Proposed ASU – Codification Improvements—Financial Instruments – What’s New on the CECL Front?

When FASB released the CECL ASU in June 2016, the defining theme through the ASU was the flexibility given to preparers with regard to the new expected losses standard. Since this time, there have been many discussions and buckets of ink spilled on the interpretation of the guidance released, but no new ASUs released that actually changed the guidance. While ASU 2018-19 was issued in late 2018, all this really did was make some clarifications and changes around the effective date of the standard for private companies, essentially extending the adoption date for those companies to Q1 2022. However, the first proposed ASU with substantial changes to the codification has now been proposed as of November 19th, 2018 with a comment period ending on January 18th, 2019. This ASU addressed many of the issues that have been brought up and discussed in the Transition Resource Group (TRG) formed by FASB to look at the implementation of the standard, as well as other issues brought up by stakeholders to FASB. We’re going to spend the next series of blog posts looking at a few of these issues and how they will affect the implementation of the standards for financial institutions. For reference, the proposed ASU can be found on FASB’s website here under the title 11/19/18: Proposed Accounting Standards Update—Codification Improvements—Financial Instruments. The issues are numbered in the update, and we will use the same number scheme to be consistent. Issue 1A: Accrued Interest One of the issues that came up at the June 11, 2018 meeting of the TRG was the issue of Accrued Interest. In CECL, the estimate of credit losses is to be based on the amortized cost basis of the asset. This is defined in the glossary of the ASU [...]

2019-01-18T10:08:46+00:00January 18th, 2019|Blog, CECL, CECL Accounting|

MST is Now Abrigo

We hope your 2019 is off to an exciting start! We know ours is… We are excited to announce that we are now Abrigo and together we are going to make big things happen! Who is Abrigo? We, along with Sageworks, were acquired by Banker’s Toolbox, a leading provider of anti-money laundering and fraud prevention software, in the first half of 2018. We are thrilled to bring our combined industry expertise and technological brainpower together under one name in 2019. What does this mean to you? As a current customer, not much will change other than our logo, name, tagline and website. Our product names (MST Loan Loss Analyzer, Virtual Economist, etc.) will stay the same. Your customer success manager will stay the same, as will the phone number for support. You will start seeing emails from if you want to add that domain to your safe sender list. But don’t worry -- you will be able to access the legacy MST website and email addresses for a few more months in case you enter the wrong domain. With the new name, we are proud to bring you more resources to manage risk and drive growth. In addition, we’ll have more in our resource library in the form of white papers, case studies, webinars, etc. for you to use to enhance your industry knowledge. If you’ve been thinking about joining our family, there’s no better time than now. As Abrigo, we’re able to provide market-leading compliance, credit risk, and lending solutions to enable you to think bigger, allowing you to both manage risk and drive growth. Our mission to “Make Big Things Happen” supports our commitment to helping community financial institutions succeed against “the perfect storm” of ever-changing and increasing regulatory requirements, [...]

2019-01-15T10:29:32+00:00January 15th, 2019|Blog, Solutions|

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|

December Jobs: An Unexpectedly Big Jump

The December Employment Situation report numbers from the Bureau of Labor Statistics showed a hefty 312,000 jobs added, well above the 180,000 expected. Revisions to the previous two months added another 58,000 jobs. The consensus on new December jobs was notably diffuse this month, some very serious analysts projecting numbers relatively far above and below that average result. No one, however, was suggesting any figure nearly this large. Health care, food services, construction, manufacturing, retail trade, and business services were all strong, with other sectors essentially unchanged.  Average hourly earnings came in a bit above expectation as well, at 3.2% year-over-year. New jobs for 2018 totaled highest since 2015. This dispersion of beliefs no doubt reflects uncertainties about the economy. The fundamentals in the economy look okay (and considering this report, maybe better than okay), albeit a bit off from last year’s unsustainable pace. But the volatility in equity markets suggests risks are rising. Recent political activity has not helped stabilize expectations. The headline unemployment rate rose, .02 percent to 3.9 percent, versus the expectations that it would remain unchanged. The move reflected a small increase in the number of unemployed, most of which is coming from increased voluntary separations. The labor force participation rate was essentially unchanged.  The broadest measure of labor underutilization, U6, remains at 7.6 percent. The headline unemployment rate is still quite low. The real message in today’s report is the extremely strong job creation and decent earnings growth. It’s difficult to assess this as anything other than a very strong report. Unfortunately, this report doesn't clarify the outlook. By itself, with job growth this strong, there is a strong argument for the Fed to continue tightening. Financial markets' view of the future is more mixed, but that's the issue: the base of the economy – employment – [...]

