1. CECL Highlights and Challenges June 2016 aba.com |1-800-BANKERS

2. aba.com1-800-BANKERS Purpose and Disclaimer This slide presentation is meant to initiate discussion of various aspects of the CECL credit loss standard among Board and Audit Committee members, investors, auditors, examiners, and management and may be edited and used by ABA members. This presentation is not intended to provide word-for-word reference to the CECL standard or include all aspects of the standard. In fact, certain parts of the presentation will be misinterpreted without a deeper reading of the standard. The ABA does not give accounting advice, but provides observations based on its understanding of the standard. Any interpretations of the CECL standard provided in this presentation should be discussed with your auditors and examiners prior to making any decisions related to CECL implementation. 2

3. aba.com1-800-BANKERS CECL: Current Expected Credit Loss Impacts Allowance for Loan and Lease Losses (ALLL) and credit loss provision expense. Applies to loans, loan commitments, and “Held To Maturity” securities Effective 1/1/2020 for SEC registrants –1/1/2021 for non-SEC Public Business Entities (PBEs) –12/31/2021 for non-SEC non-PBEs 1/1/2021 opening CECL balance still required for income statement purposes. FASB PBE definition may scope in many banks not thought of as “public.” 3

4. aba.com1-800-BANKERS CECL Model: Expected credit losses over life of loan or portfolio Life of Loan (LOL) loss expectation (pool basis) effectively recorded at origination Forecast of the future to LOL required Historic averages of “life of loan” losses Used as starting point for estimates Applied to periods beyond “forecastable future.” 4

5. aba.com1-800-BANKERS CECL Model Framework No specific required methodology Average charge-off rates, PD/LGDs, DCF analysis, Roll rates, LTVs are acceptable Main difference applies to unimpaired loans –No significant change expected in practice re: impaired loans, collateral dependent loans, TDRs, nonaccruals. 5

6. aba.com1-800-BANKERS Other CECL Standard Features Life of renewable loan extends only to contractual end, regardless of expectation of renewal (unless TDR anticipated) No forecast of future activity on unconditionally cancellable open loan commitments (e.g. credit cards) Other Than Temporary Impairment (OTTI) on AFS debt securities is recorded as an allowance and not as a direct write-down. –Allows for immediate gain recognition when there is recovery. Loans “Purchased with credit deterioration” (PCD) r ecorded “gross”: ALLL recorded at purchase. –Allows for more consistent “ALLL coverage” and net interest margin yields, compared to rest of the portfolio. –Any loan with higher than normal credit spread may qualify –Contrasts w/ current process that records no ALLL at acquisition –Acctg for other purchased loans will not change (FV w/no ALLL) 6

7. aba.com1-800-BANKERS CECL Disclosure Requirements Credit quality ratings: amortized cost by vintage –Not required for non-PBEs if not relied upon by mgmt –5 years of vintages –No vintages on revolving lines Roll-forward of ALLL –Beginning Provision ALLL on PCD loans - Charge-offs - Recoveries Past due loans (no change) Nonaccrual loans (no change) TDRs (no change) Assets purchased with credit deterioration –In period asset is purchased –Purchase price, credit discount detail 7

8. aba.com1-800-BANKERS CECL Disclosures: Discussion by portfolio segment How estimates are developed Policies and methodology used and discussion of factors including: –Past events, current conditions, “reasonable/supportable forecasts about the future.” –Changes of methodology and rationale from the prior period Risk characteristics Changes in the factors (and reasons) that influence the estimate –e.g. changes in portfolio composition, underwriting practices, significant events/ conditions that affect the current estimate but were not contemplated or relevant during a previous period. Reasons for significant changes in the amount of write-offs Reversion method applied for periods beyond forecastable period Significant purchases/sales/reclassifications of financial assets 8

9. aba.com1-800-BANKERS Possible Improvements Under CECL 1.No losses “GAAP doesn’t allow us to record” –Actual practice may depend on supporting documentation for losses developing in the future. 2.Coverage/NIM ratios more consistent –Most purchased loans will have ALLL at acquisition –ALLL on debt securities vs today’s OTTI charge-off 3.Certain allowances may decrease –Short term loans and renewable loans may have lower allowances, since expectations of renewal are not considered. –Certain open credit card line allowances. 9

10. aba.com1-800-BANKERS Biggest CECL Challenges for Banks 1. Investors/Mgmt – Communications Relationship of traditional metrics to provisions no longer continues New Metrics needed 2. Auditors – Supporting documentation Life of loan, more granular data needed Quantifying forecasts of the future 3. Regulators – Aligning CECL To capital management, ALM, budgeting and planning

11. aba.com1-800-BANKERS Auditor/Investor Challenges 1.Reconciling credit metrics to provisions –Directional consistency of many Q factors goes away. –Allowances, provisions should have no necessary relationship to current metrics. –Reduced comparison between banks because CECL is based on long-term expectations 2.Accuracy of long-term forecasts of the future –Auditors acknowledge large measurement uncertainty –Capital buffers likely needed 3.Understanding assumptions made –Small changes in assumptions can lead to large changes in provision. 11

12. aba.com1-800-BANKERS ABA Resources on ABA.com –ABA CECL Backgrounder and FAQ Documents –ABA Discussion Paper: CECL Challenges: The Life of Loan Concept –Fintellix Cost Analysis of ALLL Process –ABA Accounting Committee mailing list or receive ABA e- newsletters Tax and Accounting Newsbytes ABA FYI for CFOs –Join ABA CECL implementation groups By product By bank size –Send message to mdockery@aba.com for signing up.mdockery@aba.com 12

13. aba.com1-800-BANKERS ABA Webinars and Training Upcoming ABA training Webinars –July 26: Five Questions You Need to Answer Before Making a Decision on CECL –August 23: CECL Measurement Methods: Advantages and Challenges ABA CFO Exchange Workshop: –Sept 19 in Charleston, SC 13