The Institute of Internal Auditors Washington, D.C. Chapter - PowerPoint PPT Presentation

The Institute of Internal Auditors Washington, D.C. Chapter Regulatory & Accounting Hot Topics March 7, 2016 Jin Ryu Professional Accounting Fellow Office of the Comptroller of the Currency 1

Jin Ryu Professional Accounting Fellow Office of the Comptroller of the Currency Jin Ryu serves as a Professional Accounting Fellow within the Office of the Chief Accountant at the Office of the Comptroller of the Currency (OCC). He provides accounting policy and regulatory guidance to key stakeholders in the banking industry by monitoring and interpreting accounting rules and regulations. He has over ten years of combined experience in accounting and auditing. Prior to joining the OCC, Jin was a Sr. Manager at Deloitte in the accounting & advisory practice in the financial services industry specializing in advising clients in financial reporting, accounting standards implementation, and technical accounting & valuation of complex financial instruments. Jin is an actively licensed Certified Public Accountant in the state of Virginia with a Bachelor of Science in Accounting from San Diego State University. 2

Agenda • The Allowance for Loan and Lease Losses • Troubled Debt Restructurings • Current Expected Credit Losses (CECL) • Classification & Measurement Business Combinations • • OCC Resources and Contact Information • Questions and Answers 3

Allowance for Loan and Lease Losses (ALLL) 4

Source: Call reports – OCC Integrated Banking Information System (25,000) (20,000) (15,000) (10,000) 10,000 15,000 (5,000) 5,000 ‐ SEP2008 (13,888) (Provisions > Charge-offs) Increases DEC2008 (20,099) ALLL MAR2009 (16,468) JUN2009 (13,028) SEP2009 (7,643) DEC2009 (3,508) MAR2010 3,251 JUN2010 9,295 SEP2010 7,692 ALLL Releases DEC2010 8,568 MAR2011 10,886 JUN2011 7,797 SEP2011 6,830 (Charge-offs > provisions) DEC2011 4,448 MAR2012 6,316 ALLL Releases JUN2012 5,107 SEP2012 6,489 DEC2012 2,476 MAR2013 4,015 JUN2013 4,657 SEP2013 5,447 DEC2013 3,987 MAR2014 2,364 JUN2014 3,063 SEP2014 1,865 DEC2014 1,453 MAR2015 771 JUN2015 852 SEP2015 478 DEC2015 (816) 5

Source: Call reports – OCC Integrated Banking Information System 0.00% 0.50% 1.00% 1.50% 2.00% 2.50% 3.00% 3.50% 4.00% 4.50% Mar ‐ 02 Jun ‐ 02 Sep ‐ 02 Dec ‐ 02 Mar ‐ 03 Jun ‐ 03 Sep ‐ 03 Dec ‐ 03 Mar ‐ 04 Jun ‐ 04 Sep ‐ 04 Dec ‐ 04 Mar ‐ 05 ALLL to Total Loans Jun ‐ 05 Sep ‐ 05 Dec ‐ 05 Mar ‐ 06 Jun ‐ 06 Sep ‐ 06 Dec ‐ 06 Mar ‐ 07 Jun ‐ 07 Sep ‐ 07 Dec ‐ 07 Mar ‐ 08 Jun ‐ 08 Sep ‐ 08 Dec ‐ 08 Mar ‐ 09 Jun ‐ 09 Sep ‐ 09 Dec ‐ 09 Mar ‐ 10 Jun ‐ 10 Sep ‐ 10 Dec ‐ 10 Mar ‐ 11 Jun ‐ 11 Sep ‐ 11 Dec ‐ 11 Mar ‐ 12 Jun ‐ 12 Sep ‐ 12 Dec ‐ 12 Mar ‐ 13 Jun ‐ 13 Sep ‐ 13 Dec ‐ 13 Mar ‐ 14 Jun ‐ 14 Sep ‐ 14 Dec ‐ 14 Mar ‐ 15 Jun ‐ 15 6 Sep ‐ 15 Dec ‐ 15

Allowance Components Reported by U.S. Banks as of Q4 2015 5% 12% ASC 450 ASC 310 ‐ 10 ASC 310 ‐ 30 83% Source: Call reports – OCC Financial Institution Data Retrieval System 7

