cecl overview and what to be considering now - read-only · 2018-04-03 · there has been a lot put...
TRANSCRIPT
© 2018 Mark H. Smith, Inc. CECL – What To Do NowAll rights reserved
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Presented by:
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CECL OVERVIEW AND WHAT TO DO NOW
PRESENTED BY:MATT JACOBSEN, V.P.
(Webinar will begin on the hour)
© 2018 Mark H. Smith, Inc. CECL – What To Do NowAll rights reserved
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OVERVIEW
• The industry has been inundated with CECL
• What should I be focusing on now
• Find a process and methodology that will be right for your credit union
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AGENDA
• CECL Overview• Timeline• Action Plan• Data Assessment• Methodologies• Other Considerations• Credit Union Fit
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WHAT ISFASB is replacing the current “incurred loss” accounting model with a current expected credit loss accounting model – CECL
The new standard requires an estimate at origination / purchase and periodic assessments of the lifetime expected credit losses for all financial assets that are within its scope.
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WHY THE CHANGE?
Current expected credit loss – CECL• Aligns the accounting with the
economics of the financial asset.• Record the full amount of
expected credit loss at acquisition
• Provides higher transparency and accuracy
• More timely
Criticism of the current
methodology is the losses are
recognized “too little and “too
late”.
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HOW WILL IT WORK?
Estimate the expected loss over the life of the loan using the following:
1. Historical loan data
2. Current conditions
3. Reasonable forecasts
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TIMELINE01/01/2021 - Credit Union implementation date 12/31/2021 - Credit Union first Call Report date 01/01/2020 - Parallel run encouraged
• comparisons• adjustments• capital analysis
12/15/2018 - Early adoption is allowed (for fiscal years beginning after this date.)
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POLL QUESTION 1
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• Define who should be involved• include the right people at the right times
• Develop a project plan timeline• Data Assessment• Methodology solution• Adjustments• Consider a CECL committee• Stay flexible – interpretations will continue
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Data completeness Data integrity Historical data
Review data capture at input level
Purchased asset
considerations
DATA ASSESSMENT FRAMEWORK
http:/www.markhsmith.com/ensuring-data-completeness-integrity
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DATA ASSESSMENT CONSIDERATIONS
• There is no absolute data set.
• Dependent on the methodology(s)
• More data elements and history
• may allow for better utilization
• different methodology(s)
• Consider the cost/effort versus the benefit
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CREDIT UNION SPECIFIC DATA ELEMENTS
Loan file
Charge off
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CREDIT UNION SPECIFIC DATA ELEMENTSCOMPREHENSIVE LOAN ANALYSYIS EXAMPLE
Loan IDAccount NumberMember NumberAddress, City, State, ZipCollateral CodeLoan TypeTermMaturity DateBalloon Payment DateBalloon Payment AmountOrigination DateOriginal Balance / Credit Limit Current BalanceLast Payment DateNext Payment Date
Days Past DueCharge Off Amount (loan type, origination date, specific loan)Recovery amount, date, and loan type (recovery expenses)Loss ProbabilitiesCurrent Interest Rate (f/v)Lien PositionOriginal Appraised ValueAppraisal DateOriginal and Current LTVOriginal/Current FICODebt to Income
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EXTERNAL DATA NEEDED FOR FORECAST• Economic data that correlates best with
credit performance.• Examples:
• Unemployment rate• GDP• Consumer Spending
• Historical economic data available on FRED (Federal Reserve Economic Data).
• Consider regional economic data.• Other considerations
• Regional Home Price Indices (for updating LTVs)
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PEER AND INDUSTRY DATA
The current interpretation of FASB is that credit unions can use external peer data (also use for benchmarking)
Must be representative of the credit union’s experience.
A plan must be in place and progress being made towards using the institutions own data.
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SEGMENTATION
• By loan type at the Call Report level
• Minimum and may be fine for some cu’s
• Better CECL refinement and more loan analysis (pricing / performance) can be obtained by pooling at more refined level.
• Better segmentation will minimize ALLL.
• FICO• Origination Date• Branch
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DATA ASSESSMENT SUMMARY
Primary priority at this time.
• Identify data gaps (even if you are not 100% sure it will be utilized).
• Start capturing and maintaining missing data.
• Better data equals • more methodologies to consider• better analysis • and better support.
