CECL may not be the bogeyman banks fear

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Adopting a new accounting standard for expected loan losses might not be too bad for bankers.

At least that seems to be the view of Peoples Bancorp in Newtown, N.C. The company disclosed in its quarterly filing with the Securities and Exchange Commission that the Current Expected Credit Loss accounting standard, widely known as CECL, "will have no material impact" on the size of its loan-loss allowance.

While Lance Sellers, the $1.1 billion-asset Peoples' president and CEO, wasn't available to discuss the matter in greater detail, other industry observers are starting to believe that CECL may not trigger the kind of crisis many bankers have been anticipating.

In fact, some believe the change could result in a net positive by providing better data to bankers, which could lead to superior pricing decisions and more-accurate forecasting. It could also foster more communication among the various departments within a bank.

“CECL is one of those things that introduce functional compression in an organization,” said Frank Saavedra-Lim, a managing director at accounting firm Grant Thornton. “Risk, finance and accounting functions all need to work together. … It puts a lot of pressure on making sure everyone is collaborating and executing like clockwork.”

The looming standard will require financial institutions to project a loan’s lifetime losses at origination. Under the current, incurred-loss framework, loans go on the books shiny, new and presumably perfect. Provisions are permitted only when losses are deemed imminent.

Despite CECL’s unquestioned significance, and a rapidly closing window before implementation— banks that report to the SEC must convert in January 2020 — most institutions are revealing little, other than noting the status of their preparations.

“Companies have hired consultants and have done a fair amount of model building internally, [but] CECL commentary with management teams has been sparse thus far,” said Chris Marinac, an analyst at FIG Partners in Atlanta.

That's why disclosures like Peoples' are important; they give outsiders a sense of what bankers are expecting.

Home Bancshares in Conway, Ark., recently shed some light on its efforts. The $14.9 billion-asset company disclosed in its quarterly filing that it has started gathering and assessing data, constructed a warehouse and developed models to forecast asset quality. Home is also vetting software vendors.

Still, Home isn’t ready to predict what impact, if any, CECL will have on its loan-loss reserves.

“The company … currently does not know or cannot reasonably quantify the impact of the adoption of the [CECL] as a result of the complexity and extensive changes” from the incurred-loss method, Home said in its filing.

With little on the record to serve a counterbalance, most of the attention paid to CECL has been focused on critics, who have complained that the standard will be hugely expensive to adopt and result in big day-one increases to allowances — delivering a corresponding hit to capital.

Regulators recently proposed a plan that would phase the impact of any increased provisions over three years. Several banks were quick to suggest additional alternatives to cushion the anticipated blow.

Timothy Zimmerman, CEO at the $983 million-asset Standard Bank in Monroeville, Pa., predicted that many bankers would eschew any phase-in plan approved by regulators.

“There’s almost no reason to do that,” Zimmerman said.

Concerns over capital levels might be overstated, Marinac said, in an echo of Zimmerman's comments.

“The broader CECL discussion in my mind is the fungible status of capital and reserves,” Marinac said. “For years and several cycles, the two have been synonymous with regulators, but investors and board members have to be reminded or re-educated that capital and reserves for loan losses are the same and the CECL charge in 2020 is really just moving money between pockets.”

To be sure, some banks have warned that CECL will create a spike in loan losses.

Sierra Bancorp in Porterville, Calif., disclosed in its quarterly filing that its allowance could double after it implements CECL. Based on the June 30 allowance, the $2.4 billion-asset company might feel compelled to add $9 million to its reserve.

Kevin McPhaill, Sierra's president and CEO, said he is hopeful the new system, which he called a "game changer," will succeed.

“It will allow us to better reserve for loan losses, theoretically," McPhaill said. "CECL has required a lot of high-level work; a lot of granular work. It requires gathering a lot of data. … We’re still working on it.”

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