REACHTalks Preparing for the CECL Model Implementation

Transcription

1 REACHTalks Preparing for the CECL Model Implementation Bryan W. Mogensen, CPA Thomas G. Johnson, CPA Investment advisory services are offered through CliftonLarsonAllen Wealth Advisors, LLC, an SEC registered investment advisor.

2 CECL Model In June 2016, the FASB issued Accounting Standards Update No , Financial Instruments Credit Losses (Topic 326) Current Expected Credit Loss (CECL) model Forward looking requirements Removes probable loss threshold Longer loss horizon Need for loan level data

3 CECL Model Life of loan losses versus losses over the next operating cycle Based on current, known factors and reasonable and supportable forecasts about the future Concept every loan originated increases exposure to credit risk Contractual loan payments reduce this exposure Transparency for financial statement users

4 CECL vs. Incurred Loss Model

5 Data Inputs Expected credit loss model will be based on information such as: Past events Historical loss experience Current conditions Borrower credit worthiness Forecasts of expected credit losses Current point and forecast direction of economic cycle

6 Possible CECL Methodologies Loss rate approach Vintage/static pool analysis and forecasting Probability of default and forecasting Risk migration and forecasting (by risk rating and/or credit score) Regression analysis and forecasting 6

7 FASB Example

8 FASB Example: Loss Rate Approach

9 Vintage Year Concept

10 FASB Example: Vintage Year Approach Reversion

11 Year One Impact Regulatory reporting effective date for credit unions is December 31, 2021 Early application will be permitted for all organizations for fiscal years beginning after December 15, 2018 Year one: Post a cumulative effect adjustment to the statement of financial condition (undivided earnings)

12 Joint Statement on CECL On June 17, 2016, joint statement on CECL was issued: A financial institution can leverage its current internal credit risk systems as a framework for estimating CECL. CECL does not specify a single method. Smaller and less complex institutions will be able to adjust their existing ALLL calculation without the use of costly and complex models.

13 Joint Statement on CECL Use of a third party service provider is NOT required. Institutions should not begin increasing their allowance levels beyond current GAAP prior to the effective date. Need to evaluate the potential impact on capital. Credit losses on AFS securities will be recorded through an allowance for credit losses rather than a direct write down.

14 Form an Implementation Committee Consider affected areas C level representation Define committee roles Set objectives and timelines Scope out resource requirements Provide regular updates to the board and management Create and update a project plan

15 Form an Implementation Committee Require collaboration across functional areas Committee members must understand their roles Assumptions used will need to be consistent (ALM & stress testing) Create a system of checks and balances

16 Model Considerations Methodology Changes Data Requirements Capital Adjustment Communication Projected Impact There will not be one right way to accomplish CECL Expectation is that most credit unions will need to alter their current ALLL estimate methodology Reasonable and supportable forecast Model validation Internal controls External provider?

17 Model Considerations Methodology Changes Data Requirements Capital Adjustment Communication Projected Impact Build and maintain a data warehouse Assessing availability and quality of historical data Determining key data necessary for the methodology you select Data validation process Report building process Gather industry data Gather economic data

18 Model Considerations Methodology Changes Data Requirements Capital Adjustment Communication Need to increase current capital? Management and board education Timing considerations Regulatory communications Projected Impact

19 Model Considerations Methodology Changes Data Requirements Capital Adjustment Communication Projected Impact Training and education of CECL with the board and senior management Document new policies and procedures Periodic meetings Documents read into the board minutes

20 Model Considerations Methodology Changes Data Requirements Capital Adjustment Communication Projected Impact Run scenarios to test initial model(s) Net income projections due to changes in provision Peer comparisons will change ALM impact Stress testing Loan pricing Underwriting guidelines

21 Resources The final 285 page standard: cid= &accepteddisclaimer=true FASB s presentation: 97BE5898E D094CC45C2BA&eventuserid= Joint statement on CECL: reg b1.pdf

22 Questions? 22

23 Bryan W. Mogensen, CPA Principal & National Credit Union Practice Leader Thomas G. Johnson, CPA Principal (520) CLAconnect.com linkedin.com/company/ cliftonlarsonallen facebook.com/ cliftonlarsonallen twitter.com/claconnect