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POLL QUESTION 2
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METHODOLOGIES
HISTORICAL LOSS RATE
PROBABILITY OF DEFAULT / LOSS GIVEN DEFAULT
PD / LGD
VINTAGE ANALYSIS(Inherent economic conditions built in)
DISCOUNTED CASH FLOW METHOD
(DCF)
Different methodologies can be used for different financial asset types
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HISTORICAL LOSS RATE
• Cumulative loss rate over expected life• Historical lifetime loss experience (1.5%)• +/- Adjustments (past events and current
conditions) (+.10% due to property value decline)
• +/- Adjustments for forecasts (reasonable and supportable) (+.05% due to a forecasted increase in the unemployment rate)
• = Loss Rate 1.65%
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PROBABILITY OF DEFAULT / LOSS GIVEN DEFAULTPD / LGD
• Probability of default: average percentage of loans that default over a given time period (0.50%) x
• Loss given default: percentage of exposureif the loan defaults (20.0%) +
• Qualitative Adjustments (0.40%)
• = Loss Rate +.50%
Loan pools that are statistically too small, haven’t experienced a material amount of default in the loan data available, or new loan types that may need to utilize industry/peer data.
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VINTAGE PREDICTABLE LOSSES BASED ON SEASONING OF STATIC POOLS
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DISCOUNTED CASHFLOW
• May benefit longer average life assets• Industry-level PD and LGD can be
incorporated• Expected cash flows, including the
consideration for current conditions, reasonable and supportable forecasts, are discounted at a rate that equates the purchase price with the cash flows expected.
• Utilized prepayment speeds to derive estimated cash flows.
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ADJUSTMENTSAdjustments may be quantitative or qualitative
1. Based on external current conditions 1. Credit cycle
2. Economic
3. Other external industry adjustments
2. Based on internal current information1. Current FICO and/or credit rating
2. Current LTV
3. Reasonable forecast
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POLL QUESTION 3
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CAPITAL ANALYSIS• Initial adjustment – one-time charge to capital
and the ALLL account, not a flow through on the income statement.
• Subsequent entries will be through the income statement.
• Some are thinking 10% to 50% higher than current reserves.
• The weighted average life of the loan portfolio will be a factor.
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LINES OF CREDIT• Revocable without cause or notice to be
excluded.
• Would the credit union actually cancel a line without cause.
• Forecasting line of credit usage in different credit and economic cycle forecasts.
• Example - credit card balances continue to grow and economic cycle turns
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INVESTMENTS
• Included in scope
• Easier to assess expected credit loss in the investment portfolio for most credit unions
• FASB CECL update – An entity is not required to measure expected credit losses on assets where “potential default is greater than zero, but expected nonpayment is zero.”
• Equity in CUSOs and Corporates?
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Prepayment speeds
Weighted Average
Remaining Maturity
More Complex
Disclosures
OTHER ITEMS OF CONSIDERATION
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MORE COMPREHENSIVE LOAN ANALYTICS
• Make better decisions• Improve
• Loan offerings• Underwriting• Pricing• Credit management
• Trends and factors• Concentrations• Risk Migration
• Affordable to all CUs
• Understand loan portfolio performance better
BEST SOLUTION FOR YOUR CREDIT UNION• Affordable• Does the job
(flexible, options, comparability, support)• Understands our credit union• Fits our resources available for CECL
MHSI INTRODUCING A CECL ONLY AND COMPREHENSIVE LOAN
PORTFOLIO ANALYSIS SOLUTION
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CONSIDERATIONS
• Have an action plan
• Be adaptable to change
• Stay focused
• Best implementation for your credit union
OBSERVATIONS
• Continue to unfold
• FASB interpretations
• Regulators
• Auditors
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REMEMBER FASB AND REGULATORS
ACKNOWLEDGE THE SOLUTION SHOULD BE
COMMENSURATE WITH THE SIZE AND COMPLEXITY OF
THE CREDIT UNION
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If you have not already, it is definitely time to assess where you are at in this process, plan, and prepare.
Reminds me a lot of Y2K for those of you that remember. There was a lot involved to get ready, but it came and went without the world ending.
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WHAT IS APPROPRIATE FOR MY CREDIT UNION
There has been a lot put out there about CECL and what you will need and I expect it will continue.
In your planning and development I would strongly urge you to continually be thinking about what are the right questions, answers, and solutions for your credit union?
We have emphasized that throughout this presentation because it is definitely not going to be a one size fits all.
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HOW DO I WANT TO COMMIT MY CREDIT UNION RESOURCES?
IN-HOUSE
• Develop inhouse• Purchase a solution
that we run• “Help line” function• Responsive and
dedicated to CU support
• Internal personnel resources
OUTSOURCE
• Not all solutions are the same
• Various costs• Methodologies and
Options• Support differences• One shoe does not fit
all
THANK YOU FOR ATTENDINGWOULD YOU LIKE TO KNOW MORE ABOUT OUR SERVICES?
CECL SOLUTIONCOMPREHENSIVE LOAN ANALYSIS SOLUTION
IRR/ALM OUTSOURCED SOLUTIONSIRR/ALM MODEL REVIEW/VALIDATION
PEER ANALYSIS
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