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  • CECLWHYITSABIGDEALANDWHATYOUNEEDTOKNOWTOFULFILLYOUROVERSIGHTROLE

    NewJerseyBankersAssociationAnnualConference

    May2017

    1

  • TODAYSPRESENTERS

    FayeMillerPartner,NationalProfessionalStandardsGroupFaye.Miller@rsmus.com410.246.9194

    MartinCaineMemberoftheFirm,Wolf&Company,P.C.MCaine@wolfandco.com413.726.6852

    2

  • AGENDA

    WhatisCECL?

    Whyisitabigdeal?

    Whatisyouroversightrole?

    3

  • WHATISCECL?

    CECL(CurrentExpectedCreditLosses) Vastlydifferentapproachforestablishingtheallowanceandrecognizingcreditlosses Appliestoloans/leases,otherreceivables,commitmentstolendandHTMsecurities

    Comesintoeffectin2020forCYESECfilersand2021forallothers Earlyadoptionpermitted2019

    4

  • WHYISCECLABIGDEAL?

    5

  • WHYISCECLABIGDEAL?

    Significantincreasestotheallowancearelikely Provideforexpectedlossesratherthanincurred Evenifriskoflossisremote Recognizeallowanceonpurchasedfinancialassets Limitedcircumstancesinwhichyoucanconcludebasedsolelyonthecollateralthatnoallowanceisnecessary RecognizeexpectedcreditlossesonHTMsecuritiesregardlessofimpairmentstatus

    Ramificationstoregulatorycapitalratios

    6

  • Managementactionitems

    7

  • MANAGEMENTACTIONITEMS

    Analyzerequirementsandassessneeds Internal/externalexpertise Data Systems/applications

    Developplan Implementationtimeline/team Methodologies/processes/controls Fillingdatagaps Modifycurrentsystemsorinvestinnew Monitordevelopmentsanddiscusswithconstituents

    8

  • MANAGEMENTACTIONITEMS

    Test,refineandimplementMonitorprogress/adherencetotimeline DecideonearlyadoptionMonitordevelopmentsandrefineasnecessary Regulatoryviews,TRGinterpretations,feedbackfromauditors Conductindependentassessments/testinternalcontrols Runparallelapproachandrefine Addressramificationstocapital,creditextension,investmentphilosophy,etc

    9

  • ImplementationConsiderations

    10

  • ImplementationConsiderations

    11

    DetermineLoanPools

  • ImplementationConsiderations

    12

    DetermineLoanPools

    Identify anappropriatemethodology

  • ImplementationConsiderations

    13

    DetermineLoanPools

    Identify anappropriatemethodology

    Obtain sufficienthistoricallossdata

  • ImplementationConsiderations

    14

    DetermineLoanPools

    Identify anappropriatemethodology

    Developreasonableandsupportableforecasts

    Obtain sufficienthistoricalloss

    data

  • LOANPOOLS

    Loanpoolingisacriticaldecisionpoint;impactingallsubsequentactions.

    Theconceptofimpairedloansiseliminated anestimatedcreditlossshouldonlybemeasuredindividuallyiftherearenosimilarriskcharacteristicswithotherloans.

    15

  • PURCHASEDCREDITDETERIORATEDASSETS(PCD)

    Willbeabletogrossuptheallowanceforexpectedcreditlossesforpurchasedassetswithamorethaninsignificantdeteriorationincreditquality.

    Thiswillbeappliedmorebroadlytopurchasedloansthanthecurrentaccountingforpurchasedcreditimpairedloans,whichgenerallyonlyappliestoimpairedassets.

    16

  • PresentationofPurchasedLoans

    17

  • PresentationofPurchasedLoans

    18

  • APPROPRIATEMETHODOLOGY

    Thestandardisexplicitlyscalableandallowspreparerstodevelopestimationmethodsthatareappropriateandpracticalfortheircircumstances. FASBconcludedthatdifferentoutcomesforexpectedcreditlossesareacceptable,givendifferentlevelsofcomplexityandsophistication. OnemodelbutmanymethodsMethodologybyloansegmentshouldbedeterminedearly;relevantdata(i.e.historicallosses,riskcharacteristicssuchasgeography,LTV,vintage,etc.)andsoftwareneedsmayvary. Industrystandardsandbestpracticeswillemerge.

    19

  • CHOOSINGAMETHOD

    Choosingamethodisacriticaldecisionpoint

    Onemodelbutmanymethods Historicallossrate(mostcommonmethodnow) DCF Vintageanalysis Migrationanalysis/Rollrate Probabilityofdefault/exposureatdefault/lossgivendefault Other?

