The Issue of Disclosures and the Proposed ASU – Codification Improvements – Financial Instruments

This is the third installment in a series of blog posts about the proposed ASU for codification improvements to ASU 2106-13, better known as the CECL standard. Click here to see the initial post in the series and to read some background on the proposed ASU. Issue 5A: Vintage Disclosures - Line-of-Credit Arrangements Converted to Term Loans One of the new disclosures required by the CECL standard is the disclosure of the carrying value of loans disaggregated on both their credit quality indicator as well as the vintage, or year of origination. The entity would have to produce this disclosure with columns for term loans originated in the last five years, as well as separate columns for term loans originated prior to the last five years and revolving loans. See the below illustrative example directly from the guidance: An issue that was discussed at the November 1st meeting of the CECL Transition Resource Group was how loans should be treated in the vintage disclosure that had previously fallen into the revolving category but at some point since have converted to term loans. A variety of scenarios were raised, including revolving loans where an eventual conversion to term was written into the original agreement, or loans where the lender performs a new underwriting and converts the existing revolving loan to a term loan. This also might include loans that are restructured as part of a Troubled Debt Restructure (TDR) agreement. Opinions seemed to differ on what the correct treatment of these loans would be for disclosure purposes: whether they should be included in the column based on their origination date, included in the column the based on the date they converted to term loans, left in the revolving column even after the conversion to term, [...]

2019-02-23T21:32:47+00:00February 15th, 2019|Blog, CECL, CECL Accounting|

Shadow Loss Analysis: Running Parallel Methodologies

Many thanks to Nathan Kelly, SVP, Credit Risk & Reporting Officer, United Bank, and David Jaques, FVP, Credit Analytics Manager, Valley National Bank, for discussing their CECL journey and how partnering with a third party, Abrigo (formerly MST), and running parallel methodologies using the MST Loan Loss Analyzer’s “Shadow Loss Analysis” module are helping them determine which CECL models will best suit their institutions. Automating the Allowance Process Nathan Kelly on the impact of automating the allowance process . . . We moved from Excel to automation in 2015 to improve the efficiency of our existing process. We chose MST at that time, now Abrigo, and our partnership has grown over time as we needed to respond to the increasing complexity of our incurred loss estimations. One of the benefits of converting to an automated solution early has been the warehousing of our data. We also use Abrigo Advisory Services as a trusted resource to address issues that have come up during transition. I think a financial institution needs to focus on a partnership as opposed to just an automated solution. We have found it valuable to bring various bank departments onto our transition team, to better understand the impact CECL is going to have on the bank and capital. We’ve got a lot of bench strength, people who’ve been with the bank a long time.  We have used the Advisory team as a sounding board all along the way. They are professionals with real life experience, including at large audit firms. David Jaques on the impact of automating the allowance process . . . We went live with the MST Loan Loss Analyzer in 2016. It has allowed us to compile a data warehouse for our 149,000+ loans. CECL implementation is critical [...]

2019-02-13T18:29:11+00:00February 8th, 2019|Blog, CECL|

January 2019 Jobs Report: Is There Strength in Numbers?

The number of jobs created in January as revealed in the February 1 Bureau of Labor Statistics’ Employment Situation report could only be characterized as strong. The national economy added 304,000 jobs, approaching double the expectation of about 170,000. Strength in hiring was widespread. Construction, manufacturing, and leisure and hospitality stood out as job gaining sectors, but most other sectors also saw increases. Only wholesale trade, financial activities, and information technology were essentially flat. The report comes on the heels of a similarly strong report for December, although it did include a downward revision of December’s numbers of 90,000, leaving that month’s job creation number at 220,000, still well beyond what had been expected. The headline unemployment rate, U3, ticked up 0.1 percentage point to 4 percent. The broader labor underutilization measure, U6, which counts individuals not formally included in the narrow definition of “unemployed” but available for full-time work, jumped from 7.6 to 8.1 percent. The two sets of numbers – job creation and unemployment rates – are generated in different surveys; the partial government shutdown, for technical reasons, was expected to have an impact on the “household survey,” which produces the unemployment rates.  This seems to be the case. Expectations were that headline unemployment would be unchanged, but might tick up a bit due to the shutdown, which, indeed, is what happened. January’s job creation report, even given the revision to December’s numbers, indicates, at least as measured by the labor markets, that the U.S. economy remains strong and on firm footing. About the Author Tom Cunningham holds a Ph.D. in economics from Columbia University and was senior economist with the Federal Reserve Bank of Atlanta from 1985 to 2015. Mr. Cunningham serves as a consultant to MST in the creation and ongoing development [...]

