CECL, fintech threat: What's keeping community bankers up at night

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Community bankers have a lot more to worry about than falling interest rates.

Fintech, credit unions and a looming accounting change for loan losses occupy a lot of planning time for leaders of small banks, based on comments provided at a recent breakfast meeting in Washington hosted by the American Bankers Association.

While the Financial Accounting Standards Board's decision to delay implementation of the Current Expected Credit Loss standard for most banks was viewed positively, bankers were still up in arms about the required change.

CECL is “the wrong action at the wrong time,” said Julie Livingston, the CEO of Marblehead Bank in Massachusetts.

"When you look at the impact this will have on credit in a downturn, it baffles me as to why we don’t analyze CECL’s quantitative and qualitative impacts," added Luanne Cundiff, president and CEO of First State Bank in St. Charles, Mo. "Why don’t we just pause and figure out the direction we want to take as an industry?"

The other bankers — Jeremy Callais, president of MC Bank & Trust in Morgan City, La.; Chris White, president and CEO of Peoples Bank of East Tennessee in Madisonville; Andy Anderson, president and CEO of Bank of Anguilla in Mississippi; Jennifer Jones, president and CEO of Citizens Building and Loan in Greer, S.C.; and Bryan Bruns, president and CEO of Lake Central Bank in Annandale, Minn. — also discussed the challenges they face.

Here is an edited transcript of the conversation.

Are you open to partnering with fintech? How will fintech impact your bank?

BRYAN BRUNS: It seems like every six months we have new technology coming out. There are new customer demands for innovation and how quick to the market we are. That’s something really concerning to me and a lot of bankers. We’re trying to figure out this plethora of fintech out there. Who’s credible. Who’s not. Who’s tested and who’s not.

The whole space is evolving constantly. Until we get it figured out, it’s going to be difficult for the banking industry to be really innovative, especially with the regulatory environment we’re in.

JENNIFER JONES: For just about every area of the bank, I understand where our risk lies. I’ve sat in every position. I’ve done lending, deposits and teller work. I’ve done operations.

IT is growing so exponentially fast, and I don’t know what I don’t know to make sure we’re mitigating our risk. I’m out of my league. It’s hard to manage because I don’t understand it. It’s Greek to me.

We had somebody in an IT role who kind of got the job out of default. Now we’re going to have to look at getting a specialized person to take over. We’re fine so far, we’ve had great audits and examinations, but if things keep going the way they’re going we won’t because the technology has outgrown our knowledge base.

ANDY ANDERSON: We have 30 employees, and we have to be knowledgeable in every area. It doesn’t matter the size of the bank. There’s the same core knowledge you have to master. For us, one bad decision can close our bank. If our bank shuts down, our community will shut down. We have to be very careful on the technology side and who we partner with. It’s why we can never be on the front edge.

How's your CECL preparation? Will FASB's extension provide ample time to get things in order?

CHRIS WHITE: We just finished an exam last week, so CECL is fresh on our mind. We had a 30-minute conversation with the regulators about where we are, knowing our first reporting period would be the first quarter of 2023. It makes you feel a little relieved, but the thing you can’t do is rest on your laurels.

We’ve been gathering historical data for quite some time. Our concern, early on, was the impact it will have on the initial, front-end adjustment we’re going to make. More and more, the people working through it and from our CPA firm believe there will be less of an impact than we originally thought. We don’t see it being as large an impact now as we did when they first started talking about it.

We’re going to be prepared. I’m hoping we’ll continue to see some adjustments with it, though, in terms of how it’s calculated and that sort of thing.

LUANNE CUNDIFF: FASB did extend it, so they listened to an extent. When you look at the impact this will have on credit in a downturn, it baffles me as to why we don’t analyze CECL’s quantitative and qualitative impacts. Why don’t we just pause and figure out the direction we want to take as an industry? If accounting standards start to impact capital levels, it’s going to have a very broad impact nationally.

JULIE LIVINGSTON: It’s reasonable to assume that, if we have until 2023, we will experience an economic downturn. My concern is, as people are starting to adopt CECL and there’s an downturn, what’s going to happen to availability of credit when consumers need it most?

I’d like to see continued review. From a community bank standpoint, there are those of us on Main Street and those of us on Wall Street, and we’re completely different entities. Implementing this for Wall Street is one thing. They have the power to do what CECL requires. For us, it’s a great difficulty.

I personally think it’s the wrong action at the wrong time. It’s a knee-jerk reaction to the biggest recession since the Great Depression. It’s a little too little, a lot too late. There were a lot of other pieces of legislation that were put into place in response to things that happened in 2007, 2008 and 2009. This is overkill. I think it will hurt communities more than anything else.

ANDERSON: We’re the only bank in two counties. Our region experienced serious flooding. We had 545,000 acres underwater. We had several businesses go under. Our farming was a disaster this year, a lot of homes underwater. That could impact impact our loan-loss reserves. The impact on our reserves is one of the uncertainties about CECL that scares us.

Any thoughts on SBA lending?

WHITE: I have one commercial lender that does a fair number of loans with them. We’ve been very pleased with the responsiveness we’ve gotten from our local office. They do a lot of outreach. But for a small or midsize bank it always comes back to the amount of documentation and processing. It’s a burden. A lot of times you find that after you get to the point where the SBA is good with it, you’d almost be good with it without a guarantee. We utilize it when we can, but we’re limited by the amount of labor and documentation that goes along with it.

CUNDIFF: I never want to think that anyone navigates their strategy based on paperwork or regulatory layers, but in a couple of cases we did that. With SBA lending, we dabbled in it, but in my opinion you can’t dabble in 7(a) lending and do it correctly and efficiently.

How are credit unions impacting your business?

JONES: The biggest thing we’re seeing is the impact with talent and staffing. We had two great applications from credit union employees for teller positions, but they were making $45,000. In our area that’s a good salary. We know a lot of credit unions can make more money, so they can pay more. That’s hard when good talent is hard to come by. We’re having to kind of up the ante a bit because of the credit unions. They can pay higher compensation.

BRUNS: Bankers are pretty resilient. We’re entrepreneurs first. We don’t mind having competition, unless it’s an unfair playing field. There are a lot of people trying to divide the banking industry between large and small. I think the credit union industry is where we should be focusing.

Some have stayed true to their mission and to their core belief and common bond. Those are good for communities, whether we like them or not. But when credit unions decide they want to broaden their scope and have a field of membership that covers a seven-county metropolitan area, public policy people should be questioning that. Not just bankers, there should be other people asking why there are tax advantages for somebody that wants to act and be just like a bank. That’s what I think is frustrating.

One other thing that’s a bit concerning is that credit unions are supposed to be serving people of modest means, yet you see some have naming rights on sporting venues. It would be interesting, I think, to see who actually serves people of modest means in the financial services industry. I wouldn’t be surprised to see that banks do a better job, even though it’s not our mandate.

CUNDIFF: Now you have credit unions acquiring banks, so you’re taking away the taxpaying entities. It’s a conundrum, for sure.

What do you think of the First Horizon-Iberiabank deal?

JEREMY CALLAIS: We’d kind of heard some rumblings about it. In our smaller markets, in our rural markets, people really are searching for community banks, so it presents quite an opportunity.

The fact [First Horizon] has no Louisiana presence; that in itself is an opportunity. [Iberiabank] competes directly in all our markets. In the larger markets, we’ve found that the larger the bank, the more competitive they can be. They tend to get the rate shoppers. It’s really an opportunity for us in our smaller markets.

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