How Do I Sign Alabama Banking PDF

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uh with car rigs and ingram he serves primarily internal and external audit clients he does publicly traded banks and privately owned banks so he's got extensive experience he also does um various consulting with regulatory agencies and by advises our clients relative to merging acquisition activities and due diligence you can see from his professional affiliations that he has a lot of you know activity and not only professional affiliations but also cheryl and civic also glad to have him leading our webinar today and again i'm phyllis ingram i'm the one of the founding partners of carbine ingram based in montgomery alabama so um just glad to be the moderator for today's session just a few housekeeping comments if you're attending and you want to get the cpe credit you have to be logged into the webinar for the whole entire 50 minutes and you need to answer the polling questions you don't have to get the polling questions correct but you need to answer those and you'll see that on the screen that you get one hour of cpe credit and then certificates will be emailed 24 hours after the session and if there's any questions about the certificate process you can email that to marketing at cricpa.com and then a note at the bottom you'll see that the pdf handout of the slides will be emailed within 24 hours also so here's today's agenda and with that i'll turn it over to doug memphis okay thank you phyllis well good morning and welcome i appreciate you all joining us we are uh today we're going to cover uh the the draft interagency statement that that's currently out and uh this is our third cecil webinar it's the third in our series uh so we affectionately refer to it as cecil three but today we're going to cover just the interagency statement not so much in the standard and kind of hopefully give you the cliff notes version of what's out there i will start out with a little background and overview of asc326 we'll cover the scope of the interagency policy statement we'll talk about the measurement of acls we'll talk about the measurement of acls for afs debt securities we'll go through documentation standards which is very significant in this document analyzing and validating the measurement of acls we'll talk about the board's responsibility management's responsibility the exact how the examiners are going to approach the review and then talk briefly about some next step and closing thoughts so we'll and this is kind of how the interagency guidance is structured so we're kind of going in lock step with that so i'll say this the the interagency guidance was issued i believe in october and so we plan to have the our our we started the planning process for our webinar i really thought it might be final before we actually got to the point of having our webinar but as of today to my knowledge i have not been able to determine that it was issue final so we're we are speaking regarding with regard to a draft document which means obviously it could change but when it goes final so so just uh please keep that in mind and we'll certainly look take a look and if there's significant changes when it goes final we might have it might give us a reason to have cecil four so just a little bit of background and overview so as asc i mean excuse me uh asu 2016-3 topic 326 issued a number of years ago and it's gone through several iterations as you know we kind of landed uh with as of right now the largest banks and and sec registrants of larger sec registrants are a go for having to comply with cecil uh now q1 um and then uh prospectively uh most of the people on this phone hopefully everybody on this call because if if you hadn't if you're going q1 and you're on this call we might have a problem but hopefully everybody on this call is planning and set up to go in 2023 so that's that's kind of where we are and i think everybody probably knows by now but but cecil is essentially moving from an incurred loss model to a more forward-looking model under the cecil methodology so topic 326 will be when i reference that we're referring to the standard and i will say this the the guide the regulatory guidance refers to topic 326 throughout the document so they've made a concerted effort to be consistent with the standard there's a couple of places where i'm not sure if they're if we're going to have a a rap gap difference or not and i'm interested to see how that comes out in the final version but i'll point those out i don't think they're significant but i do think there is a thought process there so topic 326 and this interagency statement applies to all financial institutions of all banks saving institutions credit unions finance financial institution holding companies regardless of size that file regulatory reports for which the reporting requirements conform to gaap so end of the day no matter what your size if you file a a call report and it's supposed to be in conformity with gap then you are subject to this interagency statement and i'm assuming everybody knows this but an interagency statement is when all the regulators agree so it's when the fed the fdic the occ the ncua as well as the state regulatory body that represents all the states agree on something and so this is a an ffic statement so there's collective agreement the statement as i mentioned is is maintaining conformity with gaap and there's a concerted effort to do that and i will say as i've said in prior webinars everybody's been at the table when when there's been fdic has done their webinars and all those things all these agencies have been represented as well as the sec so everybody's uh you know everybody appears to be on the same page as to as to what the expectations are whether it be the fasb whether if you're sec smaller sec registrant whether you're a you know a national charter state charter everybody is is