2019-02-13T18:28:35+00:00February 1st, 2019|Blog, Economic Forecasting, Economic Indicators|

FASB CECL Roundtable Recap – from January 28

On January 28, 2019, the FASB hosted a public roundtable on CECL intended to cover one main topic as well as a secondary topic. A large group was in attendance, with representatives from banks of various sizes, regulators, representatives from audit firms, as well as bank stock analysts and other readers of financial statements. Bank Policy Institute Proposal The primary topic was a letter containing a proposal made by the Bank Policy Institute (BPI) to FASB on November 5 identifying their concerns with CECL, as well as some proposed changes to address these concerns. The BPI is a banking trade group whose membership includes over 30 of the largest and most influential banks in the country. The first part of the letter asked for a delay in the implementation timeline as well as a more comprehensive study to be done to assess the “systemic and economic risks posed by CECL.”  The BPI’s proposed change to the standard is to essentially split the impact of CECL into three categories: Non-impaired financial assets Loss expectations within the first year would be recorded to provision for loan losses in the income statement Loss expectations beyond the first year would be recorded to Accumulated Other Comprehensive Income (AOCI) Impaired financial assets would have expected losses recorded entirely in earnings The entire proposal can be read here. If this splitting of the total expected losses sounds familiar, it may be because this proposal has a lot in common with the “three bucket approach” that was proposed back when FASB and IASB were attempting to converge on expected loss standards, and in fact has some elements in common with IFRS-9, IASB’s expected loss standard that went into effect in 2018. The BPI points to both the negative capital [...]

2019-02-13T18:29:56+00:00February 1st, 2019|Blog, CECL, Regulators|

The Issue of Recoveries and the Proposed ASU – Codification Improvements – Financial Instruments

This is a second in a series of blog posts about the proposed ASU for codification improvements to ASU 2106-13, better known as the CECL standard. Click here to see the initial post in the series and to read some background on the proposed ASU. Issue 1C: Recoveries The issue of the treatment of recoveries of previously charged off amounts has been an ongoing topic of discussion. It was discussed at the June 11 TRG meeting, discussed again at a subsequent August FASB board meeting, then discussed again in the November 1 TRG meeting. Two main issues were brought up and deliberated around this: Inclusion of Recoveries in the ACL Estimate Some preparers did not feel that the standard was clear on if recoveries should be included in the estimate of expected credit losses. Many financial institutions use net charge-off rates today, that is, loss rates that include both the charge-offs as well as any subsequent recoveries, which theoretically produces an allowance that is net of those amounts today. There were also some questions about which types of recoveries should be included in the estimate, and if recoveries were required to be considered, or if that was optional. Some of these questions were based on the difficulty in obtaining data related to recoveries. Negative Allowances Related to the question above, if recoveries are included in the estimate of credit losses, then this could result in allowance amounts at either the loan or segment level that could at times be negative. Examples were given of banks who had very high levels of losses during the financial crisis where the subsequent recoveries of these amounts resulted in net recoveries in the years following the crisis. Preparers felt that clarification was necessary considering this definition [...]

2019-02-13T18:31:07+00:00January 28th, 2019|Blog, CECL, CECL Accounting, CECL Education|

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 [...]

2019-02-13T18:30:31+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|