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©2016 Crowe Horwath LLP

Georgia CFO Council MeetingDevelopments for Financial Institutions from the FASB and Federal Financial Institution Regulators, and Qualitative Factors of the Allowance for Loan Losses

November 18, 2016

Eve Rogers, PartnerAtlanta, GA

©2016 Crowe Horwath LLP 22

Agenda

• From the FASB • Major Standards • Minor Standards and Reminders• In the Pipeline

• From the Federal Financial Institution Regulators

• Thoughts on Qualitative Factors


Financial Reporting Update forFinancial InstitutionsWhat’s New (and Old) from FASB


Recently Effective / Issued Standards and Projects

• Major Standards• Revenue Recognition (ASU 2014-09)• Leases (ASU 2016-02)• Financial Instruments

• Recognition & Measurement (ASU 2016-01)• Credit Losses (ASU 2016-13)

• Minor Standards• PCC Effective Date and Transition Guidance (ASU 2016-03)• Breakage for Prepaid Cards (ASU 2016-04)• Derivative Novations (ASU 2016-05)• Contingent Puts and Calls on Debt Instruments (2016-06)• Equity Method (ASU 2016-07)• Share-Based Payments (ASU 2016-09)• Statement of Cash Flows: Certain Clarifications (ASU 2016-15)• Revenue Recognition (ASU 2016-08, 10, 12)

• Reminders

• In The Pipeline• Goodwill & Intangibles for Public Business Entities • Definition of a Business• Stock Compensation• Restricted Cash• Interest Income: Purchase of Callable Debt Securities• Net Periodic Pension Costs• Disclosures

• Government Assistance• Fair Value Measurement • Income Taxes• Defined Benefit Plan Sponsors

• Hedging

Private Company Council (PCC) alternative which is only available to institutions not considered “public”


Major Standards

Standard Effective for Public Business Entities Early Adoption?Revenue RecognitionASU No. 2014-09, “Revenue From Contracts With Customers (Topic 606)” (May 2014)

• Annual reporting periods beg. after Dec. 15, 2017, including interims within

• 12/31 year-end PBEs –• March 31, 2018, interim F/S

• Yes, annual reporting periods beg. after Dec. 15, 2016, including interim periods within

Recognition and MeasurementASU No. 2016-01, “Financial Instruments –Overall (Subtopic 825-10): Recognition & Measurement of Financial Assets & Financial Liabilities” (Jan. 2016)

• Fiscal years beg. after Dec. 15, 2017, including interims within


• Own credit risk for financial liabilities using FV option to recognize change in OCI

• Non-PBEs removing FV financial instruments table

LeasesASU No. 2016-02, “Leases (Topic 842)“ (Feb. 2016)

• Annual periods beg. after Dec. 15, 2018 and interims within


• Yes, early adoption is permitted

Credit LossesASU No. 2016-13, “Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (June 2016)

• Fiscal years beg. after Dec. 15, 2019, including interims within (SEC filers)

• 12/31 year-end SEC-filers –• March 31, 2020, interim F/S

• Yes, fiscal years beg.after Dec. 15, 2018, including interim periods within

Non-PBEs and other entities typically receive an additional year


Definition of a Public Business Entity (PBE)

• FASB ASU 2013-12, “Definition of a Public Business Entity”• Issued Dec. 23, 2013• Defines “public” for financial reporting purposes, not legal purposes • Implications for effective dates, disclosure, recognition and measurement (e.g., PCC alternatives)

• In broad terms, a PBE is an entity that meets any of the following: a) Files with the U.S. Securities and Exchange Commission (SEC) b) Required to file under the ‘34 Act with a regulator other than the SECc) Required to provide financial statements with a regulator for purposes of issuing securitiesd) Securities are traded, listed, or quoted on an exchange or an over-the-counter markete) Required by law or regulation for file financial statements and make them publicly available (and the securities do not

have a contractual restriction)

• Clarifications• FASB intends OTC market to be defined broadly (criterion d)• If securities are unrestricted, and therefore do or could trade without management or board approval, there is a rebuttable

presumption that criterion d would be met and therefore the institution would be deemed a PBE

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Criterion “e”

Criterion “d”


Accounting for Financial Instruments

FASB

IASB

Recognition & Measurement

ASU 2016-01, issued

Jan. 5, 2016

IFRS 9 issued July

2014

Credit Losses

ASU 2016-13, issued June 16,

2016

IFRS 9 issued July

2014

Hedging

Proposal issued 3Q16

Micro – Final Nov. 2013

Macro – DP April 2014


Major Standards: Recognition & Measurement

• ASU No. 2016-01, “Financial Instruments – Overall (Subtopic 825-10): Recognition & Measurement of Financial Assets & Financial Liabilities” (Jan. 2016)• Retains the existing separate classification models

• Debt Securities• Held To Maturity (HTM) (amortized cost)• Available For Sale (AFS) (FV / OCI)• Trading (FV / NI)

• Loans• Held for Investment (amortized cost)• Held for Sale (lower of amortized cost or FV)

• Milestones• Original proposal – May 26, 2010• Revised proposal – Feb. 14, 2013

• Tried to converge with IASB • FASB determined it would have added too much complexity

