Preparing for CECL. Chris Emery Director, Special Projects

Transcription

1 Preparing for CECL Chris Emery Director, Special Projects

2 What is CECL? The Current Expected Credit Losses (CECL) model is a proposed Account Standards Update (ASU) by the Financial Accounting Standards Board (FASB). This ASU will change the accounting standards related to impairment of financial assets and recognition of credit losses.

3 Incurred Loss Model Probable Threshold Delayed Recognition of Losses Past Events & Current Conditions Only

4 Expected Loss Model Probable Threshold Removed Immediate Recognition of Losses Past Events, Current Conditions, Forecasts

5 Expected Loss Model All other things being equal, future expected losses will be higher than losses already incurred. Some estimates point to allowance estimates going up by 30-50% under CECL.

6 Preparing for CECL: Practical Steps 1. Learn 2. Share 3. Hoard 4. Forecast 5. Model

7 Preparing for CECL: Learn Read the proposed ASU + supporting information Read analysis from industry groups & accounting firms Watch webinars, listen to conference calls, etc.

8 Preparing for CECL: Learn Much like current incurred allowance methodologies, there will not be a one size fits all solution under CECL. If anything, CECL may promote more divergence in practices around the ALLL. It will remain the responsibility of management to determine the approach that fits their specific institution and portfolio.

9 Preparing for CECL: Share This is a big change and needs a team effort Internal stakeholders: senior management, board External stakeholders: external auditors, regulators

10 Preparing for CECL: Hoard Expected Loss models will require more data than many current Incurred Loss models Core loan system may not be sufficient for acquiring this data Act now so you don t regret it later!

11 Preparing for CECL: Hoard Loan Level Balances Segmentation information Risk information Vintage information Transaction Level Charge-offs and recoveries Defaults Prepayments

12 Preparing for CECL: Forecast Reasonable and Supportable Similarities & Differences with current Q Factors Understanding past correlations is key Potential sources of information

13 Preparing for CECL: Model Lifetime losses - Not simple multiplication Timing of losses Loan vintages Adjust for current conditions Adjust for forecasted conditions

14 Preparing for CECL: Model A Few Don ts to Consider Don t let the perfect be the enemy of the good Don t book allowances before implementation Don t lose it if your parallel model produces much-higherthan-expected results

15 Preparing for CECL: Timeline Final ASU expected in Q Still some details being worked out, but significant changes are not expected None of the changes being discussed are expected to delay ultimate release of the ASU

16 Preparing for CECL: Timeline Public business entities that meet the definition of an SEC filer will be required to apply the guidance for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Public business entities that do not meet the definition of an SEC filer will be required to apply the guidance for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Entities that are not public business entities including not-for-profit entities and employee benefit plans within the scope of Topics 960 through 965 on plan accounting will be required to apply the guidance for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020.

17 Preparing for CECL: Add l Info RMA Blog: CECL Tag ( MST CECL White Paper ( MST CECL Survey (

18 Contact MST