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Hybarger & Associates

Serving Small to Mid-Size Community Banks for over Thirty Years

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        • The Directors' Financial Digest
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        • The Account Level Forecasting Series
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    • Liquidity Risk Management
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    • Comprehensive Funds Management Policy
    • CECL Overview >
      • Historical Analysis
      • "Currently" Identifiable Risks
      • "Specific" Potential Risks
      • Potential "Future" Risks
      • Traditional Reserves vs CECL
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CECL:
Current Expected
Credit Losses

("Cliff Notes")

Assessment of
"Specific" Potential Risks


Primary Objective of CECL:

To have a sufficiently precise level of reserves so as not to need replacement provisions at time of loss.
Picture
  • CECL Overview
  • Comprehensive Historical Assessment & Analysis
  • Assessment of "Currently" Identifiable Risks
  • Assessment of Reasonably Identifiable and Potentially Probable "Future" Risks
  • Traditional Reserves vs CECL Reserves

CECL Requires that all Reserve Computations are to be both:

"Experience Based" & "Forward Looking"

Presumes, or anticipates:
Sufficient data on prior Charge-Offs to be statistically predictive of
Future Loss Exposure or Probability

Experience Based

Based upon actual:
  • Originations of Loans
  • Current & Past Loan Volumes
  • Charge-Offs
  • Recoveries of Charge-Offs

Forward Looking

  • Assessing Future Risk of Loss based upon Historical Evidence
  • Also based upon Remaining Effective Life of each Risk Element
  • Based upon Reasonable Elements of Future Economic Data
  • Computed anew each Reporting Period (Monthly) 
  • Computational Methodology is Consistent throughout the Analyses

For Reserve Levels, sufficiency is not the standard; must be "justifiably accurate"

This provision does not require a precise "prediction" of future loss.
Rather...
It requires a "statistical assessment" of loss potential, given observed loss experience with similar risks.

Total Losses
  • 100% Penetration
  • Complete & Full Accountability
  • Equals Call Report Losses

Statistical Significance
Implies that the Reliability of any Forecasted Outcome is essentially dependent on the Quantity and Quality of the Input Data. Otherwise, it may simply be the result of Random Chance.

Variables

Variables fall into two distinct classes:

Data - based exclusively on bank experience
(This should be determinate, with very few exceptions)

Discretionary Parameters - based solely upon Management's Determination
(This is established and amended by management, as appropriate)

Variables may be either Fixed or Dynamic

Individual "Specific" Risk Elements

Essentially Required:

Current Delinquencies
Loan Classifications
Troubled Debt Restructuring
Variable Rate Loan Risk

Essentially Required if Available:

Historic Delinquencies
Credit Scoring (Consumer)
Credit Standards (Commercial)
PCD Assets (Purchased Assets with
     Credit Deterioration)

Best Practices would include:

New Loan Officer Assessment
Change in Credit Standards
Quality of the Bank's Credit Review Systems
Other Risk Factors

Management Assessment - Essentially Required

*Remember, this is all to measure the "Risk of Loss,"
not identifying "Losses."


Continue Reading:

  • CECL Overview
  • Comprehensive Historical Assessment & Analysis
  • Assessment of "Currently" Identifiable Risks
  • Assessment of "Future" Reasonably Foreseeable Risks
  • Traditional Reserves vs CECL Reserves

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  • Who We Are
    • Firm's Founder and History
    • Officers
  • Who We Serve
    • Who Are Our Clients
  • What We Do
    • Asset / Liability Management >
      • Budgeting
      • Performance Analysis
      • Forecasting
      • Quality Control
      • ALM Board Reporting >
        • The Directors' Financial Digest
        • The Executive Management Series
        • The Account Level Forecasting Series
      • Alternative Planning Scenarios
    • Interest Rate Risk >
      • Reporting for Interest Rate Risk
      • Assumptions & Back-Testing
    • Portfolio Management & Accounting >
      • The InvestWise Reporting Series >
        • Portfolio Management Series
        • Financial Management Series
        • Econometric Series
      • "Total Return" Investment Strategy
    • Liquidity Risk Management
    • Capital Adequacy & Analysis
    • Dynamic Strategic Planning
    • Comprehensive Funds Management Policy
    • CECL Overview >
      • Historical Analysis
      • "Currently" Identifiable Risks
      • "Specific" Potential Risks
      • Potential "Future" Risks
      • Traditional Reserves vs CECL
    • General Consultation >
      • Holding Company Systems
      • Balance Sheet Pricing Strategies
      • Regulatory Reporting
  • What Our Clients Say
  • How We Interface
    • What happens when we become a Client?
    • How are Fees Determined?