--- title: Grossly Underdiscussed CECL Challenges description: Many banks are missing hidden CECL risks from construction loan structuring to cross-collateralization. Here’s what your model may be overlooking. image: https://intel.invictusgrp.com/hubfs/shutterstock_1199385208-1.jpg --- [![Invictus Analytics Logo 2025 _ BL](https://intel.invictusgrp.com/hs-fs/hubfs/Invictus%20Analytics%20Logo%202025%20_%20BL.png?width=200&height=46&name=Invictus%20Analytics%20Logo%202025%20_%20BL.png "Invictus Analytics Logo 2025 _ BL")](https://www.invictusgrp.com) Open menu - [Home](https://www.invictusgrp.com) - About Us - [About Invictus](https://www.invictusgrp.com/about-invictus-group) - [Client Testimonials](https://www.invictusgrp.com/client-testimonials) - [Message from the Chairman](https://www.invictusgrp.com/message-from-chairman) - [The Leadership Team](https://www.invictusgrp.com/our-team) - [Job Opportunities](https://www.invictusgrp.com/jobs) - Our Offerings - [Capital Stack](https://www.invictusgrp.com/capital-stack-old) - [M&A Advisory Services & SI](https://www.invictusgrp.com/ma-advisory-si) - Our Insights - [Invictus Intel Blog](https://intel.invictusgrp.com) - [M&A Deal Blog](https://mablog.invictusgrp.com/) - [Bank Insights Newsletter](https://www.invictusgrp.com/invictus-bank-insights-newsletter-the-invictus-group) - [White Papers](https://www.invictusgrp.com/white-papers) - [Webinars & Videos](https://www.invictusgrp.com/webinars-and-videos) - [Client Login](https://www.invictusanalytics.com/) [ Let's Talk ](https://www.invictusgrp.com/contact) [![Invictus Analytics Logo 2025 _ BL](https://intel.invictusgrp.com/hs-fs/hubfs/Invictus%20Analytics%20Logo%202025%20_%20BL.png?width=200&height=46&name=Invictus%20Analytics%20Logo%202025%20_%20BL.png "Invictus Analytics Logo 2025 _ BL")](https://www.invictusgrp.com) Close menu - [Home](https://www.invictusgrp.com) - About Us - [About Invictus](https://www.invictusgrp.com/about-invictus-group) - [Client Testimonials](https://www.invictusgrp.com/client-testimonials) - [Message from the Chairman](https://www.invictusgrp.com/message-from-chairman) - [The Leadership Team](https://www.invictusgrp.com/our-team) - [Job Opportunities](https://www.invictusgrp.com/jobs) - Our Offerings - [Capital Stack](https://www.invictusgrp.com/capital-stack-old) - [M&A Advisory Services & SI](https://www.invictusgrp.com/ma-advisory-si) - Our Insights - [Invictus Intel Blog](https://intel.invictusgrp.com) - [M&A Deal Blog](https://mablog.invictusgrp.com/) - [Bank Insights Newsletter](https://www.invictusgrp.com/invictus-bank-insights-newsletter-the-invictus-group) - [White Papers](https://www.invictusgrp.com/white-papers) - [Webinars & Videos](https://www.invictusgrp.com/webinars-and-videos) - [Client Login](https://www.invictusanalytics.com/) [ Let's Talk ](https://www.invictusgrp.com/contact) ## Grossly Underdiscussed CECL Challenges ![shutterstock_1199385208](https://intel.invictusgrp.com/hs-fs/hubfs/shutterstock_1199385208.jpg?width=2000&name=shutterstock_1199385208.jpg) Now that most community banks have eight to ten quarters of CECL experience under their belts, many are still grappling with foundational issues such as overreliance on qualitative factors, lack of responsiveness to risk rating changes, and opaque “black box” models that defy intuitive understanding. But beyond these basics lie deeper, more nuanced challenges that are rarely discussed. Unfortunately, many commonly used software-as-a-service (SaaS) solutions especially those built on “one-size-fits-all” frameworks struggle to address these complexities. Here are several underappreciated issues that deserve greater attention: **Construction Loans with Built-In Permanent Financing** Many banks originate construction loans with short maturities aligned to development timelines typically 18 to 36 months. These loans are often expected to be “taken out” by permanent financing, either from the same bank or another institution, with maturities ranging from 10 to 30 years. However, some banks structure these loans as a single instrument. For example, a loan originated in 2025 with a maturity in 2053 might include: - An initial 3-year interest-only construction phase - A subsequent 25-year amortizing phase, reclassified as CRE once the project is stabilized From a CECL perspective, this can be problematic. Without proper context, such loans may appear to be long-dated construction loans, leading to inflated reserve estimates. If your CECL model lacks the flexibility to distinguish between these phases, you risk significant over-reserving. **Unfunded Commitments for Construction Loans** Unlike other unused commitments (e.g., C&I lines or HELOCs), construction loan commitments typically have near-100% utilization rates. This creates a CECL modeling challenge: - The unfunded portion often has a longer expected life than the funded balance - The unfunded amount is expected to grow over time as the project progresses - GAAP requires separate ACLs for funded and unfunded portions, housed in different GL accounts If not modeled carefully, this can lead to confusion and misaligned reserves. **Cross-Collateralization Complexities** Loan structures can be intricate: - A single loan may be backed by multiple collateral assets - One asset may support multiple loans - Multiple assets may support multiple loans with varying