Corporate America Credit Union Annual Meeting Preparing for FASB Current Expected Credit Loss (CECL) Model April 2017

Size: px

Start display at page:

Download "Corporate America Credit Union Annual Meeting Preparing for FASB Current Expected Credit Loss (CECL) Model April 2017"

Morgan Terry
5 years ago
Views:

1 Corporate America Credit Union Annual Meeting Preparing for FASB Current Expected Credit Loss (CECL) Model April 2017 Eve Rogers, Partner Atlanta, GA Merri Ellen Wadsworth, Senior Manager Atlanta, GA 2016 Crowe Horwath LLP

Agenda Credit Losses Project Background Status of Project What Has Changed Transition Models & Methodologies Different model types Complex vs simple model pros/cons Qualitative Considerations Making

2 Agenda Credit Losses Project Background Status of Project What Has Changed Transition Models & Methodologies Different model types Complex vs simple model pros/cons Qualitative Considerations Making the Transition Risk Identification Data Inventory Resource Capabilities Enabling Technologies Governance and Oversight Next Steps Developing Your Roadmap Reference Materials Closing Q&A 2016 Crowe Horwath LLP 2

3 Credit Losses (Here s CECL) Current Expected Credit Losses 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 , Financial Instruments: Credit Losses (Topic 326) Measurement of Credit Losses on Financial Instruments Issued June 16, 2016 (291 pages) 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) 2016 Crowe Horwath LLP 3

The CECL Model: Defined Recognize an allowance for expected credit losses on financial assets Allowance should be amount deducted from amortized cost of the financial asset to present net amount

4 The CECL Model: Defined Recognize an allowance for expected credit losses on financial assets Allowance should be amount deducted from amortized cost of the financial asset to present net amount expected to be collected on the financial asset Considers more forward-looking information than is permitted under current U.S. GAAP 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 Departs from the incurred loss model which means the probable threshold is removed Removes the prohibition on recording day one losses Provides flexibility to utilize different methodologies 2016 Crowe Horwath LLP 4

5 Scope for the CECL Model In CECL Key point - Its not just for loans! 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 However, ASU does change for AFS too! 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 2016 Crowe Horwath LLP 5

Changes to Methodologies Under CECL Have to change methodology (by either modifying existing methodology or making a wholesale change in methodology) to implement the CECL model Lifetime estimate

6 Changes to Methodologies Under CECL Have to change methodology (by either modifying existing methodology or making a wholesale change in methodology) to implement the CECL model Lifetime estimate Develop estimates that are clearly more forward-looking than they were in the past Not required to forecast economic cycle impacts throughout the loan life Reversion to history is required the history may be the hardest part to capture on longer-term assets! FASB believes models do not need to be unnecessarily complex Re-evaluate the current primary drivers of loss Likely more than one driver of expected losses exists for each portfolio Changes in the data needed to implement the CECL model Changes in the methodologies implemented or the risk characteristics used to organize the portfolio could require new data to be historically gathered as well as prospectively tracked (examples include credit scores or other underwriting criteria) Need to consider remaining-life exposure to not overstate loss, requires understanding of loan terms and likely more discrete pooling than today. This change will not eliminate qualitative adjustments and likely will result in more Q-factors than before 2016 Crowe Horwath LLP 6

7 Cumulative Credit Loss Example 10-year asset class with loss estimates determined at inception and revised in Years 3 and 7 Incurred Loss Model Expected Loss Model 2016 Crowe Horwath LLP 7

8 CECL: Contractual Life Prepayment estimates will mainly be relevant in complex models More sophisticated models may forecast less losses due to prepay and other characteristics, but requires more data Consider expected prepayments; should not consider expected extensions, renewals, and modifications unless anticipate executing a TDR What factors should be considered in formulating a prepayment expectation? There will be heightened sensitivity to the prepay assumption given the impact on the allowance Consider auditability and actual history/trends of the subject portfolios Market statistics on CMBS, RMBS bond performance may be helpful in formulating the assumption Asset quality may impact the assumption i.e. what s the likelihood a substandard or past due loan will prepay? Note and rate structures fixed vs. variable rate considerations, spreads to indices, teaser rates, etc. Current and forecasted rate environments may need to be assessed to adequately assess prepayment Expected life of a loan commitment Depends on type (funded versus unfunded) Funded - expected credit losses should be estimated similar to other loans (consider cash flows over expected life) Unfunded loan commitments that are not unconditionally cancelable should reflect the full contractual period of the commitment 2016 Crowe Horwath LLP 8

