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/ CECL / First Bethany Bank & Trust

Loan loss calculation complexity must reflect bank complexity under CECL, says Jane Haskin, First Bethany Bank. accounting. If necessary, the bank would consider hiring another person.

Lewis & Clark Bank Trey Maust, copresident and CEO, says this $170 million-assets bank in Portland, Ore., has been capturing data points needed for CECL in a model it created six or seven years ago. Because the bank has a high concentration in CRE loans, it needs a more sophisticated model than what a bank its size would typically employ. “We’re missing just a couple of the pieces for CECL,” Maust says, noting the bank needs to do migration analysis to identify probability of default for loans through their life cycle. “When CECL was first proposed, we had already been thinking the methodology we are using today aligns with the requirements. It was commensurate with the concentration of risk in our portfolio. It supported the loan loss allowance levels that we were holding on the books. My concern with the implementation process is that ALLL will rise significantly across the industry.” Maust worries regulators will assume something is wrong with a bank’s model if it indicates a bank does not need to increase its allowance as much as its peers. Maust expects the transition to CECL to be incremental. He is concerned about its impact on capital and staff workload. He believes additional disclosures that appear in footnotes will be useful to investors, and the new standard creates the potential for the balance sheet to be a more accurate representation of discounted cash flow in the loan portfolio. 26


Jane Haskin, president and CEO of this $196 million-assets Oklahoma bank, believes the model her bank uses for loan loss calculation is similar to what it will need for the new accounting standard. “As a small community bank, I was relieved that the document specifically says the complexity of the calculation needs to ref lect the complexity of the bank,” she says. “Community banks don’t have the same risk profile as larger banks. The loans we make are not as complicated.” The bank is discussing CECL implementation with its board and is providing a review of what it may entail. It is identifying how current practices may be used in the new system; reviewing how its current system for loan loss calculation can be leveraged for use with the new standard; and analyzing CECL’s effect on capital. The bank has realized it will not have to do a great deal of new modeling for its calculations. “We pretty much have a lot of compliance in place,” Haskin says.

The First National Bank of Elmer Brian Jones, CEO of this $244 millionassets New Jersey bank, expected to be CECL compliant by year-end 2016, thanks to its engagement of a third-party vendor to perform ALLL, stress testing, and portfolio and concentration management. Jones believes CECL accounting will provide more useful information than accounting for expected loss (EL). He says the bank will run EL and CECL for a period of time to evaluate the differences before fully integrating the new standard. “Nobody really knows the impact CECL will have on loan loss reserves,” he says. “Some people think it would require as much as 30% more in loan loss reserves.” Jones says CECL requires banks to have a more holistic understanding of reserves and forward-looking assumptions. “You have to understand what you’re doing to the nth level. It’s a more complicated model that requires you to build a system or use a vendor.” He hopes regulators will give banks time to adjust even after the effective date.

on the document that was released. “Community banks absolutely will not need to purchase a model,” he says. “That was clear out of FASB. The regulators know the community banks have a variety of techniques to develop their forecasts.” Ohlendor f adv ises small bank s to understand how their portfolios w ill perform in the future in terms of the economy and competition in their markets. “Reviewing qualitative risk factors will take us a long way down the road toward CECL compliance,” he says. While it’s too early to know if the bank will continue to use its current loss estimation for CECL , Ohlendorf says, “it will be interesting to see what sources of information the regulators will want to see. They’re giving us plenty of time to test models prior to implementation.” Ohlendorf has met with the president and staff of the Federal Reserve Bank of Chicago and with field examiners to share their understanding of what will be required to comply with CECL and to provide the bank’s thoughts regarding compliance. “It’s important that every bank engage in open dialogue with other key stakeholders. The sooner they start having those conversations, the better off we’ll all be,” he says. Ohlendorf does not complain about the workload CECL compliance represents. “There’s always work that has to be done to comply with the changing regulatory and accounting landscape, but that’s our business,” he says. “Not a year goes by that we don’t have to implement changes. This one is not insurmountable.”

First Community Bank and Trust As one of three bankers representing ICBA at the FASB board meeting, Greg Ohlendorf, CEO of this $150 millionassets bank in Beecher, Ill., spent two months preparing for the meeting and four to five months working with FASB

December 2016/January 2017

Brian Jones expected First National Bank of Elmer to be CECL compliant by year-end 2016, thanks to vendor help.

December 2016 January 2017 Banking Exchange