CFO Consulting Partners

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Webinar: CFOCP Collaborates with Continuity

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On June 25th CFO Consulting Partners’ Director Chip Steppacher and Managing Director Eric Segal were hosted by Pam Perdue on a webinar focused on restoring Bank financial and operational performance in uncertain times. Follow this link to view a recording of the event:

https://www.continuity.net/regulatory-compliance-erm-resources/webinars-archive

Continuity ( https://www.continuity.net/ ) is a provider of regulatory technology (RegTech) solutions that automate risk and compliance management for the financial services industry.

Webinar: Leadership Opportunities Through The COVID-19 Pandemic

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On June 18th, 2020  CFO Consulting Partners Director Larry Davis and Managing Director Eric Segal presented a webinar with Northern New Jersey Community Bankers on Leadership Opportunities Through The COVID-19 pandemic. Crown Bank Vice-Chairman Paul Fitzgerald moderated the discussion and Jill Freeman of Employment Practices Group, LLC ( https://www.epgstrategy.com/ ) provided thoughts and advice on Organizational and Leadership Opportunities.

Click here for the Webinar Presentation

Thoughts About Your Accounting Close and Financial Reporting with a Remote Workforce

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Many businesses are adopting social distancing strategies, including increased use of remote workforces to adapt to and fight through the Covid-19 crisis. Completing monthly, quarterly or annual financial reporting activities can be challenging to accomplish remotely, so we share our experiences in assisting clients to do so in this article. With thoughtful management, the efficiency and effectiveness of accounting and reporting processes can be maintained as much as possible with a remote workforce.
The physical separation of remote workforces adds difficulty to all involved. While many of the tools used under “normal operations” continue to be effective, the remote nature of the workforce may change the way in which the work product is compiled and assembled. It will also change the interaction needed between team members to complete, review and perform quality control on the work products. Therefore, leaders need to make extra efforts to overcome the difficulties of operating remotely.
  • Clearly define goals and project plans, and monitor and report on status. These disciplines are more important now than ever before to enable processes to run smoothly and avoid fire drills that are even more challenging in a remote environment.
  • Communicate more than “normal” so that everyone can become comfortable with remote work and interactions.
  • Ensure that the technology and information security requirements are in place so that your team can operate effectively on a remote basis
Working remotely and meeting critical finance, accounting and reporting deadlines requires significant focus to optimize team structure and workflows.
  • Use detailed project plans, checklists, timelines and other mechanisms to define project requirements, clarify roles within the team, identify dependencies, and communicate status. Monthly and quarterly closing checklists and similar outlines are extremely helpful for all required deliverables: Board and senior management reports, press releases, SEC reporting, etc.
  • Make resources available to all who need them in real time.
    • Develop a file storage plan and use it consistently while maintaining appropriate access security over those files. Typically, companies will create a central folder for each period’s financial reports.
    • Finished work products should be stored centrally and shared according to agreed-upon nomenclature so that team members can locate and process as needed.
  • One individual should own a document and be the gatekeeper for changes proposed by internal preparers, executive management, external legal and accounting advisors, investor relations etc.
    • The gatekeeper should maintain version control so that reviewers can easily identify updates to the documents. “Track Changes” and blacklined documents help focus reviewers’ efforts.
    • Establish deadlines for comments and limit the number of drafts to minimize time spent processing successive versions. Relevant comments will always need to be considered but avoid excessive wordsmithing once you have a solid document.
Success as remote team is tied to many factors: Convenient and secure access to information. Clear project plans and access to effective project management tools, deploying team members effectively and relentless communication while supporting individual needs for job satisfaction, growth and enrichment.

Newsletter – April 2020

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Thinking Ahead – Accounting for Loan Losses During and After Covid-19

One of the many challenges posed by the current health crisis is the need for lenders to reassess their borrowers’ ability to repay their loans. While it may seem unfair, or even unseemly, to have to address this issue at this time, financial institutions will need to do exactly that in closing their books and reporting on the First Quarter of 2020 in their regulatory reports and (for SEC registrants) Forms 10-Q.

