Don’t Sleep on CECL

The daily dose of top headlines includes COVID-19, the presidential election, the Paycheck Protection Program, and now the Supreme Court's vacancy due to the passing of Justice Ruth Bader Ginsburg.  In a world filled with differing opinions on face coverings, remote learning, testing, vaccines, economic stimulus, and more, it is relatively easy for the financial services industry to lose perspective relative to CECL. However, 152 of the nearly 5,300 banks in the United States adopted CECL as of January 1, 2020, and it still remains front and center.

The 2020 AICPA Conference on Banks and Savings Institutions continued as planned on a remote basis. Much discussion took place relative to Paycheck Protection Program (PPP) loans, accounting for loan modifications, and the adoption and ongoing challenges related to CECL.  This virtual venue also provided the opportunity for bank regulators and practitioners to speak to their minds on CECL and give an overview of the impact to date.

The Office of the Comptroller of the Currency (OCC) provided the following high-level observations on the impact of CECL through the second quarter of 2020.

• Provided greater flexibility and the ability to reserve now appropriately
• Mitigated reliance on historical data and lagging indicators
• Brought together multiple disciplines within adopting institutions
• Served to align accounting and financial reporting with credit risk management
• Improved transparency around the allowance

The OCC explicitly indicated that the agency supports CECL, independent standard-setting, and scalable implementation for community banks.

The CARES Act provided the opportunity for issuers to defer the adoption of CECL due to COVID-19.  As such, 45 of the 197 applicable banks chose to defer the adoption of the new standard.  The breakdown of those opting to defer (by asset size) was as follows:

• Less than $3 billion – 7
• $3 billion to $5 billion – 14
• $5 billion to $10 billion – 29
• Over $10 billion – 3

For those issuers adopting CECL as of January 1, the impact was significant resulting, in an average increase in the allowance of 36.4%.

Average allowance to loans:

• December 31, 2019 – .89%
• January 1, 2020 – 1.21%
• March 31, 2020 – 1.47%
• June 30, 2020 – 1.66%

Comparison of provision expense for CECL adopters versus those opting to defer reflected first-quarter provisions to average loans of .44% and .15%, respectively. The second quarter reflected CECL adopters at .35% with those choosing to defer at .16%

The adopting issuers ranged in asset size from $1.3 billion to $3.1 trillion, such that further dissection would likely be appropriate to assess the impact on those identifying as community banks. Nonetheless, the economic impact has been substantial between the uncertainty presented by the COVID-19 environment and the adoption of the forward-looking CECL methodology.

Looking forward, absent further intervention by the legislative branch, it appears the 45 issuers choosing to defer will likely adopt CECL in 2021, leaving approximately 5,100 community banks adopting CECL January 1, 2023.  Additionally, while the National Credit Union Administration (NCUA) continues to lobby vigorously for an exemption for their institutions, they are also scheduled to adopt on day one of 2023.

While January 1, 2023, seems distant, note that community banks and credit unions need to be in position to run their CECL model parallel with their incurred loss model beginning January 1 of 2022. That means the heavy lifting needs to be done in 2021, which is approximately 90 days away.

Economic impact aside, CECL presents an opportunity to improve processes, break down silos, and align financial reporting with how an institution manages credit risk. Hoping for legislative or divine intervention is not a plan, nor is "seeking to comply" by choosing the path of least resistance.

Community banks and credit unions can and should seize this opportunity to enhance their stakeholders' long-term return by robustly integrating CECL within their institutions. For more information regarding CECL, or to learn how we can help you maximize your "ROI," please contact your local CRI professional.