uh you know asserting that they're on the same same page so i actually jumped ahead and talked about the applicability on the previous slide and then uh the policy statement is is effective at the time that you adopt topic 326 so at the point for financial reporting purposes that you decide to basically to adopt cecil at that point this interagency statement would be effective for you otherwise it's not effective until january 1 of 2023 this statement supersedes several previous statements that we've all been operating under not only you all have been operating on it largely on a daily basis uh you know actually imp you know living in it and and we have really audited to it because it's been a supplement to you know authoritative guidance and and largely consistent but the interagency policy statement on the a triple l you will notice is is the allowance for long and lease losses is no longer uh the concept is the allowance for credit losses so it's the acl not the a triple l and then these policy statements that related to the a triple l the one from july of 2001 the one from december 2006 for banks both are superseded by this and then the ncua set up put out a separate policy statement 02-3 which i think was largely either identical or very uh similar to these other two in may of 2002 and and that statement would be superseded by this ffic guidance so one point of note is is rather than updating the agency's guidance on loan review systems as part of this they're currently developing separate standalone guidance on on expectations for effective credit risk management so we'll see in here the document does refer to credit risk management in different places but it it doesn't necessarily robustly and holistically address credit risk is very much in line with with just you know how you apply cecil so the scope of the statement and then in in this context when i say statement it's the interagency statement i guess i'll try to differentiate and say 326 when i'm referring to the fasb statement but so what's in scope and i'll i'll go through these quickly because i think most of you know these if there's any that that kind of caught me as interesting i'll mention them but this is consistent with with with the stat with the standard i guess i'll call i'll call the the 326 the standard we'll call this the statement to the extent there's any differences so finance receivables such as loans held for investment are in the scope overdrafts are in scope held security maturity debt securities are in scope receivables related to revenue that's within the scope of topic 606 which is certain fees and other things and we won't get all into that that gets fairly complex most community banks it's not a big deal so most most of the folks on this call 606 was a non-event and and therefore the receivables associated with them would not be a big deal either certain reinsurance recoverables are included receivables related to repurchase agreements and securities lending agreements within the scope of topic 860 on transfers and servicing again that's probably not applicable to you all uh off balance sheet credit exposures in including commitment standby letters of credit etc not including derivatives so i will focus on that just a little bit i think some folks were unaware that off-balance sheet credit exposures were in the scope of cecil and they are so keep that in mind because that normally applies to everybody particularly even small community banks it does not apply to the following financial assets financial asset sets measured at fair fair value through net income which we don't have a lot of those in community banks and credit and small credit unions afs debt securities that's a little misleading because there is a sub topic that we'll cover in this so topic so 2326 directly doesn't cover it but subtopic 30 does and we'll address that long-tailed for sale are not in the scope of cecil policy loan receivables of an insurance entity loans and receivables between entities under common control so if if you happen to have a a loan between uh you know sister companies so if you had that then those would not be in the scope receivables arising from operating leases which with the lease standard might might be relevant so those are outside the scope okay oops okay so we're on a poll question phyllis i snuck up on you thank you doug that's that's some good information so we'll start with our first poll question and remember to get the cpe credit you need to answer the poll question doesn't have to be right but just make sure you answer it so our first poll question is sea soul methodology is not applicable to available for sale securities so if you just answer that true or false and submit your answer then we'll see how those are are coming in okay we'll wait just a couple more seconds done the first few slides have been very interesting so thank you sure so we'll close a poll and so the answer was true so um that is correct the the majority got the correct answer true very good thanks phils thank you okay so we'll talk a little bit about measurement of acls overview of acls the the there will be a valuation account deducted from or added to the amortized cost basis so financial assets that's you know that's the same thing we do today represents the net amount expected to be collected over the contractual term quite frankly that's largely what we do today but we'll get there a different way estimation should include consideration of past events current conditions and reasonable and supportable forecasts so estimation in today's environment includes typically at a community banker credit union today includes past events meaning our historical losses and current conditions conditions which is our qualitative factors today so in today's methodology two of the three parts we're doing the part that that's new if you will is the reasonable and supportable forecast so that's