Written By: Sageworks
The allowance for loan and lease losses (ALLL) is already one of the most significant estimates on a bank or credit union’s financial statements. Moreover, the transition to the current expected credit loss model, or CECL, is considered by industry leaders to be the biggest accounting change in banking history and brings new emphasis to the calculation of the allowance. In this occasional feature, CFOs from financial institutions share their approaches to the ALLL and to the CECL transition, as well as advice for keeping the board informed about related matters.
Ronald S. Ohsberg
Senior Executive Vice President, Chief Financial Officer and Treasurer
The Washington Trust Company
- What is your role in your institution’s ALLL? As CFO I am responsible for the overall adequacy of allowance and the internal controls surrounding the processes that produce it. To accomplish this, I work closely with our Chief Risk Officer, who manages the team that implements and runs the methodologies covering each component of the ALLL.
- How many people at your financial institution are involved in calculating the ALLL, and about how long does it take you to prepare it each period? Five to six people are involved in terms of review and sign-off, but most of the work is done by two people, one of whom is primary. We would estimate about 1.5+ FTEs for the ALLL process now that the methodology has been stabilized. Especially while CECL planning and implementation is underway, we expect this to increase.
- What have allowance trends been like at your institution in recent quarters and why? Trends have been flat to declining because asset quality trends are stable to improving.
- What are some common questions lately from your board about your ALLL? Most questions relate to our plans for transition to CECL, since there has been little news of note on the current ALLL methodology or outcomes.
- What is your best advice for keeping the board informed about the transition to CECL? We report on CECL status regularly to the Audit Committee. At upcoming meetings, we will begin to delve more deeply into some of the data and methodology issues that we are facing.
- What differences have you seen in feedback from auditors vs. examiners about the allowance? Auditors are deeply, almost obsessively, focused on process, especially with regard to qualitative factors. Regulators tend to focus less on process and more on whether the level of the ALLL as a percentage of loans “feels” congruent with our asset quality posture, in the context of our peer group.
- What is your institution’s foreseen deadline for implementing CECL and what are the biggest challenges in meeting it? We have to go “live” with CECL in the first quarter of 2020, and we want to run in parallel for the four quarters preceding this date. The biggest challenge in meeting the deadline is to balance the need for adequate analysis with the limited resources available to a community bank of our size. Given that CECL involves forecasting, requirements for supporting those forecasts could be significant if our auditors push for in-depth analysis.
- Is your institution likely to use a blend of loss rate methodologies in calculating losses under the CECL standard? If so, which methods are most likely? We have not settled on any one methodology yet, but using estimated cash flows makes the most sense to us intuitively.
- What steps has your institution taken to improve data quality in advance of CECL requirements? We have done a formal gap analysis and are seeking to fill the gaps. Fortunately, we have had a fairly consistent servicing environment for our loans, so we have a good base of data to begin with.
- Do you have a good understanding of how you expect earnings, capital and the portfolio to change after transitioning to the CECL standard? It’s not clear yet, though the perceived “pro-cyclicality” of CECL would be troubling once there is the inevitable credit downturn. Nor have we determined what the use of CECL will mean to our origination standards. Over the next few quarters we expect to learn a lot in both these areas.
Ronald S. Ohsberg is responsible for the bank’s financial planning, accounting, financial reporting, asset and liability management and budgeting. Before joining Washington Trust in 2017, Ohsberg spent more than 25 years in finance and accounting, most recently serving as Executive Vice President, Finance, for Linear Settlement Services. Prior to that, he spent 12 years at Citizens Bank, leaving in 2016 as Executive Vice President, Corporate Controller and Chief Accounting Officer.
Ohsberg is a Certified Public Accountant (CPA) and holds a bachelor’s degree in accounting and finance and a master’s of business administration from the University of Rhode Island. A Rhode Island resident, he serves as Audit Committee Chairman of the Procaccianti Hotel REIT and is a member of the Finance Committee of the Scandinavian Home Nursing and Retirement Center in Cranston, RI.
Founded in 1800, Washington Trust is the oldest community bank in the nation and one of the Northeast’s premier financial services companies. Washington Trust offers a full range of financial services, including commercial banking, mortgage banking, personal banking and wealth management and trust services through its offices located in Rhode Island, Connecticut and Massachusetts. The Washington Trust Company is a subsidiary of Washington Trust Bancorp, Inc., (NASDAQ: WASH). Additional information on Washington Trust and its subsidiaries can be found at https://www.washtrust.com/.