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Short on New Years’ Resolutions? We’ve Got a Few Suggestions.

What were your New Year’s resolutions? With our sole focus being the allowance, you might guess that ours are all about getting you ready for CECL. So if you’ve come up short on resolutions for 2019, we’ve got a few suggestions. CECL New Year's Resolutions From Senior Advisor Paula King With a “go-live” date of Q1 2020, SEC registrants should be well on their way to CECL compliance. Resolve to spend 2019 parallel testing your incurred loss model against your preliminary CECL model(s) and pooling structure(s), making adjustments each quarter as you test. While 2018 was a year for determining methodologies and loan segments, 2019 should be a time to focus on tweaking, and on structuring your qualitative factor framework and forecast component (identification of pertinent economic indicators, correlation analysis, etc.). As you walk through the testing phase and determine qualitative and forecast adjustments, begin developing your accompanying documentation (e.g. narrative or memo) to support your CECL calculation. Writing down your process will not only solidify your understanding of your model, it should provide insight into any necessary changes. Spending 2019 as a “practice” session will minimize surprises on Day 1 of CECL. From Data Analyst Zach Langley Financial institutions that haven’t done s0, should be developing their data “wish list.” This wish list is comprised of data fields that they are not capturing today but will need for their CECL model, or fields they are capturing today but haven’t done so historically and will begin capturing and maintaining historically starting in 2019. From Senior Advisor Tom Flournoy Early in 2019, institutions should make a thorough assessment of where they are in their CECL transition process. SEC banks should be preparing to run parallel models and tweaking the results. Public business entities [...]

2019-01-11T10:25:11+00:00January 11th, 2019|Blog, CECL|

Mixed Economic Signals Suggest Cautionary Reasonable and Supportable Forecasts

Volatile is not a big enough word to describe what’s going on in the global financial markets. Markets both reflect and anticipate their economies. Tariff wars, interest rates, global political instability – all have been cited as reasons to be nervous about the world economy and ours. But none are probably as meaningful to banks and their lending practices as the fourth leg of that stool, a slowing economy. But the real economy data doesn’t look that slow. Some larger foreign economies are slowing. The U.S. is deliberately trying to reduce trade with them through tariffs, which is responsible for some slowing of our economy as well as theirs. China, the second largest economy in the world – first if you use a purchasing-power-parity based exchange rate – is trending downward, from 6.8 percent growth in GDP in 2017 to 6.5 percent this year to 5.8% projected for 2022. That’s not the same pace as the near 7 percent and more of the previous ten years, but neither is it slow in the long-run sense. In the U.S., the fundamentals remain strong. There is no underlying economic condition pointing to an inevitable recession. Financial markets are disquieted by the political instability all around the world. But political instability does not necessarily create immediate economic dislocation. In the case of Brexit, for example, it’s been two years and now all the negative consequences that were predicted for a couple of years down the road look like they’re going to happen in March. The likelihood of avoiding a bad outcome, in terms of slowing British and European Union economies, looks less possible as deadlines approach and the political process does not seem to be coming up with plausible schemes to resolve the anticipated economic [...]

2018-12-28T10:10:00+00:00December 28th, 2018|Blog, Economic Indicators|

Two Things in Accounting Life Are Certain: Taxes and CECL

As we begin to look to the end of the year and think about taxes, have you thought about the impact of CECL on taxes? In this session at the National CECL Conference, Heather Wallace and Will Neeriemer of DHG discussed CECL and taxes. Here are some of the takeaways from the session. Often a tax professional is the last person to be brought into the CECL discussion, though there are tax implications relative to multiple loan accounting items. It is critical to have representation of a tax expert on your CECL committee, or at least someone to pull in when tax issues arise. Deferred tax assets and liabilities are created when there is a difference between the GAAP basis and the tax basis carrying amounts of assets and liabilities. In general, the allowance is recognized for GAAP purposes before being deducted for tax purposes. The difference in timing between the GAAP deduction and the tax deduction produces a deferred tax asset. Book method for expensing: Charge-offs and recoveries are recorded directly to the allowance. The provision is recorded to expense based on the estimated losses to be reserved. Charge-offs are recorded when amounts are deemed noncollectable. Tax method for expensing: Charge-offs are allowed when collection is no longer being pursued. The tax deduction is calculated as a direct charge-off, by the experience method, or as a fair value adjustment. It is important to track the difference from a tax standpoint or you might miss a deduction. You do get a deduction for the part of the loan you’re charging off. Use the reports from your allowance software to keep track of tax assets and liabilities. You can deduct for losses during the year for direct charge-offs. If you have a loss [...]

