cecl: planning & preparing€¦ · cecl committee. data gap analysis. review/ select solution....

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CECL: Planning & Preparing What we need to know

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Page 1: CECL: Planning & Preparing€¦ · CECL Committee. Data Gap Analysis. Review/ Select Solution. Preliminary Modeling. Review Model with Auditors. Final Model & Validation • Consider:

CECL: Planning & Preparing

What we need to know

Page 2: CECL: Planning & Preparing€¦ · CECL Committee. Data Gap Analysis. Review/ Select Solution. Preliminary Modeling. Review Model with Auditors. Final Model & Validation • Consider:

Presenter

Tully MaragakisVP, CU Accounting ServicesCarolinas Credit Union League

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Page 3: CECL: Planning & Preparing€¦ · CECL Committee. Data Gap Analysis. Review/ Select Solution. Preliminary Modeling. Review Model with Auditors. Final Model & Validation • Consider:

Purpose

• Credit unions asked what the Carolinas Credit Union League is doing with respect to CECL

• Give credit unions an informed start• Examiners will soon begin asking the

status of CECL implementation

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Page 4: CECL: Planning & Preparing€¦ · CECL Committee. Data Gap Analysis. Review/ Select Solution. Preliminary Modeling. Review Model with Auditors. Final Model & Validation • Consider:

SpeakerThomas CaragherDirector, Product Management, Online CECLZM Financial Systems

• As Director of Product Management at ZM Financial Systems, he is responsible for the overall direction and strategy for the company’s on-line CECL solution.

• Before joining ZM Financial Systems he spent 12 years as the Sr. Product Manager for the risk products at a financial software company.

• Prior to that, Tom spent 5 years as an interest rate risk consultant as well as several years at the Chicago Board of Trade in back office operations and a credit analyst for GreenTree Financial.

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Page 5: CECL: Planning & Preparing€¦ · CECL Committee. Data Gap Analysis. Review/ Select Solution. Preliminary Modeling. Review Model with Auditors. Final Model & Validation • Consider:

Discussion

When it comes to CECL planning, preparing and asking questions will make life easier.

In this session, we will discuss:• Timelines• Planning• Data• Most commonly discussed methods• Data to consider for those methods• Q Factors

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Page 6: CECL: Planning & Preparing€¦ · CECL Committee. Data Gap Analysis. Review/ Select Solution. Preliminary Modeling. Review Model with Auditors. Final Model & Validation • Consider:

Effective Dates - Original• Measure impact as of:

– SEC Filers — January 1, 2020• Adopt Q1 2020

– Public Business Entity — January 1, 2021• Adopt Q1 2021

– Non-Public Business Entity — January 1, 2022• Modified effective date to Jan. 1, 2022 for non-public business

entities– Purpose: To correct the effective date for non-public

business entities to match the FASB’s original intention to have an extra year

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Page 7: CECL: Planning & Preparing€¦ · CECL Committee. Data Gap Analysis. Review/ Select Solution. Preliminary Modeling. Review Model with Auditors. Final Model & Validation • Consider:

Effective Dates – and then things change (proposed)

• Everyone else = January 2023 (assuming calendar year company)

• SEC registrants that do not meet the definition of a smaller reporting company or emerging growth company = no change

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Page 8: CECL: Planning & Preparing€¦ · CECL Committee. Data Gap Analysis. Review/ Select Solution. Preliminary Modeling. Review Model with Auditors. Final Model & Validation • Consider:

CCUL Resources: Timeline & Worksheet

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Page 9: CECL: Planning & Preparing€¦ · CECL Committee. Data Gap Analysis. Review/ Select Solution. Preliminary Modeling. Review Model with Auditors. Final Model & Validation • Consider:

Preparation is critical

Establish CECL

CommitteeData Gap Analysis

Review/ Select

SolutionPreliminary Modeling

Review Model with Auditors

Final Model &

Validation

• Consider:– The amount of data needed– The amount of currently stored– Running parallel for a year prior to the first filing

• Is there a gap between what you need to do and what you can do?

• ZM Financial Systems can help bridge that gap and help meet the CECL mandate

Data capture and model development should begin immediately

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Page 10: CECL: Planning & Preparing€¦ · CECL Committee. Data Gap Analysis. Review/ Select Solution. Preliminary Modeling. Review Model with Auditors. Final Model & Validation • Consider:

We should be thinking about…

• Historical Data• Methods• Segmentation• Q Factors• Reporting

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Page 11: CECL: Planning & Preparing€¦ · CECL Committee. Data Gap Analysis. Review/ Select Solution. Preliminary Modeling. Review Model with Auditors. Final Model & Validation • Consider:

Build a team• Create a “CECL Committee”

– This is important for visibility and transparency– Regulators encourage building a committee

