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

2. 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.

3. 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.”

4. 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.”

5. 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.

6. 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) recorded “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)

7. 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

8. 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

9. Possible Improvements Under CECL
No losses “GAAP doesn’t allow us to record”
Actual practice may depend on supporting documentation for losses developing in the future.
Coverage/NIM ratios more consistent
Most purchased loans will have ALLL at acquisition
ALLL on debt securities vs today’s OTTI charge-off
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.

10. 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. Auditor/Investor Challenges
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
Accuracy of long-term forecasts of the future
Auditors acknowledge large measurement uncertainty
Capital buffers likely needed
Understanding assumptions made
Small changes in assumptions can lead to large changes in provision.

12. 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 for signing up.

13. 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