The accounting approach most community institutions are following, and on which we will focus here, is the traditional, probable incurred loss model. This model requires institutions to provide for losses that are probable to have been incurred under the GAAP literature in Accounting Standards Codification (ASC) 450, Contingencies, and 310, Receivables. In practice, this usually involves a modeled component, based on historical write-offs over a look-back period, and a qualitative component, based on the current state and trend of economic and other factors affecting the portfolio. A good summary of the factors to be considered in this qualitative analysis are the nine points summarized in an Interagency Policy Statement issued in 2006 by federal banking agencies, which can be found at this link: https://www.occ.gov/news-issuances/bulletins/2006/bulletin-2006-47a.pdf

Generally, increased loss provisions are expected but likely too few facts are available to make specific loss assumptions. Measuring specific incurred losses at the end of Q1 will be difficult and most likely will be addressed through additional qualitative factors. Reserve assumptions for those credits already under analysis should be reevaluated and likely dealt with across product and delinquency categories.

Following are the nine points from the Policy Statement, in italics, followed in each case by our comments:

1. Changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, and recovery practices not considered elsewhere in estimating credit losses. This would include loan forbearance and other regulatory relief measures enacted to assist with resolution of the crisis: https://www.fdic.gov/news/news/press/2020/pr20038a.pdf

2. Changes in international, national, regional, and local economic and business conditions and developments that affect the collectability of the portfolio, including the condition of various market segments. The effects of the current health crisis will be pervasive, as covered in the other points.

3. Changes in the nature and volume of the portfolio and in the terms of loans. Institutions will need to address any shifts in new lending – in some portfolio segments, new production will have stopped, and thus not be available to offset increased non-performing loans and normal amortization within those segments. Thus, looking forward and doing the math, loss rates will increase within these portfolio segments.

4. Changes in the experience, ability, and depth of lending management and other relevant staff. Will there be sufficient staff available to effectively manage the portfolio? Will remote collection efforts be as effective as prior techniques?

5. Changes in the volume and severity of past due loans, the volume of non-accrual loans, and the volume and severity of adversely classified or graded loans. A sharp increase in delinquencies can be expected, albeit delayed by the TDR forbearance mentioned above. The ultimate losses may be mitigated by any government guarantees that are available, as well as borrowers’ ability to access business interruption insurance.

6. Changes in the quality of the institution’s loan review system.
Improvements that strengthen the process of reviewing loans could be a mitigating factor. If however, the loan review process weakens, either because of staff illness or other limitations, this factor may be another reason to strengthen reserves.

7. Changes in the value of underlying collateral for collateral-dependent loans. Real estate loans will be a challenging area, as the impact of current developments on the commercial and residential real estate markets will take some time to shake out, however declines in market values seem likely.

8. The existence and effect of any concentrations of credit, and changes in the level of such concentrations. The effect of concentrations can become more severe as conditions in certain industry sectors worsen, and the relative size of concentrations can become larger as healthier loans run off in a low origination environment.

9. The effect of other external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in the institution’s existing portfolio. These factors include forbearance that is enabled by legislation e.g., restrictions on foreclosure that lead to increased losses from deterioration in the physical condition of properties and/or in the property market.

Your portfolio consists of two types of borrowers: healthy and current borrowers who may be negatively affected by the duration and severity of the current crisis; and those already exhibiting financial stress (past due and delinquent accounts, businesses already under severe attack from a variety of sources including the lack of a viable internet strategy, lower cost of foreign competition, and many others) for which the current crisis may finalize their situation. Both may benefit from the governmental assistance and forbearance programs, however the exclusion from TDR accounting applies only to the former borrowers. You should track and maintain records of your borrowers’ status throughout the deferment and modification process in order to demonstrate those which are not TDRs.

We have discussed the challenge of first quarter reserving with senior representatives from several large accounting firms, and the following pieces of practical advice emerged:

* Now is not too soon to begin discussing reserving considerations with professional service providers, including auditors and consultants.