that's where we're headed it requires management to use relevant forward-looking information and expectations so only if it's relevant you don't have to consider everything and we'll talk more about that and and acls are to be evaluated at at the end of each reporting period which i'm i'm interpreting to be quarterly for for most everybody i think there's a caveat for credit unions that that would be quarterly or prior to paying a dividend the methods used to estimate acls uh should be applied consistently over time and again this is straight out this is not the standard this is out of the statement but it's it's it's very similar changes to acls via periodic evaluations are recorded through increases or decreases to the provision for credit losses so instead of the provision for law same thing we do today provision for loan losses is now pcl's provision for credit losses so we'll have to get used to that specifically identified uncollectible amounts should be properly written off against acls again it's what we do today estimation of acls involves a high degree of judgment and is and is inherently imprecise i think we all know that too so that we're living in that world today may result in a range of estimates within the best estimate being supported and recorded i think that is is important we'll see it again where it talks about a range of estimates i think most most community banks today come up with a number and maybe the range comes in when you have an unallocated reserve maybe that's kind of your range if you will but there is definitely an expectation that you might not land on a number and there's an acknowledgement of the imprecise nature of of the exercise so collective evaluation of expected losses so there is a requirement this is this is required for you for losses to be evaluated on a collective or pool basis when you have financial assets that share similar risk characteristics this is again the standard and statement aligned with on this and i've and we've gone over this in in our prior webinars but so for most community banks smaller less complex community banks which are for most of you call report call codes are going to be are going to be relevant and call call codes should be considered that doesn't mean you have to use them but but if if that works today i think you need to ask yourself why wouldn't that work respectively is there a reason it wouldn't work and these are some examples and this is not in the standard that i recall so this is is in this statement where they give some examples of how you could group collateral type size effective interest rate term geographic location industry of the borrower oops oops click on the trigger there or vintage which means you know when when the laws were originated which would be uh challenging but so collateral type size effective interest rate term you know just some things that you could do i think today you know call codes kind of align with collateral types so that's what most folks are doing so it's certainly acceptable to continue doing that topic 326 the standard does not prescribe a process for segmentation meaning it doesn't mandate you do it a certain way or that you group things a certain way and it does but it does require that you evaluate on an ongoing basis how you're pulling and that's consistent that's in three topic 326 and it's also mentioned in this statement that not only do you segment but you need to continue to evaluate it on an ongoing basis and we'll talk a little bit more later but that means you gotta document how you continually assess it everything's about documentation and we'll talk about that further financial assets that do not share similar risk characteristics with other assets can be evaluated individually now that's that's not what we're doing today that that's not the same as an impaired loan today an impaired loan is is isolated and evaluated separately because of the deterioration the fact that it is impaired by definition this just means if you have a loan or loans that don't fit anywhere you can evaluate them individually but if they fit somewhere they need to be in a pool so estimation methods it the 326 does not require the use of a specific estimation method they they reference several different type uh kinds and this statement does as well and we'll we'll mention those later the same loss estimation does not have to be applied to all financial assets so you can use a different estimation method based on the pool and and or other or other if it was a one-off you know if you pulled one out because it didn't have any comparability and you used a different loss estimation that's that's acceptable and here's some of the accepted methods probability of default roll rate method discounted cash flow method a method that uses aging receivables or other reasonable methods so i think it's trying to this this a method that uses aging receivables i think it's speaking to a smaller less complex institution it doesn't come out again it doesn't come out and say hey you use the use the war method but they've all but said that so so when you think about call report codes and you think about your institution and you think about uh you know what method i'm going to am i going to use there's not been an endorsement of using your call codes in the warm method but it certainly has been discussed a lot methods selected should be appropriate for the financial assets being evaluated and be consistent with the institution size complexity risk appetite etc which makes sense a little discussion about the contractual term of financial asset topic 326 requires the the loss that to be expected laws to be measured over the contractual term of the financial assets including the consideration of expected prepayments so you would have to estimate prepayments renewals extensions and modifications are generally excluded so that that's a little bit of a twist but renewals