Like many small-to-midsize banks, Bank Independent in Sheffield, Ala., calculated its monthly allowance for loan and lease losses the hard way: setting aside a week every month to complete a largely manual, Excel-based model.
The method worked but it was inefficient. And the cumbersome calculation process wasn’t going to cut it under impending data requirements of the Financial Accounting Standards Board’s Current Expected Credit Loss standard, or CECL.
(The new regulatory standard, which goes into effect in 2020, will require institutions to assess potential loan losses when they put an asset on their books. Banks and credit unions are currently required to set aside funds only when losses seem likely.)
So the $1.4 billion-asset bank purchased a loan-and-lease loss calculation product from technology vendor Sageworks in an effort to help automate and streamline much of the loan risk calculation process. The bank implemented the technology in January of 2017 (it has been a user of other Sageworks products since 2013).
With growing evidence that many bank management teams are still procrastinating when it comes to CECL implementation, Bank Independent believes technology greatly helps its data preparedness and calculation understanding in lieu of the impending new standard.
“We are getting a leg up,” said J. Raleigh Green, asset quality officer in the credit administration department at the bank. “I think we’re ahead of the curve" on CECL preparation. "We ran our first CECL calculation on June 30 of last year.”
Many small banks have yet to start this process, said Jonathan Prejean, managing director with Deloitte Risk and Financial Advisory.
“I think towards the middle-to-end of last year, you started to see a number of them say ‘OK, we really need to get started on this,’ ” he said. “And that’s just starting to think about the process; they’re going to have a lot of work to do in 2018” running calculations.
It can be even more difficult for smaller banks that — such as was the case with Bank Independent — use manual methods for calculating their allowance for loan and lease losses, known as ALLL.
“At smaller banks there’s often a manual [ALLL] process that can be clunky,” Prejean said. “There are a lot of spreadsheets and a lot of human involvement.”
Bank Independent’s Green noted that the bank didn’t invest in technology solely because of CECL; but as it grew, Green and others realized the manual processes in place would become too cumbersome to continue. Green noted that “it’s fairly commonplace” for smaller banks to use Excel-based processes when it comes to loan-loss calculations.
“When you’re a bank up to a billion and a half [in asset size] you’re kind of in that gray zone,” he added. “Will Excel work? It will, but you have to think about at what size is it that you should start to look at using technology that will allow you to be more efficient and more proactive.”
For Bank Independent, crossing the $1 billion threshold meant it could no longer rely on manually inputting data into Excel spreadsheets, Green noted.
“I think we now have a better understanding of our data than most institutions our size,” he added. “We have very defensible calculations we can show regulators.”
Green also noted the possibility of human user input error has greatly diminished and the bank can better defend against data breaches and recognize data patterns more quickly.
Since implementing the technology, Bank Independent said the time needed for ALLL calculations have gone from one week every month to about two days.
“It has allowed those people to assist and work in other areas,” Green said. “We’re much more efficient now with our resource time.”