Pub 1 2021 Issue 4

24 | The Show-Me Banker Magazine Myth: Financial institutions with more than $1B in total assets are no longer “smaller and less complex.” Reality: The term “smaller and less complex” has been popularized through interagency guidance on CECL, risk management, and compliance. The agencies have yet to define what exactly is “smaller and less complex.” Until then, this classification remains subjective and based on more than an arbitrary asset size. CECL Insights & Lessons Learned Approximately 150 financial institutions adopted CECL as of Jan. 1, 2020. These early adopters are concentrated to publicly traded institutions. Of the approximately 240 banks in the state of Missouri, only a handful were early adopters. Further, of the 240 banks in the state of Missouri, 213 are under $1B in total assets and 178 are under $500M in total assets as of Dec. 31, 2020. Expectations for the vast majority of banks in the state of Missouri will not be the same as those banks that adopted CECL as of Jan. 1, 2020. However, there are some universal lessons learned that should be contemplated by banks of any asset size. Acquisitions Were a Significant Driver in Increased Reserves Looking at the 10 CECL adopters less than $50B in assets as of March 31, 2020, with the most significant increases in reserves as a percentage of loans, all but one had an acquisition in 2018 or 2019. This increase in reserves upon adoption was expected as accounting for credit losses on acquired loans has materially changed as part of the CECL standard. Historically, purchased loans fell under separate guidance that didn’t allow for the recognition of an allowance at acquisition. Under the CECL standard, an allowance for credit losses is to be recorded on purchased loans, regardless of the purchase accounting discount on those loans. For more information on accounting for purchased loans under the CECL standard, see this archived BKD webinar on the topic ( https://www.bkd.com/ webinar/2018/12/cecl-business-combinations). If your institutio n is anticipating an acquisition in the coming years or expects to have a large amount of acquired loans at the date of the adoption, reach out to a BKD Trusted Advisor™ to review the day-one accounting implications of CECL adoption. Unfunded Commitments Had a Significant Effect at Adoption Another effect of adopting the CECL standard was an overall increase in the allowance for unfunded commitments. With the adoption of CECL, increases in unfunded commitments were expected. Of the early adopters with less than $50B in total assets, 21% experienced a more significant effect from unfunded commitments at adoption compared to loans outstanding. Further, nearly half these adopters indicated 20% or more of the total CECL allowance increase derived from reserves on unfunded commitments. This impact is due to the fact that many institutions did not previously record an allowance on unfunded commitments. CECL defines an approach and requires adopters to record an allowance for unfunded commitments that are not unconditionally cancelable. Forecast PeriodsWere Generally One or Two Years CECL requires “reasonable and supportable forecasts” when determining expected credit losses. “Reasonable and supportable forecasts” make the standard forward-looking, can be viewed as the biggest change within the standard, and are the most significant assumptions when estimating future credit losses. We reviewed public filings for 116 CECL adopters with less than $50B in total assets and noted 68 used either one (39 adopters) or two years (29 adopters). Twenty-three adopters did not disclose the forecast period. CECL does not require an entity to create an economic forecast over the contractual life of loans. Rather, for periods beyond which the entity is able to make reasonable and supportable forecasts, reversion to historical loss information is required. A Practical Solution I completely get it. Planning, preparing, and researching for your upcoming CECL adoption is the last thing you want to do right now. Most of you reading these words represent true community banking and feel like this standard was not intended for the size and complexity of your institution. You may not receive a financial statement audit and answer solely to state regulators and the FDIC or OCC. While the market is ripe with powerful software applications, you question if the cost and complexity of those solutions is commensurate with the risk at your institution and what is truly required. To this end, you are frustrated with the academic articles pontificating on one of the most confusing and subjective accounting standards ever written by our friends at FASB. I have always been taught to never address a problem without offering a related solution—and I believe BKD has done just that. Our team has developed CECL simplified. Our solution is geared toward community banks and delivers the rare one-two consulting punch: an understandable CECL tool coupled with a BKD Trusted Advisor who assists with the development and documentation of your unique CECL calculation. Our aim is not to be just another software application. Instead, our goal is to work with management to develop a CECL calculation that is easy to use and easier to understand and comes with a BKD Trusted Advisor™ in tow. With our help, you can be “CECLing” independently (and accurately) after initial adoption. Lately, as it relates to CECL, I have felt that I have been shouting into the empty void where practicality and sensibility used to reside. Help me fill this void. ■ This article is for general information purposes only and is not to be considered as legal advice. This information was written by qualified, experienced BKD professionals, but applying this information to your particular situation requires careful consideration of your specific facts and circumstances. Consult your BKD advisor or legal counsel before acting on any matter covered in this update. Continued from page 23