Overview of ASC 326-20 (CECL) FASB Accounting Standards Update (ASU) - PowerPoint PPT Presentation

Overview of ASC 326-20 (CECL) FASB Accounting Standards Update (ASU) 2016-13, Financial Instruments – Credit Losses Topic 326 was approved in June 2016. FASB replaced the current “incurred loss” accounting model with an “expected loss” model – CECL. The new accounting standard applies to all banks, savings associations, credit unions, and financial institution holding companies that file regulatory reports prepared in accordance with U.S. Generally Accepted Accounting Principles (GAAP), regardless of size . Institutions are encouraged to take steps to assess the potential impact on the ALLL and capital. Impact on an institution’s ALLL and capital will depend on: • Existing allowance level • Composition and credit quality of its portfolio • Historical, Current, and forecasted loss data, assumptions, and economic conditions

Overview of ASC 316-20 (CECL) Key Changes: • Move from incurred loss (Historical losses) to a lifetime horizon (Life of loan/asset losses) • Single measurement objective applied to all financial assets carried at amortized cost:  Requires an allowance on held-to-maturity securities • Institutions will use a broader range of data to estimate expected losses:  Requires collective or pool-basis assessment of credit losses • Accounting for available-for-sale debt securities • Accounting for purchased credit impaired loans • Off-Balance-Sheet Credit Exposures o Loan commitments o Standby letters of credits o Financial guarantees/similar instruments

Overview of ASC 316-20 (CECL) Effective Dates: For public business entities that are U.S. Securities and Exchange Commission (SEC) filers, the new guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Thus, for a calendar-year company, it would be effective January 1, 2020. For public business entities that are not SEC filers, the new guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. For all other organizations, the new guidance is effective for fiscal years beginning after December 15, 2020, and for interim periods within fiscal years beginning after December 15, 2021. Early application will be permitted for all organizations for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.

CECL Models/Methods Allowance for credit loss may be determined using various methods, including: • Discounted cash flow models ( Refer to example 14 in FASB Guidance) Key Data Fields : Loan Type/Product, Effective Interest Rate, Fixed/Adjustable rate product, Loan Term, Maturity Date, Interest Rate, etc. • Vintage analysis ( Refer to example 3 in FASB Guidance) Key Data Fields: Loan Type, Loan Product, Origination Date, Maturity Date, Charge-off amount, Charge-off date, Origination Date of Charged-off loan etc. • Loss-rate methods ( Refer to example 1 and 2 in FASB Guidance) • Roll-rate methods • Probability-of-default methods Key Data Fields: Loan Type/Product, Charge-off amount, Product LTV, Days Delinquent, # of Non-accrual, Recovery amounts etc. Choose the method that best suits each portfolio- Does not have to be the same method for all loan pools Institutions are not expected to: • Implement complex models • Hire consultants to develop their models

Loan Data Requirements Key Required for initial model implementation Model Additional fields necessary for DCF, Vintage and PD/LGD Models Loan Data Fields Loan Data Fields Key $ Limit/Unused Comittments Model Days Delinquent Key Account Number Model Risk Rating Key Current Balance Model Payment Frequency Key Origination Date Model TDR Flag Key Current Maturity Date Model Call Report Code Key Modification/Renewal Date Model Collateral Code Key Current Interest Rate and index factor Model NAICS Code Key Rate Floor and Ceiling Model Product Code Key Fixed/Adjustable rate Model Current Collateral Value/Original Collateral Value Key Chargeoff Amount Model Current /Original Collateral Value Date (appraisal date) Key Chargeoff Date Model Delinquency Status Key Current Deferred Loan Cost Model # of Times Past Due more than 120 Days Key Current Deferred Loan Fees Model # of Times Past Due more than 180 Days Key Current Discount Model # of Times Past Due more than 30 Days Key Current Premium Model # of Times Past Due more than 60 Days Key Current Payment Amount Model # of Times Past Due more than 90 Days Key Current Interest Payment Model Balloon Payment Key Current Principal Payment Model Current/Original FICO Score Key Original Balance Model Current/Original Risk Rating Key Original Discount Model Credit Bureau Combined LTV Key Original Premium Key Loan Type Code Key FDIC Type Code Key Guarnatee Amount

Implementation of CECL Methodology S tart Transition Proj ect Mobilizat ion Confirm It erat ive Prot ot ype Final Development Requirement s Review -Develop CECL Management Team Revisions -Confirm scope and requirements -Discuss data accessibility and -Review data requirements talk with loan accounting/ system -Review interim results -Confirm loan segments/ pools -Final Revisions vendor -Confirm forecast (life of loss) -Methodology and Design S essions -Final Development assumptions and qualitative factors -Develop CECL Prototypes -Design Decisions -Establish forecast and qualitative -Review all assumptions used -Determine Timeline factor parameters for forecast and qualitative S yst em Test ing/ Validat ion -Agree on final methodology/ factors for reasonableness methodologies -Prototype Reviews -Confirm Data -Prototype Revisions -Confirm Reports Management/ BOD reviews: -Confirm Users Launch -CECL Methodology -All data and documentation supporting forecast assumptions -Ongoing testing plan -S cripts S upport -Bug Fixes -Deployment Plan Orchestration Platform Alignment & Adoption Proj ect Management / Quality Assurance 6

CECL Orchestration • Collect, Store, & Manage loan-level data • Determine risk characteristics of the loan portfolio and break out loan pools/segments/cohorts • Select applicable Model approach 1. Discounted Cash Flows 2. Vintage Analysis 3. Loss Rates 4. Probability of Default Methods • Perform Vintage and/or Trend Analysis • Monitor changes in collateral value • Run Scenarios & Plan for Adjustments • Perform analysis well beyond the Excel world • Receive Support from Internal Management or SMEs

CECL Implementation and Modeling Summary • Become familiar with Accounting Standards Update (ASU) 2016–13 • Develop an implementation team and plan a timeline with key stakeholders: • Board of directors • Industry peers • External auditors • Supervisory agencies • Review existing allowance and credit risk management practices and policies • Begin gathering data by loan /asset type or pool: o Historical loss information o Economic trend data and correlation of other qualitative factors o Ensure Key fields are extractable from the loan system o Obtain historical loan data from the loan system. Is data purged or archived? o Determine contractual life and prepayment information from historical loan data • Consider potential expected loss methodologies • Keep BOD, Auditors and Examination team up to date