Using a vendor to implement the new loan loss accounting standard can create more work and complications for community banks, rather than less.
The current expected credit loss model, or CECL, forces banks to calculate lifetime losses at origination, rather than when a loss becomes probable, using historical data and future economic forecasts. The size of the undertaking led some banks to seek assistance from one of the many vendors selling allowance software. But as the three community banks found out, partnerships don’t always go smoothly.
Laura Beth Butler, chief financial officer of First Citizens Bancshares, said during a recent accounting conference that she was disappointed by the vendors who were not selling a CECL solution at the time she was in the market for one: core providers. Her bank, which has $1.8 billion in assets, invited representatives from all three core providers to her bank in Dyersburg, Tennessee, to make presentations when it put the contract up for bid.
“To me, the most disappointing thing out of that is that none of them cared about CECL. They pointed to other outside vendors, and they really are not offering any help,” she said.
(Some core providers offer CECL solutions, but through subsidiary divisions under separate brands.)
First Citizens selected a vendor that was a “partner” with the bank’s core. That did not prevent the bank from encountering “a perfect storm of challenges” that have put her bank behind schedule and led her to reconsider the vendor contract.
“We have learned lessons the hard way and before we get trapped, for lack of a better word, into a solution that would be hard to move later, I think we will put it all back on the table and look at it one more time,” she said, noting that the bank is better prepared for CECL than when it signed its contract last time.
But she’s also concerned about contract pricing and renewals. She said some pricing has been “overblown,” and the bank has “fought battles” with consultants that charged $200 or more an hour than the bank’s retained attorneys.
Costs were also a concern for Leominster, Massachusetts-based Rollstone Bank & Trust. The Rollstone Bancorp unit, which has $686 million in assets, had a better experience with its vendor selection and implementation process, but CFO Christopher Seidlich pointed out that the proposed delay for community banks threw a wrench in its contract. (The Financial Accounting Standards Board proposed a new effective date of Jan. 1, 2023, for some community banks.)
“The goalpost has moved a little, [and] my contract does not get me to the [effective] date. That puts me in a precarious position,” he said.
He said the extra time now between the contract and the effective date comes as many vendors are taking on banks and credit unions that are latecomers to CECL implementation, and that engagement and contract pricing are increasing.
At Norway Savings Bank in Norway, Maine, working with a vendor led management to a surprisingly conclusion: They might not need a vendor. The bank, which has $1.2 billion in assets and is a unit of Norway Bancorp, selected a CECL solution that was sold with a commercial loan software package, said Controller Sharon Breytenbach. Executives wanted to use a vendor to calculate the allowance in part because of the ability to use “sophisticated modeling” techniques to calculate the allowance. They are revisiting that assumption.
“I think now if we go back and look at it, we are leaning [toward] more simple processes because of our noncomplex loan pools and products,” she said. “The question has come up: Do we need the vendor?”
Executives are considering whether they can calculate their CECL allowance on a spreadsheet.
Her bank is three years into its contract and is waiting to see what the renewal price will be.
She said the credit loss tool is “very handy,” and provides a lot of visibility and detail into the allowance, which could help with validation. However, she pointed out that the model also contains built-in assumptions, and bankers should make sure to understand the impact of those assumptions and document them.
“You have to peel back the spool, and make sure you get down to the nuts and bolts and understand how the model is actually functioning,” she said.