extensions modifications are generally excluded prepayments have to be estimated and the exception is when you have a uh when you you have the reasonable expectation which is not to find your end a reasonable expectation of executing a tdr so if you have a troubled debt restructuring that you expect to happen uh you you would you can consider renewals extensions and modifications and we're to another poll question thank you doug so we're up to our second poll question so we'll launch the poll and it's the same loss loan loss method has to be consistently applied to all assets true or false so if you would answer that and doug i love your poll questions that true and false versus a multiple choice are much easier so our participants have a 50 50 chance of getting answer right [Laughter] and it's easy to read too as a moderator exactly so the results are coming in so we'll wait just a couple more seconds remember you have to answer the poll question to get the cpe credit so we'll close the poll and the answer is false so we had 92 percent got the correct answer so doug you're doing better on that second section we're good great so continue on okay thanks phyllis thank you okay so a little discussion about historical loss information and i'll i'll keep saying this everything that we've talked about thus far everything i've been going through is on in this interagency statement is consistent with topic 326 so uh and and and redundant with that so if you've been on a prior we're not talking about anything new on here historical loss information generally provides a basis for an institution's assessment of credit losses so there's a little bit of encouragement there certainly you would consider historical losses as your past event in some respect that doesn't mean you don't adjust them but that means that that they provide a general basis historical loss information can be based on internal or external information or a combination of both you should consider the need for adjustment based on your current asset asset characteristics such as underwriting standards in portfolio mix so so you should you should consider adjustment based on your current asset characteristics examples of which are underwriting standards and portfolio mix and the implication obviously there is you would continue to evaluate that because those may or may not change further adjustments should be considered relative to current conditions and reasonable and supportable uh forecast to the extent that they uh they differ from the conditions that existed during the historical loss period so if today your current current conditions as well as when you look forward you're reasonable and supportable if today those are different than your historical losses then you need to adjust your historical losses so is there ever a scenario where you could say hey everything's the same today as it was been for the past five years and and looking forward it looks the same to me and we're just going to use our historical losses the answer that's probably not right i mean nobody's doing that today we're all using we're all uh rolling up our sleeves and trying to support our qualitative factors today so that probably won't work but it's also probably not true because because obviously a lot changes in over over a period of time adjustments to the data may be qualitative or quantitative in nature and should reflect changes to relevant data such as such as unemployment rates and delinquencies so get it referencing relevant and what they really say and it may say it on another slide i may be jumping ahead but don't you don't have to consider everything all information out there is not relevant just because it's out there doesn't make it relevant to you and your institution and the risk characteristics of your portfolio so you don't have to consider everything but if it's readily available and relevant then you should consider it's a little bit more unreasonable and supportable topic 326 requires management to consider for-looking information that is both reasonable and supportable relevant to the collectibility of cash flows we i think everybody knows that for the most part it may extend over the contractual term or a period should be shorter than the contractual term so again prepayments have to be considered but as a general rule you use the contractual term unless you think it's a unless you can establish an estimate for you know there's likely of a prepayment forecast may vary by portfolio segment or individual forecast input so so you can actually do this you don't have to do it in the aggregate your forecast can be by portfolio segment it could be buy by loss pool you know it just depends on how you want to do it that that and that varies today we have folks who who uh consider like qualitative factors for the current conditions that that's considered by pool by some of our institutions it's applied by by pool normally but it might not it might be considered on the whole and then applied to all the pools it just depends so you just have to consider the makeup of your portfolio uh and this is this is where it's not required to search all available information or incur undue cost and effort to collect data multiple economic scenarios can be considered but are not required so a little bit of extra verbiage in the in this statement than there is in the standard to say you know simple it just if you try to find the path of least resistant and do something that's reasonable 326 and this statement do require you to revert to historical loss information or an appropriate proxy when the contractual term of an asset or what we'll just you know asset pool extends beyond the reasonable and supportable period so if if you've got a contractual term on a pool of assets or we'll just say an asset and and it extends beyond what you think is reasonable and supportable then you can revert you can use a reversion