IASB approach


Recognition & Measurement: Key Changes

• Equities• Eliminates the available-for-sale (AFS) category – all will be carried at fair value with changes in earnings (trading)• Practical expedient for equities without a readily determinable FV to be recorded at amortized cost, less impairment,

adjusted for observable price changes • Scope now includes other ownership interests such as investments in partnerships, unincorporated joint ventures, and

limited liability companies

• Valuation allowance for deferred-tax assets (DTA) on an AFS debt security • Assess in combination with other DTAs

• Financial liabilities measured at fair value under the FVO election• Fair value change attributed to instrument-specific credit risk will be presented in OCI rather than net income


Recognition & Measurement

• Disclosures• Assets and liabilities

• On the balance sheet or in the footnotes, disclose all financial assets and financial liabilities grouped by measurement category and form (for example, securities or loans and receivables) of financial assets

• Fair value of financial instruments measured at amortized cost (formerly FAS 107) • PBEs - measure based an exit price, rather than the commonly used entrance pricing• Non-PBEs – have the option to remove this disclosure

• Note – HTM disclosures (FAS 115) remain

• Effective Date• PBEs - fiscal years (and interim periods) beginning after Dec. 15, 2017• Non-PBEs – fiscal years beginning after Dec. 15, 2018, and interim periods within fiscal years beginning after Dec. 15,

2019; early adoption is permitted

Can early adopt for F/S not yet issued

1Q18 for 12/31 year-ends

12/31/19 for 12/31 year-ends


Credit Losses (Here’s CECL)

• Milestones • May 26, 2010 – FASB’s comprehensive proposal for financial instruments• Jan. 31, 2011 – FASB & IASB propose common solution (“3 bucket approach”)• Dec. 20, 2012 – FASB proposes CECL model as alternative • July 24, 2014 – IASB issued IFRS 9

• ASU 2016-13, “Financial Instruments: Credit Losses (Topic 326) Measurement of Credit Losses on Financial Instruments”• Issued June 16, 2016 (291 pages total – 95 through 123 key, implementation

guidance 123-140)• On June 17, the federal financial institution regulators issued a statement, “Joint

Statement on the New Accounting Standard on Financial Instruments – Credit Losses,” to provide initial supervisory views on implementation (7 pages)

Current ExpectedCredit Losses


Scope for the CECL Model

In CECL• Financial assets measured at amortized cost basis, including:

• Financing receivables• Held-to-maturity (HTM) debt securities• Receivables from revenue transactions (Topics 605, 606 and 610)• Reinsurance receivables from insurance transactions (Topic 944)• Receivables that relate to repurchase agreements and securities lending

agreements (Topic 860)• Net investments in leases by lessors (Topic 842)• Off-balance-sheet credit exposures not accounted for as

insurance• Off balance sheet loan commitments,• Standby letters of credit• Financial guarantees not accounted for as insurance• Other similar instruments, except for derivatives and hedges (Topic 815)

Not in CECL• Financial assets measured at FV through

net income• Available-for-sale debt securities • Loans made to participants by defined

contribution employee benefit plans• Policy loan receivables of an insurance

entity• Promises to give (pledges receivable) of

a not-for-profit entity• Loans and receivables between entities

under common control

Key point - Its not just for loans!

However, ASU does change for

AFS too!


The CECL Model

• Recognize an allowance for expected credit losses on financial assets

• Departs from the incurred loss model which means the probable threshold is removed• Removes the prohibition on recording day one losses

• Considers more forward-looking information than is permitted under current U.S. GAAP• “...an entity shall consider available information relevant to assessing the collectability of cash flows. This information may include internal

information, external information, or a combination of both relating to past events, current conditions, and reasonable and supportable forecasts” [326-20-30-7]

• An entity shall not rely solely on past events to estimate expected credit losses. When an entity uses historical loss information, it shall consider the need to adjust historical information to reflect the extent to which management expects current conditions and reasonable and supportable forecasts to differ from the conditions that existed for the period over which historical information was evaluated

• Project the expected losses as far as can reasonably estimate • Revert to a unadjusted historical lifetime loss experience for the future periods beyond which the entity is able to make or obtain

reasonable and supportable forecasts

• Provides flexibility to utilize different methodologies


Debt Securities

• HTM – use CECL model• Will use an allowance instead of direct write-off (so permits reversals)• Evaluations of expected credit losses for some debt securities likely to be similar to those previously used in practice• Required pooling of HTM debt securities

• AFS – modifies “other than temporary impairment” (OTTI) model • Will use an allowance instead of direct write-off (so permits reversals)• Will remove the criteria to consider the length of time and extent that FV < cost• Will remove the criterion to consider recoveries or additional declines in value post B/S• Fair value floor – which means credit losses are limited to amount of FV < amortized cost

Par 100 ECL (5) Fair Value 96 Recorded ECL (4)

AFS OTTI FV Floor


Example: Vintage Disclosure of Credit Quality Indicators


Transition & Effective Dates

• Transition• Modified retrospective with cumulative effect adjustment to the balance sheet (credit allowance, debit retained earnings)• Separately addresses debt securities with OTTI and PCI transition