* Most institutions are targeting timely filings of their First Quarter reports, notwithstanding the grace periods being offered by regulators, including the FDIC and SEC. See the announcement of the grace periods at:
https://www.fdic.gov/news/news/financial/2020/fil20028.html
https://www.sec.gov/news/press-release/2020-53

* Auditors, regulators, analysts and other interested parties will be looking for a strengthening of the environmental/qualitative reserve, along with supporting evidence that identifies the impact of current events and links to any adjustments.

* Whatever process is followed, it will be necessary to step back and consider whether the result makes sense.

* Whatever answer is arrived at for First Quarter reporting, further adjustments will undoubtedly be required in the Second and Third Quarters as more information becomes available.

We are familiar with these issues and accustomed to working remotely. Please let us know if we can help in any way.

Note on CECL: Institutions that have adopted the new Current Expected Credit Loss Model in the First Quarter will have similar considerations, but with the additional challenge of adopting the new model. They should also consider the possible impact of the CARES Act on timing of adoption, and related regulatory actions, including the Federal Institutions Letter on the interaction between timing of adoption and capital relief:
https://www.fdic.gov/news/news/financial/2020/fil20032.pdf

Larry Davis – ldavis@cfoconsultingpartners.com
Paul Karr – pkarr@cfoconsultingpartners.com
Eric Segal – esegal@cfoconsultingpartners.com

CFO Consulting Partners Reaches Its 14-Year Milestone

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In 2006, David DeMuth and Allan Tepper formed CFO Consulting Partners. We focused on addressing the senior-level accounting and finance needs of companies whose accounting firms could no longer adequately address these needs due to independence issues. Eric Segal joined the partnership in 2009 to extend its capabilities to Financial Services and Insurance. Our firm began by providing fractional CFO services and that continues as a core service today. Over time, we added new capabilities including: M&A buy and sell-side services, private equity services, management and supervision of assurance processes, finance and accounting process improvement, finance transformation, SEC, regulatory and BOD/internal reporting.
Over the years, we built expertise in a broad range of industries, including banking, FinTech and other financial services businesses, business services, manufacturing, healthcare, technology, real estate and nonprofit.
As we reflect on what we have achieved since our inception, some notable accomplishments stand out:
  • We have developed significant expertise in helping companies achieve their business and accounting & finance goals, including buying and selling businesses, raising capital, strengthening internal controls, improving cash flow management and developing growth plans.
  • Clients have benefited from our all-senior-level financial management team who have “been there, done that.” Our people have held CFO or Controller positions in large and small companies, most are CPAs from major firms and have advanced degrees.
  • Clients have been aided by our firm-wide team approach to problem solving. Clients have access to the expertise of all of our team members to diagnose and solve problems.
  • Clients have prospered from having a boutique firm that moves quickly and has the depth of knowledge and experience to meet their needs.
  • Finally, we are proud to say that our clients recognize us as the “go-to” firm for CFO services provided to the community banking industry.
As we celebrate our 14th year, we want to thank our clients, referral sources, partners and team members. We simply wouldn’t exist without your support.
We look forward to continuing to serve the needs of small and midsized companies, and we are proud of the benefits we offer to our clients.

 

Thank you.

 

Allan Tepper, Sr. Managing Director, CFO Consulting Partners
(646) 650-2028 x701
 
David DeMuth, Sr. Managing Director, CFO Consulting Partners,
609-309-9307 x700
 
Eric Segal, Managing Director, CFO Consulting Partners
609-309-9307 x702

Newsletter – June 2017

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Insurance Company Credit Rating Advisory Practice, Part 2

Marc Liebowitz, CFO Consulting Partners LLC

There are three primary drivers of insurance credit ratings:

  1. Risk adjusted capital levels
  2. Operating results
  3. Market profile which is the overall evaluation of strategies, products, underwriting strength and risk diversification.

