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November Jobs Report: No Cause for Celebration or Concern

November’s national Employment Situation report from the Bureau of Labor Statistics was marginally weaker than expected. The number of new jobs reported for the month came in at 155,000, lower than the expected 190,000. Otherwise the report was in line with expectations, the headline U3 employment rate coming in at 3.7 percent for the third month in a row. Health care, manufacturing, retail, transportation and business services all added employment with the other sectors essentially flat. No sector was a notable job loser. While the U3 held steady, the broadest measure of labor underutilization, U6, ticked up only slightly to 7.6 percent. On the other hand, average hourly earnings were marginally higher, a 3.1% increase year-over-year. Perhaps most notably, the number of long-term unemployed fell substantially, 120,000 to 1.3 million who have been jobless for 27 weeks or longer. Interestingly, the knee-jerk equities markets pretty much ignored the report as they opened on December 7. With the nation essentially at full employment, the report appears to have offered little cause for either celebration or concern. A marginally weaker than expected new jobs report will add a little fuel to the argument that the economy is slowing somewhat. But it is also clear that the labor market is still in very good shape. The report could give those in the Federal Open Market Committee hesitant to vote for raising rates some support for pausing the rate hike process. It is not weak enough to rule out a hike, but it does add some uncertainty to predicting the Committee's actions.  The report is not weak enough that it would rule out a hike, but it does add some uncertainty to predicting their action. About the Author Tom Cunningham holds a Ph.D. in economics from Columbia University and [...]

2018-12-07T14:09:20+00:00December 7th, 2018|Blog, Economic Indicators|

Transitioning Your Incurred Loss Methodology to CECL

Notes from the 2018 National CECL Conference session with Hans Pettit, Horne; Anthony Porter, Moss Adams; and Garry Rank, MST Regulators have urged institutions to leverage their current methodology for the allowance in transition to CECL but make changes to it, primarily in respect to life-of-loan and forecasting requirements. The FASB expects the transition to be scalable, but that “the inputs to the allowance estimation methods will need to change to properly implement CECL.” Compared to current GAAP, which requires you to reasonably estimate the amount of loss that has been incurred (upon meeting the probable requirement), CECL is more about what cash flows you expect not to collect at origination. And while current GAAP sees all loans as good until proven otherwise, under CECL, all loans are originated with some measureable risk of default. CECL requires loans to be pooled or segmented according to shared risk characteristics for measurement. Start that process by looking at how you are analyzing your risk segments now and how they will line up for CECL. Most institutions are using a call report structure on which to base their pooling. CECL will require a more granular approach than that, but you can start there as call codes contain much useful information. Your initial pooling decisions are likely to change as you move through the process, like your methodology choice and Q-factors. You will have to continue to ask yourself if your pooling structure remains appropriate given your risk profiling. Things that may bring about a change in pooling structure are new products, changes in underwriting and standards, and loan acquisitions. The way you look at risk under CECL is going to change. CECL will force you to peel the onion back to understand why a loan went bad and that will give you a clearer picture of your risk categories. Most banks haven’t been accumulating the data they’ll need for CECL, so by year four or five you will [...]

2018-11-30T10:57:59+00:00November 30th, 2018|ALLL, Blog, CECL|

Don’t You Forget About Me: The Impact of CECL on Debt Securities

Notes from the 2018 National CECL Conference session with Gordon Dobner, BKD; John Griffin, BKD; and Dale Sheller, The Baker Group The impact of estimating credit losses for debt securities for most community financial institutions is relatively minor, certainly not as impactful as for loans. Guidance for estimating held-to maturity securities (HTM) follows the CECL standard like loans. There are fairly minor changes relative to assets-for-sale (AFS) debt securities, a modified version of today’s OTTI model. In addition for AFS and HTM securities, you’re buying after their original issuance, you have to consider whether they will fall into the PCD category. The biggest impact is determining the rigor with which you have to approach this. Typically you wouldn’t expect any losses, but the standard says to document. You don’t have to have a loss measurement if the expectation is zero at default – anything issued by the federal government that are backed, like U.S. treasuries, has a zero loss expectation. The expectation is that for most institutions the impact of CECL on HTM will be on municipals and corporate bonds. You could get to an expectation of zero if there is insurance or some other type of guarantee. You could also call it close to zero and immaterial, eliminating the need for a reserve. It is not as simple as just feeling you won’t have losses, you will have to document it. Municipal defaults over 30 years are at .15 percent, very rare, much more rare than corporate defaults, which could support your documentation of zero credit loss or immateriality. If you don’t believe zero is the answer, there will be pooling considerations, and a need to pull out securities where there might be a specific identified loss issue and analyze those [...]

2018-11-16T09:48:18+00:00November 16th, 2018|Blog, CECL|

Job Growth on a Roll; U.S. at Full Employment

Guest blog by Dr. Tom Cunningham, Economist and MST Advisory Services, Senior Advisor- Economics The Bureau of Labor Statistics’ jobs report for October was extremely strong. The November 2 release reported the U.S. added 250,000 jobs in the month, 31-plus percent more than the 190,000 expected. The other highlight number, hourly earnings, also grew substantially at 3.1 percent better than the average hourly wages reported in October 2017 – although the number is somewhat suspect given last year’s unusual decline in wages due to Hurricane Harvey. […]

2018-11-02T14:47:21+00:00November 2nd, 2018|Blog, Economic Forecasting, Economic Indicators|

Florence Distorts Job Numbers; Labor Market Remains Strong

Guest blog by Dr. Tom Cunningham, Economist and MST Advisory Services, Senior Advisor- Economics The headline numbers from the Bureau of Labor Statistics’ (BLS) September jobs report suggest a mixed employment situation. New jobs came in at just 134,000, well below the expected 180,000, while that headline unemployment rate, U3, fell 0.2 percentage points to 3.7 percent, slightly lower than the 3.8 percent expected. […]

2018-10-23T17:31:16+00:00October 9th, 2018|CECL, Economic Forecasting, Economic Indicators|

Time – and CECL – Wait for No One

Use our industry experience to build your institution a CECL “backward timeline.”  From the very announcement of the CECL implementation dates, we have been working with lenders – and spilling a lot of ink – on timelines. When do you need to get started on your CECL transition to have enough time to be ready for your implementation date?  […]

2018-10-24T10:12:41+00:00October 5th, 2018|CECL|

Overcoming Organizational Obstacles in Transitioning to CECL

Who owns the present Allowance for Loan and Lease Losses (ALLL) and the new Allowance for Credit Losses (ACL) processes in your financial institution? The Chief Financial Officer (CFO)? The Chief Credit Officer (CCO)? The Chief Lending Officer (CLO)? Perhaps it is a shared function. In my 40 years in banking, I have seen the responsibility fall to each of these roles.  […]

2018-10-23T23:29:42+00:00September 28th, 2018|CECL|