• Effective dates were extended by one year as follows:

• Early adoption is permitted for fiscal years beginning after Dec. 15, 2018, including interim periods within those fiscal years

PBEs (SEC filers) PBEs (Other than SEC filers) All Other Entities (Non-PBEs)Fiscal years beginning after Dec. 15, 2019, and interim periods within

Fiscal years beginning after Dec. 15, 2020, and interim periods within

Fiscal years beginning after Dec. 15, 2020; interim periods within fiscal years beginning after Dec. 15, 2021

Calendar year ends – 1Q20 Calendar year ends – 1Q21 Calendar year ends – As of Jan. 1, 2021, recorded in 4Q21


From the FASB

• Credit Losses webpage• Transition Resource Group (TRG)• Educational Resources

• FASB in Focus• 4 pages

• Understanding Costs and Benefits• 4 pages

• Video• Webcast from July 21, 2016

http://www.fasb.org/jsp/FASB/Page/ImageBridgePage&cid=1176168210663


FASB Transition Resource Group (TRG)

• Led by Larry Smith, Board member• Cross function of preparers, auditors and users• Assist with implementation issues

• Met on Sept. 30, 2015 and April 1, 2016

• 16 Member Composition • 6 Audit Firms• 5 Banks (Mega) • 2 Credit unions • 1 Community bank• 1 Insurance Company

• Observers• SEC• PCC• PCAOB• Federal Reserve, OCC, FDIC, NCUA and FHFA

Meetings

Submit An Issue


AICPA DIEP Update on CECL

• AICPA Depository Institutions Expert Panel (DIEP)• Auditing

• International Auditing & Assurance Standards Board (IAASB)• AICPA Auditing Standards Board (ASB)• PCAOB

• Modeling approaches

• International Activity• International Banking Federation (IBFed)• International Auditing & Assurance Standards Board (IAASB)

• Project to revise ISA 540 (auditing accounting estimates)• March 2016 paper – Auditing Challenges Arising from the Adoption of Expected Credit Loss Models

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Crowe Resources: Credit Losses

• Adapting to CECL, Part 4: Developing Needed Resources and Technology (Oct. 2016)

• Adapting to CECL, Part 3: Governance and Oversight for Making the Transition (Sept. 2016)

• Inside the New Credit Loss Model (Aug. 2016)• Adapting to CECL, Part 2: Taking stock of the

data requirements (July 2016)• Adapting to CECL, Part I: Identifying portfolio

risks (June 2016)• Here’s CECL: FASB Issues Final Standard for

Credit Losses (June 2016)• Credit Data Management: Looking Beyond

DFAST, Basel, and CECL (Oct. 2015)• FASB’s CECL Model: Navigating the Changes:

Planning for Current Expected Credit Losses (CECL) (Dec. 2014)

http://www.crowehorwath.com/cecl


Major Standards: Revenue Recognition

• ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)”• Issued May 28, 2014

• Create single, joint standard with a robust framework • Increased comparability across industries and better disclosures• All contracts with customers, except leases, insurance, financial instruments, guarantees

• FASB’s Transition Resource Group (TRG)• 16 AICPA Revenue Recognition Industry Task Forces

• Financial services• Depository Institutions• Insurance• Asset Management• Broker Dealers

• Effective Dates• PBEs – annual periods beginning after Dec. 15, 2017, including interim periods within those annual periods• Non-PBEs - annual reporting periods beginning after Dec.15, 2018, and interim periods within annual periods beginning

after Dec. 15, 2019

1Q18 for 12/31 Y/E


Revenue Recognition: Issues Addressed to Date

• Scoping Considerations for Financial Institutions (Memo 52; April 18, 2016 TRG)• Servicing & sub-servicing – generally not in scope of 606 • Deposit fees – in scope of 606; provides observations• Financial guarantees – generally not in scope of 606

• Credit cards for issuing banks (Memo 36; July 13, 2015 TRG)• Fees and reward programs • Evaluate for performance obligations

• Sale of Non-Operating Assets (OREO – FinREC Issue #5-4) • Eliminates the table and various models (installment, cost recovery)• Recognize sale when control has passed• Evaluate whether probable consideration is collectible• FinREC Issue #5-4: Sale of Non-Operating Assets (Other Real Estate Owned)

• Issued Nov. 1, 2016, available for comment until Jan. 2, 2017 • http://www.aicpa.org/InterestAreas/FRC/AccountingFinancialReporting/RevenueRecognition/DownloadableDocuments/Working_Drafts/De

pository/DEP_5-4_Sale_of_Non-Operating_Assets.pdf


Major Standards: Leases

• ASU 2016-02, “Leases (Topic 842)”• Issued Feb. 25, 2016; 3 parts

• Topic 842 – 191 pages• Conforming amendments – 148 pages• Background information and basis for conclusions – 152 pages

• Basic concept from proposal is retained: • Record an asset (right of use (ROU)) and liability (lease obligation)

• Lessee model• FASB – classification line is the same as current accounting• IASB – single model

• Lessor model • Maintaining current model with only minor updates• Reduced lessor disclosures

