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introducing new products or expanding into new markets, for example, the relative stability of the customer base should keep things within a reasonable band.”

STARTING with CECL Chad Kellar, partner, Crowe Horwath Advisory Services, says most banks are in the education stage of CECL preparation, participating in conferences and webinars, talking to service providers, and considering software packages. His organization offers transition guidance (, illustrating how methodologies may change using bank practices today. Kellar emphasizes that banks should sta r t the process ea rly, per for ming assessments and collecting data. “CECL is a change in perspective in how you look at the allowance, and so it requires different data points and methodolog ies.” Yes, there is f lexibilit y in the standard, but “scalability is in the eye of the beholder,” he says. As with all regulatory and accounting changes, it will require time and effort. CECL prov ides some benef its. A s par t of an overall business strateg y, CECL pulls credit losses forward, which impacts capital planning and budgeting. It helps organizations view the business holistically. The disclosures that appear in financial statement footnotes will be useful to the marketplace, particularly during a bank merger or acquisition. Kellar recommends that banks begin assembling information for the transition now, so they can run the models for 12 to 18 months before the effective date. “ That’s a best practice for any model implementation,” he says. “It will give you four to six quarterly observations on how the model will react in that environment.” Kellar says the models should ref lect market dynamics, but notes: “Banks need to be careful about the volatility assumptions built into their models. The current credit environment is fairly stable, but those assumptions may not be as relevant in the future, as the magnitude of that volatility could be significantly different when CECL is fully implemented in the future.” Some of Kellar’s clients are exploring using outside technical help. He advises them to take control of the process and look at various types of data that can be collected and utilized. “Our own process starts with risk identification and then

drilling down to see what kind of models may be needed,” he says. “Next is assembling teams and getting a collaborative view of where the risk is and then incorporating data into methodologies.”

banks GETTING READY There isn’t unanimity on CECL implementation among the community bankers interviewed by Banking Exchange. Most aren’t sure if the new standard’s requirements will impact their performance; a few believe that the change is part of their enterprise risk management journey.

Powell Valley Bankshares, Inc. Leton Harding, CEO of this $270 million-assets bank in Jonesville, Va., says his bank began preparing for CECL before the standard was f inalized in June. It began to question RMA, ABA, and its CPA f irm about how best to prepare. The bank also made CECL a discussion item with its outside vendor in August during its core software IT transfer to a service bureau. Internally, the bank’s asset liability management committee, which also serves as its risk management committee, considered what would be needed to comply. Powell Valley is currently evaluating a new loan platform system that will help gather information for CECL as well as contribute to its general risk management. The focus will be on the data points and information needed for input into the core system for current and future loan trend assessments. Harding believes that banks in rural markets like his are unique—not only from larger institutions, which don’t operate there, but from rural banks in other parts of the country, which may have a client base more dependent on specific industries, such as cattle, energy production and natural resource development, or tourism. He says regulators should provide guidance specifically for rural banks because they face challenges in collateral and portfolio diversification. “Much of the land here in our county do e sn’t h ave mu n ic ipa l- de velop e d water and sewer; some land may have timber; some proper ties a re multiuse, combining, for example, farming, cattle production, or retail,” says Harding. “Customers’ incomes are generally low-to-moderate or unstable; some customers are self-employed.” While Harding believes CECL will

cause banks to analyze the data they measure, he doesn’t expect it will cause his bank to change its “fairly conservative” practices on loan policy and loan loss reserves. But he believes the potential for information and measurement will be improved in as much as its loan system’s robustness will improve via CECL. Harding is providing staff members with information about CECL and asking them to participate in training. “There may be some point where we have to work on pricing structures, but that’s yet to come,” he says. “We’re doing assessments on the front end. We might have to document somewhat differently, but the process shouldn’t change much if you’re already practicing good risk management.”

Bank of Fayette County McCall Wilson, president and CEO of the $460 million-assets bank in Moscow, Tenn., says his bank has started preparing for CECL, but is “nowhere near where we need to be.” No fan of CECL, Wilson calls it “an effort in futility” that will not help the bank, the regulators, or the consumers to whom the compliance costs will have to be passed. Wilson’s bank got through the Great Recession using only $1.2 million of its $4.5 million in reserves. “The current system has served us well, and our bankers understand the exposure that’s in our portfolios,” he explains. But Wilson says his bank will modify its system to fit CECL requirements, which will require manual reports and add to the workload of an employee in operations or

CECL “shouldn’t change much, if you are practicing good risk management,” says Leton Harding of Powell Valley.

December 2016/January 2017



December 2016 January 2017 Banking Exchange