9 CECL: Considering Risk of Loss An entity s estimate of expected credit losses shall include a measure of the expected risk of credit loss even if that risk is remote, regardless of the method applied to estimate credit losses. [ ] Not required to measure expected credit losses if forecast results in expectation that nonpayment will be zero. Unless using collateral dependent, cannot rely solely on current value of collateral; also consider the nature of the collateral, potential future changes in values, and historical loss information on similar collateral. See Example 8 US Treasury 2016 Crowe Horwath LLP 9

10 The CECL Model: Aggregation Aggregation An entity shall measure expected credit losses of financial assets on a collective (pool) basis when similar risk characteristic(s) exist (as described in paragraph ). If an entity determines that a financial asset does not share risk characteristics with its other financial assets, the entity shall evaluate the financial asset for expected credit losses on an individual basis. [ ] (a) Internal or external (third-party) credit score or credit ratings (b) Risk ratings or classification (c) Financial asset type (d) Collateral type (e) Size (f) Effective interest rate Similar risk characteristics from Not all inclusive! (g) Term (h) Geographical location (i) Industry of the borrower, (j) Vintage (k) Historical or expected credit loss patterns (l) Reasonable and supportable forecast periods Crowe Horwath LLP 10

11 The CECL Model: Forecasts and Beyond Project the expected losses as far as can reasonably estimate 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. [ ] Revert to a historical lifetime loss experience for the future periods beyond which the entity is able to make or obtain reasonable and supportable forecasts Reversion should occur at either the component level or the entire loss estimate Example Historical Experience Forecast Period (Years 1-2) Periods Beyond Forecast (Years 3 and beyond) Portfolio A Historical Loss Experience Expected Losses in Forecast Period Expected Losses based on Reverting to Historical Loss Experience Permitted to revert: [ ] (a) immediately (b) over the financial asset s estimated life on a straight-line basis or (c) over a period and in a pattern that reflects the entity s assumptions about expected credit losses over that period Disclose pattern of reversion Changes in the reversion period would represent a change in estimate rather than a change in accounting policy 2016 Crowe Horwath LLP 11

12 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 Use an allowance instead of direct write-off (so permits reversals) Removes the criteria to consider the length of time and extent that FV < cost Removes the criterion to consider recoveries or additional declines in value post B/S Includes a fair value floor which means credit losses are limited to amount of FV < amortized cost DCF??? Example: AFS OTTI FV Floor Par 100 ECL (5) Fair Value 96 Recorded ECL (4) 2016 Crowe Horwath LLP 12

13 Troubled Debt Restructurings (TDRs) Credit losses should be measured using the CECL model as applied to all other financial assets measured at amortized cost. A discounted cash flow technique to measure credit losses upon a TDR that is required in current GAAP will no longer be required and an entity may use other approaches to measure credit losses upon a TDR. Interest rate concessions will likely still require a DCF analysis to capture implied economic loss Concession given to the borrower upon a TDR will continue to be recorded through an allowance account 2016 Crowe Horwath LLP 13

Collateral Dependent Method Retains the use of the collateral dependent method but is re-defined 326-20-35-5 An entity may use, as a practical expedient, the fair value of the collateral at the

