As CECL Looms, Prepare for Board Discussions

By Debra Cope

As the implementation date for Current Expected Credit Loss (CECL) draws near, discussions about the implications of the new loan impairment standard will inevitably move into the boardroom.

When that happens, the focus of the conversation will shift from accounting mechanics and the credit performance of the loan book to broader issues, including the financial management and performance of the bank, Larry Sorensen, CFO of Washington Trust Bank, Spokane, Wash., said during a recent ABA webinar. Loan committees and chairs should be positioned to play a role to facilitate the discussions.

During the webinar, Sorensen played the role of a CFO in a mock board meeting to discuss CECL. He was grilled throughout the session by three “directors” played by Mike Gullette, American Bankers Association SVP for tax and accounting; Laura Beth Butler, CFO of First Citizens National Bank, Dyersburg, Tenn.; and Paula S. King, senior adviser with Abrigo, a provider of compliance, credit risk, and lending solutions based in Austin, Texas.

This article originally appeared in the March/April 2019 issue of ABA Banking Journal Directors Briefing. Subscribe now.
The webinar (available at aba.com/CECL4BankBoards) offers insights regarding questions board members may want to ask about CECL. “It is designed to put some practical perspectives on the concepts that we’ve been thinking about,” Gullette said.

Topics covered during the mock board meeting include why CECL might trigger volatility in earnings and capital; how it will impact loan terms and products; how budgeting and strategic planning will be affected; the need for contingency planning; how to mitigate any negative impact on earnings; expense reduction strategies, and the need to achieve cohesive forecasting across the bank’s analytical and financial management activities.

“We’ve been so entrenched with technical aspects of CECL,” King said. “This will give us some takeaways for interaction with a board group.”

The Financial Accounting Standards Board adopted CECL in June 2016, in response to the global financial crisis. The essence of CECL is that it scraps the ”incurred-loss” accounting framework that has been in place for 40 years. Instead of accounting for incurred losses in loan portfolios, banks will have to take a longer view and make predictions about future expected losses over the life of a portfolio.

The new accounting standard is slated to take effect in 2020 for banks under Securities and Exchange Commission registration and 2021 for all other banks, though early application is permitted beginning in 2019.

Teeing up the board discussion, Gullette noted that CECL is a fundamental change because it replaces the longstanding incurred-loss framework for loans with a “life of loan loss” expectation, which places heavy emphasis on economic forecasting and reliance on historic averages as the basis for analysis.

Gullette noted that there have been efforts, including by ABA, to postpone implementation of some portions of CECL. However, he said, a change in mindset is already underway. “No matter what happens, we are definitely going to be in an environment that is forward looking, and that’s what CECL is,” he said.

In addition to the webinar, ABA has developed background and training materials to help boards and management prepare for the CECL standards. Resources include a background paper, webinars and an active online community with 750 members. Learn more at aba.com/cecl.

 

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Debra Cope

Debra Cope is editor-in-chief of ABA Banking Journal Directors Briefing.