutions in very high-risk markets and customer bases. So, I think focusing on that and paying attention to risk within their portfolios, and just keep doing what they’ve been doing. Many of these financial institutions have been through World War I, World War II. They’ve seen so much, they’ve thrived, and they’ve continued to be resilient, regardless of what the economy has thrown at them. So just keep doing what you do best.
Paul Perry (22:37): Right. Good information. Gentlemen, here on The Wrap, we’d like to wrap it up in 60 seconds or less. Josh, I realize that’s going to be very difficult for you. But as we end this discussion around financial institutions, what is that one thing you want the listeners to leave with? Whether it’s something you’ve already said, maybe it’s a summary of some of the things or maybe some ideas that didn’t get into the podcast? What are those things that you want to leave our listeners with?
Jeff Burleson (23:09): Yeah, I think from my perspective, it would be that the adoption of CECL was not as big of a deal as everyone thought it was going to be several years ago. However, as the interest rates are changing credit risk, that’s going to have to be focused on. We’re probably going to see allowances increasing. You know, just the topic of the day: liquidity management. Just really focus on that. Josh?
Joshua Bowen (23:37): Yeah, I agree. For the first time in a long time, financial institutions had been under a lot of margin compression, because rates have been almost zero for a long time. Now, rates are higher, but there’s not as much margin compression there. At the end of the day, we have all these other ancillary issues. I think, for the most part that the financial institutions that we work with, and most financial institutions out there, are doing a great job. I think now’s a good time to—although we look at Silicon Valley and many other things going on, and we say, “Oh, they’re not like us.” This is completely true, but I think there’s still an opportunity for financial institutions that are doing a fantastic job to take a look at the smaller things, because all of the smaller things add up and can make significant impacts to the operations. Whether that be just spending a little bit more time looking at your model assumptions, whether that be combing through your contingency funding plan to ensure that it’s up to date and it’s aligning with the bank strategies or really just looking at the enterprise risk management process of the bank or financial institution. Just make sure that everything is aligned with the financial institution’s ultimate strategy as they look out the next year, two years, five years and so forth.
Paul Perry (25:08): Good stuff.
Jessica Juliano (25:08): Oh, thank you, Josh and Jeff. I feel like we probably could spin off and have five other podcasts based on the information y’all have provided today to our audience. We thank you both for your time, your professional insights and your expert advice on these matters. So, thank you both for being here.
Joshua Bowen (25:29): We appreciate the opportunity. Thank you all.
Jeff Burleson (25:31): Thanks. Yep.
Commentators (25:33): And that’s a wrap! If you’re enjoying the podcast, please leave a review on your streaming platform. To check out more episodes, subscribe to the podcast series or make a suggestion of other topics you want to hear, visit us at https://warrenaverett.com/thewrap/.