2017 - Overview of New CECL Model for Determining the Allowance for Loan and Leases Losses (ALLL)

Key Take Away
Attendees will leave this webinar with:
• Overview of the “old” incurred loss model for determining the allowance for loans and lease losses (ALLL) – for calendar year companies continues through year 2019 for SEC filers, and 2020 for private companies
• Explanation of the “new” current expected credit loss (CECL) model for determining ALLL – for calendar year companies which becomes effective in 2020 for SEC filers, and 2021 for private companies
• Understanding the need for forecasting over the life of the loan
• Understanding how to account for the accounting transition to CECL
• Understanding risk characteristics for pooling of loans
• Listing and comprehension of qualitative factors (“Q” factors)
• Distinguishing between SFAS 5 (ASC 450-20) and SFAS 114 loans (ASC 310-10-35) when considering impairment
• Analyzing and understanding the exact meaning of key terms
• Analyzing LTV, FICO, risk ratings guarantees, unemployment rates, housing price indices, GDP etc.
Overview
The seminar is important for banks, savings associations, credit unions and Bank and S&L Holding Companies.
It covers primarily, the new balance sheet way to account for estimated losses relating to loans, accounts receivable and lease receivables. It briefly covers H-T-M debt securities, AFS debt securities, commitments that are not unconditionally cancellable, and purchased credit-deteriorated (PCD) assets.
It explains need for forecasts of credit losses over the life of the financial assets.
It revisits the incurred loss model since data for that model will be helpful for complying with the new CECL model.
It explains the new model’s dependence on:
• Past events
• Current conditions
• Reasonable and supportable forecasts
It emphasizes the need to put loan data into pools of assets with similar risks and to use qualitative factors (“Q” factors) to support estimates of credit losses. It explains that judgments need to be made. It also “hones in” on quantitative and qualitative factors as well as other factors relevant to expected collectability of cash.
Various techniques explored, include:
• Discounted cash flows
• Loss-rate
• Roll rate
• Probability of default
• Aging of accounts
Examples of estimation approaches are presented and explained.
The webinar takes away the mystique and in some cases the fear of the estimation (forecasting) requirements.
Why Should You Attend
The webinar:
• Eliminates the nervousness surrounding the new CECL model
• Explains that the new CECL model borrows heavily from what already exists under the incurred loss model
• Clarifies confusion about forecasted losses over the life of the loan regardless of the method used
• Dispels the fear that the new CECL method is difficult and hard to implement
• Eliminates uncertainty about application of various judgments
• Distinguishes between discounted cash flow and non-discounted cash flow approaches
• Lessens the fear that the provision will be uncontrollable and unpredictable
• Allows attendees to put aside doubts about implementation
• Eliminates mistaken belief that CECL implementation is difficult
• Analyzes factors that are needed to gather input data
• Contrasts CECL model options with various approaches and selects which fits best in your bank
• Familiarizes attendees with the various CECL approaches
• Contrasts and compares
o Loss rate approach – collective evaluation
o Loss rate approach – individual evaluation
o Loss rate approach – vintage year basis
o Loss rate approach – collective and individual evaluation
• Helps with the understanding of techniques such as:
o Discounted cash flows
o Regression analysis
o Probability of default
o Vintage analysis
o Loss rate analysis
o Migration analysis (roll rate)
Areas Covered In This Webinar
The webinar covers new CECL requirements. It allows attendees to:
• Analyze what is covered by ASU 2016-13
• Explain the balance sheet approach
• Emphasize that CECL ALLL represents the projected lifetime credit losses
• Focus on documentation, consistency and faithful representation of cash collectability from loans
• Learn to adjust historical loss experience
• Understand that CECL applies to banks of any size. It is scalable
• Comprehend that the range of data is needed and the data must include information about:
o Past events
o Current conditions
o Reasonable and supportable forecasts about collectability of cash flows
• Re-visit the current incurred loss approach
• Focus on the ASC sections that provide guidance along with FIL 105-2006
• Understand the Q factors and how they require input data and judgment calls
• Understand currently used grading systems and what to do with unclassified and classified categories
• Identify and understand information required to select loans for individual impairment evaluation
• Understand exactly what is meant by an “impaired” loan
• Understand the effective dates for implementation of CECL method
• Learn how to account for the transition to CECL
• Understand the factors that determine risk characteristics
• Accept that CECL is highly judgmental and will require many specific judgments
• Compare and contrast the importance of:
o LTV
o FICO
o Risk ratings
o Guarantees
o Unemployment rates
o Housing price indices
o GDP
o Creditworthiness of the borrow
o Forecasted direction of the economic and business environment
• Focus on key terms such as:
o Default
o Loss rate statistics
o Reasonable and supportable forecasts
o Recoveries
o Reverting to historical credit loss information
Learning Objectives
• Learn new GAAP requirement in ASU 2016-13
• Understand CECL inputs and how they interface with existing incurred loss model
• Comprehend what needs to be done to forecast the credit losses over the life of the asset
• Analyze various technique that can be used to implement CECL
• Contrast and compare when using discounted cash flows (DCF) or other non-dcf techniques
• Analyze and understand examples such as:
o DCF
o Regression analysis
o Probability of default
o Vintage analysis
o Loss rate analysis
o Migration analysis (roll rate)
Who Will Benefit
• Accountants
• Controllers
• Treasures
• Loan officers
• Loan administrations
• Internal and external auditors
• Risk Managers
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