By Stephen LaBarbera, CPA – Shareholder, Financial Institutions Group

In 2016, the Financial Accounting Standards Board (FASB) announced a new accounting standard introducing the current expected losses (CECL) methodology for estimating allowances for credit losses, applying to all financial institutions that file regulatory reports conforming to Generally Accepted Accounting Principles.

Financial institutions were encouraged spend adequate time planning for, and implementing the new standard before its Jan. 1, 2023, effective date. Now in 2022, the last year of implementation, the final countdown has begun for institutions to ensure their CECL allowance methodology and calculation is up to par with the new standard.

Doeren Mayhew’s Financial Institutions Group has developed a CECL readiness checklist, which includes the top 10 items your institution should be checking off as you wrap-up your implementation process this year.

1. Gain a clear understanding of CECL and industry expectations for implementation by leveraging FASB guidance and other resources, such as those available from the National Credit Union Administration (NCUA) and Federal Deposit Insurance Corporation (FDIC).

2. Ensure an achievable preparation timeline has been established with actionable items and target completion dates.

3. Determine whether your institution will be compiling data at the loan level or at the loan class level. In addition, evaluate whether you be implementing in-house or leveraging one of the following third-party providers:

          • Sageworks, now Abrigo
          • Visible Equity, now nCino
          • 20/20 Analytics
          • Fiserv’s Prologue Credit Loss Manager
          • Profitstar’s CECL Analysis and Reporting

4. Select your methodology. Evaluate or model different methodologies to estimate expected credit losses and choose which one best fits your institution’s loan types, asset size and complexity. CECL provides a wide range of accepted methodologies, including:

          • Static pool analysis
          • Weighted average remaining life (WARM)
          • Migration analysis
          • Vintage analysis
          • Discounted cash-flow
          • Probability of default/loss given default

5. Finalize your institution’s data collection process and input data into the chosen methodology as it becomes available. Note, the data needed may vary depending on the methodology you’ve selected. Some methodologies require more detailed data than others.

6. Double check the data by analyzing CECL outputs monthly. In addition, consider sharing preliminary results with external auditors (like those at Doeren Mayhew), regulators or others for valuable feedback.

7. Calculate the estimated impact to net worth ratio. Doing so will help the institution take preventative steps to minimize dramatic changes in the levels of capital or earnings.

For credit unions, gain an understanding of the NCUA’s guidance on the Transition to the CECL Methodology, which allows for credit unions to phase-in the potential day-one adverse effects on regulatory capital over 12 quarters or three years.

8. Run models side-by-side comparing the allowance for credit losses balance under the current methodology to the projected balance under a CECL methodology, in consideration of any fine-tuning modifications.

9. Make sure everyone buys in. Arrange meetings with the Board of Directors, Audit Committee and other stakeholders to assess the methodology and make certain all have a strong understanding of the change and its impact to financial reporting.

10. Update the allowance for loan and lease losses policy to reflect new operating procedures, and have it approved.

While implementation may seem like a daunting task, now is the time to check the boxes and ensure your institution is properly positioned and ready for the final deadline. Whether your institution needs your updated policies and procedures evaluated, or assistance with reviewing your model, Doeren Mayhew’s Financial Institutions Group is here to support you every step of the way. Contact us today.