Changes to the ALLL: Current Expected Credit Losses (CECL)

Transcription

1 Changes to the ALLL: Current Expected Credit Losses (CECL) Presented by: Greg Schwartz, CPA

2 Course Objectives Understand the changes coming from CECL Understand the impact of CECL Discuss timing Questions to ask about CECL

3 Before Current GAAP Total Loans X 1%

4 Strengths of Before Current GAAP Simple Consistent

5 Current ALLL GAAP Incurred loss model Incurred loss = probable Probable = within 1 year

6 What is good about the Incurred Loss model 1 year bright line Quick look back turnaround time We are all familiar with it

7 FASB History Response to historical events Principals vs Rules based Black Monday 1987 FASB Great Recession 2008 CECL 2015

8 New GAAP Current Expected Credit Losses (CECL) Change from 1 year to expected life Change from loan losses to credit losses Includes HTM securities, loan commitments and lease receivables Allows for recoveries of losses on HTM ALLL becomes AECL

9 CECL What is excluded Equity Securities Related Party Loans

10 CECL Changes OTTI Allowance - Losses can be recovered

11 Inputs Past events Current conditions (Including internal and external factors) Reasonable forecasts Expected life of the asset (problem for CC) Expected prepayments

12 Level of Detail Individual assets Pools with similar

13 Probability Path Estimated losses on a straight-line basis Pattern of expected losses

14 Common Methodologies Discounted cash flow analysis Average charge-off method Vintage analysis Static pool analysis Migration analysis Probability of default method Regression analysis

15 Discounted Cash Flow Analysis Currently used on individual impaired loans Probably continue to use on larger loans

16 Average charge-off method Average over the life of the loan Can t simply multiply 1 year by estimated loan life

17 Vintage analysis Tracking loan losses by year to determine patterns

18 Static pool analysis Similar to Vintage except year of origination is not the driver type of pooled risk is

19 Migration Analysis Roll rates from one risk category to another

20 Probability of default method Forecasting future losses based on FICO scores

21 Regression analysis Estimates correlations between economic data and historical losses Big Data

22 Looking Into the Future All future periods Reasonable and Supportable Forecasts If not revert to the means

23 Revert to the Means 7 year RE loans with a historical annual loss rate of 15bps Year 1 10bps 2 10bps 3 11bps 4 12bps 5 13bps 6 14bps 7 15bps Expected Losses

24 Sample from FASB

25 Effective Dates Public companies 2017 Others

26 Impact of Adoption 20% 100% increase in the AECL Impact on credit unions close to 6% and 7% capital? IFRS - NO

27 Adoption entry Equity, as previously reported Cumulative effect of CECL Equity, as restated $xx,xxx (x,xxx) $xx,xxx

28 What s going to Happen Once final software companies will step-up the marketing Webcasts White Papers Seminars (like this one)

29 What to do now? Know where your data is Know your options Wait for final issue My guess Christmas 2015

30 Question 1 You are required to purchase special software to comply with CECL True or False?

31 Question 2 The effects of CECL will be phased in over a 3 year period True or False?

32 Question 3 CECL is effective for years ending December 31, 2016 and later True or False?

33 Question 4 Probability Proportion to Size is one of the mentioned CECL methods True or False

34 Question 5 CECL is IFERs Compliant True or False

35 Question 6 CECL Requires us to Accurately Forecast All Future Years Losses True or False