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. From hard and fast rules to anecdotal commentary, the nation’s leading experts on the ALLL shared their knowledge and observations through three days of intense education. In this and two subsequent blogs, we’ll share some of the gems from each day’s general sessions.
Notes from the General Sessions of Tuesday, May 23, 2017:
Session: CECL: Fact or Fiction
Presenters: Mike Lundberg, RSM; Graham Dyer, Grant Thornton
- CECL is designed to be scalable to smaller institutions and less complex portfolios, but is a significant undertaking for all entities. It is fundamentally different than what estimating the ALLL has involved under the current incurred loss model. You’ll need the accounting expertise, but also credit and economic data, and lots of involvement from IT and/or those most familiar with your data.
- CECL requires the pooling of assets with similar risk characteristics. Lenders will likely employ different approaches across different portfolios or even portfolio segments.
- CECL is absolutely NOT fair value.
- Data requirements for CECL are complex and highly dependent on the methodology selected.
- The forecast must be as extended as is reasonable and supportable, up to the contractual term of the loans reduced by expected prepayments.
- A properly executed CECL will generally require a larger reserve than a true incurred loss model.
Session: Current GAAP: ALLL We Need to Know Now
Presenters: Will Neeriemer, DHG Financial Services; Garry Rank, MST Advisory
- Once a TDR, always a TDR? A TDR that has been performing and is refinanced to market terms may be a candidate for removal from TDR status. There are different assessments among auditors, regulators and bankers as to when you have a TDR. Call report guidance defines a TDR and offers an example of when a TDR can be assigned non-TDR status.
- ALLL continues to be a source of both material and immaterial misstatements as a result of heavy spreadsheet use, multiple input sources, and insufficient reconciliation and review processes.
- A lender cannot increase its reserves in anticipation of CECL.
- An emerging trend is an increase in illiquid assets in borrower’s statements.
Session: Building Your Blueprint for Expected Credit Loss
Presenters: Pam Molvar, HomeStreet Bank; Dorsey Baskinand Shane Williams, MST Advisory
- CECL is an opportunity to reanalyze pools when that might not have been done in some time. You will have to justify your loan pools for CECL.
- The FASB decided that disclosures around vintage were necessary. Even if you don’t adopt vintage as a methodology you still have to disclose by year of origination.
Session: Compliant Methodologies Under CECL
Presenters: Mike Gullette, ABA; Vince Milano, Postlethwaite & Netterville; Chris Emery, MST Advisory
- The look-back period should encompass a time frame that best matches the life-of-loan concept, and, if possible, should include the “Great Recession” years.
- Types of portfolio data for CECL include:
–Basic, such as loan number, origination balance, maturity, interest rate, payment terms, lien position, etc.
– Risk indicators, such as risk rating, credit scores, industry, property type, debt service coverage, etc.
– Others, such as charge-off and recovery amounts and dates, default reason, amount outstanding at default, etc.
- Selecting a methodology is a collaborative effort, but it is important that the process gets driven through Credit as it is a measurement of credit risk.
- PD/LGD is getting a lot of attention as a prospective methodology, as it measures frequency and severity of losses. Combining the two is the simplest way to estimate.
Coming soon: The MST 2017 National ALLL Conference Digest, a compilation of summaries of the conference general sessions and workshops.