14 Collateral Dependent Method Retains the use of the collateral dependent method but is re-defined An entity may use, as a practical expedient, the fair value of the collateral at the reporting date when recording the net carrying amount of the asset and determining the allowance for credit losses for a financial asset for which the repayment is expected to be provided substantially through the operation or sale of the collateral when the borrower is experiencing financial difficulty based on the entity s assessment as of the reporting date (collateral dependent financial asset). If an entity uses the practical expedient on a collateral-dependent financial asset and repayment or satisfaction of the asset depends on the sale of the collateral, the fair value of the collateral shall be adjusted for estimated costs to sell (on a discounted basis). However, the entity shall not incorporate in the net carrying amount of the financial asset the estimated costs to sell the collateral if repayment or satisfaction of the financial asset depends only on the operation, rather than on the sale, of the collateral Crowe Horwath LLP 14

15 Disclosures Carries forward many existing disclosures Consider BS and IS geography A description and discussion of factors that influenced management s estimate, including reasonable and supportable forecasts about the future. The factors that influenced management s current expected credit losses, the changes in those factors, and the reasons for those changes The method applied to revert to historical credit loss experience Vintage disclosures A disaggregation of the credit-quality indicators, for all classes of financing receivables and major security type and net investment in leases, that are disclosed under current GAAP, by year of the asset s origination (that is, vintage year): Excludes reinsurance receivables and funded or unfunded amounts of line-of-credit arrangements, such as credit cards) Practical expedients Non-SEC filer PBEs can elect a practical expedient in transition Disclose only three years in the year of adoption and four years in the year after adoption. Full five-year disclosure requirement in years thereafter. For all other entities the vintage disclosures will be optional; therefore, those entities may elect not to make those disclosures Crowe Horwath LLP 15

16 Vintage Disclosure For purchased financing receivables and net investment in leases an entity shall use the initial date of issuance to determine the year of origination, not the date of acquisition. For origination years before the fifth annual period, an entity may present the amortized cost basis of financing receivables and net investments in leases in the aggregate. For interim period disclosures, the current year-to-date originations in the current reporting period are considered to be the current-period originations use the guidance in paragraphs through when determining whether a modification, extension, or renewal of a financing receivable should be presented as a current-period origination. An entity shall use the guidance in paragraphs through 25-9 when determining whether a lease modification should be presented as a current period origination 2016 Crowe Horwath LLP 16

17 Example Disclosure of Credit Quality Indicators ASC Example 15 also includes Commercial 2016 Crowe Horwath LLP 17

18 Transition and Effective Date Transition Debt Securities with prior OTTI prospective transition Amounts previously recognized in AOCI related to CF improvements will accrete to income. Yield locked at adoption date and subsequent changes in expected CFs will be recorded through allowance Recoveries of prior charge-offs will follow existing recovery models for loans All Other Assets Modified retrospective with cumulative effect adjustment to the balance sheet (credit allowance, debit retained earnings) Effective Date Fiscal years beginning after Dec. 15, 2020, and interim periods within the fiscal years beginning after Dec. 15, 2021 (as of 1/01/2021, but recorded in Q4 2021) Early adoption is permitted for fiscal years beginning after Dec. 15, 2018, including interim periods within those fiscal years 2016 Crowe Horwath LLP 18

19 BASEL CECL Consultative Document Basel Committee on Banking Supervisions Consultative Document Guidance on accounting for expected credit losses Issued on December pages Document lays out 11 principles which should be considered to maintain an effective internal control environment Crowe Horwath LLP 19

FASB Transition Resource Group (TRG) Led by Larry Smith, Board member Address implementation issues as needed 16 Member Composition Audit Firms

20 FASB Transition Resource Group (TRG) Led by Larry Smith, Board member Address implementation issues as needed 16 Member Composition Audit Firms Banks Credit unions Insurance Company Meetings Submit An Issue Observers SEC PCC PCAOB Federal Reserve, OCC, FDIC, NCUA and FHFA 2016 Crowe Horwath LLP 20

21 Models and Methodologies 2016 Crowe Horwath LLP 21

22 Changes to Current Methodologies Under CECL Loss-rate model Open pool - Cumulative credit loss Closed pool - Vintage/static pool Component loss models Probability of default Roll-rate (migration analysis) Rating transition models Regression Loss given default/severity Exposure at default Discounted cash flow Hybrid models Current Conditions, Forecast and Reversion Adjustments Qualitative Quantitative 2016 Crowe Horwath LLP 22

