Publicly Traded Banks Disclose CECL Progress, Expected Impact
As CECL is implemented, the allowance for loan and lease losses, or ALLL, is being called the allowance for credit losses, or ACL.
As financial institutions plan for their respective deadlines to implement the new current expected credit loss (CECL) model, they are also weighing how to disclose the potential financial impacts and how to keep stakeholders informed along the way.
A study of recent SEC filings finds that publicly traded financial institutions are taking varied approaches to disclosures about the FASB’s Accounting Standards Update (ASU) 2016-13, Financial Instruments—Credit Losses (Topic 326) – approaches that the study authors say also provide insight for private, non-SEC registered banks and CECL disclosures.
“Initial disclosures by SEC registrants are leading indicators of how the ASU is likely to impact all affected entities, and these disclosures are carefully scrutinized by interested parties,” wrote authors Ariana Pinelllo, PhD, CPA, CIA, an associate professor of accounting at Florida Gulf Coast University, and Ernest Lee Puschaver, CPA, a retired partner of PriceWaterhouseCoopers, in the CPA Journal. Puschaver is also the former chief accounting officer for FleetBoston Financial Corp. and the former CFO of the Federal Home Loan Bank of Atlanta.
The study authors reviewed 2016 Form 10-K CECL disclosures for 15 of the largest and 15 of the smallest domestic SEC registrants in the financial services industry. They examined disclosures about efforts to comply with the new standard and disclosures about the expected materiality of the standard’s impact.
Early glimpse of banks’ views of CECL
ASU 2016-13 is effective for public entities for fiscal years beginning after Dec. 15, 2019, although early adoption is allowed. Non-SEC filers and all other entities are required to issue financial statements using the new standard beginning a year later. However, the SEC requires its registrations to make certain disclosures ahead of CECL implementation. These include pertinent dates for adoption and a discussion of the impact, unless the impact is unknown or unable to be estimated.
As a result, the most recent 10-K filings provide an early glimpse of how managements at various institutions are viewing the implications of CECL and of how they are handling disclosure of CECL’s expected impacts, Pinello and Puschaver wrote.
None of the financial institutions in the study disclosed an intent to adopt CECL early. However, they generally revealed they are “exerting significant compliance effort,” the authors said. At 14 institutions, cross-functional steering committees had been formed and models were being reviewed. Even those that didn’t provide detailed descriptions of current efforts noted they are evaluating the implications of the accounting standard update.
Learn more about navigating the CECL transition.
CECL likely a material matter for many banks
Nine of the 30 entities in the study made some comment indicating that the accounting change is likely going to be a material matter. However, none of the CECL disclosures indicated an expected range of adjustment, the authors noted.
For example, among the smaller institutions, Astoria Financial said it expects the adoption of the CECL model will “materially affect how we determine our allowance for loan losses and could require us to significantly increase our allowance.” Astoria in October completed its merger with Sterling Bancorp (NYSE: STL), giving the combined bank $30 billion in assets. TFS Financial Corp. (Nasdaq: TFSL), the holding company for Third Federal Savings and Loan Association of Cleveland, said the new model may require it to increase its ALLL and also “to greatly increase the types of data we would need to collect and review to determine the appropriate level” of the ALLL. The financial institution (with nearly $14 billion in assets) further said that any such increase in the allowance or in expenses incurred to determine the appropriate level of the ALLL “may have a material adverse effect on our financial condition and results of operations.”
Sterling Bancorp simply noted ASU 2016-13 “will significantly change the accounting for credit impairment.”
Where banks will disclose CECL info
The study authors also examined how and where SEC registrants disclosed information about CECL. SEC registrants are required to make disclosures in either the early part of the 10-K, such as in the management discussion and analysis (MD&A) section, or in the financial statements themselves. Other preparers are only required by GAAP to present the information within the financial statements, the authors noted. The analysis of recent filings found 24 of 30 filers presented their disclosures on CECL in the financial statements.
In an email exchange with Sageworks, Pinello said she and co-author Puschaver believe their findings have important implications for private banks. While non-SEC registered banks aren’t subject to the same disclosure requirements as publicly traded banks, they must still plan for the major industry change that CECL implementation represents.
“Generally, material matters regarding changes in accounting pronouncements are a serious consideration for discussion in an entity’s financial statement footnotes,” Pinello wrote. “Accordingly, we believe that the ASU and its CECL requirement will be a disclosure consideration in the financial statements of any entity likely to be materially impacted.”
In addition, Pinello and Puschaver noted something else in the comments of smaller banks’ SEC filings. “Some of the smaller institutions in our sample of SEC registrants revealed more ‘alarmist’ wording in their disclosures, suggesting that smaller institutions may encounter more major issues than larger institutions, which may be indicative that the most severe implications of CECL adoption may be faced by the even smaller non-registrants,” she wrote. “These non-registrants might choose to not make any disclosure until they must (i.e., until the effective date of the ASU) but as the ASU’s effective date nears, non-registrants might also feel ‘peer pressure’ to disclose as disclosures increase by others in the industry.”
Large banks in the sample review of filings included Bank of America (NYSE: BAC), Wells Fargo (NYSE: WFC), PNC Financial (NYSE: PNC) and SunTrust (NYSE: STI). Other smaller banks included in the study were Washington Federal (NASDAQ: WAFD), Bancorp South (NYSE: BXS) and Bank of the Ozarks (NASDAQ: OZRK).