A Practical Guide for CECL Implementation

CECL-1-12-18.pngBy now, most community bankers are familiar with the Current Expected Credit Loss standard (CECL), which was issued by the Financial Accounting Standards Board in June of 2016 as a new standard for the recognition and measurement of credit losses for loans and debt securities. However, your bank may be struggling with applying its theoretical concepts. We’ve put together a few simple steps to help you start your implementation process.

Form an implementation team.
CECL implementation cannot be the responsibility of just one or two people. It requires a team that should include:

  • A chief financial officer or equivalent who has knowledge of loan loss accounting and basic modeling capabilities;
  • A chief audit executive or equivalent to identify key controls necessary to the new process;
  • A chief credit officer with deep knowledge of the loan portfolio and related documentation;
  • And a chief technology officer to assist with data gathering and retention.

We advise documenting the members of your team, and briefly summarizing their skill sets and roles in implementing CECL.

Confirm your implementation deadline.
The deadline for implementation of CECL is based on whether or not the bank is considered a Public Business Entity (PBE), unless the institution is a Securities and Exchange Commission registrant. It is important to periodically re-evaluate, document, and receive concurrence from auditors and regulators regarding the bank’s status as a PBE. The American Institute of Certified Public Accountants’ (AICPA) Technical Questions and Answers (TQA) document can help institutions with this determination. Based on this document, most non-SEC registrants will not qualify as a PBE, so most institutions will be expected to implement CECL by December 31, 2021. For SEC registrants, the standard will go into effect one year earlier, in December 2020.

Establish a simple project plan.
A CECL project plan does not need to be voluminous in order to be effective. Start with a single page implementation timeline as a foundation. Next, break the project into manageable segments. For near-term deadlines, record specific tasks and dates. Assign broader timeframes to latter segments to allow sufficient time in the event that there are changes in the bank’s operations, such as an acquisition or PBE classification updates.

Understand CECL’s impact.
It is important to quantify the impact of CECL by understanding industry reserve levels compared to current accounting rules. For the historical loss component of the allowance, which will be the base component for this new standard, current industry data shows the following:

  • Most financial institutions use between a three- and five-year average annual loss rate to compute the historical loss component of the allowance.
  • Based on quarterly call report data, the average three-year net charge-off rate for all bank loans from December 31, 2014 to December 31, 2016 was 0.49 percent. The average five-year net charge-off rate was 0.68 percent.
  • The percentage of allowance to loans for the historical loss component for all banks over $1 billion in assets was 1.24 percent as of September 30, 2017.

Under current accounting rules, this data would suggest that the industry believes incurred losses in the loan portfolio are 0.56 percent to 0.75 percent worse than the average of the last three to five years of actual charge-offs. This could indicate there may be some excess in current reserve levels, which could reduce your previous expectation of the impact of CECL on your institution.

Start retaining available data and use it for modeling.
Consider what models can be built with information that is readily available to most community banks, such as a standard loan trial balance, the history of net charge-offs by loan number and a watch list for set periods of time. Starting with a limited number of data points and simple models can help banks gain familiarity with modeling basics, and identify modeling flaws and potential additional data point requirements.

Effective models such as discounted cash flow, vintage analysis, migration analysis and static pool analysis can be built with these limited reports. The important step in data retention is to ensure core system reports are maintained for a period of time. This will ensure when you begin your modeling efforts, you will have the data necessary to start to build your model.

Even though the implementation date is a couple years away, it is important for institutions to get started with data collection and modeling efforts, as there will be unforeseen challenges along the way. The sooner an institution begins its modeling efforts, the sooner it can identify potential additional data requirements, and the potential impact of this new standard to the balance sheet and income statement.


Todd Sprang


Todd Spang is a principal at CliftonLarsonAllen LLP in the firm’s financial services practice and has over 20 years of auditing and consulting experience in the financial services industry. Mr. Sprang has more than 20 years of principal-level experience performing audit and consulting services for a variety of clients in the financial services industry. His clients in this dynamic industry include banks, credit unions, mutual funds, hedge funds, trust companies, mortgage companies and unit investment trusts.


David Heneke