most institutions struggle during an audit, Dobner said, is from a documentation standpoint. When an institution is working through determining methodologies and models and analyzing outputs, it’s important they are documenting each decision they make.
“As an auditor, that is the biggest challenge — can we understand why you did what you did under this standard,” Dobner explained.
ECONOMIC VARIABLES, FORECASTS AND REVERSIONS One of the most challenging pieces of CECL is the forward- looking components. Trying to assess what the future will hold is difficult — just look at 2020. While the economic variables do vary, there are common indicators used. Unemployment rates — national or statewide — are among the most popular variables used. Other common indicators include GDP, housing price indexes, commercial property rate indexes and C&I interest rates. Most institutions tend to use two to three variables as the risk of duplicating impacts increases with more than three.
Traditionally, the unemployment rate was one of the strongest factors tied to expected or recognized losses. While unemployment rates spiked to a record 14.7% in April 2020, the subsequent stimulus packages have prevented — or at least postponed — expected defaults.
“Was it wrong based off of the information we had to tie [the forecast] to unemployment rate? No, but our eyes have been opened to say, ‘Well, maybe there’s more there,’ and you might look at effective unemployment rate or something to adjust for that,” Camp explained.
In regard to the length of the forecast period, aſter looking at nearly 120 community financial institutions, Dobner found nearly two-thirds forecasted one or two years. Similarly, on the reversion side, a one-year forecast tends to be the most common, according to Dobner’s assessment. A longer reversion period builds in some of the uncertainty on the length of the recession. Regardless of a V-shaped, W-shaped or K-shaped
recovery, each expert emphasized the importance of being nimble and flexible with forecasting and modeling.
“It’s not a one-time, set it and forget it deal. You’re probably not changing it every period, but you’ve got to have some framework to look at,” Dobner said.
Reassessing variables, forecasts and reversions should be a continuous process, and those factors will likely continue evolving. Although the pandemic certainly complicated the process, it didn’t fundamentally change anything about CECL.
“Te pandemic is really a catalyst, showing us that we have to have this continuous, flexible process,” Camp said.
PARTNER WITH THOSE WHO HAVE GONE THROUGH IT
If an institution is still worried about the unknowns or is still waiting to get started, consider partnering with those who have gone through it. Tere are many advisors and experts who have worked through hundreds of CECL implementations to this point, and these partners can help institutions see the forest from the trees, so to speak.
“We can quickly take the 31 flavors of Baskin-Robbins and narrow it down to the strawberry, chocolate and vanilla and say, ‘Based off of your makeup, this is what we think might work well, and that’s where you should start,’” Camp explained.
Although a number of unknowns remain, the best thing your financial institution can do is to get started. Tere are tools and groups to help if you feel overwhelmed, but procrastination is no longer an option.
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