23 Pooled Loss-Rate Approach Example 1 ASC through Facts $3 million pool of 10-year amortizing loans with similar risk characteristics Originated over the last 10 years (i.e. not all same vintage) Methodology / Approach Develop 10 year loss rate Believe most recent 10 years is reasonable period to base loss expectation Determined historical lifetime credit loss rate based on sum of all credit losses for similar pool Historical loss rate developed 1.5% 2016 Crowe Horwath LLP 23

24 Pooled Loss-Rate Approach Example 1 (con t) Develop Qualitative Factors Considered qualitative adjustments to historical loss rate due to differences in current asset specific risk characteristics (ASC ) No necessary adjustments Considered significant factors that could affect the expected collectability of the pool (ASC ) Primary factors determined to be: Real estate values - current has declined and expected to continue to decline in next 1-2 years 10 basis point adjustment determined to be necessary Unemployment rates current increased and expected to continue to increase in next 1-2 years 5 basis point adjustment determined to be necessary No further adjustments as management determined it could not support an estimate of real estate values or unemployment beyond this forecast period and utilized an immediate reversion technique Total pooled loss rate 1.65% 2016 Crowe Horwath LLP 24

25 How the Process Differs (Incurred vs. CECL) Incurred Loss Example CECL Example Period XYZ Call Code XYZ Call Code XYZ Annual XYZ Call Code Ending Amortized Cost Annual Loss Loss Rate (%) 2010 Loss 2010 $ 1,500,000 $ 4, % $ ,610,000 4, % 3, ,730,000 4, % 3, ,850,000 4, % 3, ,980,000 5, % 3, ,120,000 5, % 2, ,270,000 6, % 2, ,430,000 6, % 2, ,610,000 7, % 1, ,800,000 7, % ,000,000 8, % - $ 63, % 1 Year Emergence (%) $ 22, Cumulative Loss Losses only attributable to loans outstanding at 2010 Year End % Q-Factor (Hypothetical) $ 1,500, Ending Balance XYZ Call Code = 0.78% Total Incurred Loss (%) = 1.50% 10 Year Cumulative Loss (%) x $ 3,000,000 Year-end 2020 XYZ Call Code % Q-Factor for Current Conditions = $ 23,300 Total Incurred Loss ($) % Q-Factor - Forecast RE Values % Q-Factor - Forecast Unemployment % Other Forecast = 1.65% Total Expected Loss (%) x $ 3,000,000 Year-end 2020 XYZ Call Code = $ 49,500 Total Expected Loss ($) 2016 Crowe Horwath LLP 25

26 Open Pool Complexities Cumulative Loss-Rate Model Pros Cumulative Loss-Rate Model Cons Calculation is simpler calculation than that of other methods. Data needed to develop unadjusted historical loss rates might be easier to obtain than data for more complex methodologies. Qualitative factor is likely a simple top of model adjustment for current condition fitting and reasonable and supportable forecasts. For smaller entities, the use of an open pool concept at a minimally disaggregated level might provide better information. Smaller institutions and portfolio segments often do not have significant populations and data sets, and results may be erratic as further disaggregation occurs. Steady state (of terms, product mix, prepayment, collateral values, etc.) is assumed. Data needs and challenges shift to supporting qualitative factors. Top of model adjustments are harder to support Segmented pools are required to have similar risk characteristics. Support is needed for the evaluation of similar risk characteristics entities might prefer disaggregation beyond current state of allowance for loan and lease losses (ALLL) segmentation. Key is understanding steady-state and determining documentation required Crowe Horwath LLP 26

