5 Reasons to Start CECL Implementation Today

Many credit unions are juggling managing record-low net interest margins, pandemic-related uncertainties and operational issues, as well as their own strategic initiatives. Despite the many competing interests, it’s critical that credit unions remain focused on their transition to the current expected credit loss (CECL) standard to be ready by the 2023 effective date.

Many SEC registrants that implemented CECL in time for their 2020 deadline have said in hindsight, they would have started the implementation process sooner.

“You’re never going to have enough time,” Lance Holladay, director of regulatory reporting at Renasant Bank, said during Abrigo’s recent ThinkBIG Conference. “Start now.”

“At the end of the day, we still have regular jobs and daily responsibilities, and [CECL implementation] is added to that,” said Felicity Ours, CPA, CRC, SVP and director of credit at Summit Financial Group, which implemented CECL in 2019. “We are very fortunate to have individuals with strong IT and data analysis skills to help with this process, but I believe that will be a challenge, especially for some smaller institutions, so the longer the timeline, the better.”

One reason behind the Financial Accounting Standard Board’s (FASB) delay of CECL for smaller SEC-reporting companies and private institutions was for them to learn best practices from SEC registrants’ experiences. The later CECL deadline was also expected to help later adopters avoid a last-minute scramble for audit, technology and other assistance when implementation resources are in peak demand.

If your credit union has yet to begin CECL implementation, consider these five reasons to start implementation immediately, according to SEC registrants and outside experts.

1. Start CECL implementation now so you get the right processes and people in place.

Moving to CECL isn’t like ramping up for the Paycheck Protection Program (PPP) or even handling pandemic-related loan workouts. In those unanticipated situations, credit unions have had urgent deadlines for which they scrambled and shifted staff to meet the unexpected challenges. CECL has been in the works for more than a decade, and regulators have repeatedly urged bankers to prepare for one of the biggest changes to bank accounting. Starting now affords enough time to enhance policies, procedures, and systems. It also will allow more collaboration between credit risk and accounting staff needed to develop forecasts for credit risks and trends.

Graham Dyer, Partner in Grant Thornton LLP’s National Professional Standards Group, has noted that accounting staff creating the estimate for the allowance of credit losses (ACL) will need to utilize quite a bit more information from the credit risk side of the credit union. For some credit unions, a closer working relationship between the two sides can be a dramatic change and involve cultural issues that require preparation to navigate.

2. Start CECL adoption now so you can assess and address any data gaps and accuracy issues.

A critical first step to a successful CECL transition and to a conversion that satisfies examiners is assessing the credit union’s data. Regulators have said that data quality is a critical component of the CECL estimate. Some credit unions store loan data in different places – mortgages in one system, auto loans in another, etc., so assessing and gathering it can be time consuming.

Credit unions also need to determine what data has been tested or historically reconciled to make sure that gaps and inconsistencies do not cause problems. If a credit union determines it lacks data (such as certain fields needed), has inaccurate data or struggles with gaps in data, then time is of the essence to get on track to develop controls as the CECL process is being designed. It’s important to be set up to have data on a go-forward basis.

Credit unions might also need to make assumptions based on peer or industry data in the near term, so beginning CECL adoption now provides sufficient time to determine those needs and identify appropriate resources.

3. Starting CECL efforts now gives you options and the ability to pivot.

The CECL standard is non-prescriptive. Accounting standards setters and regulators intend for credit unions to choose the methodology that is right for their loan portfolio and unique credit risk situation.

Waiting until the last minute to begin CECL implementation will limit the flexibility available to select a methodology, while earlier implementation provides time to test and compare different methodologies. Many credit unions have started with one methodology and later switched to another.

During the ThinkBIG Conference, Heather Raibourn, SVP of credit risk analytics and credit policy at Homestreet Bank, said it makes sense to look at challenger models while choosing a CECL model during implementation. Doing so provides reference into some data sets that a financial institution might need to collect going forward, she added.