liquidation preferences Most SaaS models oversimplify these relationships, often relying on a combined loan-to-value (LTV) ratio if it’s even accurate. These ratios frequently depend on manual inputs, which are prone to error. Robust CECL models should be able to parse these relationships algorithmically, reducing human error and improving reserve accuracy. **Government Guarantees (e.g., SBA Loans)** Many banks use shorthand adjustments for SBA loans, which can be risky. Loss rates on SBA loans can be high, and simplistic modeling may obscure true risk. A waterfall analysis is strongly recommended, tailored to the specific guarantee structure: - SBA 7(a) loans have a different loss-sharing profile than - SBA 504 loans, which follow a “50-40-10” structure Does your model account for these nuances? If not, your ACLs may be misaligned. **Loan Participations (Inbound and Outbound)** Modeling expected losses for participations requires precision: - Ensure LTVs aren’t understated or collateral overstated by misapplying appraised values - Understand which portions of the loan your bank owns - Account for lien position relative to other participants Again, waterfall modeling is essential to capture the full risk ecosystem across multiple lenders. **From CECL 101 to CECL 401** These challenges reflect a “301” or “401” level of CECL maturity, while many banks are still navigating “101.” Yet those with the foresight to anticipate these complexities—and proactively address them are far more likely to make smarter, long-term decisions. For many, that means seriously considering a transition to a more advanced and flexible CECL model sooner rather than later. Waiting until problems surface may lead to costly missteps, while early adoption of a better-suited model can position your institution for greater accuracy, defensibility, and strategic clarity.   Other Resources:  Watch our latest video: [Video Library](https://www.invictusgrp.com/webinars-and-videos) Read our latest insights : [Intel Blog](https://intel.invictusgrp.com/) Follow us on LinkedIn for expert analysis & industry updates: [LinkedIn](https://www.linkedin.com/in/adammustafa/)   [![Schedule Exploratory Call](https://no-cache.hubspot.com/cta/default/20257776/8e4412b8-e2dd-46a0-8e28-0c923e1b0581.png)](https://cta-redirect.hubspot.com/cta/redirect/20257776/8e4412b8-e2dd-46a0-8e28-0c923e1b0581)     ## More recent posts ![Invictus CEO to Moderate Regulatory Panel at ](https://intel.invictusgrp.com/hubfs/AdobeStock_901521336-1.jpeg) [banking](https://intel.invictusgrp.com/tag/banking), [Capital Plan for Community Banks](https://intel.invictusgrp.com/tag/capital-plan-for-community-banks), [Community Banks Capital Plan](https://intel.invictusgrp.com/tag/community-banks-capital-plan), [capital planning](https://intel.invictusgrp.com/tag/capital-planning), [liquidity](https://intel.invictusgrp.com/tag/liquidity), [stress testing](https://intel.invictusgrp.com/tag/stress-testing), [Trade War Recession](https://intel.invictusgrp.com/tag/trade-war-recession), [Capital Requirements for community banks](https://intel.invictusgrp.com/tag/capital-requirements-for-community-banks), [community bank regulations](https://intel.invictusgrp.com/tag/community-bank-regulations), [Global Oil Shock](https://intel.invictusgrp.com/tag/global-oil-shock), [Stagflation](https://intel.invictusgrp.com/tag/stagflation), [Banking CRE](https://intel.invictusgrp.com/tag/banking-cre), [Banking Construction](https://intel.invictusgrp.com/tag/banking-construction), [Concentration Limits](https://intel.invictusgrp.com/tag/concentration-limits), [CRE Banking Strategies](https://intel.invictusgrp.com/tag/cre-banking-strategies) ### [Invictus CEO to Moderate Regulatory Panel at "Concentrate 2026" *Author: Patti Casaleggio, Invictus Analytics * As regulatory scrutiny and expectations around commercial real estate (CRE) continue to evolve, staying ahead of supervisory trends has never been more critical for community and...](https://intel.invictusgrp.com/invictus-ceo-to-moderate-regulatory-panel-at-concentrate-2026) ![Preparing for the Possibility of a Global Oil Shock and Stagflation Scenario](https://intel.invictusgrp.com/hubfs/AdobeStock_1939288070-1.jpeg) [banking](https://intel.invictusgrp.com/tag/banking), [Capital Plan for Community Banks](https://intel.invictusgrp.com/tag/capital-plan-for-community-banks), [Community Banks Capital Plan](https://intel.invictusgrp.com/tag/community-banks-capital-plan), [capital planning](https://intel.invictusgrp.com/tag/capital-planning), [liquidity](https://intel.invictusgrp.com/tag/liquidity), [stress testing](https://intel.invictusgrp.com/tag/stress-testing), [Trade War Recession](https://intel.invictusgrp.com/tag/trade-war-recession), [Capital Requirements for community banks](https://intel.invictusgrp.com/tag/capital-requirements-for-community-banks), [community bank regulations](https://intel.invictusgrp.com/tag/community-bank-regulations), [Global Oil Shock](https://intel.invictusgrp.com/tag/global-oil-shock), [Stagflation](https://intel.invictusgrp.com/tag/stagflation) ### [Preparing for the Possibility of a Global Oil Shock and Stagflation Scenario *Author: Adam Mustafa CEO, Invictus Analytics * What happens when inflation reaccelerates from already elevated levels while economic growth slows? 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