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 commitmentso Standby letters of creditso 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/MethodsAllowance for credit loss may be determined using variousmethods, 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 methodsKey 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 FieldsKey $ Limit/Unused Comittments Model Days DelinquentKey Account Number Model Risk RatingKey Current Balance Model Payment Frequency Key Origination Date Model TDR FlagKey Current Maturity Date Model Call Report CodeKey Modification/Renewal Date Model Collateral CodeKey Current Interest Rate and index factor Model NAICS CodeKey Rate Floor and Ceiling Model Product CodeKey Fixed/Adjustable rate Model Current Collateral Value/Original Collateral ValueKey Chargeoff Amount Model Current /Original Collateral Value Date (appraisal date)Key Chargeoff Date Model Delinquency StatusKey Current Deferred Loan Cost Model # of Times Past Due more than 120 DaysKey Current Deferred Loan Fees Model # of Times Past Due more than 180 DaysKey Current Discount Model # of Times Past Due more than 30 DaysKey Current Premium Model # of Times Past Due more than 60 DaysKey Current Payment Amount Model # of Times Past Due more than 90 DaysKey Current Interest Payment Model Balloon PaymentKey Current Principal Payment Model Current/Original FICO ScoreKey Original Balance Model Current/Original Risk RatingKey Original Discount Model Credit Bureau Combined LTVKey Original PremiumKey Loan Type CodeKey FDIC Type CodeKey Guarnatee Amount

Implementation of CECL Methodology

Start Transition

Project Management / Quality Assurance

Confirm Requirements

-Review data requirements -Confirm loan segments/pools-Confirm forecast (life of loss) assumptions and qualitative factors-Establish forecast and qualitative factor parameters -Agree on final methodology/methodologies -Confirm Data-Confirm Reports-Confirm Users

-Develop CECL Management Team-Confirm scope and requirements-Discuss data accessibility and talk with loan accounting/system vendor -Methodology and Design Sessions-Design Decisions-Determine Timeline

Revisions

-Review interim results-Final Revisions-Final Development

-Develop CECL Prototypes-Review all assumptions used for forecast and qualitative factors for reasonableness-Prototype Reviews-Prototype Revisions

Final Development

Management/BOD reviews:-CECL Methodology-All data and documentation supporting forecast assumptions-Ongoing testing plan-Scripts-Bug Fixes-Deployment Plan

System Testing/Validation

ProjectMobilization

Launch

Iterative Prototype Review

Orchestration Platform Alignment & Adoption

Support

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 Flows2. Vintage Analysis3. Loss Rates4. 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 informationo Economic trend data and correlation of other qualitative factorso Ensure Key fields are extractable from the loan systemo 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