How One Bank Intends to Implement CECL – And Maybe Even Do It Early

By: Mary Ellen Biery

Main Street Bank, like thousands of other privately held or smaller financial institutions across the U.S., recently found out it will have extra time to implement the current expected credit loss (CECL) accounting standard. The Massachusetts mutual bank has until 2023 to comply with CECL, considered the biggest change to bank accounting in the industry’s history, after FASB recently agreed to extend the deadline for smaller public and all privately held financial institutions.

Nevertheless, the $1 billion bank is aiming to run calculations for its allowance under both the existing incurred loss methodology and under CECL by the end of next year, and to be ready to transition completely to CECL as early as late 2021 or 2022.

“We’re pretty committed as an organization,” Robert Sousa, Lead Credit Analyst for Main Street Bank, said during a recent Abrigo webinar hosted by the American Bankers Association’s Endorsed Solutions Group. Sageworks ALLL (which Main Street Bank utilizes) and MST Loan Loss Analyzer, Abrigo’s Allowance for Loan and Lease Losses (ALLL)/CECL solutions, have been identified by the ABA as best-in-class solutions that meet the operational needs of financial institutions as they prepare for CECL compliance deadlines. “I think we’re on track for probably 2022, maybe late 2021.”

“We’re really working hard to get a project plan in place and help us test our model in 2020. That way, even with some delays we’ll still have plenty of time to be ready by 2023,” Sousa said. “If (the Financial Accounting Standards Board, or FASB) hadn’t pushed it out, I still think we’d be in a good place.”

Sousa believes one of the main advantages Main Street has had in the transition is that it had already automated its calculation of the ALLL. Automating the allowance calculation eases the transition in at least two main ways, he noted during the webinar, “A CECL Transition Story: Main Street Bank’s Roadmap to Expected Loss Accounting.”

Have the time to implement CECL

First, it is affording staff time to think about CECL. The hours that used to be spent on gathering data, manual data entry, working on complicated spreadsheets, and correcting errors in order to calculate the ALLL using the incurred loss method can be shifted to focus on CECL investigations and discussions since the ALLL was automated using Abrigo’s solution. “If we were to allocate a certain amount of time every quarter to doing our incurred loss model and we cut that to a third of what it used to be, then now we can take the other two-thirds and start looking at ‘Well, what if we were to do this in CECL, what would that look like? What methodology would we use?’” Sousa said. “We’re not taking as much time from day-to-day operations to get ready for CECL because we’re saving so much time on the incurred loss model.”

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Have the data to implement CECL

Second, automating the ALLL is easing the transition from a data perspective. The core integration is already completed, so Main Street Bank’s data is already going to be in place for CECL, and it is warehousing additional loan data in the system in the meantime. “We’re building up a track record in the system so when our transition comes along, it should be a lot easier to move over to the new methodology,” Sousa said.

“The biggest piece with having the allowance in the same system that we’re going to be doing CECL is that we can backtest,” he said. “Once we have those models ready, we can really just backtest against quarter after quarter of what it would have looked like…to kind of reduce the impact on the bank and help us get there.”

Abrigo Executive Risk Management Consultant Rob Ashbaugh told Sousa during the webinar that backtesting early would be a big advantage for Main Street. “That backtesting is going to be what defines and what picks your methodology,” he said.

The core integration also revealed some data gaps, allowing Main Street Bank to fix those early in the process before data challenges had a chance to complicate the CECL transition, Sousa said. “It wasn’t systemic, but it was those tiny things that, when it comes to CECL, are going to throw everything off,” he said. Examples included misreported call codes, loans in the wrong buckets, or charge offs allocated to the wrong bucket.

“Automating the allowance shined a light on that and has allowed us to fix a lot of the problems we saw,” he said. “Combined with the amount of data in (Abrigo) -- whether it’s our own or Peer Data or FRED data -- we’re hoping we will be able to fill the gaps as necessary and come up with a robust model.”

Main Street Bank is continuing to work to develop its data and to identify which methodologies will work best for its market and portfolio. Sousa said the bank is currently focusing on using three methodologies: remaining life, discounted cash flow, and PD/LGD. “We’ll figure out which works best with each pool,” he said.

The bank also continues to work through questions that are perplexing other banks as well, such as how to handle forecasting in CECL. “Forecasting is one of our biggest challenges,” Sousa said. “What is it supposed to look like?” Shifting away from relying primarily on qualitative factors will be a big challenge for the bank, he acknowledged. However, “What Abrigo has with all of the data will be very helpful.”

About the Author

Mary Ellen Biery

Mary Ellen Biery is a Senior Writer and Content Specialist at Abrigo.

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