New FASB Ruling Creates Hundreds of “CECL Orphans.” What’s a Prudent Banker to Do?

By: Peter Cherpack, EVP and Partner, Ardmore Banking Advisors Inc

To Be an SRC and Not Be a PBE—That Is the Question

In July of this year, the Financial Accounting Standard Board (FASB) shocked the banking world by delaying the CECL implementation date for hundreds of smaller community banks from 2020 to 2023.

Originally, most SEC Filing community banks were set to implement the new CECL accounting standard in March of 2020, because they were designated as Public Business Entities (PBE) by FASB. This summer FASB announced that they were realigning dates for CECL for smaller banks and would now use the SEC designation of Small Reporting Company (SRC) to be the designation for banks NOT due to convert to CECL in 2020. SRCs are defined based on their total revenue and the amount of stock held by outside investors and include many more banks than the old Non-PBE designation.

CECL Implementation Schedule as of June 2019:

cecl implementation

CECL Implementation Schedule as of August 2019:

cecl 2

Relieved or Orphaned by FASB

This new schedule brought a sigh of relief for those smaller banks that, according to many recent industry surveys, have done little to prepare for CECL. For these banks the delay was intended by FASB to “give smaller institutions more time to plan and prepare.” More likely these banks will continue to wait, see how larger 2020 institutions do it, and hope CECL somehow goes away entirely.

But what about the old 2020 PBEs who had already prepared for the CECL transition and were in parallel testing when the announcement was made? What about those that had invested in automation and built a new process, which are orphaned until 2023?

Some SRCs, feeling squeezed on expenses by management are looking to curtail all investment in CECL for a couple of years. They will have to restart their efforts all over again, but hopefully with some lessons learned and a better understanding of their portfolio data management goals.

Others, that don’t want to throw away months or even years of work on preparing for CECL will want to keep the calculations and data management practices going, but can they justify it?

Advantages to Staying Under the CECL Umbrella through 2023

While most bankers are loath to admit it, there are some advantages to keeping the CECL path going. For example, CECL requires much more rigorous management of credit portfolio data, including collecting and archiving more borrower financial data and more controls related to coding and manual hand offs between systems.

Under the umbrella of CECL, prudent and forward-thinking CFOs and CCOs have revamped their loan data management without internal political consequences or pushback. Without CECL the “it isn’t broken, so why fix it” mentality, and the discomfort of process change bugaboos would likely stifle any improvement efforts. Keeping CECL going allows bank management to gauge the value of these data and process improvements and continue to refine them through and beyond the 2023 deadline.

Another important consideration is that for some financial institutions, being CECL compliant could be a competitive advantage over noncompliant brethren. As many of the 2020 CECL banks are community banks trying to appeal to the investor community, will the 2023 banks of similar size be seen as less attractive for not being CECL compliant?

One of FASBs stated objectives in creating CECL was to make the reserve calculation more transparent, so that the institution’s risk profile and history was more readily understandable. Even if this goal isn’t met under the current interpretations of CECL, the very fact that a bank has the wherewithal and talents to be CECL compliance would tend to make them more attractive to investors.

Searching for Middle Ground in the Middle of CECL

So, instead of “about to be CECL,” hundreds of bankers are now years away and thinking about what to do. They can ask the opinion of regulators, auditors, and even vendors—but they are not likely to be told what to do—except, of course, for the vendors who suggest staying engaged.

Is there some way an institution can get the best out of CECL, but not add significant extra cost and tie up institution resources in the process? A prudent banker suddenly no longer at the finish line, but now in the middle of CECL might consider the following as best practices:

  • Continue to apply CECL-driven credit data collection and process improvements to realize the benefits in improved portfolio data management.
  • Continue to archive portfolio data with controls, so that the raw materials of CECL continue to build and grow in quality.
  • Try the CECL calculations periodically, to keep current with best practices evolving from similar 2020 CECL banks and see how they would impact the bank’s reserves.
  • Consider early adoption of CECL if it appears to be a good way to be competitive with investors.


Peter Cherpack is a partner and EVP at Ardmore Banking Advisors, focusing on credit data management and risk control. He is a nationally recognized thought leader in best practices for concentration management, stress testing, and CECL’s impact on community financial institutions.

Ardmore Banking Advisors will be a Gold Sponsor and exhibitor at the 2019 RMA Annual Risk Management Conference, October 27–29, and will be presenting this topic during one of the breakout sessions. To hear more from Peter Cherpack on this topic, you can register for the Conference here, and attend Ardmore’s session. 

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