• Impact• Regulatory capital • Financial and performance measures• Borrowers’ financial statements (e.g. debt covenants and debt-to-equity ratios)

Joint project with IASB


For Lessees

• Characterization of expense• Depends on lease classification

• Pattern of recognition• Depends on lease classification

Financing Lease Operating LeaseHas control passed to lessee? Yes NoBalance sheet Right of Use asset

Lease liability Right of Use asset Lease liability

Income statement (characterization) Interest expenseAmortization expenseOther (impairments, amortization, variable payments excluded from liability

Lease expenseOther (impairments, amortization, variable payments excluded from liability

Pattern of expense Front-loaded Straight-line, typicallyCash flow statement Operating - cash paid for interest

Financing - cash paid for principal Operating - cash paid for lease payments

Permitted to make an accounting election not to recognize certain “short-term” leases


For Lessors

• Determine lease classification based on similar criteria to existing GAAP• Apply the five criteria that lessees use. If any are met and control is retained the lease will be classified as a sales-type

lease.• If not, two triggers determine classification as a direct finance lease.• Leases not meeting any of the five initial criteria and do not meet the two criteria for classification as a direct finance lease

are classified as operating leases.

Direct Financing/Sales-Type Operating

Balance sheet Net investment in the lease (unless for sale-type collectability is not probable)

Continue to recognize underlyingasset

Income statement Direct finance - Interest income and any profit on the lease, loss at commencementSales-type – interest over term, profit/loss at commencement

Lease income, typically straight-line

Cash flow statement Operating - cash received for lease payments Operating - cash received for lease payments


Leases

• Transition• Lessee – require modified retrospective for capital and operating existing at or entered into after the beginning of the

earliest comparative period presented (no required transition for leases that expired before application). • Lessor – require modified retrospective transition approach for sales-type, direct financing, and operating leases existing

at, or entered into after, the date of initial application (no required transition for leases that expired before application).

• Effective dates• PBEs - fiscal years (including interims within) beg. after Dec. 15, 2018, including interim periods within those fiscal years• Non-PBEs - fiscal years beg after Dec. 15, 2019, interim periods beg. after Dec. 15, 2020• Early application permitted upon issuance of the final standard – February 2016

1Q19 for 12/31 year-ends

12/31/20 for 12/31 year-ends


Resource: Leases

• Crowe Newsletter, “Something Borrowed, Something New: Get Ready for the New Lease Accounting Standard” • Issued April 8, 2016• 16 pages

• Background• Who Will Be Effected• Sale and Leaseback Transactions• Effective Dates• Transition• Disclosures

https://www.crowehorwath.com/insights/asset/borrowed-new-lease-accounting-standard/


Other Final Standards Issued in 2016

• Many permit early adoption

Private Company Council (PCC) alternative which is only available to institutions not considered “public”

PBEs Non-PBEsPCC Effective Date and Transition Guidance (ASU 2016-03) N/A AnytimeBreakage for Prepaid Cards (ASU 2016-04) 1Q18 Dec. 31, 2019Derivative Novations (ASU 2016-05) 1Q17 Dec. 31, 2018Contingent Puts and Calls on Debt Instruments (2016-06) 1Q17 Dec. 31, 2018Equity Method (ASU 2016-07) 1Q17 March 31, 2017Share-Based Payments (ASU 2016-09) 1Q17 Dec. 31, 2018Statement of Cash Flows: Certain Clarifications (ASU 2016-15) 1Q18 Dec. 31, 2019Revenue Recognition Clarifications (ASU 2016-08, 10, 12) 1Q18 Dec. 31, 2019

For calendar year-ends


PCC Effective Date and Transition Guidance

• ASU No. 2016-03, “Intangibles—Goodwill and Other (Topic 350), Business Combinations (Topic 805), Consolidation (Topic 810), Derivatives and Hedging (Topic 815): Effective Date and Transition Guidance (a consensus of the Private Company Council)”• Issued March 7, 2016• May elect to apply the PCC alternatives at any point in time without performing a preferability assessment

• For any change subsequent to the initial election of such accounting alternative, preferability must be assessed under ASC Topic 250 as a change in accounting policy


Breakage for Prepaid Cards

• ASU 2016-04, “Breakage for Certain Prepaid Cards”• Issued on March 10, 2016• Narrowly address breakage (that is, the monetary amount of the card that ultimately is not redeemed by the cardholder)

for prepaid stored-value products that are redeemable for monetary values of goods or services but may also be redeemable for cash.

• For prepaid products that are in scope, such as prepaid gift cards issued by specific payment networks and redeemable at network-accepting merchant locations, and traveler’s checks, breakage can be recognized as follows:• If an entity expects to be entitled to breakage, derecognize amounts in proportion to the pattern of rights expected to be exercised by the

product holder to the extent significant reversals will not subsequently occur.• If an entity does not expect to be entitled to breakage, derecognize amounts when the likelihood of the product holder exercising its

remaining rights becomes remote.

• Effective dates• PBEs - fiscal years beginning after Dec. 15, 2017, and interim periods within (March 31, 2018 for calendar year-ends)• Non-PBEs - fiscal years beginning after Dec. 15, 2018, and interim periods beginning after Dec. 15, 2019 (Dec. 31, 2019

for calendar year-ends) • Early application is permitted.


