As hope for regulatory relief and legislative intervention has faded, financial institutions are set to adopt FASB Accounting Standards Codification Topic 326 (ASC 326) – Financial Instruments – Credit Losses (aka CECL) on January 1, 2023. While approximately 150 banks adopted CECL on January 1, 2020, there are still almost 5,000 community banks that are somewhere on the CECL preparation continuum. It is not particularly clear where the “other 5,000” stand with regard to CECL preparation, as survey information varies significantly depending on the source. However, polling reflects that a significant percentage of institutions have not decided on CECL methodology or vendor partners as the 2022 parallel run window fast approaches. On July 15, 2021, the Federal Reserve introduced the Scaled CECL Allowance for Losses Estimator (SCALE) Tool. SCALE is a spreadsheet-based tool intended to assist community banks with total assets less than $1 billion in complying with CECL. The SCALE tool was fashioned as a cost-effective alternative for smaller banks that leverages peer data as the starting point for an institution’s allowance for credit losses under CECL. Initial questions regarding SCALE raised by community bankers and professionals serving the community banking industry include:

• Does the SCALE model comply with Generally Accepted Accounting Principles?
• What is the position of the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC) relative to SCALE?
• Can small community banks efficiently and effectively tailor “peer data” to their institution using qualitative factors?
• Does a spreadsheet-based solution present many of the same challenges present in current practice?

While the above questions will be contemplated and presumably answered in the coming weeks, the Weighted Average Remaining Maturities (WARM) method remains the methodology most similar to current practice for the vast majority of community banks. In addition, the WARM method has been formally acknowledged by FASB and the joint regulatory bodies as an acceptable means by which to comply with CECL. There are also a variety of cost-effective solutions in the marketplace that employ the WARM method. As institutions continue to assess alternatives such as SCALE and develop action plans for CECL compliance, it’s crucial to engage with a professional services team to ensure that you are prepared for success. For assistance with getting on the CECL path to compliance, learn more about CECL and request a demo to see how it can help your institution proactively plan for the new Allowance for Credit Losses (ACL) requirements.