    Entityrequiredtoapplyjudgmenttodevelopestimationmethodsthatareappropriate,practical,andconsistentwiththeprinciplesoftheguidance,whilebeingconsistentwithstrategicdirectioni.e.scalable)

    20

  • HISTORICALLOSSDATA

    Anentityslosshistorylossremainsasthestartingpointandgenerallyprovidesabasisforexpectedcreditlosses.GAAPdoesnotspecifyaparticularmethodologyfordetermininghistoricalcreditlossexperience.Thatmethodologymayvarydependingonthesizeoftheentity,therangeoftheentitysactivities,thenatureoftheentitysfinancialassets,andotherfactors.[ASU32620552]Theloansegmentandthechosenmethodwilldeterminethedataneeds.Considertheimpactofloansthatwillbeassessedindividually(removedfromthepool)

    21

  • REASONABLEANDSUPPORTABLEFORECASTS

    Theadjustmentsforcurrentconditionsandreasonableandsupportableforecastsmaycontinuetobequalitative,similartotheapproachappliedbymanyinstitutionstoday.

    Morerobustquantitativemodelsand/orgreatersegmentationmayresultinasmallerqualitativecomponent,dependingonthecircumstances.QFactoradjustmentsmaybemoresignificantbecauseofthelifeofloanmeasurementperiod.Qualitativeanalysismaynotalwaysbedirectionallyconsistentwithcurrenttrends/events.Forexample,anincreaseindelinquencyratesmayhavebeenpreviouslyconsidered/anticipatedwhenestimatingexpectedcreditlosses.

    22

  • IMPACTSOFCECLSTANDARDONSECURITIESAFS

    ImpairmentaccountingforAFSdebtsecurities:

    Currently Creditlossesarerecordedasdirectwritedownsbasedonexpectedcashflows.Subsequentincreasesinexpectedcashflowsareamortizedtointerestincome.

    NewUseofanallowanceisrequiredtorecordimpairment,whichwillallowforreversalifthevaluesubsequentlyincreases.Certainotherrefinementsareincludedinthestandard.

    23

  • WHATISYOUROVERSIGHTROLE

    24

  • GoverningBodyConsiderations

    25

  • GOVERNINGBODYQUESTIONSTOASK

    Istoneatthetopappropriate?

    Areinternal/externalresourcessufficientandqualified?

    Isthereadetailedplanwithkeymilestonescompletedasplanned?

    Areappropriatepolicies,proceduresandcontrolsinplace?

    Whatindependentassessmentswillbeperformed?

    Whatinformationwillbemadeavailabletogoverningbody?

    26

  • Questions?

    27

  • SUPPLEMENTARYSECTION EXAMPLES

    TheFASBmaterialiscopyrightedbytheFinancialAccountingFoundation,401Merritt7,Norwalk,CT06856,andisreproducedwithpermission.

    28

  • Example LossRateApproach

    29

  • Example Estimatinglossesbyvintageyear(ASC326205530)

    30

  • EXAMPLE PROBABILITYOFDEFAULTMETHOD

    Expectedloss=ProbabilityofdefaultxLossgivendefaultxExposureatdefault

    Bankhasapoolofloanswithanoutstandingbalanceof$30million.Managementestimatestheprobabilityoftheseloansgoingintodefaulttobe5%andthelossgivendefaulttobe20%.

    5%x20%x$30million=$300,000expectedlosses

    31

  • RSMThoughtLeadership CECLResourceCenter

    32

  • Thisdocumentcontainsgeneralinformation,maybebasedonauthoritiesthataresubjecttochange,andisnotasubstituteforprofessionaladviceorservices.Thisdocumentdoesnotconstituteaudit,tax,consulting,business,financial,investment,legalorotherprofessionaladvice,andyoushouldconsultaqualifiedprofessionaladvisorbeforetakinganyactionbasedontheinformationherein.Wolf&Company,RSMUSLLP,itsaffiliatesandrelatedentitiesarenotresponsibleforanylossresultingfromorrelatingtorelianceonthisdocumentbyanyperson.

    RSMUSLLPisalimitedliabilitypartnershipandtheU.S.memberfirmofRSMInternational,aglobalnetworkofindependentaudit,tax,andconsultingfirms.ThememberfirmsofRSMInternationalcollaboratetoprovideservicestoglobalclients,butareseparateanddistinctlegalentitiesthatcannotobligateeachother.Eachmemberfirmisresponsibleonlyforitsownactsandomissions,andnotthoseofanyotherparty.Visitrsmus.com/aboutus formoreinformationregardingRSMUSLLPandRSMInternational.RSM andtheRSMlogoareregisteredtrademarksofRSMInternationalAssociation.Thepowerofbeingunderstood isaregisteredtrademarkofRSMUSLLP.

    2016RSMUSLLP.AllRightsReserved.

    33

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