5 Benefits of leaving behind an Excel-based ALLL model ahead of CECL: One bank’s story
Each institution must consider its own size and complexity in determining the most appropriate approach to CECL. However, one community bank that decided to shift from an Excel-based model to an automated approach ahead of CECL has identified several benefits from its decision.
CECL Software Considerations
Although many institutions have already discovered the value of a dedicated software platform to accomplish their current ALLL processes, nearly all institutions would agree that modernizing their approach has material benefits. The following recommendations are not intended to replace regulatory guidance as it relates to vendor management. Rather, the intent is to provide an understanding of a CECL-ready solution and the critical elements that such a solution should contain for tactical due diligence.
Peer Group Comparisons for the ALLL
For this ALLL benchmarks to be significant, however, requires the institution to have a valid and comparable peer group from which the benchmark allowance to total loans is calculated. In a recent Sageworks User Group, Sageworks consultants and attendees discussed meaningful peer groups as they related to portfolio management.
Your credit union CECL committee
If a credit union has not yet formed a committee to oversee CECL implementation, consider including representatives from the board of directors, accounting/finance, information technology, credit analysis, internal audit and risk mitigation.
discounted cash flow
How applicable will DCF estimation be to your institution?
Being educated on and prepared for CECL is not complete without an understanding of DCF and it's applications. A DCF method affords institutions flexibility in their approach, is more prospective in nature, has cross utilization purposes that can inform pricing and valuation within the same model and is applicable to institutions with limited historical data.
Making sense of CECL
In a July 2016 webinar with more than 220 bankers attending, executives at banks and credit unions spoke up with some of their most pressing questions related to the implementation of the current expected credit loss (CECL) model. Neekis Hammond CPA and senior risk management consultant at Sageworks addressed some of the questions during the webinar and archived the responses below for the ALLL.com audience.
The two D’s of the ALLL: Data and documentation
One critical component of the ALLL is data-gathering and documentation. The reserve is more than simply a calculation of funds, and a lack of or insufficient data and/or documentation is often a sore spot for many banks and credit unions. Whether an institution assesses the ALLL monthly or quarterly, collecting portfolio-level and loan-level data is often the most time-consuming aspect of the process, but a crucial one.
Life of Loan Concept
The more forward-looking CECL model will require institutions to adopt a methodology that takes into account the lifetime of the loan. This will require institutions to gather significantly more data components in order to perform the calculation.
Choosing the right peer group
Peer analysis is a tool many banks use to provide benchmarks and context for financial results. Selecting that peer group is critical for the peer analysis to be accurate. Too often, banks use peers with whom they compete directly for revenue and do not give regard for the non-revenue parts of the profiles with which they are more closely aligned.
How FANB readies its ALLL data
A past due loan report is used to review loans needing a downgrade due to days past due or days past due in combination with history. Commercial loans over 90 days past due are placed on non-accrual. Consumer loans, including home loans, are typically assigned non-accrual at 90 days but in some cases where a workout is in process or collateral value exceeded the fair market value less cost to sell & the loan is in collection, non-accrual is not assigned until 120 days past due.
Institutions should begin to gather the necessary documentation, both internal and external, before commencement of the ALLL calculation. Many sources of information, such as appraisal values or cash flow schedules, may require updating prior to the time of the calculation. As such, institutions should be mindful of documentation requirements as they begin to plan for their ALLL calculation.
Institutions must consider succession planning when they prepare for the ALLL. If an institution has one person responsible for the process, it may not be repeatable should that person step down. The process should be well-documented from start to finish, and there are certainly other ways to ensure the continued soundness of a bank or credit union’s ALLL process by “institutionalizing” the calculation.
It is vital to ensure data integrity before performing the actual calculation. Institutions must validate that the numbers they have on their books are up-to-date in order to derive an accurate output on the ALLL calculation.
Institutions should defer to final guidance for the implementation schedule once it is released. One can conjecture now, however, that the implementation schedule will be largely similar to prior guidance timetables. With this in mind, it is likely that the FASB will require implementation of the CECL model in 2019 for public institutions and in 2020 for private institutions.
The FASB issued the final CECL standard on June 16, 2016.
Thomas Curry, Comptroller of the Currency, has been on the record stating that banks should expect a 30%-50% increase in their allowance levels upon implementation of the CECL model. This will be a one-time adjustment to capital, not a provision expense.
With the transition to the CECL model, institutions will likely need to rely on archived loan-level detail. This could include individual loan segmentation, individual charge-offs and recoveries, risk ratings by individual loan, loan balances and duration.