method and revert to historical losses um you can do that for each individual input or the entire estimate of loss so if you deem it appropriate you also don't have to revert if you don't if you think your data is okay and you think you can and you um if if if you don't if the contractual term doesn't extend beyond the reasonable support or you don't have to revert but it must i think there'll be some reversion in everybody's calculation no specific reversion technique or period is required and uh and there are well reversion techniques are not an accounting policy elect election and should be evaluated each reporting period so what they're saying is if you do deem you have to revert to historical loss because again your contractual term extends beyond the reasonable and supportable then it's not a and this is important because we're going to talk about accounting policy elections later this is not an accounting policy election it doesn't have to be documented as such so it's more like a a uh an estimate and it'd be a change in estimate so you would you would just reevaluate periodically and if you deem you've got you want to change your reversion method then then you do it document why i support it and it's not a significant change in accounting policy or practice so historical credit losses generally do not by themselves so this kind of goes back to what we're talking about a moment ago generally by themselves form a sufficient basis so you can't most likely just use historical losses you should consider qualitative adjustments you may increase or decrease the estimate of loss and adjustments should not be made if information is already considered in the loss estimation so if you've already got it factored in somewhere don't double dip and there's always a risk of that when you're when you're using qualitative factors and other things here are things that you should consider and i put on purpose because you're not required to consider them nature and volume of financial assets concentration of credit let me oh let me back up so this is key factors like i kind of jumped in i'm not reading the top of my slides i'm trying to look at the content so so these are q factors so so you should use quantitative factors you can't just use your loss loss you know historical losses so we we know that and so today i think there's nine uh in the old in the old statement that we've all been following the the old statement had the nine you know environmental factors that everybody's used as as a basis for their q factors well these are and these uh this is me uh i guess paraphrasing i don't know whatever how what the official you know buckets will be this will be close so the buckets you use today for your q factors these are what they are in this proposed statement the nature and volume of financial assets concentrations of credit volume and severity of past due non-accrual and inversely classified assets value of under client underlying collateral for loans not collateral dependence so we'll talk later in this in the slides about collateral dependent loans so for for non-collateral dependent loans you would consider the value of the underlying collateral collateral dependent loans are they're different okay lending policies and procedures any changes in underwriting collections write-offs recoveries the quality of your credit review function the experience ability and the depth of your your management team and staff external factors including regulatory legal technology competition and natural disasters actual expected changes in economic and business conditions and uh and and there are additional key factors because this all relates and i probably should have said this before this all relates to debt securities too so there are additional key factors that you may consider for debt securities in addition to the ones above so just just to run back through these not to so nature and volume concentrations of credit and you can see these others so a little different it's very similar to what we have today but a little bit different and and maybe a different number of buckets if you will so that that's the q factor adjustments under this ffi state ffic statement prospectively and we're to a poll question okay great we're to our third poll question and we'll go ahead and launch the poll and the question is historical losses should not be adjusted under cecil true or false if you'll take a few minutes to answer that and submit your answers we'll wait a few seconds before we close the poll so we'll go ahead and close the poll now and that answer is fault so 66 percent got the correct answer so great job doug good thanks phil okay so we'll we'll forge ahead so a little bit of key factors and then we'll go into what is a collateral dependent financial asset this is one the one where i'm not sure if we've got a rap gap difference so if if you have a financial asset for which repayment is expected to be provided substantially through the operation or sale of collateral there's not a definition of expected so we're going to need that at some point they also use the phrase a reasonable expectation which i pointed out earlier i think i i need to look back at the standard but we'll need some some guidance and some clarity on that but if you expect whatever those criteria are if you expect that you're gonna on the only way you get paid back is through collateral then it's a collateral dependent financial asset then there's an emphasis and there's also a note a footnote and a drop down there for regulatory purposes the acl is measured using the fair value of the collateral of the collateral regardless of whether foreclosure is probable again i i don't know if expected is probable and i probably should know that but i i didn't see any guidance on that and we'll we'll work on that and uh all of us can yeah i think there'll be some some guidance about that and there may be