In a previous article, we covered risk adjusted capitalization. Click here for the first article in the series. In this installment, we review how credit rating agencies evaluate operating results and market profile. Our focus is on the A.M. Best Company (AMB) and Kroll Bond Rating Agency (KBRA) methodologies as these agencies are most relevant to the mid-market insurance company ratings universe. The AMB and KBRA rating methodologies are available through their respective web sites:

A.M. Best’s Credit Rating Methodology
Global Insurer & Insurance Holding Company Rating Methodology

To measure the relative strength of a group’s operating results, analysts, develop a view of overall earnings power and compare those estimates to peer group averages and industry norms. The major components of this analysis are:

  • Comprehensive evaluation and trend analysis of financial outcomes, returns, and ratios
  • Development of multi-year projections and stress testing those forecasts
  • Review of key metrics for the consolidated organization and for individual business segments
  • Analysis of earnings by product and of investment portfolio earnings by asset type
  • Comparison of company specific results against peer group and industry-wide aggregates

Benchmarking comparisons are influential parts of the earnings analysis and management teams that demonstrate an understanding of key strategic and operational business elements which are apparent from this analysis are more likely to achieve their desired ratings outcome.

The market profile is a qualitative evaluation of a company’s spread of risk, revenue composition, and management strength. Given the qualitative nature of this analysis, management should provide a clear view of strategic plans and other elements which can provide a full picture of the company and how management approached the competitive landscape in its key markets.

A clear presentation of management’s plans to grow the company and improve operational efficiencies is essential to getting the appropriate rating for an organization. Sometimes there are areas where the goals of management and credit agencies are at odds. For example, a strategy to grow revenues and build the bottom line can be seen by the credit agency as a plan to add risk to the balance sheet. CFO Consulting Partners can work with the clients on how to best communicate the benefits of strategic actions and review strategies to mitigate the perceived risk.

Newsletter – May 2017

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Insurance Company Credit Rating Advisory Practice

CFO Consulting Partners has begun to work with insurance companies to help maximize a company’s rating potential. This article is the first of a two-part series which will discuss the credit rating process for insurance companies. Here we discuss how ratings firms look at capital levels, and how management can demonstrate effective capital management strategies. A subsequent article will review the roles of: operating results, market profile, and additional analytic considerations in the ratings process.

Marc Liebowitz, CFO Consulting Partners LLC

There are generally five Security and Exchange Commission (SEC) registered Nationally Recognized Statistical Rating Organizations (NRSRO), otherwise known as rating agencies, which follow the U.S. insurance industry: A.M. Best Company (AMB) and Kroll Bond Rating Agency (KBRA) are the primary providers of credit ratings to the mid-market segment of the industry. The three larger NRSROs: Fitch, Moody’s and Standard & Poor’s (S&P), tend to focus on the industry’s larger companies.

AMB and KRBA provide two types of ratings on insurance companies, debt and policy issuer strength ratings. Debt ratings are an indication of the insurer ability to meet their interest and principal obligations on specific bonds, a policy issuer strength rating considers the likelihood of a failure to honor a company’s insurance policy liabilities. For policy liability ratings AMB issues Financial Strength Ratings (FSR), and KBRA issues Insurance Financial Strength (IFSR) ratings. Insurance companies seek policy issuer strength ratings for several reasons, for example, ratings are required by insurance agents, by reinsurance brokers and companies, and to insure bonded construction projects. Also, ratings are utilized by boards and other stakeholders as a third-party evaluation of operations and capital adequacy.

There are three primary drivers of insurance credit ratings: risk adjusted capital levels, operating results, and market profile (the overall mix of products, underwriting strength, and risk diversification). These factors form the foundation of the rating and are quantified and evaluated relative to rated peer groups and to industry averages. Enterprise Risk Management (ERM) practices, management quality, and other qualitative factors are also considered and may raise or lower the rating.

AMB uses a proprietary capital model, Best Capital Adequacy Ratio (BCAR), details of AMB’s methodology can be reviewed here: Best’s Credit Rating. AMB is in the process of updating its BCAR model – the most significant change will be the incorporation of scenario modeling of an insurance company’s loss factors at various confidence levels. The revised BCAR model is currently open to public comment before it goes into production, likely prior to year-end 2017.

