Prepare for CECL Implementation With NXTsoft

Prepare Your Financial Institution For CECL With NXTsoft’s Easy-to-Implement Solution

Bankers must prepare in advance for CECL.

Transitioning from the current accounting guidance’s incurred loss approach to CECL will bring a whole new perspective to how financial institutions estimate losses in the allowance for loan and lease losses (ALLL). Even though you have a year or more before the accounting standards update, you must begin learning, strategizing and collecting data now so that you can meet the new CECL standard.

Your examiners will be checking your plans and progress this year. We know what’s required. Let our team of experts help you get off to a good start.

This new accounting standard completely changes the timing of loss recognition.

Instead of waiting until losses have occurred, CECL requires you to estimate and book expected life of loan credit losses upfront on origination day. This timing difference will upend your pricing, income and capital planning. We have specific strategies to help you minimize the disruption to your business and maximize your ROE.

The new accounting standard requires you to calculate and document your expected lifetime losses before you make another loan.

Do you understand the many various methodologies available and the different data they require? How about the required qualitative adjustments? We do, and we can help you pick the best method for your bank based on where you are today. Plus, we have the framework to help you document your selections to stand up against regulatory scrutiny.

The new accounting standard gives financial institutions the opportunity to choose the appropriate level of loan loss calculation detail.

How would you know the right detail level for your institution? More importantly how would you navigate the tricky conversions from aggregate to loan-specific alculations? We offer an upgrade path that lets your loan loss calculations grow with you as you capture more data over time. Plus, we have proven techniques to fill in data gaps that might otherwise cause problems for you.

Why struggle with outdated spreadsheets when you can use our simple and effective solution designed just for CECL?

What NXTsoft Does To Implement CECL

• We capture all required financial data…From FFIEC Call Reports or NCUA 5300 Call Reports
• We perform all required calculations…Using the aggregate method
• We derive all required peer calculations…Using the exact same data and methodologies
• We collect and evaluate your Q-factors…Via our symmetrical matrix
• We assist in developing and applying required adjustments…To best reflect your bank
• We produce and review your report with you…Via our “Analyst with every report”
• We make sure you are Exam-Ready…With our self-contained report and education

What Your Financial Institution Does to Help NXTSoft Produce your CECL Report

• You complete a simple point-and-click Q-factor questionnaire
• You set aside time to review and help us fine tune your inputs and results
• You get back to focusing on banking while we do all the CECL heavy lifting

Why NXTsoft's CECL Solution is the Best Financial Institution Solution.

• Complete and comprehensive done-for-you solution
• Fully validated model…3rd party independent model validation certificate provided
• No complex math, software or calculations to trip you up…Just the results you want
• Let our regulatory experience guide you through the CECL minefield
• Scalable solutions with upgrades to vintage/DCF if and when needed
• Simplest, easiest and best value CECL solution

Clearing Up Some Misinformation on CECL

Here are a few examples of CECL misinformation…

CECL implementation will be extremely costly for community financial institutions.  This simply isn’t true.  Our regulators and FASB have gone out of their way to assure us that complex and costly CECL solutions won’t be required for smaller, less complex banks.  And comprehensive CECL solutions can be obtained for just a few thousand dollars annually.
The truth of the matter is that big banks will bear the lion’s share of the implementation costs and they know it.  They’re just trying to pull an end run on us to get their way… and save their profits.

CECL will result in massively increased credit costs. Again, this is just not accurate. Total credit losses under CECL will be exactly the same as under the incurred loss method. The big bank coalition knows this.  They’re just trying to scare us to save their business model. The biggest change is the acceleration of the timing of credit losses closer to origination, instead of later when the losses actually occur, but the total loss is unchanged.
What does change is the profitability and ROI of longer term loans.  That’s a big bank playing field and it’s about to get less profitable. But that’s a problem for big banks, not community financial institutions.