• Understand how much of each type of data are needed

• Review existing allowance for loss calculation and credit risk management practices to identify processes that can be leveraged– See if your ALM system already credit adjusts cash flows

and provides the discounted cash flow methodology– See if your ALM system incorporates third party loss

metrics for benchmarking

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Page 12: CECL: Planning & Preparing€¦ · CECL Committee. Data Gap Analysis. Review/ Select Solution. Preliminary Modeling. Review Model with Auditors. Final Model & Validation • Consider:

Need historical data to support assumptions

• Sample data points:Original LTV Original Balance Non-Performing FlagCurrent LTV Current Balance Charge-Off AmountsOriginal FICO/Credit Rating Rate Recovery AmountsCurrent FICO/Credit Rating Rate Type Days DelinquentRegion — City/State/Zip Payment Type Expense Related toOrigination Date Payment Frequency Disposal RecoveryMaturity Date Cost Center Loss Probabilities

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Page 13: CECL: Planning & Preparing€¦ · CECL Committee. Data Gap Analysis. Review/ Select Solution. Preliminary Modeling. Review Model with Auditors. Final Model & Validation • Consider:

Data

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Page 14: CECL: Planning & Preparing€¦ · CECL Committee. Data Gap Analysis. Review/ Select Solution. Preliminary Modeling. Review Model with Auditors. Final Model & Validation • Consider:

Data

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Page 15: CECL: Planning & Preparing€¦ · CECL Committee. Data Gap Analysis. Review/ Select Solution. Preliminary Modeling. Review Model with Auditors. Final Model & Validation • Consider:

Need historical data to support assumptions

• Sample data points:Original LTV Original Balance Non-Performing FlagCurrent LTV Current Balance Charge-Off AmountsOriginal FICO/Credit Rating Rate Recovery AmountsCurrent FICO/Credit Rating Rate Type Days DelinquentRegion — City/State/Zip Payment Type Expense Related toOrigination Date Payment Frequency Disposal RecoveryMaturity Date Cost Center Loss Probabilities

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Page 16: CECL: Planning & Preparing€¦ · CECL Committee. Data Gap Analysis. Review/ Select Solution. Preliminary Modeling. Review Model with Auditors. Final Model & Validation • Consider:

METHODS

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Page 17: CECL: Planning & Preparing€¦ · CECL Committee. Data Gap Analysis. Review/ Select Solution. Preliminary Modeling. Review Model with Auditors. Final Model & Validation • Consider:

Methods

• The most commonly discussed methods:– Remaining Maturity– Historic Loss Rate/Snapshot– Vintage– Migration– Discounted Cash Flows (DCF)

Less

Com

plex

, Dat

a In

tens

ive

& Se

nsiti

veM

ore Com

plex, C

omputational

Intensive & Sensitive

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Page 18: CECL: Planning & Preparing€¦ · CECL Committee. Data Gap Analysis. Review/ Select Solution. Preliminary Modeling. Review Model with Auditors. Final Model & Validation • Consider:

Methods

• A good ALM Model will already incorporate DCF and/or migration– Does it have a historical database?– Can it incorporate less complex methods?

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Page 19: CECL: Planning & Preparing€¦ · CECL Committee. Data Gap Analysis. Review/ Select Solution. Preliminary Modeling. Review Model with Auditors. Final Model & Validation • Consider:

Interagency Webinar

• Discussed the following 3 methods:– Remaining Maturity– Historic Loss Rate/Snapshot– Vintage

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Page 20: CECL: Planning & Preparing€¦ · CECL Committee. Data Gap Analysis. Review/ Select Solution. Preliminary Modeling. Review Model with Auditors. Final Model & Validation • Consider:

Incurred Loss

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Page 21: CECL: Planning & Preparing€¦ · CECL Committee. Data Gap Analysis. Review/ Select Solution. Preliminary Modeling. Review Model with Auditors. Final Model & Validation • Consider:

Remaining Maturity

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Page 22: CECL: Planning & Preparing€¦ · CECL Committee. Data Gap Analysis. Review/ Select Solution. Preliminary Modeling. Review Model with Auditors. Final Model & Validation • Consider:

Remaining Maturity

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Page 23: CECL: Planning & Preparing€¦ · CECL Committee. Data Gap Analysis. Review/ Select Solution. Preliminary Modeling. Review Model with Auditors. Final Model & Validation • Consider:

Remaining Maturity

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Page 24: CECL: Planning & Preparing€¦ · CECL Committee. Data Gap Analysis. Review/ Select Solution. Preliminary Modeling. Review Model with Auditors. Final Model & Validation • Consider:

Remaining Maturity

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Page 25: CECL: Planning & Preparing€¦ · CECL Committee. Data Gap Analysis. Review/ Select Solution. Preliminary Modeling. Review Model with Auditors. Final Model & Validation • Consider:

