Three steps to CECL compliance

Deadlines to implement the Current Expected Credit Loss (CECL) standard begin for some banks in 2020. While preparations can be daunting, accountants and community bankers alike say following certain steps can make the process more manageable.

By Katie Kuehner-Hebert

1. Know your CECL deadline
Community bankers should first determine when they must comply with the Financial Accounting Standards Board’s CECL standard, says David Heneke, CPA, CISA, principal at CliftonLarsonAllen LLP in Waite Park, Minn.

“The deadline for implementation of CECL is based on whether or not the bank is considered a public business entity [PBE], unless the institution is a Securities and Exchange Commission [SEC] registrant,” Heneke says. “It is important to periodically re-evaluate, document and receive concurrence from auditors and regulators regarding the bank’s status as a PBE.”

Most non-SEC registrants will not qualify as a PBE, so most institutions will be expected to implement CECL by Dec. 31, 2021, he says. For SEC registrants, the standard will go into effect one year earlier.

“However, it is important to recognize that calculations will need to start before the implementation date,” Heneke adds, “as a portion of the accounting adjustment related to CECL will be recognized in earnings of the implementation year, with the remaining adjustment being recorded in retained earnings.”

2. Assemble your team
Community banks should form an implementation team now, says Todd Sprang, a CPA with CliftonLarsonAllen LLP in Oak Brook, Ill. CECL implementation cannot be the responsibility of just one or two people, Sprang says, so banks should share the workload by assigning responsibilities along these lines:

  • Knowledge of loan loss accounting and basic modeling capabilities
  • Identification of key controls necessary to the new process
  • Building and maintaining deep knowledge of the loan portfolio and related documentation
  • Data gathering and retention

“We advise documenting the members of your team and briefly summarizing their skill sets and roles in implementing CECL,” Sprang says.

The composition of a bank’s team is paramount, says Terry Thomas, chief financial officer of $675 million-asset Waterford Bank, N.A. in Toledo, Ohio. “We have our IT team, our operations team, someone from accounting, from our credit team or loan committee team, and any other team member who might have been working on this before, making sure we have everyone’s input.”

3. Use data to build models
The next task is to start retaining available data and use it for modeling, Heneke says.

“Evaluate the data extraction tools inherent in your core system to determine if there is additional data you will need and if it is easily extractable,” Heneke says. “Start with a limited number of data points and build simple models to gain familiarity with modeling basics, and identify modeling flaws and potential additional data point requirements.”

Effective models can be built with these limited reports, and some model types to consider include vintage analysis, closed pool analysis, migration analysis and cash flow analysis, Heneke says.

“The important step in data retention is to ensure the core system is retaining data for a period of time,” he says. “This will ensure when you begin your modeling efforts, you will have the data necessary to start to build your model.”

Waterford Bank, N.A. worked with the CliftonLarsonAllen LLP CPAs, who came onsite to help implement models based on the bank’s loan data from the prior five years, Thomas says.

“We broke the loan information down by purpose code and maturity: commercial real estate, commercial and industrial, mortgages and home equity lines of credit,” he says. “The data also included all of the losses and recoveries related to each of these purpose codes, to help us create expected credit losses in the future for each code.”

Depending on the model type, the bank is evaluating the vintage analysis, the migration analysis or the cash flow analysis, Thomas says.

“Community bankers should remember that there are also going to be a lot of qualitative factors going into the model in addition to quantitative factors, such as their knowledge and insight about their local economy or industry-specific factors,” he says. “For example, when the price of oil dropped from $100 to $40 a barrel, that likely impacted loans some banks made to the oil and gas industry.”

Quick stat

Dec. 31, 2021 Deadline for most financial institutions to comply with CECL

Waterford Bank, N.A. picked CliftonLarsonAllen LLP’s Excel-based CECL platform, because some of the subscription-based cloud software providers would not let banks take the data once their subscription expired, meaning Thomas and his team would have had to start the process from scratch.

Even though the implementation deadline for many community banks is more than two years away, models need to be evaluated to ensure they will compute accurate results based on a bank’s loan portfolio, Sprang says. This will also help management teams determine the potential impact to the balance of the allowance as a result of this standard.

“This will be a critical capital-planning issue, as the adjustment made to the allowance will transfer from Tier 1 capital to Tier 2 capital and could impact capital ratios in a significant way,” he says. “The time is now to get started with real steps forward in implementing CECL within your community bank. This can be a manageable process so long as we as an industry do not wait until the last minute.”

Thomas agrees. “Bankers have to just get ahead of the ball,” he says. “If they haven’t started, they need to get started now.”


Katie Kuehner-Hebert is a writer in California.

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