The two main hidden complexities of CECL
CECL's details have been out for two years, but banks and credit unions may encounter complexities when theory collides with the reality of implementation.
New stress testing reform may have some CECL benefits
Banks with assets between $10 billion and $250 billion will no longer be subject to mandated annual stress testing, whether it be for the Dodd-Frank Act Stress Test (DFAST) or the Comprehensive Capital Analysis and Review (CCAR), due to the passage of a new regulatory relief bill.
Streamlining the new fair value disclosure requirement
A new Financial Accounting Standards Board (FASB) disclosure requirement makes several material changes to U.S. generally accepted accounting principles (GAAP). New requirements for determining the fair value disclosure of financial institutions’ loan portfolios are among the revisions.
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 within DFAST: What you should know
An upcoming whitepaper and webinar by Garver Moore, Managing Director of Sageworks Advisory Services, will explore differences between the CECL and DFAST exercises; this blog post excerpts a discussion on CECL within DFAST. The discussion thoroughly addresses stress testing projections, adoption dates, and CECL modeling.
Poll: How 254 financial institutions are approaching Q factors under CECL
During a recent webinar, Sageworks Senior Consultant Tim McPeak and Danny Sharman, an implementation consultant, shared tips to help institutions get prepared for the CECL transition. During the presentation, they also discussed current practices regarding the use of qualitative factors, or Q factors, in the allowance and how to prepare for using Q factors under CECL. A poll of 254 webinar attendees showed that Q factors are a common area of questioning by auditors and examiners.
CECL for community banks: A recap of regulators’ webinar
The FDIC and the Federal Reserve Board (FRB), in conjunction with the Financial Accounting Standards Board (FASB), the U.S. Securities and Exchange Commission (SEC), and the Conference of State Bank Supervisors (CSBS), recently hosted a webinar to discuss how smaller, less complex financial institutions can implement CECL. The purpose of the webinar was to help small financial institutions go from theory to application as they prepare for CECL and to dispel myths often associated with FASB’s new standard.
CSBS offers CECL readiness tool
The Conference of State Bank Supervisors (CSBS) released a readiness tool for Accounting Standards Update (ASU) 2016-13, Financial Instruments—Credit Losses (Topic 326). The tool is a downloadable resource that institutions can use to their expected loss implementation planning.
CECL Transition Workshops to Kick Off in March
As part of a three-pronged approach to help Sageworks’ clients transition to the excepted loss accounting standard, Sageworks will kick off in March 2018 a series of CECL Transition Workshops to take place across the country. These events will be open to all financial institutions, not just those who subscribe to the company’s ALLL solution.
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.
Upcoming Webinar: How a Real Bank is Tackling CECL
On January 30, 2018, Sageworks will host a webinar that answers the question many financial institution leaders are asking: what should a real-life bank with real-life data be doing for the current expected credit loss (CECL) model?
What is the discounted cash flow (DCF) methodology?
A discounted cash flow methodology in the context of ASU 2016-13 (Topic 326/CECL) is one way to estimate credit losses. Discounted cash flow (DCF) methodologies utilize a bottom-up approach—meaning they model expected cash flows on a loan-level basis and aggregates results at the pool-level.
CECL: A CEO’s role in improved management of credit losses
There is a reason regulatory agencies are directing their guidance on the new current expected credit loss (CECL) model to the attention of financial institution CEOs. After all, it is top management’s responsibility at the end of the day to ensure the allowance for loan and lease losses (ALLL) is adequate.
Regulators offer new round of answers to FAQs about CECL
In a new round of answers to Frequently Asked Questions, or FAQs, regulators addressed initial supervisory views on qualitative factors, data needs and other topics related to (ASU) No. 2016-13, Topic 326, Financial Instruments – Credit Losses, which takes effect as early as 2020 for SEC-registered financial institutions.
CECL – Data and Methodology
The Financial Accounting Standards Board's (FASB) Accounting Standards Update (ASU) 326 provides the guidance for estimating allowances for credit losses, as the current expected credit losses methodology (CECL) will be applied. The allowance will be reported as a valuation account, or the difference between the financial assets’ amortized cost basis and the net amount expected to be collected. Two common questions that bankers ask about FASB's CECL model are: 1) What methodologies make the most sense for CECL? 2) What are the data requirements for my institution?
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.
The Case for Early Adoption of the FASB’s Current Expected Credit Loss (CECL) Model
The standard, issued in ASU 326 (Financial Instruments – Credit Losses) in June of 2016, contains several timelines for required adoption of the standard depending on the type and existing reporting requirements of the financial institution. While the timelines are (directly) independent of institutional size and complexity, all financial institutions do have one thing in common: For fiscal periods beginning after December 15, 2018, and for interim periods within those years, use of the CECL standard is permitted.
Other Regulatory Considerations for CECL Preparation
On December 19, 2016, the Board of Governors of the Federal Reserve System (the Fed), Office of the Comptroller of the Currency (OCC), Federal Deposit Insurance Corp. (FDIC), and National Credit Union Administration (NCUA) issued an 18-page, 23-question statement titled, “Frequently Asked Questions (FAQs) on the New Accounting Standard on Financial Instruments – Credit Losses,”
CECL is here – Answering your common questions
For financial services companies, June 2016 was a major milestone with the FASB’s issuance of the new accounting standard for loan losses and held-to-maturity debt securities. Designated the current expected credit loss model (CECL), the standard requires entities to record credit losses at origination based on a life of loan loss concept. This is an extensive, impactful change in accounting guidance, which brings significant questions regarding interpretations, implementation and challenges financial services professionals and others are facing.
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.
Don’t panic about upcoming accounting change
Bankers shouldn't panic about the upcoming CECL standard. What financial institutions can do now is take measured steps to examine their current calculation processes and to communicate with their boards so that institutional panic doesn’t snowball.
FASB’s CECL Model: Navigating the changes
Final deliberations by the FASB on the impairment of financial instruments are drawing to a close, and the board is expected to issue a final standard in 2015. Prior to deciding to issue a final standard, the board will ask themselves whether re-exposure is warranted. While the deliberations are not yet complete, the CECL model removes the “probable” threshold that exists today and requires the development of an estimate of all contractual cash flows not expected to be collected. Given the pervasive impact, many financial institutions are beginning to think about the impact the new model is likely to have on their allowance methodologies.
Financial instruments: Credit impairment
Since the financial crisis, the FASB has been debating wholesale changes to the U.S. GAAP credit impairment model. The FASB completed the majority of its deliberations in April and expects to issue a final standard in the fourth quarter of 2015. This standard, which uses the CECL model, fundamentally will change the way the allowance for credit losses is calculated. The standard will have a pervasive impact on all financial institutions, and questions are circulating about what changes are in store.
What credit unions need to know about CECL
Over the course of the next several years, any number of aspects of the financial industry can change. Information security could become tighter to better protect a financial institution’s sensitive data, or restrictions could relax allowing more credit union members access to lines of credit for mortgages or auto loans. One critical change in the landscape, though, isn’t member-facing – transitioning from the incurred loss model to the expected credit loss model in a credit union’s allowance for loan and lease losses (ALLL).
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.
An Update on CECL
Final guidance on the Current Expected Credit Loss (CECL) model has been an anticipated event in the eyes of bankers and other financial professionals. Its release marks the end of the incurred loss model in accounting for expected losses and brings with it a slew of process changes in the way financial institutions collect data and perform their ALLL calculations.
CECL effective dates vary among financial institutions. This post shows a timeline for implementing CECL, including selecting methodologies and validating models, depending on the institution's effective date.
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.