how to get started with cecl - nycua how to get... · 2019-06-18 · 3 assess cecl methodologies...

How To Get Started With CECLJune 14, 2019

The main objective of the Accounting Standards Update is to

provide financial statement users with more decision useful

information about an institution’s expected credit losses by

requiring consideration of a broader range of reasonable and

supportable information.

More Discussion and Disclosures

-Replaces “Incurred” Model-“Lifetime” Losses-No “Probable” Threshold-Past, Current, and Future

CECL Accounting Standards Update

Statement of Financial Condition (Balance Sheet)

Assets

Cash $5,000,000

Loans $100,000,000

Other Assets $10,000,000

Less Allowance for Expected Credit Loss <$2,000,000>

Total Assets $113,000,000

Current estimate of cash flows NOT expected to be collected.

Includes Loans, Leases, Debt Securities, Etc.

*Expected losses on unfunded commitments go on the balance sheet as a liability, not in the allowance.

Dec. 31, 2018 Mar. 31,

2019

Beginning Balance $1,000 $1,100

- Charge-offs -$500 …

+ Recoveries +$100 …

+ PCD Adjustment +$0

Balance Before Expected Credit Loss Provision =$600 …

+ Provision for Expected Credit Loss +$500 …

Ending Balance =$1,100 … Then use the Provision to balance You first calculate the required

Allowance for Expected Credit Loss

From prior period (Sept 2018)

Roll-Forward by Segment: Mortgage

Statement of Financial Performance (Income Statement)

Interest Income

Loans $10,000,000

Etc. $ 1,000,000

Total $11,000,000

Interest Expense

Deposits/Shares $ 2,000,000

Etc. $ 0

Total $ 2,000,000

Net Interest Income $ 9,000,000

Less Provision for Expected Credit Loss <$ 500,000>

Net Interest Income After Provision for Expected Credit Loss $ 8,500,000

The provision adjusts the net interest income to reflect the measurement of credit losses

for new assets as well as changes in expected losses

during the period.

“When developing an estimate of expected credit losses on financial asset(s), an entity shall consider available information relevant to assessing the collectability of cash flows. This information may include internal information, external information, or a combination of both relating to past events, current conditions, and reasonable and supportable forecasts.”

–FASB, ASU 326-20-30-7

Steps to a Successful CECL Implementation Plan

Form a CECL Committee

Ready Your Data

Assess CECL Methodologies and Results

Prepare Documentation and Reporting

Assess Impact

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Where Are You In Your

CECL Journey?

Recent Survey Results

A CECL committee should consist of representatives from the following:

• Board of Directors

• Accounting and Finance

• Lending

• Data Specialist (IT or someone from loan operations who is familiar with the data)

• Others as deemed appropriate (e.g. Credit Risk, Internal Audit, Risk Migration)

Form a CECL Committee1

A CECL Committee should accomplish the following:

• Understand the guidance (ASU 2016-13)

• Define what is expected of each member

• Clearly identify objectives and milestones

• Ensure the institution is staying on track

Form a CECL Committee1

Ready Your Data2

Historical data requirements:

• The more the better (provides flexibility)

• Static Pool and Vintage require historical data

• Probability of Default and Discounted Cash Flow only require current

information

How to get your data ready:

• Understand the data requirements

• Conduct an inventory of available data and know where it's located

• Identify what's missing and how to fill the gaps

• Combine data into one data warehouse

Ready Your Data2

Loan IDOrigination DateMaturity DateTermRateBalanceOriginal BalanceCredit Limit Original Credit Limit Senior Balance Original Credit ScoreCredit Score(s)Credit Score Date(s)DTI (not required, but useful)DTI DateDays DelinquentOriginal Value Borrower/Collateral Address Borrower/Collateral City Borrower/Collateral State Borrower/Collateral Zip Code Auto Make

Auto Model Auto Year Direct/Indirect Indicator Gross Charge-off BalanceGross Charge-off DateRecovery BalanceRecovery Balance DateClosed DateAmortization PeriodBalloon Indicator/AmountBalloon DatePayments (Min., Scheduled P&I, Actual)Credit Card Purchases (Credit Cards)Statement Balance (Credit Cards)Statement Date (Credit Cards)Interest Only IndicatorLien PositionLine of Credit Draw Expiration DateLast Renewal DatePayment Frequency

Data Fields

CECL Data Requirements by Method

Loss Rate Models Probability of Default Models

Data Field Static Pool Vintage 1st

Mort.

