Where Are You In Your CECL Journey?
May 2019

In case you haven’t heard, CECL is a big deal. It’s been described as one of the most significant accounting changes for financial institutions in decades. As the implementation date draws closer every day, many institutions are starting to feel the heat. This inevitably begs the question: Where are you in your CECL journey?

We recently conducted a survey to learn more about how financial institutions are doing in their CECL preparations. After hundreds of responses from institutions across the country, we’re pleased to share some of the most interesting findings from the survey results. So sit back and relax (for now), and see what your peers are saying about their CECL journey.

Overall many institutions are making headway in their implementation efforts. Forty-one percent have formed a working CECL committee and are having internal discussions about their implementation plan. Thirty-seven percent have an implementation plan in place and are starting to test CECL methodologies. Most institutions are making fairly good progress and are more or less on track. Others are playing catch up. Twenty percent have not yet started their preparations. Only 2% of respondents have fully implemented CECL and are producing comparable results under the new standard. Depending on your institution’s effective CECL date, we highly recommend a minimum of one year to run parallel calculations with your current ALLL allowance so that you can fully assess CECL’s impact.

For certain base loss methods, estimating CECL will require more historical data than the current reserve standard. Thirty-one percent of respondents indicated that they have 5-9 years of historical data. Sixteen percent have 10 or more years of historical data. In our experience, one of the biggest hurdles for an institution early on in the implementation process is getting their data ready and ensuring that they have enough historical data to test certain CECL methods. This will be a critical factor when determining which loss method to use.

One of our favorite topics at Visible Equity is CECL methodology selection and we were excited to hear more about which methods institutions are considering. Twenty-two percent are considering Probability of Default, followed closely behind by Vintage and Static Pool at 21% and 20% respectively. Seven percent are considering the Weighted-Average Remaining Maturity (WARM) method. There’s been a lot of chatter about WARM recently and we anticipate that more institutions will be considering this method in the future. It’s expected that financial institutions will continue to wrestle with which methodologies they should seriously consider, and by far one of the most frequently asked questions we get is, “How do I know which method is most appropriate for my portfolio?” Determining which method(s) to use is a decision that ultimately must be made by each institution. To assist you in this process, we have a handy CECL Methodology Selection Guide. Check it out!

Producing and incorporating reasonable and supportable forecasts is one of the key changes that comes with CECL. We wanted to know how financial institutions are planning to be compliant with this aspect. Forty-six percent of respondents indicated that they have not yet determined how they will handle forecasts in CECL. Twenty-two percent are planning to use a third-party for both the forecast and the resulting adjustment. These results are interesting because it shows that a large percentage of institutions are still grappling with how best to handle the reasonable and supportable forecast requirement of CECL. It also indicates that many institutions will likely be looking to third-party vendors and other consultants to assist them in these efforts.

This question had the potential to elicit all kinds of emotions. Fortunately, we didn’t allow for any open-ended responses! In all seriousness, the responses were informative. Thirty-eight percent of respondents said that they anticipate it will increase their reserves by 10-25%. The next highest response rate indicated that they think it will increase their reserves 25-50%. Only 13% anticipate that their reserves will stay about the same. Interestingly, 3% of respondents think that CECL will decrease their reserves. The vast majority of respondents expect that CECL will impact their reserves. This reinforces our earlier point that institutions would be wise to assess CECIL's impact as soon as possible in order to adequately prepare for potential changes to capital requirements.

Having touched on some of the key aspects of CECL implementation in the previous questions, we wanted to know what financial institutions are planning to use as the primary tool to calculate the allowance under CECL. Sixty-five percent plan to use a third-party software solution. Somewhat surprisingly, 22% are planning to use in-house tools, and 13% are planning to use a third-party consulting service or other tool. These numbers clearly show that the vast majority of financial institutions surveyed are seeking some kind of third-party assistance to calculate the allowance under CECL.

CECL Checkup

Examiners are starting to inquire about efforts financial institutions are making to prepare for CECL. Perhaps after seeing where your peers are in their journey, you might want to learn more about how you can better prepare for this significant accounting change that will inevitably impact your institution. We would like to invite you to attend a Visible Equity webinar on May 30, 2019 to assess how you’re doing in your CECL journey. In this webinar attendees will receive a “CECL Checkup” to assess how they’re doing in their CECL preparations, as well as to see what they can do to ensure they’re on track with implementation efforts. Regardless of where you are in your journey, this presentation will help educate and prepare attendees to discuss all things CECL with examiners. We hope you will attend!

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