While conducting CECL testing, consider the impact each scenario will have on capital. Starting sooner also provides more time to give management comparisons of the current ALLL against proposed CECL scenarios and their impact on the provision and capital, so plans can be made.

Another factor that credit unions should keep in mind is that internally developed models will need to be validated by an external authority and internal controls must be developed. If internal development is not feasible, the CECL committee will need time to vet an external ALLL-CECL solution and the provider or consultant.

CECL vendor due diligence should ensure that the solution is transparent and can be easily communicated with examiners. Since comparing methodologies is part of determining the right one for CECL, it’s critical that any third-party solution is capable of running multiple scenarios concurrently.

Financial institutions that adopted CECL for the 2020 deadline would never have imagined having to pivot like they did to adjust their credit loss accounting for the impact of the pandemic.

Anthony Porter, assurance services senior manager with Moss Adams, said institutions that haven’t yet adopted CECL can learn a lot from financial institutions that have already walked down the CECL road. Many of them had to “return to the drawing board” to revise forecasts and credit loss estimates rapidly as a result of the pandemic’s impacts.

“There’s a big undertaking leading up to implementation,” he said. “Use the information that’s out there – to look at filings, to understand how they talk about their disclosures, or whatever forecasting they use. Try to gather as much information as you can.” Credit unions need to have controls and a process in place for responding to circumstances that affect the ACL.

4. Start CECL ASAP and have sufficient time to document your decisions.

Before a credit union settles on a methodology, it’s likely the CECL committee will have significant discussions related to methodology selection. Regardless of the methodologies ultimately selected, documenting the decision is critical to provide examiners with the context of the discussions and strategies. Even now, reading SEC filers’ disclosures can provide insight into why certain types of lenders selected their methodologies and how they’ve explained their decisions related to that and other CECL matters.

Beginning to adopt CECL now will also provide more time to actually work on writing disclosures, which can involve considerable work, according to Gordon Dobner, CPA, a partner in BKD’s National Financial Services Group.

“This is one of those areas where you’re so focused on methodology, quantitative output, qualitative adjustments and so forth, that a lot of times, disclosures seems to be one of those last things, no matter what your intention is, and in any major standard shift like this the disclosure piece can be significant,” he said during ThinkBIG.

5. Starting CECL adoption leaves more time for testing and external input.

Implementing CECL as soon as possible allows more time to run the model in testing mode to determine whether forecast components and methodologies are working as expected.

Any CECL implementation timeline needs to incorporate approval of the final CECL model by the board of directors and external auditors, and it should take into account any regulatory feedback.

Indeed, auditing firms and regulators have said in numerous settings that involving them early on in CECL implementation is important. Internal controls, technical expertise for understanding and testing, and evaluating the transparency of a vendor’s information are among the areas that can benefit from an auditor’s perspective, Dobner said.

“The sooner you have those conversations, the sooner solutions can be thought out and talked about,” he said during ThinkBIG. “Doing that stuff at the last minute is really hard and can be time-consuming and expensive for all parties involved. Having those conversations upfront, even if it’s theoretically, so everybody can have an idea of what that approach feels like, looks like, how it changes all of the stuff from an audit perspective is really, really important and is helpful to avoid some of those last-second blowups.”

“Those that are engaging those outside sources sooner rather than later are the ones that are tending to have smoother processes as time goes on,” Regan Camp, managing director of advisory services at Abrigo, said.

Oana Norman, SVP, portfolio reporting and analysis manager at Banner Bank, agreed 2023 filers will benefit from auditor involvement. “Get auditors involved early,” she said. “Non-SEC filers have the benefit of better educated, more informed auditors, but that’s also a disadvantage; they know what to look for now.”

The good news for financial institutions facing CECL implementation is that SEC filers have already learned many of the hard lessons of first adopters. Taking advantage of the time available now to begin implementing the new expected loss method will allow credit unions to better plan and allocate their own resources. And it will ensure a smoother CECL transition in 2023.

Mary Ellen Biery is Senior Writer & Content Specialist for Abrigo in Austin, Texas.