something buried in 326 now but um expectable probable so if if um what what they're saying here is that for regulatory purposes it doesn't matter if it's if it meets the threshold of probable which we do have that guidance i guess i should say we have that under current standards we have we know what probable is so but if you expect then they expect it to be valued at the fair value of your collateral and i think what the emphasis point of emphasis is is there could be a scenario where you have a loan that doesn't uh meet quite make it to collateral dependent under the standard under gap but under rep for regulatory purposes it does and then you might have a rap gap difference i think this is what the the point of emphasis and what it's leading to but for now just know this collateral dependent financial assets meaning if hey the only way i'm getting paid back is is if i foreclose then those need to be valued at fair value less cost to sell which is what we do today with impaired vaults increases and decreases in fair value should be reported through the acl with any negative acl capped at the amount previously written off meaning once you establish your your uh ceiling you know you say when you bring it in and this is it can't be ever it can't be written up above where you are so if you bring it in at ten dollars that's your new cost basis just like it is today you establish that and if it if it declines in value then you would recognize that if it declined to eight dollars you'd recognize the two dollars as a reserve if it goes back up you can write it up you can never write it up against 10 above 10 that's the same thing we should be doing today in fact most folks when they foreclose nobody wants to write up a foreclosure so we actually have a little bit of a rap gap different sometimes because we still we still bring those in at the lesser of fair value or the loan balance and that's actually not gap so very similar to what we do today but potential rap gap difference tdrs expected credit losses on financial assets modified in tdrs are reasonably expected so we mentioned it in relation to tdrs earlier but again that phrase reasonably expected to be modified and tdrs are estimated using cecil so under current guidance i think there's three three methods might be two i but but there's there's some methodology in and around how you value a tdr and i think and there i believe there are three methods today i don't know why i'm drawing a blank on that but it's two or three nonetheless that's under this methodology a tdr or a reasonable expectation of a tdr you should value it under the cecil methodology losses related to collateral dependent tdr should be estimated based on the fair value of the underlying collateral the estimated effect of reasonably expected tdrs may be included in the institution's q factor adjustments so let me say that again if a loss is related to a collateral dependent tdr then it should be done the same way as any other collateral dependent law it should be at fair value le s cost to sell the estimated effect of reasonably expected tdrs may be included in an institution's q factor adjustment so if you if you have a tdr if you hadn't done it it's you reasonably expect that you will have a tdr it's in process whatever then you can actually adjust for that through your q factors i think until you actually do the tdr and then you need to record it at fair value but your estimate would be at fair value either way i believe okay accrued interest receivable is also in the scope and this is the accounting election i was talking about so accrued interest receivable should be included in the amortized cost basis of the asset and it generally should be written off against acls generally there's three independent accounting elections that you can make at adoption one is you may elect to measure via acls if uncollectable interest is written off timely you may elect to write off by reversing interest income use of pcl's or a combination thereof or you may elect to present accrued interest receivable separate from the financial assets on a net basis so you got three options not to belabor the point and and i probably said that too fast but there's there's three ways to do accrued interest and you've got to make a formal election i don't think it's going to change the way most of us look at it today but you can you can include it in the amortized cost or you can cannot and then there's a hybrid in the middle so you just have to make that election and just be aware of that and my guess is most folks will do what they're doing today off-balance sheet credit exposures i mentioned previously those are in the scope of cecil and need to be reserved for accordingly it requires estimation of credit losses associated with with off-balance sheet credit exposure uh estimates they should take into account this is this is a a an estimate again you got to document this so estimates should take into account the likelihood of funding as well as the amount expected to be funded over the contractual terms so if you've got an offshoot off uh off balance sheet exposure and uh you should take into account the likelihood of funding as well as the amount you expect to fund because you might not actually expect the fund at all so that's that's an estimate that you'd have to evaluate and document and you shouldn't record credit losses for exposures that are unconditionally cash flow cancelable by the issuer so if the issuer can cancel it then you don't have to to record a reserve estimated credit losses are recorded as a liability rather than in the acl so if you determine that based on the likelihood of funding and the amount expected to be funded and when you evaluate it you think you do have a reserve an acl to record that should be done through a liability not through your allowance for credit losses only for off balance sheet credit exposure key point measuring