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2 Reasons CECL-508322-edited.jpgAs banks navigate through their CECL implementation, many are experiencing challenges and uncertainties along the way. Since last summer when the new standard was announced, we’ve advised banks to get started on their implementation timeline sooner than later. In part, it’s to give time to mitigate the unexpected. In part, the advice comes from our experience with how complex and challenging it can be to implement new models, standards, regulations, and technologies. And finally, it’s because more robust data analysis means more confident decisions and ultimately more profitable loans over the long term.

How you capture credit risk and calculate the allowance for loan and lease losses (ALLL) is the most critical estimate for your organization. The value of creating the space to challenge processes, perform simulations, make early corrections, and begin to build a data set can’t be understated. The outcomes of these initial steps inform later decisions around models and software procurement. And the more you can connect pricing and credit risk, the greater your ability to predict your needs and outcomes accurately. Ultimately, these interwoven decisions help to ensure your institution can build foresight and maintain control over your future profitability.

“I don’t make bad loans.”

No institution intends to originate a bad loan. The question bankers often ask is how to project a loss on a loan in which you didn’t expect to incur one.

The reality is, you’ve always made pricing decisions based on a borrower’s creditworthiness. A projected loss is already considered and included in loan’s credit spread. With CECL, you have to think about how to parlay that projection into the assets’ life of loan loss. The opportunity here is in designing your CECL data analysis and projection of loan losses into a system that also provides more robust and profitable pricing models. This level of pricing decision demands adding foresight to a traditional historic assessment.

The value of starting early

HORNE Banking is here to help you build an effective CECL implementation. We recognize that the long-term strength of your institution depends on the sufficiency of your loan data and the integrity of your analysis in anticipating future losses.

Tightening the link between loan pricing and allowance opens the door to greater profitability over time. That means better protection from unintentionally pricing loans for good borrowers too high (thereby losing to competitive lenders) or from pricing loans too low for risky borrowers (thereby missing out on compensation).

While its complexity is unquestionable, CECL is an opportunity. Compliance flips the lending process from relying on a historic view to a carefully constructed, highly informed resource that enables foresight.

CECL is not a one-size-fits-all regulation; nor is the path to compliance. The HORNE Banking team can help you identify your specific challenges, opportunities, and needs now. In doing so, you’ll have clarity about what’s working and what isn’t, what’s important and what isn’t – and other fundamental details that will shape your success at the point of implementation.

See the implementation schedule for your organization here and don’t hesitate to contact a member of our team. We are CECL specialists who are available to guide you through the process of turning compliance into opportunity.

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THIS POST WAS WRITTEN BY Hans Pettit

Hans serves as a partner in HORNE's financial institutions practice. He is dedicated to helping banks achieve their growth potential using reliable insights and thoughtful guidance. Hans's specialized experience includes growth opportunity planning and assessment; risk management evaluation and structuring; and internal control framework design and effectiveness.

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