2nd

Mort.

HELOC Auto CC Student Other

Sec.

Other

Uns.

Other

LOC

Bus. Sec. Bus. Uns. Bus. CC CRE

Amortization Period A A A A A A A A A A

Auto Make A A

Auto Model A A

Auto VIN A A

Auto Year A A

Balance A A A A A A A A A A A A A A A

Balloon Indicator B B B B B B B B B

Balloon Payment B B B B B B B B B

Balloon Payment Date B B B B B B B B B

Borrower Credit Score B B B B B B B B B B B B

Borrower Credit Score Date B B B B B B B B B B B B

Borrower Original Credit Score A A A A A A A A A A A A

Borrower State B B B A A A A A A A A A B

Borrower Zip Code B B B A A A A A A A A A B

Charge-off Balance A A B B B B B B B B B B B B B

Charge-off Date A A B B B B B B B B B B B B B

Closed Date B B B B B B B B B B B B B B B

Collateral State A A A A A

Collateral Zip Code A A A A A

Credit Limit A A A A

Days Delinquent A A A A A A A A A A A A A

Debt-Service Coverage Ratio A

Debt-Service Coverage Ratio Date A

Gross Charge-off Balance A A B B B B B B B B B B B B B

Gross Charge-off Date A A B B B B B B B B B B B B B

* Auto = Consumer Auto; CC = Consumer Credit Card; Other Sec. = Other Consumer Secured; Other Uns. = Other Consumer Unsecured; Other LOC = Other Consumer LOC; Bus. Sec. = Business

Secured; Bus. Uns. = Business Unsecured; Bus. CC = Business Credit Card; CRE = Commercial Real Estate

** A = Critical Priority Data Requirement; B = High Priority Data Requirement

CECL Data Requirements by Method

Loss Rate Models Probability of Default Models

Data Field Static Pool Vintage 1st

Mort.

2nd

Mort.

HELOC Auto CC Student Other

Sec.

Other

Uns.

Other

LOC

Bus. Sec. Bus. Uns. Bus. CC CRE

Interest Only Indicator B B B B B B B B B B B B B

Lien Position A A A A A A A

LOC Draw Expiration Date B B A A A A

Loan Id A A A A A A A A A A A A A A A

LOC Payments (Calendar) B B B B B B

LOC Payments (Statement) B B B B B B

LOC Purchases (Calendar) B B B B B B

LOC Purchases (Statement) B B B B B B

LOC Statement Date B B B B B B

LOC Statement Date Balance B B B B B B

Maturity Date A A A A A A A A A A A A

Monthly P&I B B B B B B B B B B

Original Balance A A A A A A A A A A

Original Collateral Value A A A A A A A A

Original Loan Type Code B B

Origination Date A A A A A A A A A A A A A A

Rate A A A A A A A A A A A A A

Recovery Balance A A B B B B B B B B B B B B B

Recovery Date A A B B B B B B B B B B B B B

Risk Rating B B B

Risk Rating Date B B B

Senior Balance B B B B B B

Senior Original Balance A A A A A A

Status A A A A A A A A A A A A A A A

Term A A A A A A A A A A A A

Type Code A A A A A A A A A A A A A A A

* Auto = Consumer Auto; CC = Consumer Credit Card; Other Sec. = Other Consumer Secured; Other Uns. = Other Consumer Unsecured; Other LOC = Other Consumer LOC; Bus. Sec. = Business

Secured; Bus. Uns. = Business Unsecured; Bus. CC = Business Credit Card; CRE = Commercial Real Estate

** A = Critical Priority Data Requirement; B = High Priority Data Requirement

Assess CECL Methodologies and Results3

Key steps to calculating your allowance:

Step 3.1 Properly segment your portfolio

Step 3.2 Calculate base loss rates using various CECL methods

Step 3.3 Make direct adjustments (Q&E) and forecast adjustments

Step 3.4 Individually review

Step 3.5 Collectively review


• Goldilocks principle (not too broad, not too granular)

• Segmentation is composed of three levels: segment, class, and optionally credit quality indicator (CQI)

• Pools of loans should be reasonable homogenous in risk

• Each Class/CQI (and Vintage, if applicable) should have a minimum of 30 loans, preferably 1000s

• One loss rate method per class

• Separate out lines of credit

Segment your portfolio:

Step 3.1 Properly segment your portfolio


Common Loss Methods


Static Pool

Loss Migration

Probability of Default (PD)

Discounted Cash Flow

Loss Rate Methods

Probability of Default Methods

Vintage

Roll Rate

Weighted Average Remaining Maturity(WARM)


Static Pool:Static Pool loss rates are calculated by taking the losses from a pool, divided by the starting balance of the pool.

