Countdown to CECL: A Timeline for Community Banks

Kylee Wooten
February 12, 2021
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Preparing for 2023

While community banks have until 2023 until they must comply with CECL, there is likely less time than expected. 

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Large SEC filers have officially adopted the current expected credit loss standard, or CECL, for recognizing credit losses, and other financial institutions are eager to learn from their implementation efforts. While community banks have until 2023 until they must comply with CECL, there is likely less time than expected. Many institutions can get caught up in “analysis paralysis” in their transition, delaying their preparations. Add a sudden global pandemic to the mix, and CECL has been put further on the back burner for many financial institutions. Experts and 2020 adopters have repeatedly stressed the importance of preparing early. “If you’ve kind of been dragging your feet on this, now is the time,” said Brandon Quinones, Manager of Client Education at Abrigo. “The bottom line is, there are no benefits to starting early because it is no longer early. The time is now to ensure you are ready for January 1, 2023.”

If you’re eager to get started, but struggling with where to start, consider this timeline.

Getting started today

Getting Started with CECL in 2021

During a webinar hosted by Abrigo, “CECL in 2023: Steps to Take This Year,” Garver Moore, Managing Director of Abrigo Advisory Services, advocated for financial institutions with 2023 deadlines to consider the following goals:

  • Start preparing early
  • Choose options within one’s data constraints and supplement with internal/external information as appropriate
  • Follow a consistent and well-reasoned process that’s unique to each institution, even if it differs slightly from market “one-size-fits-all” recommendations
  • Remain flexible throughout the process

Community banks just getting started with their transition to CECL should consider possible partnerships and begin assessing data gaps and accuracy. Leveraging a third-party vendor to assist with CECL can be extremely beneficial in the CECL transition, but finding the right vendor is paramount. “You want to avoid ‘black box’ solutions,” explained Quinones. “CECL is all about the data that you have available and the way that you use that data. So, if you’re just putting it all into a ‘box’ that’s just spitting out an answer, and you can’t actually go in and identify where those numbers are coming from, then you put yourself in a difficult position to defend your calculations with examiners.”

When completing vendor due diligence, ensure that the solution is transparent and can be easily communicated with examiners. This includes the need for user-driven changes and a simplified data integration process. Community banks will need to test and compare different methodologies to determine the right one for their loan portfolio, so it’s critical that a third-party solution has the ability to run multiple scenarios concurrently, which is key for modeling decision-making. Once the community bank selects a vendor, it should ensure that clear timelines and action plans have been communicated and are in place.

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Another key consideration is data availability. Abrigo experts recommend that financial institutions perform a data gap analysis to determine how far back the community bank’s data currently goes. Lack of loan-level data can hamstring an institution’s methodology options. Additionally, consider how accurate the data is – do you trust it? Just because a community bank has a lot of data doesn’t mean that it’s quality data. Some community banks, for example, may have recently undergone a core migration. Others may lack quality control on data input processes.

“The standard gives you a lot of options on how to estimate future credit losses,” said Moore. “And those different options have different data requirements, including the amount data you need, how far back it goes, and what that data covers. Yet, even if you have data, that doesn’t mean that you have intelligence. If you have 15 years of granular data as a small commercial bank, there might not be like a material loss in that entire dataset, which wouldn’t tell you anything meaningful.”

If a community bank finds that it lacks data, has inaccurate data, or struggles with gaps in data, then it will likely need to make assumptions based on peer or industry data. For a successful CECL transition and to satisfy examiners, assessing the community bank’s data situation is a critical first step.

Availability of data should guide a community bank’s decision to leverage a particular methodology or methodologies. “It’s important to dispel the myth of, ‘I need to just try every option on every loan type’, especially when it doesn’t map out to what the institution does,” advises Moore. While considering various scenarios is generally a good idea, there is no expectation to model every possible permutation. For example, there will be some methodologies, like vintage analysis, that can be ruled out quickly because the institution’s data is simply insufficient, and discounted cash flow or remaining life would be a better approach.

Regardless of the methodologies a community bank selects, documenting the decision is critical. Not every methodology will work for a financial institution’s unique circumstances, and there will likely be significant back and forth during CECL committee discussions before a community bank determines the direction it wants to go in. Examiners, however, will lack the context of the discussions and strategies, unless these processes are well-documented. Community banks must ensure examiners understand why the institution ultimately decided on the methodology it chose.

Testing, discussing, and deciding does not happen overnight. Community banks must devote enough time to each of these areas.

Looking ahead

CECL in 2022: The Testing Phase

The last year before implementation, 2022 for community banks, is when consistency is key. Each quarter represents a final opportunity to refine the CECL model prior to the 2023 adoption, so look for consistency in application and in results. During this testing phase, consider the following questions:

  • Do methodologies that weren’t previously selected make more sense to use now that the community bank has built more data?
  • Do forecast components work as expected? Has the outlook changed and produced increased or decreased expected losses?
  • Do you understand why you’re getting the results? Can you explain those results to an examiner? 
  • Can you reasonably project your Day 1 impact on retained earnings?

“Be clear on what CECL isn’t and don’t do that. Any one-size-fits-all, prescriptive approach is something that you can do, but isn’t something you must do,” Moore said.

This will be a critical period for community banks to make sure that they can justify their model(s). Community banks will still likely be making changes and may even have to go in a different direction due to granular details that weren’t available earlier on in the process. Leveraging a partnership for guidance and second opinions can be especially useful for this step in the process. Regardless, 2022 is a critical year to get comfortable with your model and your results.

While the 2023 deadline can seem distant, community banks will need to devote a significant amount of time and resources to their CECL processes. As many experts and 2020 adopters have noted, the key to a successful CECL implementation is to get started as soon as possible. By starting now, community banks will have enough time to consider the available options, get processes in place, test various models, monitor for consistency, and ultimately transition successfully to CECL.

About the Author

Kylee Wooten

Content Marketing Manager
Kylee manages and writes articles, creates digital content, and assists in media relations efforts

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About Abrigo

Abrigo is a leading technology provider of compliance, credit risk, and lending solutions that community financial institutions use to manage risk and drive growth. Our software automates key processes — from anti-money laundering to fraud detection to lending solutions — empowering our customers by addressing their Enterprise Risk Management needs.

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