FEATURE

A guide to CECL implementation for community banks

Todd A. Sprang, CPA and David Heneke, CPA, Financial Institution Principals, CliftonLarsonAllen, LLP

By now most community bankers understand the theoretical con- cepts of CECL (Current Expected Credit Loss) via attending nu- merous presentations that cover the requirements of the accounting standard and the related modeling concepts. However, they get back to their bank and struggle with applying those theoretical concepts they’ve just learned. We put together the following simple steps to assist with beginning your implementation process.

Form a multi-disciplinary team

CECL Implementation cannot be the responsibility of just one or two people. It requires a team that should include

1. A Chief Financial Officer or equivalent, with knowledge of loan loss accounting and basic modeling capabilities.

2. Chief Audit Executive or equivalent, to identify key controls necessary to the new process.

3. Chief Credit Officer, with deep knowledge of the loan portfo- lio and related documentation.

4. Chief Technology Officer, to assist with data gathering and retention.

We advise documenting the members of your team and briefly summarizing their skill sets and roles on the team.

Confirm your implementation deadline

Generally, unless you are an SEC registrant, your deadline for implementation is based whether or not you are considered a Public Business Entity (PBE). It is important to periodically re-evaluate, document, and receive concurrence from auditors and/or regulators regarding your PBE conclusion. Tis step is more commonly ap- plicable to C-Corporation institutions with total assets in excess of $500 million, since this conclusion involves an analysis of whether or not all outstanding shares of stock are sufficiently restricted. Tis step is usually less complex for S-Corporations, mutuals, and institutions with total assets under $500 million.

Establish a project plan

A CECL Project plan does not need to be voluminous in order to be effective. Start with a single page implementation timeline as a foundation. Next, break the project into manageable segments. For near-term segments, assign specific tasks and dates. Assign broader timeframes to the latter segments and allow sufficient cushion ahead of the implementation timeline in the event you experience changes in your operations, such as acquisition activity or changes in your PBE classification.

Start retaining currently available data and start modeling with it

Since the standard-setters and regulators have stated that com- munity banks may be able to utilize excel-based models for CECL implementation, that’s where we began our modelling efforts and we advise the same for most community banks. Our efforts started with the intent of what models can be built with information that is most likely readily available to most community banks, i.e. a standard loan trial balance, history of net charge-offs by loan num- ber, and a watchlist for several periods of time. By starting with a limited number of data points and simple models, this provides a good starting point to gain familiarity with modeling basics, identify modeling flaws and identify potential additional data point requirements. We were pleasantly surprised to discover that effec- tive models (such discounted cash flow, vintage analysis, migration analysis, and static pool analysis) can be built with these limited reports. Te important step in regards to data retention at this time, is to ensure core system reports are maintained for a period time. Tis will ensure when you begin your modeling efforts, you will have the data necessary to start to build your model.

How we can help

At CLA, we’re helping institutions convert the theoretical concepts of CECL into action and progress. We have developed tools and examples for each step listed above to aid with the implementation obstacles you are facing and our professionals are well-versed in community banks to assist you as needed.

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