Pros Cons

• Simple calculations• Similar to current

industry standard

• Data availability• Only using small part

of history• Loan age assumptions

Assumptions for Use

• Long historical data availability• Consistent age distribution over

time• Historical pool is comparable to

current portfolio


Assess CECL Methodologies and Results3Step 3.2 Calculate base loss rates using various CECL methods

Loss Migration:

Aggregates historical loss performance by grade and uses multiple snapshots to estimate expected losses.

Pros Cons

• Simple calculations• Similar to current

industry standard• Improved stability

• Data availability• Still ignores recent

vintage years• Loan age assumptions

Assumptions for Use

• Long historical data availability• Consistent age distribution over time• Historical pools, in aggregate,

comparable to current portfolio


Vintage:Vintage loss rates are calculated by segmenting the portfolio into vintages and dividing historical losses by the appropriate balance.

Pros Cons

• Uses entire data history• Stable estimates• Accounts for loan age

• Involved calculations• Different from current

approaches

Assumptions for Use

• Long historical data availability (or reasonable balance estimates)

• Historical data comparable to current portfolio


Roll Rate:Observes historical progression through various types of delinquency and subsequent default. Historical behavior is observed to model movement across delinquency levels, and the findings are applied to the current delinquency profile of the class.

Pros Cons

• Uses entire data history• Stable estimates• Accounts for loan age

• Involved calculations• Different from current

approaches

Assumptions for Use

• Long historical data availability (or reasonable balance estimates)

• Historical data comparable to current portfolio


Weighted Average Remaining Maturity (WARM):Combines average annual charge-off ratio with anticipated pay-downs to estimate lifetime expected loss.

Pros Cons

• Only call report data• Simple calculations

• Only good for simple classes

• Must estimate paydown schedule

• Not good for LOC

Assumptions for Use

• The likelihood of default is the same throughout the life of the class

• The paydown schedule is accurate


Probability of Default:Life of loan losses are estimated by modeling the probability of default based on collateral, economic, loan and borrower attributes.

Pros Cons

• Only need current data• Q&E and forecast

adjustments seamlessly integrated

• New / less familiar

Assumptions for Use

• Majority of active class has all required data fields

• Those who do not have required data in class are represented by those who do


Discounted Cash Flow:Estimates future cash flows based on probabilities of default and prepayment.

Pros Cons

• Only need current data• Q&E and forecast

adjustments seamlessly integrated

• New / less familiar

Assumptions for Use

• Majority of active class has all required data fields

• Those who do not have required data in class are represented by those who do

1. Build out a variety of allowance profiles (segments/classes, credit quality indicators, and loss rate methods)

2. Review your data quality and completeness on a pool level to determine which methodologies are feasible based on this review

3. Back test each method by estimating your allowance on a historical data set and then comparing the results to actual losses for a comparable period

4. Compare the results to each other and to your existing methodology5. Based on step 4, repeat steps until you decide on the “most appropriate”

Allowance Profile

Assessing CECL models and their results:

Management comfort level, reasonableness of results, data availability, etc.


1. Direct adjustments (Q&E)

2. Forecast adjustments

Q&E and forecast adjustments:

Assess CECL Methodologies and Results3Step 3.3 Make direct adjustments (Q&E) and forecast adjustments

Economic Adjustments:Reasonable & Supportable

Forecasts

Direct Adjustments:Q&E Factors,

Etc.

Base Loss RateAdjusted Loss

Rate

Think of each method for calculating the Adjusted Loss Rate in three parts: 1) a base rate, 2) an adjustment for qualitative and environmental factors (Q&E), and 3) an economic adjustment, including reasonable and supportable forecasts, even though they may all get rolled up into one or the economic adjustments may apply equally to all classes.

