Overview of ASC (CECL)

Transcription

1 Overview of ASC (CECL) FASB Accounting Standards Update (ASU) , Financial Instruments Credit Losses Topic 326 was approved in June FASB replaced the current incurred loss accounting model with an expected loss model CECL. The new accounting standard applies to all banks, savings associations, credit unions, and financial institution holding companies that file regulatory reports prepared in accordance with U.S. Generally Accepted Accounting Principles (GAAP), regardless of size. Institutions are encouraged to take steps to assess the potential impact on the ALLL and capital. Impact on an institution s ALLL and capital will depend on: Existing allowance level Composition and credit quality of its portfolio Historical, Current, and forecasted loss data, assumptions, and economic conditions

2 Overview of ASC (CECL) Key Changes: Move from incurred loss (Historical losses) to a lifetime horizon (Life of loan/asset losses) Single measurement objective applied to all financial assets carried at amortized cost: Requires an allowance on held-to-maturity securities Institutions will use a broader range of data to estimate expected losses: Requires collective or pool-basis assessment of credit losses Accounting for available-for-sale debt securities Accounting for purchased credit impaired loans Off-Balance-Sheet Credit Exposures o Loan commitments o Standby letters of credits o Financial guarantees/similar instruments

3 Overview of ASC (CECL) Effective Dates: For public business entities that are U.S. Securities and Exchange Commission (SEC) filers, the new guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, Thus, for a calendar-year company, it would be effective January 1, For public business entities that are not SEC filers, the new guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, For all other organizations, the new guidance is effective for fiscal years beginning after December 15, 2020, and for interim periods within fiscal years beginning after December 15, Early application will be permitted for all organizations for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.

4 CECL Models/Methods Allowance for credit loss may be determined using various methods, including: Discounted cash flow models ( Refer to example 14 in FASB Guidance) Key Data Fields: Loan Type/Product, Effective Interest Rate, Fixed/Adjustable rate product, Loan Term, Maturity Date, Interest Rate, etc. Vintage analysis ( Refer to example 3 in FASB Guidance) Key Data Fields: Loan Type, Loan Product, Origination Date, Maturity Date, Charge-off amount, Charge-off date, Origination Date of Charged-off loan etc. Loss-rate methods ( Refer to example 1 and 2 in FASB Guidance) Roll-rate methods Probability-of-default methods Key Data Fields: Loan Type/Product, Charge-off amount, Product LTV, Days Delinquent, # of Non-accrual, Recovery amounts etc. Choose the method that best suits each portfolio- Does not have to be the same method for all loan pools Institutions are not expected to: Implement complex models Hire consultants to develop their models

5 Loan Data Requirements Key Model Required for initial model implementation Additional fields necessary for DCF, Vintage and PD/LGD Models Loan Data Fields Loan Data Fields Key $ Limit/Unused Comittments Model Days Delinquent Key Account Number Model Risk Rating Key Current Balance Model Payment Frequency Key Origination Date Model TDR Flag Key Current Maturity Date Model Call Report Code Key Modification/Renewal Date Model Collateral Code Key Current Interest Rate and index factor Model NAICS Code Key Rate Floor and Ceiling Model Product Code Key Fixed/Adjustable rate Model Current Collateral Value/Original Collateral Value Key Chargeoff Amount Model Current /Original Collateral Value Date (appraisal date) Key Chargeoff Date Model Delinquency Status Key Current Deferred Loan Cost Model # of Times Past Due more than 120 Days Key Current Deferred Loan Fees Model # of Times Past Due more than 180 Days Key Current Discount Model # of Times Past Due more than 30 Days Key Current Premium Model # of Times Past Due more than 60 Days Key Current Payment Amount Model # of Times Past Due more than 90 Days Key Current Interest Payment Model Balloon Payment Key Current Principal Payment Model Current/Original FICO Score Key Original Balance Model Current/Original Risk Rating Key Original Discount Model Credit Bureau Combined LTV Key Original Premium Key Loan Type Code Key FDIC Type Code Key Guarnatee Amount

6 Implementation of CECL Methodology Start Transition Project Mobilization Confirm Requirements Iterative Prototype Review Final Development -Develop CECL Management Team -Confirm scope and requirements -Discuss data accessibility and talk with loan accounting/system vendor -Methodology and Design Sessions -Design Decisions -Determine Timeline -Review data requirements -Confirm loan segments/pools -Confirm forecast (life of loss) assumptions and qualitative factors -Establish forecast and qualitative factor parameters -Agree on final methodology/ methodologies -Confirm Data -Confirm Reports -Confirm Users Revisions -Develop CECL Prototypes -Review all assumptions used for forecast and qualitative factors for reasonableness -Prototype Reviews -Prototype Revisions -Review interim results -Final Revisions -Final Development System Testing/Validation Management/BOD reviews: -CECL Methodology -All data and documentation supporting forecast assumptions -Ongoing testing plan -Scripts -Bug Fixes -Deployment Plan Launch Support Orchestration Platform Alignment & Adoption Project Management / Quality Assurance 6

7 CECL Orchestration Collect, Store, & Manage loan-level data Determine risk characteristics of the loan portfolio and break out loan pools/segments/cohorts Select applicable Model approach 1. Discounted Cash Flows 2. Vintage Analysis 3. Loss Rates 4. Probability of Default Methods Perform Vintage and/or Trend Analysis Monitor changes in collateral value Run Scenarios & Plan for Adjustments Perform analysis well beyond the Excel world Receive Support from Internal Management or SMEs

8 CECL Implementation and Modeling Summary Become familiar with Accounting Standards Update (ASU) Develop an implementation team and plan a timeline with key stakeholders: Board of directors Industry peers External auditors Supervisory agencies Review existing allowance and credit risk management practices and policies Begin gathering data by loan /asset type or pool: o Historical loss information o Economic trend data and correlation of other qualitative factors o Ensure Key fields are extractable from the loan system o o Obtain historical loan data from the loan system. Is data purged or archived? Determine contractual life and prepayment information from historical loan data Consider potential expected loss methodologies Keep BOD, Auditors and Examination team up to date

9

10

11

12