Share-Based Payments

• ASU 2016-09, Improvements to Employee Share-Based Payment Accounting (ASC 718)• Issued March 30, 2016• Simplifies several aspects including income tax consequences, forfeitures, statement of cash flows• Effective dates – early adoption permitted

• PBEs - annual periods beginning after Dec. 15, 2016, and interim periods within • Non-PBEs - annual periods beginning after Dec. 15, 2017, and interim periods beginning after Dec. 15, 2018

Current GAAP Simplification

Excess tax benefits are recognized in APIC; tax deficiencies are offset to accumulated excess tax benefits, if any, or in earnings.

All excess tax benefits and tax deficiencies would be recognized as income tax expense or benefit in earnings.

Forfeitures: Accruals of comp cost are based on the number of awards expected to vest.

Make policy election to either use current GAAP or account for forfeitures when they occur.

Minimum Statutory Tax Withholding Requirements: To qualify as equity, an entity cannot partially settle the award in cash in excess of the employer’s minimum statutory withholding requirements.

The threshold to qualify for equity classification permits withholding up to the maximum statutory tax rates in the applicable jurisdictions.

Excess tax benefits must be separated from other income tax cash flows and classified as a financing activity.

Excess tax benefits should be classified along with other income tax cash flows as an operating activity.

No guidance on classification of cash paid by an employer to the taxing authorities when directly withholding shares for tax-withholding purposes.

Cash paid by an employer when directly withholding shares for tax-withholding purposes should be classified as a financing activity.


Statement of Cash Flows: Certain Clarifications

• ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments” (EITF consensus)• Issued Aug. 26, 2016• Addresses diversity in practice on 8 specific issues

1. Debt prepayment or extinguishment costs2. Settlement of zero-coupon bonds3. Contingent consideration payments made after a business combination4. Restricted cash* (now Issue 16-A; final ASU to be issued shortly)5. Proceeds from the settlement of insurance claims6. Proceeds from the settlement of life settlement contracts7. Distributions received from equity method investees8. Beneficial interests in securitization transactions

• Effective dates• PBEs – Fiscal years beginning after Dec. 15, 2017 and interim periods within• Non-PBEs – Fiscal years beginning after Dec. 15, 2018 and interim periods beginning after Dec. 15, 2019• Early adoption permitted

32


Reminders….Standards from Yesteryear

PBEs Non-PBEsCloud Computing Arrangements (ASU 2015-05) 1Q16 Dec. 31, 2016Presentation of Debt Issue Costs (ASU 2015-03) 1Q16 Dec. 31, 2016Measurement-Period Adjustments (ASU 2015-16) 1Q16 Dec. 31, 2017Consolidated Collateralized Financing Entities (CFEs) (ASU 2014-13) 1Q16 Dec. 31, 2017Consolidation Amendments (ASU 2015-02) 1Q16 Dec. 31, 2017Going Concern (ASU 2015-14) Dec. 31, 2016 Dec. 31, 2017Fair Value Measurement Level for NAV (ASU 2015-07) 1Q16 Dec. 31, 2017

For calendar year-ends


In The Pipeline

• Goodwill & Intangibles for Public Business Entities • Definition of a Business• Restricted Cash• Interest Income: Purchase of Callable Debt Securities• Disclosures

• Government Assistance• Fair Value Measurement • Income Taxes• Defined Benefit Plan Sponsors

• Hedging

Final Standards


Interest Income: Purchase of Callable Debt Securities

• Proposed ASU, “Receivables – Nonrefundable Fees and Other Costs; Premium Amortization on Purchased Callable Debt Securities”• Issued Sept. 22, 2016• Comments due Nov. 28, 2016

• Objective• The objective of this project is to make targeted improvements on the accounting for the amortization of premiums for

purchased callable debt securities. • Proposed changes

• Requires entities to amortize premium to the earliest call date• Does not require an accounting change associated with callable debt securities purchased at a discount

• Transition• Modified retrospective (cumulative effect to retained earnings) as of the beginning of the first reporting period in which the

guidance is effective• Requires disclosures about change in accounting principle


Financial Instruments Part 3: Hedging

• Proposed ASU, “Derivatives and Hedging (Topic 815) - Targeted Improvements to Accounting for Hedging Activities”

• Issued Sept. 8, 2016; comments due Nov. 22, 2016• Objective:

• Address targeted issues to improve the hedge accounting model • Intended to simplify hedge accounting and better align accounting with risk management

practices • Milestones

• Discussion Paper – Invitation to Comment, “Selected Issues about Hedging Accounting,” issued Feb. 9, 2011

• Proposed ASU, “Financial Instruments and Revisions to the Accounting for Derivative Instruments and Hedging Activities—Financial Instruments (Topic 825) and Derivatives and Hedging (Topic 815),” issued May 26, 2010

• Exposure Draft, “Accounting for Hedging Activities an Amendment of FASB Statement No. 133,” issued June 6, 2008


Financial Instruments Part 3: Hedging

• Hedge designation and documentation• Initial long-haul method quantitative assessment required no later than first quarter’s assessment. • Subsequent to initial quantitative testing, option to qualitatively assess effectiveness.• Would permit including a “living will” in the initial designation describing what long haul method would be used should it

later be determined that the short-cut method was not appropriate.• Fair value hedges

• Permit assessing effectiveness using tenor of derivative so a 10 year instrument could be hedged with a 2 year derivative with the mismatch in tenors not contributing to ineffectiveness.

