CECL segmentation of the loan portfolio
The transition to the current expected credit loss model, or CECL, provides an opportunity to revisit loan portfolio segmentation. In the end, whether financial institutions make wholesale changes or instead determine that their current segmentation is optimal for CECL, institutions will need to document how they arrived at their decisions. Here are some tips for CECL segmentation.
Segmenting the Loan Portfolio
he extent of segmentation recommended for a bank or credit union depends on the size of the institution and the nature, scope and risk of its lending activities (new products, significant changes to underwriting, origination in new markets, etc.). Guidance suggests the loan portfolio should be segmented into homogenous pools based on similar attributes, “stratifying the portfolio into segments that have common risk characteristics or sensitivities.” But, be sure that the segmentation reflects the segmentation risk within your institution’s portfolio. Segmentation strategy should be tailored to each institution to address its specific circumstances and needs.
ASC 450-20 (FAS 5)
ASC 450-20 (FAS 5) loans are deemed as “performing” loans, and are pooled as opposed to being examined individually. Various measures of loss can be used to determine the expected loss from ASC 450-20 (FAS 5) pools. Institutions who are diligent about segmenting these pools can gather insight into the performance of each pool.
Before an institution can begin on the ALLL calculation, it must first gather and prepare the necessary data. This may require collecting data from disparate sources and converting the data from an illegible core output to a ready-to-use format. If an institution uses an automated solution that integrates with its core, this step in the process may not be necessary.