27 What If You Don t Have Historical Lifetime? Example includes 10 year amortizing and 10 year historical. May not have 10 years of internal data ASC Historical credit loss experience of financial assets with similar risk characteristics generally provides a basis for an entity s assessment of expected credit losses. Historical loss information can be internal or external historical loss information (or a combination of both). An entity shall consider adjustments to historical loss information for differences in current asset specific risk characteristics, such as differences in underwriting standards, portfolio mix, or asset term within a pool at the reporting date or when an entity s historical loss information is not reflective of the contractual term of the financial asset or group of financial assets. Likely have following options: Obtain relevant external data Utilize a qualitative factor Materiality analysis 2016 Crowe Horwath LLP 27

28 Steady-state Qualitative Factors Tomorrow Basing loss rate on history assumes a few things. Pool looks the same (ASC ) Underwriting Portfolio mix Distribution of maturities Other factors Other items are the same (ASC ) Unemployment rates Property values Commodity values Delinquency Other factors Inherently included in qualitative factors previously! 2016 Crowe Horwath LLP 28

29 Qualitative Factors Quantitative Support 2.00% Credit Union NPL Loans and Charge-off Trends 1.40% Delinquency Rate (%) 1.80% 1.60% 1.40% 1.20% 1.00% 0.80% 0.60% 0.40% 0.20% 1.20% 1.00% 0.80% 0.60% 0.40% 0.20% CU Net COs (%) 0.00% % Total Delinquency Rate - CU Net COs/Average Loans - CU * NCUA Credit Union Quarterly Data Summary 2016 Crowe Horwath LLP 29

30 Qualitative Factors Objective Data National Unemployment Levels and Charge-off Trends 12.00% 1.40% 10.00% 1.20% Unemployment Rate (%) 8.00% 6.00% 4.00% 1.00% 0.80% 0.60% 0.40% CU Net COs (%) 2.00% 0.20% 0.00% 0.00% Unemployment CU Net COs * NCUA Credit Union Quarterly Data Summary 2016 Crowe Horwath LLP 30

31 Qualitative Factors Objective Data National % Change in Unemployment and Charge-off Trends 90.00% 70.00% 50.00% % Change 30.00% 10.00% % % % Change in CU COs Change in Unemployment * NCUA Credit Union Quarterly Data Summary 2016 Crowe Horwath LLP 31

32 Qualitative Factors Objective Data 1.9 National Housing Index and Charge-off Trends Housing Index (%) CU Net COs (%) Housing Index CU Net COs *S&P CoreLogic Case Shiller Home Price Index 2016 Crowe Horwath LLP 32

33 Qualitative Factors Vintage and Loss Emergence 12.00% Loan Growth and Charge Off Trends 1.40% 10.00% 1.20% 8.00% 1.00% Loan Growth (%) 6.00% 4.00% 2.00% 0.80% 0.60% CU Net COs (%) 0.00% 0.40% -2.00% 0.20% -4.00% % Increase in Loans - Nat'l Net COs/Average Loans - CU * NCUA Credit Union Quarterly Data Summary 2016 Crowe Horwath LLP 33

34 Open Pool - Cumulative Credit Loss Example (6 Year Period) 2016 Crowe Horwath LLP 34

35 Open Pool - Cumulative Credit Loss Example (10 Year Period) 100% Principal Balance Exposure 80% 60% 40% 20% 0% Crowe Horwath LLP 35 Series1 Series2

36 Closed Pool Vintage/Static Pool/Cohort Loss Rate Model 2016 Crowe Horwath LLP 36

37 Closed Pool Vintage/Static Pool/Cohort Loss Rate Model PROs Isolates changes in economic environment, collateral value, underwriting, etc. Improves forecasting ability the more data sets collected CONs Data required can be extensive based on level of disaggregation. May be data limited on historical look-back period. Day 2 calcs may give unusual results. Say 20X5 all prepaid in Year 4 Eliminates changes in portfolio growth May require tracking more attributes to reconcile Day 2 activity to base assumption Methodology could be utilized to develop other assumptions through study (prepayment, default probability, severity/lgd). May have significant number of pools to track Crowe Horwath LLP 37

Probability and Loss Given Default ( Bottom-up ) Methodology gaining popularity after mentions in Basel II, Basel III and FASB CECL guidance Currently used by larger institutions, primarily PD

