Portfolio Risk & CECL

Innovative MetaBank “Excited” About CECL

Background

MetaBank’s Sheila Volek uses the “e” word when she talks about the bank’s transition to estimating its allowance under the CECL standard. “I’m excited to see what will happen,” she says.

Volek’s anticipation and confidence reflect a long history of innovation at Sioux Falls, South Dakota-based MetaBank, which has resulted in such accolades as being named fifth in the nation among top-performing mid-sized banks by the ABA Banking Journal, and among the top 25 of the nation’s community banks and thrifts by American Banker Magazine. It has grown to operate in several different financial sectors: payments, commercial finance, tax services, community banking and consumer lending, and works with high-value niche industries, strategic-growth companies and technology adopters to grow their businesses and build more profitable customer relationships. It has made a series of acquisitions, five since 2014, including the most recent, Michigan-based Crestmark, an institution acquired in the midst of MetaBank’s CECL transition.

“We’ve seen expansion in our loan portfolio over the past couple years, particularly through some strategic acquisitions,” said Volek, the MetaBank senior accountant with ultimate responsibility for the allowance and allowance reporting to the SEC. “The recent Crestmark acquisition further diversified our lending platforms by adding different types of commercial finance product offerings, including asset-based lending, factoring, leasing, and government guaranteed lending, and will enable cross-selling to help smaller businesses secure financing for commercial insurance.”

When we first heard of CECL, it seemed so big. We started by learning...then we began thinking about how to tackle this, then about finding somebody to help. The people here are capable of doing this, but we all have day jobs. We needed someone to do the heavy lifting.

Sheila Volek, Sr. Accountant

The Allowance

MetaBank has traditionally maintained multiple loan systems to manage its loan portfolios due to its diversity. Each product line has its own loan system and each division calculates a separate allowance.

“The portfolios are unique,” Volek noted. “Each is pooled separately.”

That translates to over seven different allowance calculations, which are then combined into a final incurred loss estimate. And until recently most of that data was gathered, analyzed, recorded, and stored on Excel spreadsheets.

Then came CECL.

“When we first heard of CECL, it seemed so big. We started by learning: watching webinars, attending meetings, and so on. Then we began thinking about how to tackle this, then about finding somebody to help. The people here are capable of doing this, but we all have day jobs. We needed someone to do the heavy lifting.”

Due Diligence

“We looked at five or six companies and their software, then narrowed it to two, looking for the best fit for MetaBank today and in the future,” Volek said. Considerations included the bank’s recent growth and the many new services it was adding. It needed a capable, customized CECL allowance solution.

“We narrowed our selection to two systems, then chose Abrigo [formerly MST] because of the customer service. They’ve been so responsive, from sales to implementation. And we’ve been impressed with their level of knowledge. The software is important, but you need people to stand behind it, to help you get where you want to go.”

Volek and MetaBank began the relationship by engaging MST Advisory Services (now Abrigo Advisory Services).

“We didn’t take on the software at first,” she explained. “We wanted to see how the advisory process went. Though we were relatively certain we’d end up automating our allowance for CECL.”

The Blueprint

The Abrigo Advisory process begins with an Abrigo Blueprint, a document defining the CECL transition process as customized for the bank. MetaBank’s Blueprint was the product of a series of meetings between Volek’s MetaBank team and Abrigo’s Advisory team led by Managing Director Regan Camp and Senior Advisor Paula King.

“We started the Blueprint process in December 2017,” Volek noted. “Regan, Paula, and their team talked through our current allowance calculation as we do it today, then looked at our pooling to determine the best way to pool under CECL,” Volek said. “All along the FASB has been saying that you shouldn’t over-complicate the process. The plan was to start with what we are doing today and make adjustments, as opposed to starting over completely.”

“They had a traditional type of portfolio and substantial historical data, including most of the critical data elements needed for various models,” King reported. “So we knew we could leverage what they had to work toward a CECL solution.”

Volek and Abrigo Advisory were several months into the Blueprint process when the Crestmark acquisition closed.