2019-01-04T15:53:44+00:00January 4th, 2019|Blog, Economic Indicators|

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|

BPI Proposal Seeks to Soften CECL’s Impact on Earnings

With mandatory conversion to CECL from the present incurred-loss allowance model set to begin Jan. 1, 2020, financial institutions and their representative associations are alternately calling for delays in required implementation dates and changes in the standard that will ease the anticipated blow to their earnings. On November 5, an advocacy group of bank corporations under the banner Bank Policy Institute (BPI) penned a letter to FASB Chairman Russell Goldman proposing a re-structured approach to CECL that “would retain the CECL methodology’s intent of establishing an allowance for the lifetime of an asset on the balance sheet, but recognize the provision for credit losses in three parts.”  The letter listed the three parts as “(1) for non-impaired financial assets, loss expectations within the first year would be recorded to provision for losses in the income statement with (2) loss expectations beyond the first year recorded to Accumulated Other Comprehensive Income ("AOCI'') and (3) for impaired financial assets, lifetime expected credit losses would be recognized entirely in earnings.” The expressed intent of the BPI proposal is to reduce the impact of CECL on bank earnings at its inception date – that is, keep the expected future losses and changes in expected future losses from impacting earnings (or spread them).  Moreover, a problem related to CECL as it currently stands that they would seemingly like to avoid is the earnings hit both from booking new loans and from an increase in expected future losses. They want to avoid these hits to earnings and capital as well as the pro-cyclical effect of booking big losses in earnings when the economy is going into a depression. However, they would also have to convince the regulators to ignore the resulting large debit to OCI when computing regulatory [...]

2018-12-21T09:28:34+00:00December 21st, 2018|Blog, CECL|

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|

ALLL / CECL Glossary

Banking with all of the various acronyms can be quite confusing, not to mention when you add in terms and acronyms from the FASB. To make it easier, we've developed this glossary of allowance and CECL terms. ALLL (Allowance for Loan and Lease Losses) – Originally referred to as the “reserve for bad debts,” a valuation reserve established and maintained by charges against a bank’s operating income. It is an estimate, calculated according to the incurred loss estimation model, of noncollectable amounts used to reduce the book value of loans and leases to the amount a bank can expect to collect. ACL (Allowance for Credit Losses) – Replaces the ALLL as a reference to the allowance under CECL. ACL is a more accurate term than ALLL under CECL, as CECL applies to a broader array of financial instruments than did the incurred loss model. Amortized Cost - The sum of the initial investment less cash collected less write-downs plus yield accreted to date. Amortized Cost Basis - The amortized cost basis is the amount at which a financing receivable or investment is originated or acquired, adjusted for applicable accrued interest, accretion, or amortization of premium, discount, and net deferred fees or costs, collection of cash, write-offs, foreign exchange, and fair value hedge accounting adjustments. ASU 2016-13 – The FASB update establishing a new accounting standard for estimating the allowance for credit losses (ACL). This ASU represents a significant change in the incurred loss accounting model by requiring immediate recognition of management’s estimates of current expected credit losses (CECL) throughout the lifetime of the loan. Back-Testing- A term used in modeling to refer to testing a predictive model on historical data. Systems that quantify risk ratings in terms of default probabilities or expected [...]

2018-11-20T12:34:36+00:00November 20th, 2018|Blog, CECL|