Not ready for CECL? Here’s How Your Financial Institution Can Get Back on Track

For many community financial institutions, the long-delayed rollout of CECL is almost here. But even if you’ve barely begun your implementation journey, you still have time to see it through. Read on for expert, actionable advice on where to focus your efforts, starting today.

The Current Expected Credit Loss (CECL) accounting standard was first unveiled in 2016 in response to the last financial crisis. The Financial Accounting Standards Board (FASB) introduced CECL with a stated goal of improving how lending institutions calculate potential future losses from loans held on their books today.

Following its initial introduction, FASB delayed implementation for several years due to financial industry concerns with the aggressive timeline. Large institutions were required to implement the standard as of annual reporting periods beginning after December 15, 2019, whereas smaller reporting companies and non-public business entities (PBEs) must start using CECL beginning the fiscal year following December 15, 2022. This means that most banks, credit unions and farm credits will be required to begin using the CECL standard as of January 1, 2023.

CECL versus the incurred loss model

CECL is a sea change from the incurred loss model standard that most financial institutions have used to calculate their allowance for loan and lease losses (ALLL).

“CECL represents the most significant change in the ALLL in nearly 50 years,” said Tim Morgan, a Financial Institutions partner at HORNE. “Previously, the allowance relied on the incurred loss model, which basically reflected the historic losses that were already established in the credit portfolio. In contrast, the current expected credit loss model is effectively designed to capture losses that will occur throughout the estimated life of the loan.”

It’s important to recognize that CECL estimates are not meant to fully reflect all losses that will occur within a credit portfolio over time. They are simply a reasonable forecast of what lenders expect to happen based on the facts they have at their disposal today.

“This does not mean that if you have additional losses outside of today’s estimates, you were wrong in your current estimate,” Morgan said. “Everyone understands these estimates are based on the facts you know today from a historic standpoint, as well as what FASB calls a reasonable forecast of losses in the future.”

Learnings from early CECL filers

Fortunately for community financial institutions, those large institutions that have been running CECL for a couple of years now have some learnings to share. Moreover, financial regulators are providing a certain amount of latitude to allow institutions to get up to speed with the new standard.

“The regulators appreciate that this is a new and complex standard,” Morgan said. “We haven’t seen regulators rigorously raising concerns about the methodologies that banks have adopted or the underlying data they are using to form estimates. But those days are coming, as the industry coalesces around a set of standardized views.”

Here are a few key takeaways from the early CECL filers:

  1. Start now. With less than a year to the January 1, 2023, implementation deadline, it’s important to get started right away. Document your project plan with an eye toward kicking the project off in the first quarter.

“Wherever you may stand today, make sure you have a viable and adequate project plan in place,” Morgan said. “The plan should be laser-focused on what needs to get done by the deadline.”

  1. Validate your data. One of the key learnings shared by early filers is the importance of having access to reliable and accurate loan data. 

“Typically, where we see challenges is in the quality of the data and its ability to support the estimate,” Morgan said. “This is particularly important for institutions that recently merged with another lender, where the acquired institution may not have had sufficient historic data on its legacy loan portfolio. In that case, you need to determine whether it makes sense to leverage industry data to a greater extent.”

  1. Get buy-in from the top. To have a successful rollout, be sure to garner support from your senior management and board of directors before

“Ensure you have appropriate focus from senior management on the importance of what CECL means not only to the bottom line, but also the process and resources required to get there,” Morgan said. “This also means budgeting for adequate resources to do what you need to do to implement.”

  1. Establish clear accountability. Lastly, Morgan recommends designating a single point person who is responsible for the entire project.

“This individual should be driving the implementation of CECL with significant support from across the company, including accounting, finance, credit administration and the frontline credit officers,” Morgan said. “You should also bring risk management and internal audit into the discussion to weigh in on how to assess and manage the risks and establish prudent policies, procedures and controls.”

It’s not time to hit the panic button yet. To ensure you make the implementation deadline, get started in the first quarter, and set a goal of running CECL in parallel with the incurred loss model within the first half of the year.

“At this point it’s doable,” Morgan said. “It just requires the proper focus and support of all the appropriate individuals within your organization. As we move a little bit further along the timeline, it may make sense to leverage the resources of a third party, because building a program internally takes more time and is likely to be a bit more problematic.”

Still need help? Here’s how to get it

No matter where your institution is on your CECL implementation journey, HORNE is here for you, and can assist in several ways.

As a professional services firm with deep expertise in financial services, HORNE has helped banks, credit unions and farm credit organizations of all sizes implement the best CECL program for their unique needs. We can assist you in selecting the right CECL methodology, developing a project plan and identifying and validating the data needed to create the current expected loss estimates.

For institutions that already use HORNE as their external auditor, our firm’s engagement is bound by independence and conflict-of-interest rules. But we can still provide feedback throughout your development process to minimize any surprises or concerns (such as those pertaining to data quality) that might be raised post-implementation.

CECL implementation requires an experienced team to ensure a seamless transition. HORNE’s Financial Institutions team is ready to collaborate with you to turn this compliance burden into an opportunity for better business insights. Contact us to help you prepare for an effective implementation.



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