ASC 450-20 Allowance Historical Qualitative Loss Rate net charge Factors offs 8

Factors to consider in the estimation of credit losses: 1. Changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, and recovery practices 2. Changes in international, national, regional, and local economic and business conditions and developments that affect collectibility, including the condition of various market segments 3. Changes in the nature and volume of the portfolio and in the terms of loans 4. Changes in experience, ability, and depth of lending management 5. Changes in volume and severity of past due loans, the volume of nonaccrual loans, and the volume and severity of adversely classified or graded loans 6. Changes in the quality of the institution’s loan review system 7. Changes in the value of underlying collateral for collateral-dependent loans 8. The existence and effect of any concentrations of credit, and changes in the level of such concentrations 9. The effect of other external factors such as competition and legal and regulatory requirements on the level of estimated credit loses Source: OCC Bulletin 2006-47: Guidance on the ALLL 9

Loosening Underwriting Standards in Auto Loans Break-even at month Break-even at month 50 for a 84mo loan 27 for a 60mo loan 10

ALLL – OCC Resources & Guidance • OCC Survey of Credit Underwriting Practices Report • OCC Semiannual Risk Perspective • OCC 2012-06, Interagency Guidance on ALLL Estimation Practices for Junior Liens • Interagency Policy Statement on the Allowance for Loan and Lease Losses , Guidance & Frequently Asked Questions on the ALLL – December 2006 • Policy Statement on Allowance for Loan and Lease Losses Methodologies and Documentation for Banks and Savings Institutions – July 2001 11

ALLL Takeaways • Methodology must follow GAAP (e.g., ASC 310 ‐ 10 and ASC 450 ‐ 20) and regulatory guidance. • ALLL releases (and negative provisions) may be appropriate, but must be supported. • Need to take into consideration qualitative factors, including loosened underwriting standards. • Not permissible to keep ALLL levels artificially high in anticipation of the proposed expected credit loss accounting standard. 12

Subsequent Restructuring of a Troubled Debt Restructuring 13

Subsequent Restructurings of a TDR • Issued by the agencies in response to industry concerns and diversity in practice. • U.S. GAAP does not clearly address issue. • See the September 30, 2014 Call Report Supplemental Instructions for the full description of this guidance. 14

Subsequent Restructurings of a TDR The banking agencies will not object to removing a TDR designation if, at the time of the subsequent (second or more) restructuring: • The borrower is no longer experiencing financial difficulty, and • There is no concession granted, including: – The loan is extended at market terms (including a market interest rate) consistent with those for other non ‐ troubled borrowers with similar risk characteristics, and – Any loan for which principal had been forgiven would continue to be designated a TDR, as that is viewed as a continuing concession . 15

Current Expected Credit Losses (CECL) 16

Current Expected Credit Loss (CECL) • Principles based • Removes the probable thresholds and the incurred loss notion • Introduces a “lifetime” concept for estimating the allowance for credit losses • Considers more forward ‐ looking information than is permitted under current U.S. GAAP Earlier recognition of losses 17

FASB’s final issuance and effective dates The FASB expects to release the final standard later this year. CECL Effective Dates Public Business Entities Fiscal year beginning after 12/15/2018, including interim (PBEs) that are SEC ‐ periods within 2019 filers PBEs Fiscal year beginning after 12/15/2019, including interim (Non ‐ SEC filers) periods within 2020 Fiscal year beginning after 12/15/2019, including interim Non ‐ PBEs periods beginning AFTER 12/15/2020 Non ‐ SEC filer PBEs and non ‐ PBEs: permit early adoption using Early Adoption the effective dates for PBEs 18

The CECL Model: Scope Loans Debt Securities Held for Held to CECL CECL Investment Maturity Available New credit Lower of for Sale loss model Held for Sale cost or market Trading FV ‐ NI 19

CECL: What’s Changing • Reduction in the number of credit impairment models – Distinction between instruments carried at amortized cost vs. fair value • Enhanced credit disclosure requirements – Disaggregation by vintage of credit quality indicators, such as loan ‐ to ‐ value (LTV) ratios, FICO scores, and risk ratings • Changes from purchased credit impaired (PCI) to purchased credit deteriorated (PCD) loans – New definition – “more than insignificant” credit deterioration since origination – Establishes a day one allowance on PCD loans Loan-par amount $1,000,000 Loan-noncredit discount $75,000 Allowance for credit losses 175,000 Cash 750,000 20

CECL: What’s Not Changing • Ability to choose an estimation method most appropriate for the bank • Credit risk review/management processes • Consideration of historical loss experience on similar assets and current conditions • Qualitative considerations • Interest income recognition and nonaccrual policies Write ‐ off (i.e., charge ‐ off) policies • • Accounting treatment for loans held for sale 21

CECL: Key Considerations • Leverage processes currently in place (e.g., a bank’s existing credit risk management function and historical loss rates) • Small banks DO NOT need big models – No requirement to hire a team of experts – However, changes to current system necessary for data collection and analysis • Consider NOW what you will need later 22