The worst part of making New Year’s resolutions is that very shortly into the year, they usually fall by the wayside. Last year I challenged you to make one resolution: “Resolve to incorporate a change management model into any major project you undertake.” I, too, challenged myself to one resolution—“to find a greater balance in my life for work and play.” So, how did you do?
We had a new president in January 2018; we are still seeing a more financial institution-friendly administration. There was a flurry of activity in the last few months of the year—tax reform, new Fed and regulatory appointments, and rate changes. How will those impact your financial institution? How will they affect your customers?
Last year I spoke about cybersecurity, HMDA changes, competition, retirement and succession planning, mergers and acquisitions, and strategic planning. I could speak about those topics again since they continue to dominate our work days and, in some cases, our nights. And hopefully you took my advice and utilized change management protocol to help you implement new changes in your financial institutions last year.
But 2018 is upon us, and with it will bring new challenges to implement in 2018 and old challenges to implement that we did not do in 2017. These all require careful planning in their implementation—RESOLVE to get them done right.
I think that by now you are probably tired of hearing your external CPA firm talking to you about CECL (the Current Expected Credit Loss model for determining your allowance for loan and loss balance). However, 2018 is really “where the rubber meets the road.” Implementation for most of you is 2021 (first quarter or last quarter), but that is no longer that far away. So here is my first 2018 New Year’s resolution:
RESOLVE to put significant planning and process time into implementing CECL, including but not limited to the following:
• Get your CECL team together if you haven’t already. This new accounting pronouncement doesn’t just impact your accounting department. You will need to engage your lenders, loan operations personnel, and information technology.
• Map out your plan and time frame for decisions.
• Have discussions with your examiners and your external auditors. Don’t wait until the implementation date to include them in discussions and decisions.
• Be thoughtful in choosing a vendor for modeling your allowance; some are better than others, and remember that you will need to include them in your vendor management program. Do they have a model validation performed of their product? If they do not, proceed with caution. Some of you may not need a model based on your loan portfolio.
• Contact us if you want help in implementation and project management.
While CECL will be front and center for the next couple of years along with its impact on the allowance for loan losses and capital, do not forget to keep your eye on your credit quality. The economy has been improving, the Federal Reserve just increased their target fed funds rate, and many financial institutions have seen increases in lending. We keep hearing from our regulators that credit risk is creeping up, and they have seen anecdotal evidence that financial institutions are not getting paid for the risk they are taking in their loan portfolios. The lessons from the Great Recession are not that far in our rear view mirror. Many of you (and rightfully so) have put your limited resources into implementing cybersecurity protocol, regulations including TRID, and the new HMDA. But now may be the time to take a look at your “good” loans. So, my second resolution follows:
RESOLVE to increase your independent (external or internal) loan review coverage to include some of the following:
• Pass loans that by size could cause significant event risk.
• New loans from new loan officers to make sure they understand your credit risk appetite.
• Floating rate loans that were approved but perhaps borderline on repayment based on lower than current rates.
I was at a conference late last year and heard a presenter recommend looking at those five loans in your portfolio that are like those five loans you wish you had never booked in 2008. Will they withstand an economic downturn? Should they be moved now? It’s more critical than ever to know your pain points in your loan portfolio. Get your loan reviewers working this year.
2018 will continue to be the year of digital disruption. FinTech, cybersecurity, and data breaches all make front page news in industry publications. Changes to make you safer, more efficient, and more relevant are coming at you faster than ever. I read in a study that the brain gets 11 million bits of information every minute and can deal with 40. The remaining 99.999996% is processed unconsciously. That factoid certainly reminded me about how much technological change, both good and bad, is thrown at us every day. So, my third and final resolution is this:
RESOLVE to be thoughtful and deliberate in your IT Strategic Plan and planning process this year. Resolve to include the following in that process:
• Be forward-thinking and innovative.
• BUT continue to keep your customers, their money, and their personal information safe.
• Be open to new ideas but retain third-party vendor management and the risk management process it provides to keep your systems safe.
• Encourage input from all parts of the financial institution; sometimes the greatest thoughts come from where it is least expected.
• Seek outside help when needed; it is difficult to handle a lot of this in-house (remember 40 out of 11 million bits a minute)!
I hope you take these into consideration, and I hope you had a great 2017 and will have an even better 2018. My resolution last year was to try to find a greater balance in my work and play life. It’s still a work in progress, but since my first grandchild was born on October 31, 2017, there has never been greater incentive to get that right! So, I will repeat my 2017 resolution again this year and hope that all of you find joy, prosperity, and a break from the 11 million bits of information in 2018!