CECL Implementation and Modeling

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CRF Advisors, Inc. assists Financial Institutions and Credit Unions with the implementation of the Current Expected Credit Loss model (CECL) through our CECL software created to conform with the new Accounting Standards Update (ASU) 2016-13, Financial Instruments – Credit Losses Topic 326. CRF Advisors has facilitated CECL methodology discussions, analyzed loan level data, and implemented CECL Modeling to financial institutions and credit union clients.

CECL is an acronym for Current Expected Credit Losses, and is used as shorthand for the new GAAP requirement to include expected life of loan (LOL) losses in the allowance for loan and lease losses (ALLL) for instruments held at amortized cost, versus the current incurred loss model. Generally, loss estimates will increase, be more volatile, and require subjective assumptions. Processes need to be enhanced and well documented to get management, auditors, and regulators comfortable with the outputs of the process.

For calendar year-end companies, implementation is required for fiscal year 2020 for large accelerated public companies that are SEC filers, and 2023 for everyone else. Early adoption is permitted starting in 2019. Upon implementation, the cumulative effect will be recorded as an adjustment to retained earnings (no income statement impact).

Our CECL implementation process will focus on the following areas:

  • Provide an understanding of the loan data requirements and loan data system extraction capabilities.
  • Review loan underwriting policies and procedures, credit quality, loans pools, and credit risk monitoring processes to assess the proper loan segmentation of the loan pools/individual loans/ cohorts to be analyzed.
  • Review the various CECL methodologies with management to ensure the methodology used is the most accurate assessment of loan portfolios expect credit losses. Our CECL Software utilizes three approaches:
    1) Vintage Loss Rate approach
    2) Probability of Default (PD) and Loss Given Default (LGD) approach
    3) Discounted Cash Flow (DCF) approach

Our focus is to work with management to provide a complete CECL computation/methodology and supporting documentation in conformity of the CECL methodology with interagency policy and accounting standards.

CECL Orchestration Process:

  • Collect, Store, & Manage loan-level data
  • Perform: Vintage, PD x LGD , DCF, and Other Loss Analysis
  • Monitor changes in economic conditions, collateral values, risk ratings, delinquencies and other key performance factors
  • Run scenarios & plan for adjustments
  • Perform analysis well beyond the Excel world
  • Receive Support from SMEs (i.e. CRF)
  • Apply collaboration with management and the Board to the CECL Review Process

CRF Advisors CECL Orchestration Outcomes:

  • Determine Pool Segmentation & Criteria for each Pool
  • Calculate the Life of each Pool
  • Calculate the Historical Loss Experience
  • Create a Life of Loan Loss model with forecasting assumptions
  • Adjust historical experience with qualitative variables to create future forecast assumptions in the model
  • Apply Pool Data to Documentation, Back-up, and Disclosures
  • Involve internal & external team members in analysis on a regular basis

CRF employs a unique hybrid agile project methodology combining the flexibility of different life of loan loss calculations with the structure required for effective testing, training, & transition to users

Other benefits of our model include:

  • Dedicated Team for Development & Customizations
  • Rigorous project planning for timelines & project resourcing
  • Continuous tracking & monitoring of progress & priorities throughout the project
  • Regular communication with project team to ensure quality

CECL will change the loan loss reserve calculation and will have implications across many aspects of day-to-day operations. CRF Advisors will assist in documenting the requirements, review and analyze methodologies, ensure proper systems inputs, and monitor the roles and responsibilities, to ensure transparency of the implementation process throughout the organization.