2018-12-14T11:18:51+00:00December 14th, 2018|Blog, CECL Accounting|

November Jobs Report: No Cause for Celebration or Concern

November’s national Employment Situation report from the Bureau of Labor Statistics was marginally weaker than expected. The number of new jobs reported for the month came in at 155,000, lower than the expected 190,000. Otherwise the report was in line with expectations, the headline U3 employment rate coming in at 3.7 percent for the third month in a row. Health care, manufacturing, retail, transportation and business services all added employment with the other sectors essentially flat. No sector was a notable job loser. While the U3 held steady, the broadest measure of labor underutilization, U6, ticked up only slightly to 7.6 percent. On the other hand, average hourly earnings were marginally higher, a 3.1% increase year-over-year. Perhaps most notably, the number of long-term unemployed fell substantially, 120,000 to 1.3 million who have been jobless for 27 weeks or longer. Interestingly, the knee-jerk equities markets pretty much ignored the report as they opened on December 7. With the nation essentially at full employment, the report appears to have offered little cause for either celebration or concern. A marginally weaker than expected new jobs report will add a little fuel to the argument that the economy is slowing somewhat. But it is also clear that the labor market is still in very good shape. The report could give those in the Federal Open Market Committee hesitant to vote for raising rates some support for pausing the rate hike process. It is not weak enough to rule out a hike, but it does add some uncertainty to predicting the Committee's actions.  The report is not weak enough that it would rule out a hike, but it does add some uncertainty to predicting their action. About the Author Tom Cunningham holds a Ph.D. in economics from Columbia University and [...]

2018-12-07T14:09:20+00:00December 7th, 2018|Blog, Economic Indicators|

Transitioning Your Incurred Loss Methodology to CECL

Notes from the 2018 National CECL Conference session with Hans Pettit, Horne; Anthony Porter, Moss Adams; and Garry Rank, MST Regulators have urged institutions to leverage their current methodology for the allowance in transition to CECL but make changes to it, primarily in respect to life-of-loan and forecasting requirements. The FASB expects the transition to be scalable, but that “the inputs to the allowance estimation methods will need to change to properly implement CECL.” Compared to current GAAP, which requires you to reasonably estimate the amount of loss that has been incurred (upon meeting the probable requirement), CECL is more about what cash flows you expect not to collect at origination. And while current GAAP sees all loans as good until proven otherwise, under CECL, all loans are originated with some measureable risk of default. CECL requires loans to be pooled or segmented according to shared risk characteristics for measurement. Start that process by looking at how you are analyzing your risk segments now and how they will line up for CECL. Most institutions are using a call report structure on which to base their pooling. CECL will require a more granular approach than that, but you can start there as call codes contain much useful information. Your initial pooling decisions are likely to change as you move through the process, like your methodology choice and Q-factors. You will have to continue to ask yourself if your pooling structure remains appropriate given your risk profiling. Things that may bring about a change in pooling structure are new products, changes in underwriting and standards, and loan acquisitions. The way you look at risk under CECL is going to change. CECL will force you to peel the onion back to understand why a loan went bad and that will give you a clearer picture of your risk categories. Most banks haven’t been accumulating the data they’ll need for CECL, so by year four or five you will [...]

2018-11-30T10:57:59+00:00November 30th, 2018|ALLL, Blog, CECL|

Don’t You Forget About Me: The Impact of CECL on Debt Securities

Notes from the 2018 National CECL Conference session with Gordon Dobner, BKD; John Griffin, BKD; and Dale Sheller, The Baker Group The impact of estimating credit losses for debt securities for most community financial institutions is relatively minor, certainly not as impactful as for loans. Guidance for estimating held-to maturity securities (HTM) follows the CECL standard like loans. There are fairly minor changes relative to assets-for-sale (AFS) debt securities, a modified version of today’s OTTI model. In addition for AFS and HTM securities, you’re buying after their original issuance, you have to consider whether they will fall into the PCD category. The biggest impact is determining the rigor with which you have to approach this. Typically you wouldn’t expect any losses, but the standard says to document. You don’t have to have a loss measurement if the expectation is zero at default – anything issued by the federal government that are backed, like U.S. treasuries, has a zero loss expectation. The expectation is that for most institutions the impact of CECL on HTM will be on municipals and corporate bonds. You could get to an expectation of zero if there is insurance or some other type of guarantee. You could also call it close to zero and immaterial, eliminating the need for a reserve. It is not as simple as just feeling you won’t have losses, you will have to document it. Municipal defaults over 30 years are at .15 percent, very rare, much more rare than corporate defaults, which could support your documentation of zero credit loss or immateriality. If you don’t believe zero is the answer, there will be pooling considerations, and a need to pull out securities where there might be a specific identified loss issue and analyze those [...]

2018-11-16T09:48:18+00:00November 16th, 2018|Blog, CECL|

Job Growth on a Roll; U.S. at Full Employment

Guest blog by Dr. Tom Cunningham, Economist and MST Advisory Services, Senior Advisor- Economics The Bureau of Labor Statistics’ jobs report for October was extremely strong. The November 2 release reported the U.S. added 250,000 jobs in the month, 31-plus percent more than the 190,000 expected. The other highlight number, hourly earnings, also grew substantially at 3.1 percent better than the average hourly wages reported in October 2017 – although the number is somewhat suspect given last year’s unusual decline in wages due to Hurricane Harvey. […]

2018-11-02T14:47:21+00:00November 2nd, 2018|Blog, Economic Forecasting, Economic Indicators|

Florence Distorts Job Numbers; Labor Market Remains Strong

Guest blog by Dr. Tom Cunningham, Economist and MST Advisory Services, Senior Advisor- Economics The headline numbers from the Bureau of Labor Statistics’ (BLS) September jobs report suggest a mixed employment situation. New jobs came in at just 134,000, well below the expected 180,000, while that headline unemployment rate, U3, fell 0.2 percentage points to 3.7 percent, slightly lower than the 3.8 percent expected. […]

2018-10-23T17:31:16+00:00October 9th, 2018|CECL, Economic Forecasting, Economic Indicators|