Portfolio Risk & CECL CECL Methodologies

The Pandemic May Not be Derailing CECL Plans – But Many Institutions Still Risk Serious Delays

Kylee Wooten

December 4, 2020

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2023 CECL adopters vary in transition progress

Financial institutions face considerable questions and obstacles in regard to their transition to CECL.

You might also like this webinar on CECL in economic downturns.

Financial institutions have endured a number of unexpected challenges throughout 2020 as they’ve worked to support customers and members amid the coronavirus pandemic. While many of this year’s challenges have been unforeseen, the move to the current expected credit loss, or CECL, standard has been on the horizon for many years. This year, most SEC filing financial institutions were required to move to the new standard, and they juggled managing their reserves in preparation for both CECL and for pandemic-related implications.

With the disruptions caused by PPP, loan workouts, and other efforts to keep customers afloat, some financial institutions’ timelines for preparing for their 2023 transition to CECL might have been put on the back burner. Luckily, it seems most financial institutions have remained committed to their CECL preparations. During Abrigo’s recent CECL symposium, more than 300 attendees participated in an informal poll on key CECL topics, highlighting their current concerns and progress. While the coronavirus pandemic has created a number of new challenges, just six percent of attendees responded that the pandemic had derailed their timeline when polled on their largest CECL challenges. While this is good news, there are considerable questions and obstacles financial institutions still face with regard to their CECL transition.

Implementation progress

Overall, it appears financial institutions vary greatly on their current implementation progress. Nearly two years out from their 2023 CECL implementation deadline, almost a quarter of respondents said their institution is currently at a “standing start” regarding their implementation progress. Another quarter of respondents indicated they are actively preparing to report ACL at the deadline. Meanwhile, just six percent believe they are on track to report ACL on their financial statements before the 2023 deadline. As we move into 2021, it’s critical that banks and credit unions, particularly those that are still in the information-gathering stage, make a concerted effort to get back on track to prevent serious delays.

Gathering enough data has long been a top concern among financial institutions, as it is one of the most significant bottlenecks to CECL. Completing a data analysis is one of the most important steps in the transition to CECL. In Abrigo’s 2019 CECL survey, less than half of survey participants (43%) had collected and validated data. However, in the symposium poll, just 11% of respondents indicated analyzing data and reconciling any gaps as their top concern.

If data is a concern, however, it’s important to understand that institutions that lack extensive historical data are still perfectly capable of implementing CECL. Quality of data and controls are much more important than the quantity of the data available. Financial institutions that are lacking data can use both internal and external data, supplementing what they need from other institutions, top-down information from Call Reports, or other data aggregators.

Top concern

An institution’s loan-level data often directs which methodologies are the most appropriate to leverage for CECL. While data appears to be less of a challenge presently, based on the results of the symposium poll, financial institutions are struggling with selecting the best methodology for their portfolio. A third of respondents noted that determining which methodology – or methodologies – their institution should be using for CECL was their biggest challenge. For 2023 adopters, which tend to be smaller financial institutions in comparison to their 2020 counterparts, preparing for CECL can be especially daunting due to a lack of meaningful losses or loan history. Garver Moore, Managing Director of Advisory Services at Abrigo, frequently recommends discounted cash flow (DCF) or remaining life methodologies to 2023 adopters. While other methodologies may be appropriate, DCF and remaining life methodologies tend to offer smaller, less complex institutions the greatest flexibility in overcoming common data and experiential concerns they may be facing.

A common myth about CECL methodologies is that all methodologies must be examined. There are many cases in which a methodology will clearly be unsuitable simply based on the bank or credit union’s loan portfolio. Regardless of the methodology or methodologies an institution selects, documentation of the decision is paramount. Financial institutions must ensure that examiners understand why the institution ultimately decided on the methodology it chose. While institutions do not have to test every single methodology, testing, analyzing, and deciding will take considerable amounts of time. Be sure to devote enough time to each of these areas and think critically about your loan portfolio to rule out methodologies that will simply not work for your institution to avoid wasting any additional time.

The coronavirus pandemic has undoubtedly created many challenges for financial institutions. While it hasn’t derailed most institutions’ plans for CECL, there is still significant work to be done to ensure banks and credit unions are prepared for the 2023 effective date. Make sure your financial institution remains diligent and committed to its implementation timeline.