Why 2019 will be a CECL critical year for financial institutions

With the recent start of 2019, financial institutions that have only this year to complete their current expected credit loss (CECL) models have hit an important milestone. Financial institutions have known about this “new” accounting standard for approximately three years, and now the frequently discussed deadline is coming to fruition. Public business entities who are registered with the Securities and Exchange Commission (SEC) have to comply by Q1 2020. Non-SEC filers and all other entities have until 2021 or 2022 to transition to forward-looking credit loss models.

CECL should be a critical item that financial institutions prioritize on their strategic agendas this year regardless of whether the institution is an SEC filer or not. There have been recent discussions and changes that FASB has made in an attempt to improve the standard after gathering industry feedback from peer groups, however, banks may be at a disadvantage in implementing in a timely manner if they view these changes as an opportunity to slow efforts to prepare.

When asked to describe their progress in preparation for and transition to CECL, in MainSreet Technoogies’ 2018 CECL survey, more than half the responding financial professionals, 55 percent, indicated they were “having internal discussion/meetings.” MST Senior Advisor Paula King, a former bank CFO and co-founder, contends, “that’s not far enough along for many institutions. If you are an SEC filer you will be estimating under CECL on March 31, 2020. You’ll want to start testing your models by the first quarter of 2019, which gives you less than a year to secure external help if you need it, budget for your transition, draft your roadmap, which will include gathering and assessing your data and re-segmenting your pools, and then ultimately implementing your plan.” King further advises that institutions and their teams should have advanced in the implementation timeline to either the stages of testing CECL-compliant methods or evaluating vendors.

Supporting the survey’s findings that institutions are often delayed at getting started, Jessica Shorney, chief financial officer at Telcomm Credit Union said in a survey after a recent CECL modeling webinar by Sageworks that “our experiences thus far with CECL modeling have been non-existent, as we stalled in the early stages of data gathering and building the files. We recently, however, made significant progress with the files, and hope to be running parallel calculations soon.”

Many financial institutions are similar to Telcomm Credit Union in that they recognize that CECL will require more effort than simply “pushing a button” due to the complex data requirements of the forward-looking models. During the same webinar, Sageworks risk management consultants Brandon Quinones and Danny Sharman polled the audience on the most challenging aspect of analyzing CECL modeling results at their financial institutions. Among 185 attendees, 40 percent specified that they do not have CECL modeling results yet. Both consultants expect this number to significantly decrease in 2019 as institutions either reach or approach their effective dates.

For institutions that have to comply at the end of this year, the final CECL model must be approved by the board of directors and external auditors, and it should take into account any regulatory feedback received by the institution. Final scenarios should be tested and presented to management and shareholders showing the projected impact on ratios, earnings and capital. As CECL is being finalized, this is the right time to introduce more robust stress testing, underwriting and loan pricing programs so that the entire lending process is defensible. Throughout most, if not all, of this year, financial institutions should be running CECL calculations in parallel to the incurred loss model.

Non-registrants and all other entities will be closely observing the actions SEC filers are taking in upcoming months. The SEC requires its registrants to make certain disclosures ahead of CECL implementation, i.e., now. These include pertinent dates for adoption and a discussion of the impact unless it is unknown or unable to be estimated. At the end of this month, Managing Director of Sageworks Advisory Services Garver Moore will be giving a web presentation to financial institutions on what their CECL models should look like in their final year before implementation. Registration for “A Practical CECL Transition: Preparing with only one year left” can be found here.

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