• Permit assessing effectiveness using the entire coupon, or just the benchmark portion of the coupon. • Hedges of callable fixed rate debt - would only consider prepayment options as it relates to the hedged risk, such as

interest rate risk, so no need to consider other reasons the call might be exercised.• Benchmark Interest Rates

• Would be eliminated from existing GAAP for variable rate financial instruments so any contractually specified index of a variable rate instrument may be designated as the hedged risk.

• Recognition and Presentation• Separately recording ineffectiveness would be removed from existing GAAP so that users will be able to see the full impact

in a single income statement line item.• Disclosures


Developments from the Federal Financial Institution Regulators


From the Regulators

• OCC Bank Accounting Advisory Series (BAAS)• Updated for ASUs effective as of Jan, 2016; issued August 18, 2016• Issued with News Release 2016-96• Presented in a Q&A format • Covers a variety of common fact patterns for financial institutions• New and updated Q&As are highlighted

• New and updated topics include:• Contingencies, Fair Value, Deferred Taxes, Transfers of Financial Assets

and Servicing, Acquisitions

http://www.occ.treas.gov/news-issuances/news-releases/2014/nr-occ-2014-167.html


From the Regulators - ALLL

• Q Factors• Identify the loss drivers • Clarify the starting point: Compare current portfolio with the Lookback period• Quantify the qualitative• Beware of layering effect/double-counting for the same risk

• 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.


What BEST describes your current state with regard to the allowance for loan losses?

A. It’s just right - adequately supported by objective data and qualitative factors.B. It is difficult to support the current level of allowance for loan losses. I expect to release (continue to

release).C. I need more, but can’t justify it.D. I think it is reasonably stated, but am struggling to support it.


Provision for Loan Loss Trends

*2004-2016 NCUA Credit Union Quarterly Data Summary

0.00%

0.20%

0.40%

0.60%

0.80%

1.00%

1.20%

1.40%

1.60%

1.80%

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Q2 '16

Credit Union Provision and Net Charge-off Trends

Provision/Total Loans - Nat'l Net COs/Total Loans - Nat'l


Qualitative Factors


Qualitative Factors

• December 2009 Interagency Policy Statement on the ALLL enumerates 9 qualitative/environmental factors:• Changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, and

recovery practices not considered elsewhere in estimating credit losses. • Changes in international, national, regional, and local economic and business conditions and developments that

affect the collectability of the portfolio, including the condition of various market segments.• Changes in the nature and volume of the portfolio and in the terms of loans. • Changes in the experience, ability, and depth of lending management and other relevant staff. • Changes in the volume and severity of past due loans, the volume of nonaccrual loans, and the volume and

severity of adversely classified or graded loans.• Changes in the quality of the institution’s loan review system. • Changes in the value of underlying collateral for collateral-dependent loans. • The existence and effect of any concentrations of credit, and changes in the level of such concentrations. • The effect of other external factors such as competition and legal and regulatory requirements on the level of estimated

credit losses in the institution’s existing portfolio.


Qualitative Factors (continued)

• Management is expected to consider factors likely to cause estimated credit losses associated with institution’s existing portfolio to differ from historical loss experiences• Choice of factors requires professional judgment• Management should document conclusions reached

• Documentation and Support• Description of factors• Management’s analysis of how each factor has changed over time• Which portfolio segments’ loss rates have been adjusted• Amount by which loss estimates have been adjusted for changes in conditions• Longer term view of internal trends on past dues, nonaccruals, etc.


Qualitative Factors (continued)

• Example Sources of Underlying Data for Qualitative Factors• FOMC Minutes• FDIC Quarterly Banking Profile• Federal Reserve Beige Book• DOL Unemployment Trend• Bureau of Labor Statistics – National and Local• Bureau of Economic Analysis, US Dept. of Commerce – GDP Growth• Ycharts.com – Economic Data• Call Report Peer Data• S&P/Case-Shiller Pricing Index• Zillow.com – Local and National Market Reports


Qualitative Factors – Quantitative Support

* 2004-2016 NCUA Credit Union Quarterly Data Summary

0.00%

0.20%

0.40%

0.60%

0.80%

1.00%

1.20%

1.40%

0.00%

0.20%

0.40%

0.60%

0.80%

1.00%

1.20%

1.40%

1.60%

1.80%

2.00%

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Credit Union NPL Loans and Charge-off Trends

NPLs/Total Loans - CU Net COs/Total Loans - CU


Qualitative Factors – Quantitative Support

*2002-2016 UBPR information on banks with total assets of $300 million - $ 1 billion

