With the FASB’s current expected credit loss (CECL) model due to be released before the end of the year, there are many changes that banks and credit unions should plan for. These slides accompany a webinar, and cover a summary of the expected loss model as proposed, the do's and don'ts for bankers as they prepare, and ways that CECL will impact the ALLL calculation. View the corresponding webinar recording here: http://web.sageworks.com/cecl-prep-webinar/

1. P R E S E N T E D B Y
Sr. Risk Management Consultant
Sageworks
Managing Partner
DHG Financial Services

2. • Ask questions throughout the
session using the GoToWebinar
control panel
• The slides and the recording will be
sent out to attendees after today’s
session
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3. • Financial information company that provides credit and risk management solutions to
financial institutions
• Data and applications used by thousands of financial institutions and accounting firms
across North America
• Awards
» Named to Inc. 500 list of fastest growing privately held companies in the U.S.
» Named to Deloitte’s Technology Fast 500
» NC Tech Awards: Excellence in Customer Service
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4. ABOUT DHG FINANCIAL SERVICES
DHG Financial Services, a national practice of Dixon Hughes Goodman, focuses on publicly
traded and privately-held financial services companies across the U.S. Their 30 financial
services partners and more than 300 dedicated professionals provide clients with in-depth
industry knowledge and a wide range of assurance, tax and advisory services to address
issues facing the financial services industry in today's challenging environment.
ABOUT DIXON HUGHES GOODMAN
With more than 1,800 people in 12 states, Dixon Hughes Goodman ranks among the nation’s
top 20 public accounting firms. Offering comprehensive assurance, tax and advisory services,
DHG focuses on major industry lines and serves clients in all 50 states as well as
internationally. Visit www.dhgllp.com for additional information.
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5. Sr. Risk Management Consultant
Sageworks
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EMILY BOGAN
Managing Partner
DHG Financial Services
WALTER MCNAIRY

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7. • Background on CECL & current status
• Distinction between current and expected new standards
• What changes mean for institutions
• 3 Preparation DO’s & 3 Preparation DON’Ts
• Questions
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8. • FASB released latest proposal December 2012
• Comment period ended May 31, 2013
• IASB issued IFRS 9 Financial Instruments in 2014, to be implemented in 2018 (includes
forward-looking ‘expected loss’ measure)
• Basel releases “Guidance on accounting for expected credit losses” in February 2015
• FASB expected to issue final CECL standard this year in Q4
• Expected to take effect in 2018
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9. • Understand the new CECL requirements
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Existing Accounting Standards CECL Model
Separate accounting standards for
• Groups of loans collectively evaluated for
impairment (ASC 450-20)
• Loans identified for individual impairment
evaluation (ASC 310-10-35)
• Loans acquired with deteriorated credit quality
(ASC 310-30) (Purchased Credit-Impaired “PCI”
loans)
• Debt securities (ASC 320-10-35 and 325-40-15)
One accounting standard for all loans and debt
securities that are not classified as available-for-
sale (other than those measure at fair value
through net income)
No separate accounting standard for impaired loan
or PCI loan accounting
Incurred loss model, typically using a 1-3 year
look-back
Expected loss model, looking at all losses over the
life of loans
Tends to produce pro-cyclical earnings based on
current point in credit cycle
Expected to be less pro-cyclical than existing model
Focused on historical information and current
information as of the measurement date
Considers past events, current conditions and
reasonable and supportable assumptions about the
future
Source: “Preparing for CECL” from DHG, August 2015

11. • How does it impact financial institutions?
» Forward-looking requirements
» “Probable” threshold removed
» Longer loss horizon
» Time value of money plays a role
» Collateral definitions
» Need for accessible, loan-level data
» Potential to increase ALLL levels by 10-50%
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12. • Incorporate expected loss concepts early
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15. • Compile as much loss data as you can, in as
much detail as you can, as far back as you can
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DO2

16. • Look at current system: Can I extract data points from my system? Is this data
dynamically available?
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17. • Limited Method
» Use core to capture detailed data (most cores go back ~13 months max)
• Static Method
» Begin storing core archives in data warehouse
• Dynamic Method
» Use automated solution to capture and store data
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WAYS TO CAPTURE LOAN-LEVEL DETAIL