“The Crestmark loans and leases and related systems were completely different from what we had at the time,” Volek explained. “We needed help with the incurred loss model for the acquired portfolios, so while we worked on the Blueprint for the Community Bank CECL solution, we also developed an incurred loss model for the Crestmark portfolio. Then we started on a CECL Blueprint for the Crestmark loans and leases. Now we’re working on one Blueprint document that covers Meta’s entire loan and lease portfolio.”

The Methodology

“We typically review three or four methodologies and check to see if the bank has the data fields necessary to satisfy each model’s data field requirements,” King said. “In this case, a Cohort CECL methodology proved most appropriate. You don’t need as many critical data fields as some of the other models to run a Cohort model, but it is preferable to have historical data dating abrigo.com back a full economic cycle, as well as enough years to accommodate CECL’s life-of-loan concept, that is, to provide a meaningful representation of historical losses.”

“Our ultimate decision to employ a Cohort method was based on the data we had, what methodologies were viable given our data, and what would be the best choice for our portfolios,” Volek added. “We didn’t have a formal data warehouse when CECL was announced but we began building one. We had trial balances back 11 or 12 years as well as historical system reports we could download and get the data in the right order and all the right fields. We like the Cohort method because to a great extent it mirrors the way we look at the allowance today, while we are able to address the additional considerations required by CECL.”

MetaBank expects to employ its customized Cohort solution across the board. “It is better for us than having to implement a cash flow or more complex model,” Volek pointed out, “and flexible enough to use on all our different portfolios.”

“The process went well,” she noted. “The Abrigo Advisory team’s answer to everything we asked for was either ‘yes’ or we’ll figure out how to do it.”

Hence, the decision to implement Abrigo’s MST Loan Loss Analyzer (LLA) software.

We like to be what our CEO calls a ‘trailblazer.’ We’ve always been a company looking for a better way to do things that is smarter and more efficient. Software can help.

The Software

“MetaBank has always been very innovative,” Volek offered. “We like to be what our CEO calls a ‘trailblazer.’ We’ve always been a company looking for a better way to do things that is smarter and more efficient. Software can help. It allows your team to focus on analysis; technology can handle many of the more routine tasks.”

Under CECL, MetaBank will use the MST LLA to bring its different allowance calculations under one umbrella. The LLA will enable the bank for the first time to house all that data in one location.

“We needed software that’s flexible. Even though different people in different divisions will have their own input, all the data and calculations will be in one place,” Volek said. “We’ll employ other LLA modules, like stress testing, which will extend the reach of efficiencies beyond the accounting team. And the reporting capabilities will help us streamline our processes and create more efficiencies. The software will also allow our chief credit officer and his team to monitor and obtain reporting on Meta’s diverse loan and lease portfolio all in one location.”

The Run-Up to Implementation

MetaBank’s early start on its CECL transition is complemented by a Sept. 30 fiscal year end that gives the financial institution an additional nine months before filing the first estimate under CECL. Volek and her team will be able to run parallel estimates for a year and a half and for all of their portfolios “for at least five quarters,” she noted.

“Starting early was valuable, especially given the way we have been growing and changing. It gave us time to break down the project into manageable pieces so we could evaluate and take our time and make good decisions – and to do the analysis on the Crestmark loan and lease portfolios without having to rush.”

Volek will continue to use Excel for the bank’s incurred loss estimates and the LLA to run the Cohort CECL model parallel. Running parallel will allow MetaBank to see how the Cohort estimates stack up against its incurred loss estimates.

“How CECL will impact us is the big thing everybody wants to know. That was another advantage of starting early. We’re able to give guidance to our investors. We have a very low loss rate, with not a lot of charge-offs, even during the economic downturn, which has made it a challenge to get adequate coverage. The LLA software is incredibly flexible, so we can fine-tune our assumptions and how we look at Q-factors going forward.”

For some institutions, transitioning to CECL has been a burden. For Sheila Volek, it has been a compelling journey of discovery.

“I’m excited about CECL. I love data and analysis. I’m interested in seeing the impact of the standard, not only on MetaBank but around the industry.”

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