CECL Blog Series – Part #1
Welcome to the CLA CECL Blog Series, where we’re hoping to answer you your CECL Questions one blog at a time!
Over the next several weeks, CLA will take a deep dive into many of the hot topics surrounding the Current Expected Credit Loss (CECL) standard. In this blog, we’ll discuss where you should be today. Future postings will include the impact of qualitative adjustments on your analysis, how to handle individually evaluated loans, the importance of model validation, and a number of other topics. On October 28, 2021, CLA will host a webinar designed to answer any remaining questions you may have. Make sure you receive our invitations by signing up for CLA communications here. We hope you find great value in these blogs and welcome the interaction with any of the authors throughout this series.
CECL effective dates
Depending on the size of your institution and your organization’s readiness, you may have already adopted CECL.
- Large accelerated and accelerated filers — Annual reporting periods beginning after December 15, 2019, including interim periods within those fiscal years.
- All other entities — Annual reporting periods beginning after December 15, 2022, including interim periods within those fiscal years.
Note: Early adoption is permitted for fiscal years beginning after December 15, 2018.
Institutions that were required to adopt CECL on January 1, 2020 and opted to accept the relief in the Coronavirus Aid, Relief, and Economic Security (CARES) Act, as amended were allowed to delay the adoption of CECL until the first fiscal year beginning after the termination of the national emergency related to COVID-19 or January 1, 2022 (whichever comes first). Therefore, those large accelerated and accelerated filers who delayed implementation will be required to adopted on January 1, 2022.
Where should I be today?
At this point in time, most institutions have determined what their approach will be to comply with the CECL standard. If your institution has not determined a CECL plan, you should use the remainder of 2021 to decide on your methodology. When it comes to what approach your institution will use, you may opt for an in-house database or spreadsheet tool or opt to work with a third-party vendor. For less complex institutions, you may consider a vendor and tool such as the BankTrends CECL Calculator. Regardless of the approach your institution takes, it is important the decision best fits your organization.
Assuming you fall into the “All other entities” bucket above, and have a fiscal year end of December 31st, you should operate with a plan to have your calculation operational at the beginning of 2022. This will allow you to run your CECL calculation parallel to your current incurred loss method for a full year and provide ample opportunity to address any issues before the standard goes into effect at the beginning of 2023.
You’ve determined your methodology, now what?
Once you have determined your approach, one of the most common question we receive is “what should I be doing between now and the implementation date?”. There are a few things you should be doing over the next 12 months leading up to implementation:
- Monitor early adopters — Despite some institutions opting to defer the implementation of CECL under CARES Act, most large accelerated and accelerated filers have already adopted CECL. Monitor those who have already adopted, as well as those who will be implementing in 2021 and 2022. You can learn from their experiences and impacts the adoption of the standard have had on their financials.
- Leverage available data — Due to the economic environment prior to the COVID-19 pandemic, many financial institutions have experienced limited losses in their loan portfolios. While this is a positive trend for the health of an institution, it poses challenges as you calculate your required reserve under CECL. Regardless of which methodology you plan to use, you will likely incorporate historical loss rates into your analysis. With limited losses, the bulk of your reserve under CECL will likely come from qualitative and forecasting adjustments. The qualitative and environmental factors utilized under CECL are similar to what you are doing today based on information provided in SEC Staff Accounting Bulletin (SAB) 119 and the Office of the Comptroller of the Currency’s (OCC) Allowance for Credit Losses Handbook. We will be taking a deeper dive into the qualitative factors in a later blog post, but below are some examples of data that can be utilized to assist in your qualitative analysis:
- Federal Reserve Economic Data (FRED) — This database provides a significant amount of economic data that you can segment in a variety of ways, including data at local, state, regional, and national levels. You can use this tool as you develop forecasts.
- Call report data — While there are limits to the depth of call report data, you can still use it to provide a peer comparison, as well as how other institutions are affected by CECL. You can leverage analytical tools such as BankTrends or CU-Metrics to aggregate call report data.
- Internal data — Since the beginning of CECL’s issuance, you may have been instructed to save your historical data. While some of the more streamlined methodologies (i.e., Weighted Average Remaining Maturity [WARM] methodology) will likely not require the depth of data once feared, you should still utilize information from your internal systems to support your analysis. If you use a more complex methodology or analyze your portfolio at the individual loan level, this set of data could potentially be the most important information in your CECL analysis.
- Conversations with Regulators – The regulatory agencies continue to discuss the CECL standard and related tools that can assist your institution in the implementation process. This includes the webinar put on by the Federal Reserve that took place on July 15, 2021, discussing the Scaled CECL Allowance for Losses Estimator (SCALE) and the related spreadsheet-based SCALE tool. Whether it is sessions such as this, future sessions, or conversations with your exam teams during a regulatory exam, they will be great resources between now and 2023.
- Conversations with External Accountants – CECL is a topic that has been discussed for nearly five years and by this point in time, most accountants are prepared to discuss this standard in detail. Make sure to connect with your external auditors as well to ensure you have their buy-in for the methodology your institution has chosen.
How can we help?
Regardless of where your institution is at on your CECL journey, CLA is prepared to assist your institution in any way we can. Throughout this blog series or at any time, contact us with your questions. We look forward to being a resource for your institution as you navigate the implementation process!
Joshua Juergensen is a principal with CLA. He works with banks and credit unions nationwide, managing audit engagements, directors’ exams, external loan file reviews, internal audits, and other consulting services.
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