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|

Confessions of a Data Analyst

The implementation of CECL has been called the biggest change in financial institution accounting . . . ever. Under current U.S. GAAP, financial institutions account for losses based on historical events or incurred losses. Beginning in the first quarter of 2020, financial institutions must look at the past as well as the future over the full lifetime of a loan. […]

Gems from the Generals- Day 2 of National ALLL Conference General Sessions

Notes from the General Sessions of Wednesday, May 24, 2017:  Session: The Board, Investors and Expected Credit Loss Presenters: Garry Rank, MST Advisory Services; Chad Kellar, Crowe Horwath; Ben Hoffman, KPMG; Walter McNairy, DHG Financial Services To be effective in governing, your board needs to understand the standard.  […]

2018-10-25T11:53:36+00:00June 2nd, 2017|ALLL|

Gems from the Generals- General Sessions of the National ALLL Conference

Notes from the general sessions of the MST 2017 National ALLL Conference The MST 2017 National ALLL Conference was dedicated to everything involved in transitioning from incurred loss to CECL modeling. Attendees left the conference with the information, ideas and insights that will allow them to lead the transition to CECL compliance for their institutions. […]

2018-10-23T12:47:32+00:00May 29th, 2017|ALLL|

Do One Thing Well.

It might be the most famous quote of the founder and leader of the world’s biggest company. “Do not try to do everything. Do one thing well.” Steve Jobs didn’t invent the idea. It’s famously identified as a philosophy (Unix) and a Zen habit, and has long been a tenet of successful entrepreneurs. As Facebook’s Mark Zuckerberg voiced it: “We just believe that an independent entrepreneur will always beat a division of a big company.” […]

2018-10-23T12:49:51+00:00July 1st, 2016|ALLL, CECL, Customer Service|

Tom Cunningham

“Under CECL you will be required to consider economic factors in determining future expected loan losses. The MST Virtual Economist is an efficient, automated way to evaluate qualitative economic factors and project their impact on the institution’s loss rate, find new variables that impact the loss rate or determine the relevance of the economic factors you are already using to make qualitative adjustments.”

2018-10-23T12:49:52+00:00June 8th, 2016|ALLL|

Ask the CECL Project Manager

CECL is today’s dominant issue for everyone involved in the allowance and attendees to the MST 2016 National ALLL Conference will be treated to a session by the individual arguably most familiar with the new ALLL accounting standard. Since the inception of the concept in 2011, Rahul Gupta has been the FASB CECL project manager, at the helm throughout the development of CECL, navigating the queries and concerns from all sides of the issue and industry, through the refinements and adjustments, to the concretization of the standard’s final version. Mr. Gupta is a partner in the National Professional Standards Group (NPSG) of Grant Thornton LLP in Chicago. He supports Grant Thornton engagement teams and clients with expertise in both GAAP and IFRS. He is Grant Thornton’s liaison not only with FASB, but its international counterpart, the International Accounting Standards Board (IASB), as well as the AICPA and SEC. […]

2018-10-31T10:34:27+00:00March 4th, 2016|ALLL, CECL|

How Much for a CECL-Compliant Model?

Opportunity is too often much like bait. A little bit of sweet can bring the roaches from the walls. That was evident in one banker’s concern voiced to the FASB panel at last week’s (2/4/16) roundtable on CECL in Norwalk, Conn. The banker complained that developing a CECL-compliant ALLL model would be too costly for small banks. He noted that a vendor had priced developing a CECL model for his bank at $100,000. (Listen to the February 4 FASB meeting Part 1 & Part 2.) His comment gave members of the FASB panel another chance to reinforce what they have said many times, that there will be no regulatory dictate on what model you must employ to be compliant. The model you choose – and will be judged on by your regulators and advisors – will be based on your bank’s size, the nature of your loan portfolio and its past performance, economic factors and the projected needs of the communities you serve. […]

2018-10-30T15:37:17+00:00February 12th, 2016|ALLL, CECL|