38 Probability and Loss Given Default ( Bottom-up ) Methodology gaining popularity after mentions in Basel II, Basel III and FASB CECL guidance Currently used by larger institutions, primarily PD (probability of default): the likelihood that a borrowers will default over a certain time period. Under CECL this needs to capture lifetime default probability. LGD (loss given default): magnitude of the loss in the event of default EAD (exposure at default): an estimate of the outstanding amount in the event a borrower defaults 2016 Crowe Horwath LLP 38

39 Probability of Default - Assumptions Probability of Default (PD) Models Vintage default curve Ratings transition Logit regression Hazard/Survival Definition of default May look to Basel definition May be different for different portfolios Typically more than 90 days past due or foreclosure triggers Important to keep data driven as opposed to trying some judgmental approach. Define it and track. Consider cure rates Effect of borrower being able to correct default without resultant loss 2016 Crowe Horwath LLP 39

PD - Vintage Default Curve Similar to vintage loss rate methodology Substitute loan count of origination and observed default based on loan count Important under CECL to understand timing of default

40 PD - Vintage Default Curve Similar to vintage loss rate methodology Substitute loan count of origination and observed default based on loan count Important under CECL to understand timing of default observation Business cycle/macroeconomic factors may explain differences in vintage curves May look to overlay economic drivers or select similar periods for expectations established Provides more diagnostic type capabilities than a loss rate method since we re looking only at the default 2016 Crowe Horwath LLP 40

PD - Ratings Transition and Other Migration More granular attribute assessment FICO Days past due Risk ratings LTV Problematic data issues Likely requires a data warehouse

41 PD - Ratings Transition and Other Migration More granular attribute assessment FICO Days past due Risk ratings LTV Problematic data issues Likely requires a data warehouse Core systems do not archive ratings or other transitions, so must take snapshots All loans must be risk-rated (FICO, RR, etc.) and periodically updated 2016 Crowe Horwath LLP 41

property values using various indices and original LTV or appraisal: HPI CPPI Core logic or other

42 Loss Given Default LGD = (Net Principal Balance Collateral Value) / Net Principal Balance Study of charge-offs over extended cycles Benchmark data from bond studies May be able to forecast current property values using various indices and original LTV or appraisal: HPI CPPI Core logic or other third party providers PD x LGD x EAD = ECL PD LGD EAD ECL 20% 20% $100,000 $4, Crowe Horwath LLP 42

43 Discounted Cash Flow BALANCE 1,000,000 DISCOUNT RATE 3.00% ANNUAL CPR 5.87% DEFAULT SMM 0.08% MATURITY 12 RECOVERY LAG 6 PREPAYMENT SMM % SEVERITY/LGD 10.00% AMORTIZATION 240 COUPON 3.00% TOTAL PV OF PRESENT ALLOWANCE GROSS PRE- DEFAULT ADJUSTED ACTUAL ACTUAL PRINCIPAL TOTAL TOTAL VALUE UNDER BALANCE PAYMEN & DISCOUNT BALANCE PRINCIPAL INTEREST REDUCTION RECOVERY CASH FLOW CASH FLOW CALC CECL 0 $ 1,000,000 (993,472) 993,472 6, ,826 $ 5,011 $ 837 $ 994,152 $ 3,326 $ 1,764 $ 9,174 $ - $ 10,101 $ 10, ,754 4, ,032 3,278 1,830 9,072-10,073 10, ,761 4, ,013 3,251 1,845 8,992-10,016 9, ,855 4, ,073 3,217 1,878 8,906-9,969 9, ,025 4, ,219 3,194 1,887 8,830-9,910 9, ,276 4, ,440 3,165 1,909 8,750-9,859 9, ,607 4, ,742 3,135 1,932 8, ,563 10, ,015 4, ,124 3,109 1,949 8, ,502 10, ,500 4, ,582 3,082 1,968 8, ,444 10, ,072 4, ,117 3,045 2,012 8, ,402 10, ,709 4, ,738 3,030 2,003 8, ,329 10, , ,952 2, , , , PROs Models contract terms/life explicitly Discrete & customizable assumptions CONs Assumption build is complex Data management and processing power 2016 Crowe Horwath LLP 43

