Pub 1 2021 Issue 4

22 | The Show-Me Banker Magazine CECL – IT’S TIME (AGAIN) By Michael Flaxbeard & Kevin Ives, BKD Has it really been a year already? It’s felt like 10 minutes … underwater, while being attacked by a shark as you watch the Chiefs in the 2021 Super Bowl. On March 11, 2020, the World Health Organization declared the COVID-19 outbreak a global pandemic. Since then, community banks throughout Missouri and nationwide have adapted to working remotely, scrambled to fund billions of dollars of loans through the Paycheck Protection Program (PPP), and modified terms on thousands of loans to help our struggling community members and address shrinking margins brought on by incredibly low-interest rates. Missouri community banks tackled these challenges while we were helping our children learn remotely, eating room temperature carry out, figuring out the mute button on Zoom calls, and just hoping our new COVID puppies wouldn’t bark during weekly check-in calls. Notice I didn’t even mention navigating all of this during an election year. All of that to say …WHAT. A. YEAR! I know what you may be thinking: “We are almost on the other side of this pandemic, my employees and customers are receiving vaccinations and finally coming back to the office and branch, and this guy has the gall to bring up CECL!?” In short, yes. But hear me out. Amid all of the COVID-19 accounting confusion, the adoption date for ASC 2016-13, Financial Instruments – Credit Losses (Topic 326), did not change. Your bank must adopt Topic 326, aka the current expected credit losses methodology (CECL), on Jan. 1, 2023, as reflected in your March 31, 2023 call report filing. The pandemic has most likely sidetracked adoption and implementation plans and you may feel like you are back to square one. Given mass adoption is less than 24 months away, CECL fervor will pick up in the coming months. Before the CECL conversation goes mainstream, allow me to dispel a few CECL myths, offer insight gleaned from the more than 150 publicly traded banks that have already adopted the standard, and offer a sensible solution to consider for your CECL problem. Common CECL Myths Initially, I read the CECL standard issued by FASB because I am a glutton for punishment. Recently, I re-read the standard because confusion abounds within the industry as to what is required versus what has been projected from software providers, accounting nerds, and the largest and most complex financial institutions throughout the country. While this guidance has been well-intentioned and helpful to many, I believe it may have perpetuated myths in the marketplace surrounding the CECL standard. Before addressing these common myths, let me provide a simple CECL refresher. Simply put, CECL requires loans to be presented at the net amount of what is expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of loans in order to present this net carrying value of what is expected to be collected. The main difference between CECL and today’s incurred loss model is the time period for estimating losses. Under the incurred loss model, one reserves for losses that are probable at the reporting date. CECL requires