Historic Loss Rate/Snapshot

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Page 26: CECL: Planning & Preparing€¦ · CECL Committee. Data Gap Analysis. Review/ Select Solution. Preliminary Modeling. Review Model with Auditors. Final Model & Validation • Consider:

Historic Loss Rate/Snapshot

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Page 27: CECL: Planning & Preparing€¦ · CECL Committee. Data Gap Analysis. Review/ Select Solution. Preliminary Modeling. Review Model with Auditors. Final Model & Validation • Consider:

Vintage

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Page 28: CECL: Planning & Preparing€¦ · CECL Committee. Data Gap Analysis. Review/ Select Solution. Preliminary Modeling. Review Model with Auditors. Final Model & Validation • Consider:

Not to be confused with Vintage Report

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Page 29: CECL: Planning & Preparing€¦ · CECL Committee. Data Gap Analysis. Review/ Select Solution. Preliminary Modeling. Review Model with Auditors. Final Model & Validation • Consider:

Vintage

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Page 30: CECL: Planning & Preparing€¦ · CECL Committee. Data Gap Analysis. Review/ Select Solution. Preliminary Modeling. Review Model with Auditors. Final Model & Validation • Consider:

Vintage

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Page 31: CECL: Planning & Preparing€¦ · CECL Committee. Data Gap Analysis. Review/ Select Solution. Preliminary Modeling. Review Model with Auditors. Final Model & Validation • Consider:

Vintage

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Page 32: CECL: Planning & Preparing€¦ · CECL Committee. Data Gap Analysis. Review/ Select Solution. Preliminary Modeling. Review Model with Auditors. Final Model & Validation • Consider:

Migration

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Page 33: CECL: Planning & Preparing€¦ · CECL Committee. Data Gap Analysis. Review/ Select Solution. Preliminary Modeling. Review Model with Auditors. Final Model & Validation • Consider:

Discounted Cash Flows

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Page 34: CECL: Planning & Preparing€¦ · CECL Committee. Data Gap Analysis. Review/ Select Solution. Preliminary Modeling. Review Model with Auditors. Final Model & Validation • Consider:

Economic Metrics

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Page 35: CECL: Planning & Preparing€¦ · CECL Committee. Data Gap Analysis. Review/ Select Solution. Preliminary Modeling. Review Model with Auditors. Final Model & Validation • Consider:

Forecasts — Base

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Page 36: CECL: Planning & Preparing€¦ · CECL Committee. Data Gap Analysis. Review/ Select Solution. Preliminary Modeling. Review Model with Auditors. Final Model & Validation • Consider:

Forecasts — Adverse

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Page 37: CECL: Planning & Preparing€¦ · CECL Committee. Data Gap Analysis. Review/ Select Solution. Preliminary Modeling. Review Model with Auditors. Final Model & Validation • Consider:

Adjustments

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Page 38: CECL: Planning & Preparing€¦ · CECL Committee. Data Gap Analysis. Review/ Select Solution. Preliminary Modeling. Review Model with Auditors. Final Model & Validation • Consider:

Adjustments

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Page 39: CECL: Planning & Preparing€¦ · CECL Committee. Data Gap Analysis. Review/ Select Solution. Preliminary Modeling. Review Model with Auditors. Final Model & Validation • Consider:

Document

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Page 40: CECL: Planning & Preparing€¦ · CECL Committee. Data Gap Analysis. Review/ Select Solution. Preliminary Modeling. Review Model with Auditors. Final Model & Validation • Consider:

What method is right for you?• Remaining Maturity• Historic Loss Rate/Snapshot• Vintage• Migration• Discounted Cash Flows (DCF)

Consider your size and complexity. • What types and how much data do you

have?• How do you want to segment?

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Page 41: CECL: Planning & Preparing€¦ · CECL Committee. Data Gap Analysis. Review/ Select Solution. Preliminary Modeling. Review Model with Auditors. Final Model & Validation • Consider:

What options do you have?

• The more data you have, the more options you have

• With more data and options, Q Factors can be better estimated

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Page 42: CECL: Planning & Preparing€¦ · CECL Committee. Data Gap Analysis. Review/ Select Solution. Preliminary Modeling. Review Model with Auditors. Final Model & Validation • Consider:

Follow-Up CECL Trainings

• June 2020• June 2021• June 2022

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Page 43: CECL: Planning & Preparing€¦ · CECL Committee. Data Gap Analysis. Review/ Select Solution. Preliminary Modeling. Review Model with Auditors. Final Model & Validation • Consider:

Questions?

Thomas CaragherDirector, Product ManagementZM Financial Systems

Office: 919.246.4517Cell: [email protected]

Are you ready for CECL?Now available with ZMdesk V 4.7 or OnlineCECL

Tully MaragakisVP, CU Accounting ServicesCarolinas Credit Union League

Office: 803.732.8442Cell: 803.397.2618 [email protected]

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