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FASB's latest CECL decision shows some responsiveness to community banks

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FASB's latest CECL decision shows some responsiveness to community banks

The FinancialAccounting Standards Board voted todelay implementation of its controversial impairment proposal — a movesome observers say will bring welcome relief to small banks and credit unions.

Smallerinstitutions have long complainedthat the current expected credit loss model, also called CECL, is an accountingsolution aimed at problems presented by the balance sheets of large institutionsand would require costly, sophisticated systems to run calculations that they believeare unnecessary. The board has been sensitive to those concerns, making changesto the draft that more fully demonstrates CECL's scalability and articulating thatexisting models will be acceptable under the standard. The board recently took furthersteps to make the reporting burden more bearable for smaller institutions, includingan exemption for some from one aspect of the reporting for some companies.

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The new date, a lack of comparability

At theApril 27 meeting, FASB voted unanimously to delay the implementation of CECL bya year, buying financial institutions more time to comply with the rule. It willnow be effective for public companies that are SEC filers in the fiscal years beginningafter Dec. 15, 2019, for nonpublic companies in the fiscal years beginning afterDec. 15, 2020, and for private companies and not-for-profits in the annual periodsbeginning after Dec. 15, 2020, and interim periods within fiscal years beginningafter Dec. 15, 2021. However, companies will have the option to early adopt theCECL standard as of the November 2015dates of essentially 2019 for public companies and 2020 for others. The pushbackin the effective date came after the final standard's release was delayed severaltimes since late 2015; it is now expected to be published near the end of the firsthalf of 2016.

An extrayear will be "clearly helpful" for smaller community institutions, especiallythose that have taken little to noaction to comply with CECL, said MiddleburgFinancial Corp. CFO Rajesh Mehra. Middleburg had $1.35 billion in assetsat the end of the first quarter. Mehra said data collection will be one of the tallesthurdles that community institutions will encounter in complying with CECL, giventhat some institutions use "fairly simplistic" methods to calculate loanlosses.

The delayalso rewards management teams that held off on acquiring a vendor system until afterthe standard's publication, given how much it has changed, said Timothy Zimmerman,president and CEO of Monroeville, Pa.-based StandardFinancial Corp. and unit StandardBank PaSB. Zimmerman, whose company had $479.9 million in assets atthe end of the first quarter, is a member of FASB's transition resource group on the topic.

BothZimmerman and Mehra said a larger institution could potentially early adopt thestandard by 2019 but doubted the ability of smaller institutions to comply in thatshort a time due to data-collection demands. Zimmerman said the industry usuallydoes not see institutions voluntarily adopting standards before their mandate, butthat some companies that have run parallel systems internally may be prepared toreport their numbers publicly.

"Wealways say, 'You can always tell the pioneers because they're the ones with thearrows in their back,'" he said. "There are always pioneers out therethat are leading the way, and they run into some things, and then other people canlearn from their experience."

Earlyadoption could destroy the comparability of allowances between financial institutions,a possibility that FASB members mentioned in their recent meeting. Zimmerman saidthe board is more concerned about all institutions having enough time to preparefor CECL and is less concerned about the lack of comparability that could existin the interim. Faye Miller, a partner in RSM's National Professional StandardsGroup, said the option to early adopt makes sense, and agreed with board membersabout the lack of existing comparability in financial statements.

"There'snot a lot of comparability today, because there are so many different methods andways in which an institution can estimate the allowance for credit losses,"she said. "They're not forsaking comparability [by allowing] entities to earlyadopt, because they don't have comparability."

Vintage disclosures ramp-up andexemption

At themeeting, the board also opted to give some entities relief from the requirementof organizing credit-quality disclosures by year of origination, or vintage. Beforethe changes, companies had been required to make disclosures for the five previousannual reporting periods. The contention was that institutional investors oftenfind the disclosure helpful, but smaller institutions with a closely-held shareholderbase said the requirement was onerous and unnecessary.

In theend, the board voted to exempt nonpublic or other-than-public business entitiesfrom reporting the vintages but permitted them to do so if they would like. It alsovoted to give public business entities that are not SEC filers a gradual build-upto full compliance of the disclosure. When the rule goes into effect in 2021, thesecompanies would disclose remaining loan amounts that were originated in 2021, 2020and 2019, with everything prior included in the aggregate, wrote FASB spokespersonChristine Klimek in an April 27 email. In each incremental year, they would disclosean additional year until they are aligned with SEC filers; by 2023, their disclosureswill be aligned with SEC filers.

The exemptionis a relief for nonpublic or other-than-public business entities. Complying withthe disclosure requirement would have been "a big deal" for those groupsand would have required "a lot" of extra effort because many had not previouslytracked the information that would yield the disclosure, Miller said.

"Theywould need to basically show their loans by year of origination for the most recentfive-year period, and while it sounds easy, it's really not," she said, givingthe example of the complexity associated with a bank or credit union recording theorigination date of a refinanced loan. "This requirement was causing smallinstitutions a lot of consternation, and I think they will welcome this change."

The exemptionalso drew praise from the Independent Community Bankers of America, a trade groupthat had previously quarreledwith FASB over CECL.The group said FASB's vote addressed many concerns that were detailed in a recentletter to FASB Chairman Russell Golden and said the exemption was "an importantstep in the right direction" for those that it applies to, according to anApril 27 press release.

But Zimmermanpointed out that total relief is still limited to a relatively few number of banks,especially when considering that many community banks that are public by FASB'sdefinition have very small, local ownership bases. He added that smaller banks oftenhave straightforward business operations and low levels of delinquencies, whichmakes the year the loan was originated less relevant to them than larger banks withmore homogeneous pools and variances in underwriting standards. He called vintagedisclosure compliance for closely held community banks "overkill" andsaid FASB should have just drawn a line for SEC filers and non-SEC filers. But morebroadly, for banks outside the smallest, closely held institutions, Zimmerman saidthe ramp-up was a "good example" of how the board has been sensitive tocommunity bankers' concerns. The comment follows previous testimony he gave that the revised CECL standard demonstratesthat board's intent to make the standard "flexible and scalable" and will"allow community banks to use their experience and understanding of the localbusiness marketplace" to determine their allowances for loan and lease losses.

"Anycommunity bank that has to comply with this disclosure will have plenty of timeto adjust their systems and start to gather information," he said.