Anticipated CECL Impact on Public Filers

The impact of CECL on anticipated loan loss allowances must now be reported in quarterly 10-Q SEC filings. Banks that are expecting the largest allowance increases have a more heavily weighted consumer portfolio because commercial loans typically have shorter expected lives whereas mortgages and consumer loans have longer terms. Moreover, the largest impact will likely be on retail portfolios heavily weighted with credit cards, which typically have larger estimated losses, especially portfolios with a concentration of lower credit quality. CECL will extend credit card estimated losses to a longer period of time, from the current year to two years.

Here are a couple examples of CECL impacts reported in 2019 (as of June 30):

  • American Express predicts a 55 to 70 percent loss allowance increase for credit card reserves, and 25 to 40 percent increase for total loss allowance
  • Synchrony Financial predicts a 50 to 60 percent increase
  • Some community bank estimates range from 40 to 70 percent increases

To help bank leadership prepare for CECL, an AICPA panel comprised of community bankers offered these suggestions:

  • Regardless of the methodology or model, focus on understanding, cleaning up and validating data, taking into consideration how to track loan extensions and how to deal with legacy vs. new loans.
  • Beware of an overly ambitious data plan that is costly in dollars and time, and keep it as simple as possible.
  • Focus on internal controls. The primary changes with CECL are centered on assumptions, so make sure there is accountability for how those assumptions are developed and used in modeling.
  • For larger banks, the production of data for the model has been the biggest challenge, whereas smaller banks have been focused on what, if any, model to use. More and more mid-size banks plan to use a third party model.
  • Run CECL parallels sooner rather than later. With each test, the model and process is documented and refined to provide a more informed outcome.
  • Update communication tools and timelines and ensure the bank’s governance committee is educated on model run results.
  • Ensure coordination across functions outside of finance, including loan officers and loan administration.
  • Educate the Board on status and key planning decisions since they need this information for budgeting and understanding implementation timeline.

For more information, check out these AICPA Resources.

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