Step Three of Seven Steps to CECL Compliance

**Please check our most recent blog post regarding the latest changes to the FASB deadlines.**

Part three of a seven part blog series

Step 3. Developing reports.

In the first of this blog series, we proposed as an initial step in preparing for CECL that the financial institution adopt a system that allows it to assemble, store and analyze the extensive amounts and types of data CECL will require of financial institutions in order to estimate future loan losses. One of the benefits of a system like the Loan Loss Analyzer is that it is accompanied by a host of useful loan reporting capabilities.

Such reports facilitate governance and oversight. A new model or methodology requires the bank or credit union to establish and document policy: how the model will be executed and who is responsible for execution and oversight. The reporting capabilities of an automated system not only make it easy to meet that requirement but provide the bank or credit union a tremendous amount of information to use in determining which model or methodology is best suited to the institution’s processes and portfolios.

“The person in charge must have the ability to mount an effective challenge to management’s estimate – that is, the output needs to be put in context,” offered Grant Thornton’s Graham Dyer who aided in the development of the seven-step process and timeline. “Each bank decides on its own metrics, but fundamentally needs to show how loans are migrating over time and over different risk categories. As they become riskier or less risky, is the allowance moving with them? The model must make sense in context of the bank’s credit portfolio.”

Dyer recommended an OCC document, Detecting Red Flags in Board Reports, specifically a chapter titled, “Reports Directors Should Receive Regularly,” which includes reports on loan portfolio, loan quality and ALLL red flags. “It’s a handy pamphlet that explains the types of information you need to give to your directors to allow them to see that your allowance and direction make sense.”