Pub. 6 2016-2017 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 2017 17 4. Communicate with your core provider CECL relies onhistorical data on life of loanor life of portfolio loss rates, keyportionsofwhichresidewithinyour coresystem. So, contact your provider toadjust the current closed-filedestruction schedule. This ensures your access to CECL information. Step 2: Address Key Decision Points The CECL project teammust consider these points to deter - mine your institution’s best course of action. 1. Data identification Institutions must anticipate collecting the following data—at a minimum—for individual loans, and assess the need for more granular detail: risk rating, loan duration, origination date, ma- turity date, loan balance, key charge-offor recovery information, and loan segmentation. 2. Data gathering Gather individual loandata for existing loans to build the his - torical picture and vintage disclosures CECL requires, including data from: • Core system: determine thedataavailable, andplan for retaining and accessing it. • Loan accounting and servicing systems: determine how to retrieve additional data points captured within these systems. • Loan files and credit memos: certain data points may only be available within the loan file or credit memo. • Other databases: search other resources, like customer rela- tionship management systems, to complete customer profiles. 3. Process adjustment The project team must adjust existing loan processes and systems to capture the CECL data more cost effectively. This includes creating consistent codes for data fields, eliminating duplicate fields, ensuring data can be accessed and transitioning to digital-collection methods. 4. Data analysis Decide where to store the data, be it in an Excel spreadsheet or a complex, secure database. Your institution also must de- termine a cost-effective way to analyze that data. 5. Portfolio Segmentation The Federal Reserve advises to “identify the portfolio seg- mentation needed to implement the proposed CECL model, such as grouping assets with similar risk characteristics.” These segments should consist of the same product or collateral type, interest rate, or other shared risk characteristic. The agency adds that loan portfolios should be accounted for at themost granular level, since granular segmentation equals better loss estimates. 6. Economic Variables Institutions also must include national and local economic data when calculating CECL. Those that are readily available, including unemployment rates, housing prices and commercial real estate prices, will prove the most helpful. 7. CECLMethodology FASB doesn’t require that a specific methodology be used to calculate the ALLL under CECL. The interagency joint statement explains “allowances for credit losses may be de- termined using various methods. Additionally, institutions may apply different estimation methods to different groups of financial assets.” Methodologies include: • Average charge-off method • Vintage analysis • Static pool analysis • Roll-rate method or migration analysis • Probability of default • Regression analysis • Discounted cash-flow analysis Step 3: Validate and Test Your Decisions Follow the change management best practice of Plan, Do, Check, Act. 1. Validate chosenmethodology Ensure your methodology meets all CECL requirements and provides the most accurate reserve estimates. The former will indicate your institution’s compliance readiness; the latter helpsminimize the financial impact fromCECL. If issues arise, adjust and retest. 2. Run parallel ALLLs Calculateboth the currentALLLmodel and thenewlydevised CECL version through the transition period, to help with budget decisions in preparation for CECL’s effective date. 3. Estimate capital impact The Federal Reserve suggests institutions “be proactive in estimating the potential impact to their regulatory capital ratios to assess whether they will have sufficient capital at the time that the CECL model goes into effect.” Step 4: Transition to CECL by 2020-21 Institutions that follow this multi-step plan, making use of the extended time frame and system-driven resources, will reap many benefits, including balancing CECL-related tasks with other responsibilities, streamlining data analysis and ensuring their CECL rollout meets regulatory expectations. Using this background information and our four-step plan, you have the tools to determine how to implement CECL based on your institution’s size, loan complexity and budget. n Keith Monson serves as CSI’s chief risk officer. In this role, Monson maintains an enterprise wide compliance framework for risk assessment and reporting, as well as other key components of CSI’s corporate compliance program. With nearly 25 years of banking experience, he has a wide range of expertise in the compliance arena, having served as chief compliance officer for both large and small financial institutions.