CECL is “pro-cyclical” and will make the next recession worse. This is the latest, and the most desperate, big bank technique.  And it’s also not truthful.  But that doesn’t stop the big bank coalition from pulling out studies and statistics to spread their agenda of fear. Find out more about what NXTsoft has to say about this myth here on our blog.

A Timeline For CECL Implementation

Here is a look at the effective dates for CECL and a detailed CECL Implementation Timeline, starting with the furthest possible implementation date. Use this roadmap to guide your own implementation plan.

If you’re a smaller private institution, and the 2022 date applies to you, here’s your practical timeline, including the steps you need to take in the interim.

#1: CECL becomes effective at the start of the next fiscal year beginning after December 15, 2021.

For most financial institutions, that’s likely to be January 1, 2022.  And that’s where the often-mentioned 2022 timeframe arises. But look again carefully. CECL starts January 1, 2022. What does that mean?

#2: Applying CECL starting January 1, 2022 means that you must reserve “Day-One exposure” starting January 1, 2022.

This requires you to reserve the expected lifetime loss on your new loans on the origination date of that loan. So how are you going to make new loans in January 2022 without a calculated and documented CECL reserve estimate?  The short (but painful) answer is that you aren’t.  This leads us to our next point…

#3: To have an operational CECL reserve calculation as of January 1, 2022 you can’t wait for December 31, 2021 data.

You know how busy and hectic year end is. Call reports and 5300s aren’t even due until late January. And even if you had the data, you’d need time to process and document it. So, there’s no way you can wait for December 31, 2021 yearend data. The truth of the matter is that to be operational on January 1, 2022 you must start, at the latest, with September 30, 2021 data.

#4: To safely make the change from the incurred method to the expected loss method (CECL) you should run parallel for at least a full year.

This is indisputably the biggest accounting change to hit financial institutions in decades. It’s a generational shift and a complete transformation from today’s incurred (current loss) method to tomorrow’s CECL (current risk) method.

If nothing else changed, just the shift to lifetime loss reserves (and the expected increases in reserves from going to a multi-year perspective) plus the resultant impact on your capital levels alone should be enough to demand a thorough review before going “live”. But there’s much more to be done.

You need the time running parallel to finetune your model, adjust loan pricing as needed (Do you understand how this is likely to influence your loan pricing?), and to familiarize everyone in the institution (as well as your various State and Federal examiners)  with all of your changes. So realistically, you need to start CECL by 9/30/20 to safely and practically meet that Jan 1, 2022 start date.

#5: In order to start running parallel September 30, 2020, your Board-approved policies and procedures must be ready to go leading up to that date.

There will still be tweaks to your policies and procedures while running parallel, and for the foreseeable future.  But to have the bulk of the Board’s drafting, reviewing, and approving of CECL policies complete by 9/30/20 you’re missing one big piece of the puzzle.

You can’t do this if you haven’t determined exactly how you are going to implement CECL. This means your solution selection must happen by or before June 30, 2020.

#6: To select your CECL solution by June 30, 2020 you must get started now.

Every financial institution needs to start now with internal education, quantifying and estimating your likely CECL financial impact, and understanding the demands on your institution’s resources, time and expertise.  Few financial institutions have excess time and resources, and almost none have the required expertise inhouse. NXTsoft can help you connect the dots and avoid the pitfalls while you prepare.

#7: Don’t let the cost and complexity of CECL paralyze you.

We understand your limited time and resources. We also understand that you don’t want to spend your hard-earned money before you need to.  We have a plan to help you start filling in your CECL gaps.  Best of all you can get an “Analyst with Every Report” to walk you, your top management team, and your Board of Directors through these massive changes at no additional cost.

What's The Bottom Line? NXTsoft Can Help

It’s now time for every bank and credit union to get started seriously working through the timeline.  Your examiners will be looking for your progress this year.  We can help those uncomfortable questions get answered a little bit more easily.  And we can help you navigate the twists and turns on your CECL roadmap.

Let NXTsoft know you’re interested in help with CECL implementation and we’ll do all the heavy lifting. Contact us now to start a discussion.