For this newsletter CFO Consulting Partners has partnered with Ardmore Banking Advisors to review the potential material financial benefits of a well planned and executed implementation of the new current expected credit loss (“CECL”) accounting standard.
Most banks have an awareness of the need to prepare for the transition to CECL, and that many foundational activities need to be looked at now. Together CFO Consulting Partners (“CFO CP”) and Ardmore Banking Advisors (“Ardmore”) have constructed an approach to help banks address the “early must do’s” of CECL at a reasonable cost.
CFO CP leverages its extensive experience with banking industry finance, and Ardmore it’s deep expertise in credit and credit data to translate the CECL transition process into tasks and activities that create valuable efficiencies and bottom line impact for the Bank. Together we can cut through the noise and assess a bank’s CECL readiness and at the same time help create a CECL action plan that will drive real value for the bank.
We have discussed aspects of CECL implementations in prior newsletters, The New CECL Approach Part I, and Part II. Similarly, Ardmore’s webinar Step #1 Of the CECL Journey provides additional perspective.
CFO CP and Ardmore are each focused on complementary aspects of the CECL implementation process in the finance, accounting, and credit disciplines. Well executed CECL projects led by an interdisciplinary team of Credit, Finance, and other bank management, coordinated by experienced project managers and executed well, can produce tangible bottom line improvements, and better efficiency ratios.
Experienced CFO CP and Ardmore Project Managers can help the bank’s CECL team identify opportunities for process improvements. The resulting databases, internal control enhancements, and automation will produce faster decisions, easy access to controlled and trusted data, high functioning executive teams and, ultimately, improved efficiency ratios. If CECL implementation is managed well, a bank can leverage the implementation to break down silos, upgrade systems, improve processes, and reduce expenses.
CFOs can strategically manage the spending to required accomplish CECL goals AND drive efficiencies which will ultimately reduce the expense ratio. Opportunities exist in:
- Credit Administration: Ensure that all credit practices are properly aligned with your CECL implementation, upgrade automation, and improve underwriting processes.
- Finance: Re-engineer financial controls and loan accounting processes, optimize general ledgers, optimize risk adjusted capital levels, and Improve management information for the Board and Management.
- IT: Improve data governance, develop and data management tools, and retire inefficient loan and credit systems.
- Operations: Update credit processes (such as data entry and coding processes), and re-engineer controls and processes
- Lending: Efficient analysis of deal structures and lending to minimize life of loan losses and capital impacts
An assessment for CECL readiness can reveal a lot that can be useful to the institution beyond the needs of CECL compliance including:
- Assess the current state of the institution’s credit portfolio data and origination process, ALLL, Financial and Credit policies, practices and governance – all within the context of CECL;
- Review Current ALLL System & Processes;
- Review controls on data used in the current ALLL process;
- Identify data points required to support industry best practice portfolio data & regulatory compliance data for CECL;
- Review loan origination process, stakeholders, criteria and coding;
- Review data stored in the core for accuracy consistency and robustness;
- Review all identified credit data source systems for data/database integrity; and
- Review any existing data warehouse capabilities, and how portfolio data is organized, maintained, and retained.
CECL compliance practices and implementation plans should be in place in 2018. Auditors, regulators, boards of directors and investors will want to know bank’s plans for CECL, including the costs and the benefits beyond compliance.
Those institutions that leverage the potential benefits of the CECL implementation will have a competitive advantage over their competitors through increased efficiencies, automation and clarification of corporate risk management practices.
About the Authors
CFO Consulting Partners, Tom Van Lenten: Tom leads CFO Consulting Partners CECL consulting services to financial institutions. CFO CP’s CECL services include: CECL readiness assessment, analysis of the accounting and regulatory implications, project management, and assisting with updates of policies, procedures and internal controls which are impacted by CECL.
Ardmore Banking Advisors, Peter Cherpack: EVP, Partner. Peter is a nationally known thought leader in CECL implementation for community banks, and with other Ardmore consultants conducts CECL readiness assessments with a focus on credit and credit data readiness.