Current Expected Credit Losses (CECL): How to Calculate and Maintain a Proper Allowance
The Allowance for Loan and Lease Losses (“ALLL”), represents one of the most significant estimates in an institution’s financial statements and regulatory reports.
It is a major portion of credit administration and is considered a key factor in maintaining a safe and sound financial institution. It is a valuation reserve established and maintained by charges against the bank’s operating income and is estimate of loans that may be uncollectible.
However, users of financial statement issued by financial institution expressed concerns that current United States Generally Acceptable Accounting Principles (GAAP) calculation of the Allowance restricts the ability to record credit losses that are expected, because they do not meet the “probable” threshold. After the economic crisis, various stakeholders requested that accounting standards enhance standards on loan loss provisioning to incorporate forward-looking information. The Financial Accounting Standards Board concluded that the existing approach for determining the impairment of financial assets, based on a “probable” threshold and an “incurred” notion, delayed the recognition of credit losses on loans and resulted in loan loss allowances that were “too little, too late.”
The Board of Governors of the Federal Reserve System (FRB), the Federal Deposit Insurance Corporation (FDIC), the National Credit Union Administration (NCUA), and the Office of the Comptroller of the Currency (OCC) (hereafter, the agencies) issued a Joint Statement on June 17, 2016, called Current Expected Credit Losses (“CECL”), which summarizes key elements of the new accounting standard and providing initial supervisory views with respect to measurement methods, use of vendors, portfolio segmentation, data needs, qualitative adjustments, and allowance processes.
CECL standards apply to all banks, savings associations, credit unions and financial institution holding companies, regardless of size that file regulatory reports for which the reporting requirements conform to U.S. GAAP. This program is designed to review the elements and thought process in establishing and maintaining an adequate ALLL level under the new regulatory guidance referred to as CECL.
- Types of Financial Instruments carried at Amortized Cost affected by CECL and the Financial Instruments Not Affected
- How CECL Addresses Major Concerns with the Current (“ALLL”) Methodology, which has Proven to be Ineffective in Recognizing Losses on a Timely Basis
- Effective Dates of CECL Implementation based upon the Type and Size of the Financial Institution
- How Should an Institution Apply the New Accounting Standard Upon Initial Adoption
- Acceptable Methods for Estimating Allowance Levels Under CECL?
- What Can Financial Institutions Do Now to Prepare for the Adoption of CECL
- Reinforce Concepts with a CECL Case Study
After completing this course, the participant will have an enhanced understanding of the importance of creating and maintaining an adequate Allowance that is legally defensible and insures the bank is operating in a safe and sound environment under the CECL Methodology.
CEO’s, Presidents & Board Members, Credit Administrators, Senior Credit Officers, Loan Review Officers, Compliance Officers, Senior Loan Officers, Commercial/Consumer Loan Officers, Loan Operation Officers, Loan Administrators
“Practical! Answered all the questions I had. Great resources for reference. Thanks!”, Linda Keith, CPA
Jeffery W. Johnson started his career with SunTrust Bank in Atlanta as a Management Trainee and progressed to Vice President and Senior Lender of SouthTrust Bank and Senior Vice President and Commercial Banking Division Manager for Citizens Trust Bank of Atlanta.
Most of his career has been spent in Credit Administration, Lending, Business Development, Loan Review, Management and Training & Development. He has managed loan portfolios representing a cross section of loan types including: Large Corporate, High Net Worth Individual, Middle Market Companies, Small Business, Real Estate and Non-Profit Organizations.
Mr. Johnson is now a training professional in the financial industry by leading various seminars covering important topics relating to issues in financial institutions. He teaches actively for fifteen state banking associations in the United States, Risk Management Association (RMA) and individual financial institutions nationwide. He co-authored a training course entitled “Lending to Service and Other Professional Organizations” for RMA in 2001.
Mr. Johnson earned a B.A. Degree in Accounting from Morehouse College in Atlanta; a MBA in Finance from John Carroll University in University Heights, Ohio; Banking diploma from Prochnow School of Banking at the University of Wisconsin and a Graduate Certificate in Bank Management from the Wharton School of Business at the University of Pennsylvania.
Institute of Certified Bankers: Visit http://www.icbmembers.org/login.aspx for instructions regarding self-reporting. Estimated credits: 2.5 CE Credits
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