0.00%

0.20%

0.40%

0.60%

0.80%

1.00%

1.20%

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Q2 '16

Bank Non-performing Loans and Charge-off Trends

NPLs/Total Loans - Nat'l Net COs/Total Loans - Nat'l


Qualitative Factors—Objective Data


0.00%

0.20%

0.40%

0.60%

0.80%

1.00%

1.20%

1.40%

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

2004 2006 2008 2010 2012 2014 2016

National Unemployment Levels and Credit Union Charge-off Trends

Unemployment CU Net COs




0.00%

0.20%

0.40%

0.60%

0.80%

1.00%

1.20%

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

2002 2004 2006 2008 2010 2012 2014 2016

National Unemployment Levels and Bank Charge-off Trends

Unemployment Net C/os



*2002-2016 UBPR information on banks with total assets of $300 million - $ 1 billion2004-2016 NCUA Credit Union Quarterly Data Summary

0.00%

0.20%

0.40%

0.60%

0.80%

1.00%

1.20%

1.40%

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

National Unemployment and Charge-off Trends

Unemployment CU Net COs Bank Net COs




-50.00%

-30.00%

-10.00%

10.00%

30.00%

50.00%

70.00%

90.00%

2004 2006 2008 2010 2012 2014 2016

National % Change in Unemployment and Credit Union Charge-off Trends

Change in CU COs Change in Unemployment




-75.00%

-25.00%

25.00%

75.00%

125.00%

175.00%

2002 2004 2006 2008 2010 2012 2014 2016

National % Change in Unemployment and Bank Charge-off Trends

Change in Net C/os Change in Unemployment




-50.00%

0.00%

50.00%

100.00%

150.00%

200.00%

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

National % Change in Unemployment and Charge-off Trends

Change in CU COs Change in Bank COs Change in Unemployment




-4.00%

-3.00%

-2.00%

-1.00%

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

-100.00%

-50.00%

0.00%

50.00%

100.00%

150.00%

200.00%

250.00%

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Q2 '16

GDP Growth and Bank Charge-off Trends

Change in Bank COs GDP Growth




-4.00%

-3.00%

-2.00%

-1.00%

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

-30.00%

-20.00%

-10.00%

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

80.00%

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Q2 '16

GDP Growth and Credit Union Charge-off Trends

Change in CU COs GDP Growth




-4.00%

-3.00%

-2.00%

-1.00%

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

-100.00%

-50.00%

0.00%

50.00%

100.00%

150.00%

200.00%

250.00%

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Q2 '16

GDP Growth and Charge-off Trends

Change in CU Cos Change in Bank COs GDP Growth



*S&P CoreLogic Case Shiller Home Price Index

0.00%

0.20%

0.40%

0.60%

0.80%

1.00%

1.20%

1.40%

100.00%

110.00%

120.00%

130.00%

140.00%

150.00%

160.00%

170.00%

180.00%

190.00%

2004 2006 2008 2010 2012 2014 2016

National Housing Index and Credit Union Charge-off Trends

Housing Index CU Net COs




0.00%

0.20%

0.40%

0.60%

0.80%

1.00%

1.20%

100.00%

110.00%

120.00%

130.00%

140.00%

150.00%

160.00%

170.00%

180.00%

190.00%

2002 2004 2006 2008 2010 2012 2014 2016

National Housing Index and Bank Charge-off Trends

Housing Index Net C/os




0.00%

0.20%

0.40%

0.60%

0.80%

1.00%

1.20%

1.40%

120.00%

130.00%

140.00%

150.00%

160.00%

170.00%

180.00%

190.00%

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

National Housing Index and Charge-off Trends

Housing Index CU Net COs Bank Net COs


Qualitative Factors—Vintage and Loss Emergence


0.00%

0.20%

0.40%

0.60%

0.80%

1.00%

1.20%

1.40%

-4.00%

-2.00%

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Q2 '16

Credit Union Loan Growth

Increase in Loans - Nat'l Net COs/Total Loans - Nat'l


Qualitative Factors—Vintage and Loss Emergence


0.00%

0.20%

0.40%

0.60%

0.80%

1.00%

1.20%

-4.00%

-2.00%

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

16.00%

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Q2 '16

Bank Loan Growth and Charge-off Trends

Increase in Loans - Nat'l Net COs/Total Loans - Nat'l


Qualitative Factors - Quantified

Changes in international, national, regional, and local economic and business conditions and developments that affect the collectability of the portfolio, including the condition of various market segments.

Estimate 15 bp change in unemployment causes 1 bp change in charge-offs.

Changes in the nature and volume of the portfolio and in the terms of loans.

Estimate 2% change in loans impacts expected losses by 20 bps.

Changes in the volume and severity of past due loans, the volume of nonaccrual loans, and the volume and severity of adversely classified or graded loans.

Estimate 20 bp change in losses for 50 bp change in non-performing loans.

Changes in the value of underlying collateral for collateral-dependent loans.

For Resi RE, estimate 15 bps of loss for every 10% change in housing index.