18. • More defensible, documented calculations
• Enhanced reconciliation capabilities
• Reduce future subjectivity
• Perform more robust data analysis
» Stress Testing / Scenario Building
» Migration analysis
» PD / LGD
» Backtesting
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LOAN-LEVEL DETAIL BENEFITS

19. • Scenario building: assess the outcome of the ALLL under various assumptions
» Run multiple scenarios, compare results
» Create projections
• Estimate the impact that ALLL-calculation variables may have without performing a
completely new calculation
• Enables the institution to be more proactive in managing the calculation and measured
in making changes to the methodology
• Similar to stress testing
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SCENARIO BUILDING

20. • Displays impact of individual factors on overall analysis
• What if just “X” changed?
• What would it do to my calculation…
» Ex: If I adopted migration analysis, would it change my reserve?
» Ex: If CRE took a hit, how much would I have to provision?
» Ex: If I changed my look-back period, what would it do to my reserve levels?
» Ex: If I began lending in a new segment, what losses would peer groups reflect?
• Helps build a range for the reserve
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SCENARIO BUILDING

21. • Migration analysis often considered a more “robust” form of analysis
» Should result in more accurate allowance than historical loss
» More insight into sub-segmented pools (credit quality/deterioration)
» Less prone to examiner criticism if performed correctly
» More effectively justify decrease in provisions, if merited
• Adjusts ALLL provision to reflect the conditions of the current portfolio
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MIGRATION ANALYSIS

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MIGRATION ANALYSIS EXAMPLE:

23. • Uses pre-determined measures of default and loss to calculate expected loss
• Probability of Default (PD)
» % likelihood a customer will NOT make full and timely repayment of their credit
obligations over a given time horizon
» Assigned to each risk rating or segment
• Loss Given Default (LGD)
» Loss amount if there is a default (%)
» Variable (%) assigned to each loan that reflects losses within the loan’s industry or
product
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PD/LGD METHOD

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• Artificially inflate your ALLL now to smooth
the impact expected with CECL adoption

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DO3
• Determine correlation of losses to general
economic data, specific risks, etc.

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Example: Correlate change in local unemployment statistics to losses in consumer loans

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3
• Overload at adoption
• Wait to prepare

28. 1. Understand the new CECL
requirements
2. Compile as much loss data as
you can, in as much detail as you
can, as far back as you can
3. Determine correlation of losses
to general economic data,
specific risks, etc.
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1. Incorporate expected loss
concepts early
2. Artificially inflate your ALLL to
smooth the impact upon
adoption
3. Overload at adoption & wait to
prepare
DO

29. When the FASB releases final guidance on the CECL model, Sageworks will
conduct a webinar featuring industry consultants to cover:
• What does the guidance mean for the ALLL calculation?
• How will it impact institutions?
• What must bankers do to comply?
Pre-register at: http://web.sageworks.com/CECL/
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32. • September 23-25 in Chicago
• ALLL & Stress Testing, Peer Roundtables
• Banker Appreciation Night on Lake
Michigan
• sageworks.com/summit
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Todd Sprang
Principal
CliftonLarsonAllen
Ariste Reno
Partner
KPMG
Walter McNairy
Managing Partner
DHG
Graham Dyer
Senior Manager
Grant Thornton

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LINKEDIN GROUPS:
• ALLL Forum for Bankers
• Commercial Credit Risk Professionals
WEBSITES
• www.sageworksanalyst.com
• www.ALLL.com
• Whitepapers, webinars, thought
leadership
• www.DHGLLP.com
EMILY BOGAN
Sr. Risk Management Consultant
Sageworks
emily.bogan@sageworks.com
866.603.7029
WALTER MCNAIRY
Managing Partner
DHG Financial Services
walter.mcnairy@dhgllp.com
919.875.4993

34. • CECL Prep Whitepaper by DHG:
http://www.dhgllp.com/Portals/4/ResourceMedia/publications/DHG_Views_FinancialS
ervices_PreparingforCECL.pdf
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