KRBA’s capital strength assessment uses the National Association of Insurance Commissioners (NAIC) Risk Based Capital (RBC) model.  KRBA details their capital adequacy approach within their rating methodology here: Global Insurer & Insurance Holding Company Rating Methodology

Rating agencies look at companies differently than management and other stakeholders – investors, employees, etc. Therefore, as part of any rating review or update management must be able speak to the agency’s perspective and clearly demonstrate management’s understanding of the company’s capital position, how it is managed through existing risk management programs, and how and why it will change going forward. Analysts expect management’s knowledge to extend beyond the results of the agencies capital modeling. Accordingly, management should present a forecast which considers the unique and proprietary aspects of the company’s strategy and operations. The ratings team will also want to discuss the programs in place to manage the company’s long-term solvency. All information presented by management will be distilled and compared to peer groups composed of comparable firms. Also, rating agency analysts cannot, due to SEC rules, provide guidance to companies on how to improve ratings.

To achieve rating upgrades, or to maintain a rating, management should plan to continuously improve risk management programs and strategies, create clear and achievable forecasts, and effectively communicate the various actions taken to maintain capital adequacy and manage the company’s risk profile. It’s critical for management to understand the agencies expectations prior to engaging discussions presenting material at an annual review.

Merchants Bancshares in South Burlington, Vt., hires Eric Segal as Interim Principal Financial Officer.

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Merchants Bancshares in South Burlington, Vt., has named an interim principal financial officer after its chief financial officer resigned.

Thomas Meshako resigned from the $2 billion-asset Merchants to “pursue other interests,” according to a regulatory filing Friday.

Merchants will pay Meshako $110,000 in severance. Meshako, who was 54 at the time of Merchants’ proxy statement in April, had been CFO since November 2014. He was previously the finance director at the $5.9 billion-asset Brookline Bancorp in Boston.

Merchants hired Eric Segal as interim principal financial officer, principal accounting officer and treasurer. Segal, 58, will serve in these roles while Merchants searches for a permanent replacement. Segal is head of the banking and financial institutions practice at CFO Consulting Partners in New York.

Merchants also retained CFO Consulting Partners for advice on its acquisition of Nuvo Bank & Trust in Springfield, Mass., which was completed last month.

Merchants announced in November that its president, Geoffrey Hesslink, would succeed Michael Tuttle as chief executive.

The company reported net income in the first nine months of last year of $10.3 million, up 7% from a year earlier.

CFO Consulting Partners in the News

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First National Bank of Chester County (West Chester, PA): Eric Segal was recently named the Interim CFO and Principal Accounting Officer for this $1.3 billion bank. Some of Eric’s principal roles are to restate and/or issue applicable SEC reports (such as 10-Q’s, 10-K’s) and to produce documents that meet certain bank regulatory requirements. First Chester is in the process of merging with Tower Bancorp. “Being an interim CFO for a company in the process of being acquired is a typical role provided by CFO Consulting Partners,” says Eric. See http://www.implu.com/releases/2010/20100304/37637/implu_viewer for more information.

NYS Society of CPAs (NYSSCPAs): Allan Tepper has been named Chairman of the Banking Committee of the NYSSCPAs for the 2010/2012 years. Allan has been a member of the NYSSCPAs for over 25 years and a Banking Committee member since 2008. Please visithttp://viewer.zmags.com/publication/5fb9dae8#/5fb9dae8/8 for more information.

Financial Executives Networking Group: Marc Engel has been named Chairman of the Internal Audit Special Interest group. He was previously Chairman of the Litigation Services Committee at the New York State Society of CPAs. Seehttp://www.crainsnewyork.com/article/20100328/FREE/303289992 for more information.

AccountingWeb: Marc Palker has recently written an article, “A day in the Life of an Interim CFO” that was published in the  AccountingWeb.com. Marc covers such topics as SEC reporting, cash management, and biggest challenges. See  http://www.accountingweb.com/topic/accounting-auditing/day-life-interim-cfofor more information.

Accountant/Attorney Networking Group: On Thursday October 14, 2010, Marc Palker was elected Executive Vice President of this group. This is a networking group for Accountants and Attorneys.  See www.aangny.org for more information.

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