Are banks taking advantage of the CECL extension?

The CARES Act extended the CECL implementation deadline for many larger community banks until the end of the COVID-19 pandemic. Community bankers tell us that while the extension is welcome, they’re already down the road to implementation.

By Stephanie Vozza

CECL: A timeline of ICBA’s advocacy

April 2011
ICBA tells FASB CECL isn’t feasible for community banks

December 2011
ICBA discusses alternatives with FASB

June 2013
ICBA again proposes CECL alternatives

October 2013
ICBA voices concerns to FASB chairman

December 2013
ICBA petitions FASB to withdraw CECL

2014
ICBA launches grassroots campaigns against FASB

February 2016
Congress sides with community banks on CECL

June 2016
ICBA achieves CECL reforms

2017
Agencies say community banks won’t need complex modeling techniques

2018
Regulators implement ICBA-supported three-year transition

June 4, 2019
ICBA backs Stop-and-Study bill

Oct. 16, 2019
FASB approves CECL delay until 2023

January 2020
ICBA continues CECL push

See the full timeline »

Here’s a CECL refresher in the unlikely event that you need it: The Great Recession of 2008 created substantial credit losses for banks. The standard allowance for loan and lease losses (ALLL) used to account for those losses didn’t offer a timely way to adjust regulatory capital. So, in 2016, the Financial Accounting Standards Board (FASB) introduced the current expected credit loss (CECL) standard, which adds a forward-looking component to accelerate the recognition of losses.

To adopt the updated method, banks must gather new data as well as build and test the model. The shift may benefit from new software and accounting that take time to implement, and banks were initially given a three-year transition period.

But while CECL is forward-looking, it could never have predicted a pandemic would have a major impact on the U.S. economy. In response, the FASB gave community banks with assets of less than $1 billion an additional two years for CECL adoption, pushing the new deadline to January 2023.

For those banks, early adoption is an option, but few if any community banks are choosing it, according to James Kendrick, ICBA’s first vice president of accounting and capital policy.

“The changes to the allowance have been a major headache, and many are trying to push off implementation as much as possible,” he says. “When they do adopt, it will require a bigger reserve and immediately deplete regulatory capital on day one. In fact, many are vocal in trying to extend the implementation date as much as reasonably possible.”

Larger, public banks were given until the end of the pandemic or 2022 to implement CECL, and many have already done so. “They have more bandwidth to handle CECL, expense-wise and personnel-wise,” Kendrick says. “There’s no real incentive for smaller banks to adopt early.”

With CECL, preparation is everything

Prioritizing adoption may be on the back burner, but preparedness is not. While the date is still more than a year off, most community banks have started the transition process by running parallel systems to ensure they’re ready for implementation.

“ICBA members have had to spend a great deal of money to comply and get their systems up to speed,” says Kendrick. “They all had to spend money, and when you have to spend money to update systems you pay attention to it—from the CEO level to CFO level. Many of our members have been very involved in the process.”

“The extra two years didn’t mean a lot to our bank; we were pretty well down the road to readiness.”
—Greg Ohlendorf, First Community Bank and Trust

Greg Ohlendorf, president and CEO of $203 million-asset First Community Bank and Trust in Beecher, Ill., is one of those members who has been engaged in the process since it was announced. “We went to FASB to meet with them when CECL was looking to be a real problem,” he says. “Because of that, my bank has been involved in trying to figure out what to do with this early. The extra two years didn’t mean a lot to our bank; we were pretty well down the road to readiness.”

Timing concerns

Ohlendorf says he was initially concerned about the timing of implementation. “My fear was, what if CECL was accidentally implemented during a recession,” he says. “Then my worst fear happened. We had no idea what COVID would do to the economy. Here we are with the CECL deadline and a recession coming together at the same time. That was a concern. If you have to predict the life of a loan at a start of a recession, the safe guess is that the allowance would go up significantly.”

Fortunately, the federal stimulus and Paycheck Protection Program (PPP) helped millions of businesses stay afloat.

“The recession lasted February through April, and it didn’t turn out to be the crash-and-burn cataclysmic impact that could have happened had those things not been done,” says Ohlendorf. “But what happens with stimulus inflation? We don’t yet know.”

Ohlendorf says his bank hasn’t implemented the standard early but is well into parallel testing each quarter. “We’re running the incurred and CECL model,” he says. “We had thought of adopting early, but with COVID hanging on longer than we hoped due to the variants and not knowing what tomorrow looks like, there’s no reason to do that. We’ll likely apply the standard when the deadline is due.”

Lucas White, president of $580 million-asset Fountain Trust Company in Covington, Ind., says his bank is also waiting until 2023.

“We’re a small, closely held bank and we’ve had the 2023 implementation date for a while now,” he says. “The two-year delay [from the CARES Act] didn’t affect us at all. It costs more money for the software, but so far the transition has been smooth.”

Curt Allison, The Fountain Trust Company’s chief lending officer, says his bank’s software program has been collecting data since Dec. 31, 2018. The community bank uploads loan level and recovery data monthly. “At the end of this year,” Allison says, “we’ll have three full years’ worth of data running parallel, giving us a whole year to fine-tune it for the first quarter of 2023.”

“Right now, we are focused on creating an action plan to ensure we can meet the 2023 deadline, including reviewing additional software to implement the CECL requirements.”
—Jill Sung, Abacus Federal Savings Bank

A similar story comes from Jill Sung, president and CEO of $338 million-asset Abacus Federal Savings Bank in New York City.

“Right now, we are focused on creating an action plan to ensure we can meet the 2023 deadline, including reviewing additional software to implement the CECL requirements,” she says. “Our regulator, the OCC, has notified its banks that they will be looking for action plans going forward that address the 2023 deadline.”

After talking to other community bankers, Ohlendorf says he hasn’t heard of anyone adopting early. “The Fed just rolled out the SCALE model [see sidebar, page 19] as a simplified way to comply with CECL,” he says. “Banks are still looking at what model they’re going to choose, document what they’re doing, and have the policies and procedures tidied up. Plus, we spent the last year doing massive amounts of PPP [lending] and trying to wade through pandemic remote working.

“I’m not sure how front and center CECL is given the environment,” Ohlendorf adds.


The Scaled CECL Allowance for Losses Estimator (SCALE)

To help community banks implement CECL, the Federal Reserve released the Scaled CECL Allowance for Losses Estimator (SCALE) in July 2021 for banks with total assets under $1 billion. The spreadsheet-based tool pulls from publicly available regulatory and industry peer data to help banks estimate CECL credit loss allowances.

The tool is intended to be a starting point. Using their own specific facts and circumstances, bank management will need to adjust the amount to adequately reflect their loss history and credit risk. According to the Fed, SCALE provides a template to help simplify a complex process. The SCALE tool is available at supervisionoutreach.org/cecl.


Stephanie Vozza is a writer in Tennessee.