FASB Loan-Loss Meeting Gets Heated, But Bankers See Progress

A group of community bankers left a meeting with the Financial Accounting Standards Board feeling more comfortable with a plan to shake up reserve accounting, even though the three-hour meeting was briefly halted after an awkward exchange between a top official and a community banker.

The break in Thursday's summit came after Lawrence Smith, a FASB board member, clashed with James Kendrick, vice president for accounting and capital policy at the Independent Community Bankers of America, over comments FASB Chairman Russell Golden made in a Dec. 10 speech. The ICBA had claimed that Golden's speech, delivered at a meeting of the American Institute of Certified Public Accountants, placed some blame for the financial crisis on community banks.

Smith on Thursday labeled the ICBA's claim as a mischaracterization. When Kendrick tried to counter, Smith abruptly called for a recess.

The confrontation overshadowed what appeared to be some softening of individual bankers' opposition to FASB's planned Current Expected Credit Loss, or CECL, model for loan-loss reserves. Prior to the meeting, several community bankers, along with the ICBA and the American Bankers Association, had been vocal in their opposition to the plan, which would require banks to estimate lifetime losses and set up reserves when a loan is made, rather than when default is deemed likely.

Bankers have been concerned that the proposed standard would ultimately force them to use complex and expensive economic modeling to determine how much to set aside.

FASB officials have stressed repeatedly that CECL has no mandate for modeling and leaves questions of methodology to individual banks. Those officials, along with representatives from a number of regulatory agencies who were in attendance, reiterated those points on Thursday. At the end of the day, such assurances appeared to have assuaged at least some of bankers' fears.

Timothy Zimmerman, president and chief executive at the $468 million-asset Standard Financial in Murrysville, Pa., said he left the meeting "with a better feeling" about the proposal. His comments were echoed by Lucas White, a vice president and director at the $275 million-asset Fountain Trust Co. in Covington, Ind.

"This was a very good meeting," said White, who attended as part of a group of community bankers organized by the ICBA. "I think our contingent is more comfortable with CECL."

"I was deeply impressed by the collaboration between FASB and bank regulators," said Tim Alexander, an economist and managing director at Triune Global Financial Services, a consulting firm in North Hills, Calif. "Some of the bankers walked away feeling some relief."

Banking trade groups, however, are maintaining a hard-lined stance against the proposal. After the meeting, the ICBA issued a press release calling on FASB to "hit the stop button."

"ICBA will continue making the voice of the community banking industry heard on this flawed accounting proposal, which would harm all aspects of community bank lending in this country if it is not corrected," the group's president and CEO, Camden Fine, said in the release.

"While we were hopeful that good progress could be made during the roundtable meeting, we are disappointed that the vast majority of the discussion was targeted toward aspects of the CECL proposal that had either been resolved long ago or were never part of the proposal in the first place," Michael Gullette, the ABA's vice president for accounting and financial management, said in a separate statement.

"As a result, little substantial discussion was given to the underlying source of complexity in the CECL model — the life of loan-loss concept that requires a lifetime loss to effectively be recorded at origination," Gullette added. "We will be reaching out to FASB, auditors and regulators separately so that real progress can be made."

FASB began mulling changes in loan-loss accounting in the wake of the financial crisis, when a committee it organized concluded that banks had gone into the recession under-reserved.

All the bankers who spoke Thursday said they agreed with FASB's intention of driving provisioning earlier in a loan's life cycle. Their objections focused on implementation. In short, community bankers said they fear that regulators and auditors will expect them to use the same tools and methodologies used by larger banks — something they cannot afford to do.

Greg Ohlendorf, president and CEO of the $143 million-asset First Community Bank and Trust in Beecher, Ill., said he is concerned that CECL will become a "very prescriptive and model-driven" process. The standard "asks for a myriad of projections and estimates," he said.

The solution to the divide may lie in adding language to make it clear that the change will not result in mandates for costly modeling.

Susan Hannegan, chief financial officer at Jeanne D'Arc Credit Union in Lowell, Mass., asked FASB to include examples of acceptable projections for small institutions. After Smith repeated the standards board's assurances that CECL would not prescribe any methodologies for arriving at loan-loss estimates, Zimmerman asked him to include an explicit statement to that effect in the final document.

Gullette said during the meeting that CECL's impact on banks depends largely on how regulators and auditors handle implementation. Care must be taken to make sure that banks aren't "spending $100 to get a $10 better answer," he said.

For their part, federal banking regulators pledged to interpret CECL in a manner sensitive to community bankers' concerns. Robert Storch, chief accountant at the Federal Deposit Insurance Corp.'s Division of Risk Management Supervision, said his agency had no intention of "pushing down" big-bank methodologies on smaller institutions.

Joanne Wakim, assistant chief accountant at the Federal Reserve Board, said her agency would also seek to implement CECL in a way that was workable for small banks.

Brief as it was, Smith's argument with Kendrick may have been an indication that relentless lobbying by bankers in recent weeks had proved nettlesome to FASB. Indeed, in a letter released Friday and arranged by the ICBA and leading credit union trade groups, a bipartisan group of 62 legislators called on the accounting standards board to reconsider CECL.

A public alliance of bank and credit union trade organizations, typically at loggerheads with each other, almost certainly grabbed lawmakers' attention, Fine said in an interview Wednesday.

"It's such a huge issue to us that we decided to go public" about cooperating with credit unions, Fine added. "Our members don't care who our allies are, as long we beat this."