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With few advantages to gain, only 4 banking institutions adopt CECL early

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With few advantages to gain, only 4 banking institutions adopt CECL early

Only a handful of institutions have chosen to adopt the current expected credit loss accounting method ahead of their deadline, according to second-quarter 2019 call reports.

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The CECL standard will be implemented for large public companies in the first quarter of 2020, but hundreds of smaller institutions will have more time to implement it. Under a proposed rule change, most private and small public companies, as well as nonprofit financial institutions such as credit unions, will not have to use the standard until 2023.

So far, three credit unions and one bank have implemented the new standard. Two credit unions implemented the standard during the first quarter of 2019, and Chicago-based U.S. Employees CU adopted the standard in the second quarter. The credit union saw its allowance for credit losses increase 427.2% quarter over quarter, while its net worth dropped approximately 20%. The company did not respond to requests for an interview.

Duluth, Ga.-based Georgia United CU began reporting under CECL in the first quarter, and according to CFO Bob Bogart, the transition has gone smoothly. The executive said Georgia United chose to implement CECL early to account for reserves for a portion of its loan portfolio.

"It's been pretty non-eventful," he said in an interview. But the credit union's first audit after adopting CECL may be difficult, he said.

"Getting through that first year's audit, and understanding what [our accountant is] going to be looking for from a documentation standpoint will probably be ... the major issue," he said.

The only bank to implement CECL so far is Waseca, Minn.-based First National Bank of Waseca. CFO and COO Thomas Sankovitz said the bank implemented the standard mainly out of convenience.

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"We started keying in historical data. Once you get it in there, why run two processes?" Sankovitz said in an interview. "It made sense to just key it and start going with it."

Sankovitz agreed that implementing the standard has been simple. "It's not been a huge impact to the bank," he said. "It's just a change in the process."

That new process is slower, though, Sankovitz said. The initial gathering of historical data took about 100 hours, while the new quarterly process also takes longer than the old method.

"It's broken out by many more loan types, and you've got to break down risk ratings," he said, which increases the time each quarter.

Neither Georgia United nor Waseca had to make large changes to their capital amounts. Bogart said Georgia United took about a 1% hit to its capital but remained around 11%, staying over the limit to be well-capitalized. Since credit unions can only build capital through retained earnings, the initial cost of implementation on credit unions with lower capital ratios could be damaging.

But Bogart says the solution is to change required capital levels, not the accounting standard.

"Accounting is either right or wrong ... it can't be wrong for small banks but right for big banks," said Bogart. "I'd be more inclined to say the regulators should adjust minimum capital levels."

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Experts on CECL said it is unlikely there will be many more early adopters, even if the deadline gets extended for smaller institutions. There are limited benefits to incorporating the standard ahead of time, while disadvantages to capital and uneven comparisons to other institutions abound.

"You're ahead of everybody else — you're in a different measurement paradigm," said Gregory Norwood, a managing director at Deloitte & Touche LLP who is also part of the firm's CECL leadership team. "You could [have to] explain what you have versus what your other peers have."

Michael Lundberg, a partner and national director of financial institution services with RSM US LLP, said there are not many advantages other than the perception of being ahead of the game.

"You're sort of in control or on top of it," he explained. If organizations are ready to adopt the standard, like First National Bank of Waseca was, going ahead with the standard would let banks "close out the project and move on," said Lundberg. But the complexity and increases in reserves likely outweigh those minor benefits, he added.

"There's really just a handful of organizations that have early adopted," said Lundberg. "It's a reflection of the complexity, and people feel like they need all the time they can get."