44 Roadmap & Making the Transition 2016 Crowe Horwath LLP 44

45 Discussion Topics How do we develop a practical multi-year CECL Strategy and Roadmap (short and long-term)? Has a CECL team been established? Can we leverage current models and methodologies in place for ALLL? How can we document and conclude on the risks associated with financial assets (loans, HTM, off-balance sheet) under CECL? Has there been an assessment of current and needed data for transitioning to CECL? What mistakes can we sidestep and how can we add value from the CECL process? Program Assessment and Roadmap (PAR ) Methodology Steps Gap Assessment Roadmap and Plans Define scope and Initiate PAR Gather information and assess current state Define future needs and assess maturity Develop multiyear roadmap Define high level plans Execute plan, evaluate and repeat 2016 Crowe Horwath LLP 45

46 Making the CECL Transition Governance and Oversight Understanding risk management practices surrounding the development, execution, and maintenance of the CECL model. This includes established roles and responsibilities of the board and senior management, as well as policies and procedures in place to articulate the expectations of the CECL model and ongoing execution of the model. Enabling Technology Understanding the existing systems, including the capabilities and limitations of those systems that may support the execution of the CECL model. This includes source systems, data warehouses, modeling systems, financial statement spreading software, and vendor technology specially designed for CECL. Risk Identification Understanding portfolio characteristics and key drivers of portfolio performance, including lending attributes, loan structures, prepayment risks, and changes in the macroeconomic environment. This component will enable the bank to appropriately segment and model the portfolios based on common drivers of risk. Accounting and Regulatory Alignment Assesses the ability of the CECL model to meet accounting and regulatory needs and objectives. Data Inventory Understanding the availability and limitations of data required to develop and maintain an effective CECL model. This includes the reliability and accuracy of data elements in addition to the historical time horizon of data availability. Resource Capabilities Understanding the capabilities and limitations of the human resources identified to develop and execute on the CECL model Crowe Horwath LLP Crowe Horwath LLP FS JW

47 Roadmap to Readiness An Example Year 1 Year 2 Year 3 Risk Identification Determine Risk Profile Evaluate What Drives Credit Losses Risk Factor Reassessment Scenario Modeling Risk Factor Reassessment Data Inventory Resources Enabling Tech Historical Data Collection Data Analysis Create Teams Identify Shortfalls Develop Plan to Fill Shortfalls Data Aggregation and Management Modeling Approach Create Supplemental Data Data Validation Data Collection (Years 2 and 3) Resource Capability Continuous Assessment Model Development and Calibration Educate ICoFR Design Testing of ICoFR Develop Roadmap Model Validation Gov & Oversight Develop and Finalize Policies Develop FS Disclosures 2016 Crowe Horwath LLP 47

48 Reference Material 2016 Crowe Horwath LLP 48

49 Crowe Resources Multi-discipline, cross-functional CECL Team Training and education Collaborative and comprehensive thought leadership ( Dedicated resources to our profession 2016 Crowe Horwath LLP 49

50 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) Crowe Horwath LLP 50

51 Eve Rogers Audit Partner, Financial Services Merri Ellen Wadworth Audit Senior Manager, Financial Services In accordance with applicable professional standards, some firm services may not be available to attest clients. This material is for informational purposes only and should not be construed as financial or legal advice. Please seek guidance specific to your organization from qualified advisers in your jurisdiction Crowe Horwath LLP, an independent member of Crowe Horwath International crowehorwath.com/disclosure Crowe Horwath LLP

NACUSAC Conference CECL Implementation and Impact to Capital Crowe Horwath LLP

NACUSAC Conference CECL Implementation and Impact to Capital 2018 Crowe Horwath LLP Agenda Session 1 CECL Overview CECL Standard Refresher Recent Regulatory Updates Session 2 - Practical Risk Assessment