Qualitative Factors – Anchoring

2006 2008 2009 2010 2015 Q2 '16

Change (since Max)

Qualitative Conversion

Qualitative Multiple

Loss Multiple

Qualitative Adjustment

Provision/Avg Assets 0.15% 0.62% 1.12% 0.80% 0.09% 0.09%ALLL/Loans 1.21% 1.43% 1.87% 1.97% 1.35% 1.34%

Net COs/Total Loans 0.11% 0.53% 1.12% 1.01% 0.11% 0.08%

NPLs/Total Loans 0.58% 2.07% 3.18% 3.24% 0.91% 0.89% 2.29% 0.5 4.58 0.2 0.92

Loan Growth 12.34% 9.40% -0.10% -1.99% 7.01% 7.26% 2.14% 2.00% 1.07 0.2 0.21Housing Index 183.49% 164.09% 148.59% 144.66% 172.33% 175.89% 27.30% 10.00% 2.73 0.15 0.41Unemployment 4.61% 5.80% 9.28% 9.61% 5.28% 4.91% 4.37% 0.15 29.13 0.01 0.29

Notes:• NPL trends may reflect/include other qualitative factors.• The qualitative adjustments above represent those that would be made

to reflect the great recession.


Qualitative Factors – Adjustment for Look Back Period

2013 2014 2015 Q2 '16 ChangeQualitative Conversion


Loss Multiple


Provision/Avg Assets 0.16% 0.12% 0.09% 0.09%ALLL/Loans 1.61% 1.45% 1.35% 1.34%

Net COs/Total Loans 0.29% 0.18% 0.11% 0.08%

NPLs/Total Loans 1.47% 1.06% 0.91% 0.89% -0.26% 0.5 -0.51 0.2 -0.10

Loan Growth 5.78% 9.15% 7.01% 7.26% -0.05% 2.00% -0.03 0.2 -0.01Housing Index 154.61% 164.81% 172.33% 175.89% -11.97% 10.00% -1.20 0.15 -0.18Unemployment 7.37% 6.17% 5.28% 4.91% -1.36% 0.15% -9.09 0.01 -0.09

Note: Current conditions might suggest negative adjustments for qualitative factors when evaluated over a typical look back period.


Qualitative Factors – Adjustment for Economic Cycle

2009 2010 2011 2012 2013 2014 2015 Q2 '16 ChangeQualitative Conversion


Loss Multiple


Provision/Avg Assets 1.12% 0.80% 0.53% 0.30% 0.16% 0.12% 0.09% 0.09%

ALLL/Loans 1.87% 1.97% 1.93% 1.77% 1.61% 1.45% 1.35% 1.34%

Net COs/Total Loans 1.12% 1.01% 0.80% 0.51% 0.29% 0.18% 0.11% 0.08% -0.49%

NPLs/Total Loans 3.18% 3.24% 2.79% 2.06% 1.47% 1.06% 0.91% 0.89% -1.21% 0.5 -2.42 0.2 -0.48

Loan Growth -0.10% -1.99% -0.57% 3.64% 5.78% 9.15% 7.01% 7.26% 3.99% 2.00% 1.99 0.2 0.40

Housing Index 148.59% 144.66% 139.24% 141.03% 154.61% 164.81% 172.33% 175.89% -23.71% 10.00% -2.37 0.15 -0.36Unemployment 9.28% 9.61% 8.94% 8.07% 7.37% 6.17% 5.28% 4.91% -2.91% 0.15% -19.38 0.01 -0.19

Notes: Current conditions might suggest mixed adjustments for qualitative factors when evaluated over an economic cycle.


Qualitative Factors – Forecasting Case Study

• Let’s estimate the impact to loss rates for the following conditions:• FOMC is expected to rates in December by 25 basis points and additional increases are expected in 2017 and beyond.• The Bank plans to aggressively grow the loan portfolio, in the double digits.• A major employer announced they are moving to Mexico. Nonperforming loans are expected to approach levels

experienced during the great recession.


Qualitative Factors – Adjustments for Forecasts

2013 2014 2015 Q2 '16 YE 2016 2017 ChangeQualitative Conversion


Loss Multiple


NPLs/Total Loans 1.47% 1.06% 0.91% 0.89% 2.00% 0.85% 0.5 1.71 0.2 0.34Loan Growth 5.78% 9.15% 7.01% 7.26% 10.00% 2.69% 2.00% 1.34 0.2 0.27

Housing Index 154.61% 164.81% 172.33% 175.89% 175.00% 11.08% 10.00% 1.11 0.15 0.17Unemployment 7.37% 6.17% 5.28% 4.91% 5.00% -1.27% 0.15% -8.49 0.01 -0.08

NPLs/Total Loans 1.47% 1.06% 0.91% 0.89% 3.00% 1.85% 0.5 3.71 0.2 0.74

Loan Growth 5.78% 9.15% 7.01% 7.26% 12.00% 4.69% 2.00% 2.34 0.2 0.47Housing Index 154.61% 164.81% 172.33% 175.89% 168.00% 4.08% 10.00% 0.41 0.15 0.06

Unemployment 7.37% 6.17% 5.28% 4.91% 6.00% -0.27% 0.15% -1.82 0.01 -0.02


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Questions?Eve Rogers, CPAAudit PartnerCrowe Horwath LLPAtlanta, [email protected]