Working Through CECL: A Banker's Perspective

February 2019 | Article

The impact of the current expected credit loss model (CECL) is still hard to determine, and it looks like banks will have a few years to iron out many of the details. Still, the time between now and the implementation date should be used wisely. Possibilities sat down with Jody Eddy, cashier/controller at Reliance Bank in Faribault, Minn., to ask how her bank has been working through its CECL model.

Eide Bailly: How much time and effort did it take the bank to gather the historical loan origination and loss data necessary to populate the Eide Bailly CECL model?
Jody: We worked at a little at a time. Starting at the beginning of the year, myself and a staff member in finance went through it and pulled data from what we already had in board reports and call reports. Most of what we needed we had in other places, so most of our time was spent pulling it all together.

Eide Bailly: How many years back could you go to get the historical loan data for the CECL model and was it readily available in your core system, or did you have to go to a more manual or labor intensive means to gather all the data?
Jody: We are only 11 years old as a bank, so we didn’t go back all the way to the beginning because there wasn’t a lot of data to pull in those first couple years as a new bank. For the most part, we pull monthly reports so we had most of the data we needed in report format. Because we’re a smaller bank we didn’t have that much data to dig through.

Eide Bailly: How often do you update the model and how much time is involved in the update?
Jody: We’ll probably be updating the model quarterly. We run our ALLL quarterly, so our plan will likely be to match them up at that time. We’ve only done that once so far, but that will be our plan and we’ll tweak and do more if we need to in the future.

Eide Bailly: What were some of the factors the bank used to determine the loan pools for the model?
Jody: We just stayed with the same format. Currently we’re doing it by purpose code for our ALLL, so we’re using purpose code as well for CECL. I think that makes it easier to match them up and compare them.

Eide Bailly: Has the bank discussed the CECL model with their regulators and if so, what has been the reaction from the regulators?
Jody: We just had FDIC here in June and they didn’t ask about CECL at all, so no discussions yet.

Eide Bailly: Why did the bank decide to try the Eide Bailly CECL model?
Jody: We’ve had a long relationship with Eide Bailly. The firm has done our loan reviews for quite a few years. Dan Bonneur, our senior lender, knew early on that Eide Bailly was working on a model, so we wanted to wait and try it out. We have a couple years before full implementation, so we anticipate continuing to use it and adjusting it as needed.

Eide Bailly: FASB recently issued an exposure draft delaying the effective implementation date of ASC 326 for non-PBE’s to year beginning after December 15, 2021, and interim periods within those fiscal years. Since this is likely to be approved, does it influence your implementation plan?
Jody: Not really. We completed this a few months ago and we’ll try to run it parallel with our ALLL the rest of this year and probably next year, and we’ll decide from there where we go. So the extension hasn’t really affected anything for us because we have it built and we’re just going to run with it and see what it looks like.

Eide Bailly: Did the bank form a CECL implementation team? If so, what was the makeup of the implementation team? If not, can you expand on why the bank didn’t feel that is was necessary to form an implementation team?
Jody: Not officially, no. Dan, myself and a finance team member have been working on it, but we didn’t create a specific team. We’re a smaller bank, so it’s just Dan and I who complete the ALL, so it made sense that we work on CECL as well. We didn’t see a need to bring in more people who were not familiar with the process now.

Eide Bailly: What types of education has the bank implementation team been involved with to ensure an adequate understanding of CECL? Webinars, seminars, combination, etc.
Jody: It’s been a hot topic for a while, and I’ve been to a few different Minnesota Bankers Association seminars targeted toward financial people that have had segments on CECL. Dan has gone to the Eide Bailly Bankers Seminar and other similar events that have had information, as well. There seemed to be a lot of discussion right away about gathering your information and figuring out a methodology, but now that we have that, I’d like to just play with it and get a handle on what we are doing before I look for more learning events.

Eide Bailly: One of the significant challenges banks will face with the implementation of ASC 326 is determining what data they will be using to assist with the forecasting of future losses. How has the Eide Bailly CECL model helped in determining the qualitative factors relating to current conditions and reasonable and supportable forecasts?
Jody: Having that format built out for us is very helpful. The qualitative and environmental factors are ones we have to tweak and update for our specific bank. That’s one thing we’re working on now that we have the data in the model. It’s nice to have the factors and examples built into the model. We’ve pulled some factors from our previous ALLL, and we need to work on those to make it really effective.

Eide Bailly: What would you say has been the most significant benefit from using the Eide Bailly CECL model? (Assistance to adopt the standard; save time and money from building own model or outsourcing, etc.)
Jody: The time savings have been huge. One of the first events I went to that talked about CECL said we’d have to come with what methodology to use, and I spent some time trying to build one on my own and came out with just one piece of that. It’s really hard to find the time for something this big when you’re a small community bank and you wear a lot of hats in your role. To have a model set up for you to plug into and adjust for your bank is a huge time savings. I also like the spreadsheet approach as well. We use a lot of spreadsheets at our bank, and the familiarity made it very easy to work with the model.

Eide Bailly: If you were a community bank that has not started the process of looking at building or purchasing a CECL solution, what piece of advice would be the most helpful that community bank based on the work that you have done so far?
Jody: I would suggest finding a vendor that you know and trust and look closely at their solution. Because to try to build something on your own is a huge time commitment and difficult. I’d encourage them to find someone trusted who they can work with and provide a starting point now, because it does take time to gather, input and adjust the data for your institution.

Eide Bailly: How has the process of dealing with CECL been for your bank?
Jody: The last year hasn’t been too much of a burden. It helps that we chose a prepared solution so we didn’t have to build it ourselves. There’s still tweaking involved, but that would be the same for any bank, like figuring out what buckets we need to analyze independently, or working through certain lines of credit. It’s not easy, but it’s been a good process. It takes time, and having to wear many hats means I have to work on it a little at a time. So more work to do on it, but it’s nice to have it built and just have to fine tune it. Hopefully the workload will be more front-loaded, and the quarterly updating will be much easier.

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