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• Management may adjust historical loss information to reflect the current conditions not already reflected in the historical loss information

• Examples include direct adjustments for lending policies, economic conditions, loan mix, management experience, delinquency, loan quality, loan reviews, collateral values, concentrations, competition and regulatory requirements

Direct adjustments (Q&E):


• Reasonable & supportable forecasts are a critical part for estimating allowances• Economic factors can be strongly related with defaults, so they are important

for forecasting• Forecasting can be modified industry-produced or statistically modeled• Location (MSA, state, national) should be taken into consideration• Visible Equity has implicit and explicit solutions depending on the CECL method

Forecast adjustments:


1. Generate the forecasts

2. Apply them to your expected loss estimates

How to incorporate reasonable and supportable forecasts:


Individually review:

• Assets with unique risk characteristics that don’t share similar risk characteristics with other assets in a pool should be reviewed on an individual basis

• Examples include TDRs or loans unique in type or circumstances

• Same rules apply as those collectively reviewed

Step 3.4 Individually review


• Collectively reviewed balance for each pool is multiplied by the adjusted loss rate (base loss rate + direct adjustments (Q&E) + forecast adjustment)

• Results from each pool are then summed and any additional unallocated allowances are applied

• When combined with the results from the individually reviewed analysis, it gives you your total required allowance

Step 3.5 Collectively review

Collectively review:

Prepare Documentation and Reporting4

• Executive Summary• Collectively Review Summary• Individually Review Summary• Q&E and Forecast Reports• Rollforward of the Allowance for Credit losses• Credit Quality by Vintage• Delinquency Aging• Charge-off and Nonaccrual Analysis• Purchased Financial Assets with Credit Deterioration (PCD)• Collateral Dependent Financial Assets• Off Balance Sheet Credit Exposures

Key reports and disclosures:

Enable financial statement users to understand:

• Credit risk inherent to portfolio

• How management monitors portfolio credit quality

• Management’s estimation of expected credit losses

• Changes in the estimate that took place during reporting period


Specific disclosures:

• Credit quality information

• Allowance for credit losses

• Past due status

• Nonaccrual status

• Other


1. Credit Quality Information

2. Allowance for Credit Losses

3. Past Due Status

4. Nonaccrual Status

5. Other

Disclosure Sections

▪ What is a CQI?

▪ How management monitors credit quality

▪ How often CQIs are updated

▪ Assess quantitative and qualitative risks arising from credit quality of financial assets


Disclosure Sections

HOW we arrived at our number

The calculation method used

Circumstantial changes

Other information

▪ Accounting Policies

▪ Past Events

▪ Current Conditions

▪ Future Forecasts▪ Portfolio Mix

▪ Grades & Ratings

▪ Underwriting

▪ Significant +/- Write-offs

▪ Significant Purchases or Sales


The main objective of the Accounting Standards Update is to provide financial statement users with more decision useful information about an institution’s expected credit losses by requiring consideration of a broader range of reasonable and supportable information.

Assess Impact5

It all goes back to the ASU:

1. Impact to capital

2. Impact to strategy

3. Impact to portfolio(s)

Evaluate and assess impact to your institution:

Assess Impact5

• Loan originations will result in immediate accounting events (loss calculations)

• Internal controls will need to be assessed and possibly redesigned

• Changes to documentation and disclosures

Impact to accounting and internal controls:

Assess Impact5

1. Describe the steps taken by management and the board to becoming familiar withthe new accounting standard.

2. Has management discussed with the board of directors, and external auditors how best to implement the new accounting standard in a manner appropriate for the institutions’ size and the nature, scope, and risk of their lending and debt securities investment activities.

3. Have you determined the actual allowance estimation method or methods to be used?

4. Have you developed a plan detailing the steps and timing needed to implement the newaccounting standard; and the functional areas within the institution that should participatein the implementation of the new standard?

5. Have you reviewed your existing allowance and credit risk management practices toidentify processes that can be leveraged when applying the new accounting standard; andwhich processes need to be changed?

Possible examiner questions:

Assess Impact5

6. Have you already identified your institutions CECL data needs and determined if anynecessary system changes are needed to implement the new accounting standardconsistent with its requirements, the allowance estimation method or methods to be used?

7. What additional data needs and system changes are needed?

8. Have you implemented the system changes and begun collecting the additional data thatmay be needed for CECL implementation? If no, when will this occur?

9. Have you evaluated and planned for the potential impact of the new accounting standard on regulatory capital?

Possible examiner questions:

Assess Impact5

Where Are You In Your

CECL Journey?

THANK YOUFOR MORE INFORMATION PLEASE CONTACT:

[email protected]

how to get started with cecl - nycua how to get... · 2019-06-18 · 3 assess cecl methodologies...

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