Pub. 5 2015-2016 Issue 6

O V E R A C E N T U R Y : B U I L D I N G B E T T E R B A N K S - H E L P I N G C O L O R A D A N S R E A L I Z E D R E A M S May • June 2016 9 that banks did not have enough loan reserves on hand, partic- ularly in the event of another economic crisis. • Currently-ProposedCECLModel: Aftermuch anticipation in the intervening years, the FASB finally issued its proposed CECL model at the end of 2012. Basically, it shifts from the incurred loss model to an expected loss model. • Final CECL Model: The FASB has suggested the final will look very similar to the 2012-proposed CECL model. • Anticipated ImplementationDates: The FASBhas indicated that the final guidance will be effective in 2019 for SEC-registered institutions, and 2020 for all others. 2. Understand the Difference Between the Old and New Models With the old model for the Allowance for Loan and Lease Losses (ALLL), banks didn’t have to set aside money for loans in good standing—only for those that were slow or delinquent. Under the newmodel, banks must set aside reserves for all loans, regardless of their standing. A closer look at the difference: The old model is based on incurred losses during a given 12-month period, while the new model requires banks to account for all expected losses over the life of each loan. 3. Ensure Portfolio Records are Being Retained A bank’s past loan data will be critical to an effective tran - sition to CECL, because they will need to pull from that data to calculate historic averages for life of loan losses. But don’t assume the needed data is available. While all core processors have the ability to retain both open and closed files, review your contract to ensure the schedule for closed file destruction meets your needs for CECL. If not, discuss a more appropriate schedule. 4. Expand Data Collection in Anticipation of CECL The CECL model will require more data fields, and banks should tackle this task on two fronts: A. Pulling the additional data fields for past and ex - isting loan files B. Determining the most effective way to gather these additional fields going forward Most experts believe the final CECLmodel will include these additional fields: • Individual loan risk rating • Loan duration • Individual loan balance • Individual loan charge-offs and recoveries • Individual loan segmentation 5. Estimate Your Capital Impact by Building a Vintage Model The OCC has estimated the FASB proposal will require most banks to boost their allowance in the neighborhood of 30 to 50 percent, if applied today, while others suggest it couldbe evenhigh- er. Regardless, the best way to prepare is to build a vintage model, given your existing data and a combination of forecast variables. A vintage model gives banks an indication of how big their capital hit might be, and includes the following three elements: A. Existing portfolio, good and poor loans included B. Past economic conditions C. Future economic forecasts (national, regional and local) Smart Planning Eases the Pain As a fundamental shift in accounting for loan loss reserves, CECLwill require significantlymore data collection and analysis. Fortunately, the FASB is giving banks time to adjust. So, use that time wisely—controlling the potential pain of CECL lies in smart and early planning. n Contact us today at 303.860.0242 or refer a small business anytime at coloradoenterprisefund.org Offering loans up to $500K including SBA Community Advantage loans up to $250K Advanced Traffic Services Keith E. Monson serves as chief risk officer for Computer Services, Inc. (CSI). In this role, Keith maintains focus on CSI’s compliance initiatives to establish and build out an enterprise-wide compliance framework for risk assessment and reporting, issue management and other key components of CSI’s corporate compliance program. He can be reached at keith.monson@csiweb.com .