acls additional topics i i didn't want to there's a lot of information i mean i'm not this is truly the cliff notes version of this this document but i did just want to point out purchase credit deteriorated assets are covered by the statement but i won't go into it it's it's consistent with the standard financial assets with collateral maintenance agreements is also covered and financial assets with zero credit loss expectations so it does that this the statement does contemplate that you could have loans that don't have a credit loss and you know those would be uh we wish that was all of them right but but nonetheless that that is contemplated in the standard excuse me in the statement and covered okay poll question number three i think four okay this is our final question so we'll launch the poll credit losses for tdrs should be estimated using the cecil methodology true or false so if you'll answer that and submit your answer we'll wait just a couple seconds uh doug i'm glad we're sharing the slides too because there's a lot of information on the slides that you've prepared and presented so you know those will go out in 24 hours i think that's going to be really helpful for our attendees to have that to reference back to so i'm glad we're sharing those okay we'll close the poll oh and 84 percent said true and that's correct okay good yeah okay good turn it back over to you doug okay actually you answered the question correct before i covered the topic i think uh i did i did a last last minute adjustment to my uh to my polling questions i got them out of order so we'll cover afs debt security yeah um what i would say is and phyllis is right there is a lot of information on the slides i don't even think with a lot of information that actually does does the statement justice i think it's very much a cliff notes version but the reason there is a lot is so that you can refer back to it so that's why we share them with you and and hopefully you can use them as cliff notes and where you feel like you need to look at them a little closer um certainly that'll be a be an option so this is uh for for so for well actually that was hell to mature the question was on hell to maturity yeah okay no i didn't get them out of order okay good so afs debt securities they are not within the body of 326 but they are income uh included as subtopic 326-30 financial instrument instruments credit losses afs debt securities so credit losses again we're talking afs now i was getting myself confused so we're not talking about htm so credit losses for af afs debt securities should be evaluated when the fair value is less than amortized cost so we're talking about credit losses this is actually not different than the standard today so we're talking about example if you've got a debt security and let's say it's a municipal security and it is under water then you need to evaluate whether or not you have an impairment if you will and that's not actually not the terminology do you need to record a credit loss uh related to uh the the credit worthiness of the issuer so is the city having financial problems etc you could evaluate and say hey this isn't a a short-term dip these folks are having problems i have concerns about whether or not we're going to be able to collect and you need to put a reserve up so so afs debt securities is is uh is addressed by subtopic 30 and it requires this requires credit losses to be calculated individually rather than collectively using a discounted cash flow method so going back to the other discussion in 326 it's all about pooling and things like that and it doesn't prescribe a specific method right but for afs securities you have to evaluate them individually you have to reserve for them individually and uh and you have to use a discounted cash flow method and you would recognize that through a charge to pcl now that doesn't mean you wrote it off that just means you you have a provision and you have a related allowance subsequent increases can be recognized through the pcl to the extent not previously written off so if you if you uh you know put up a reserve and you don't determine it needs to be written off but you just have a reserve and it goes up again you've got a ceiling you can't you can't go above the initial ceiling is basically what it's saying and uh and and that says that here you know acls are limited by the amount that the fair value is less the amortized cost so you have a fair value floor so that's afs securities okay documentation standards so policies and procedures for the systems processes and controls necessary to maintain appropriate acl should address so this is your written policies and procedures for the systems processes and controls necessary to maintain appropriate acls this should be addressed in your written procedures so if there's a section i really can't do justice to um you know via my cliff notes version versus what's actually in the statement this would be it because it's pretty robust but you should address the processes that support the determination and maintenance of the acl you should address roles and responsibilities as well as segregation of duties segregation is mentioned several times you should cover the processes for determination of the historical period the same for your reversion techniques as well as processes for how you arrive at what is appropriate pooling slash segmentation data capture and reporting systems you should have a description of the systematic and logical loss estimation processes for determination and maintenance of acls you should have procedures for validating and independently reviewing the loss estimation process so validation and independent review we'll talk we'll cover that more in a minute and the systems of internal controls used to confirm that your processes are maintained and periodically adjusted in accordance with gap so we'll cover some of these but i just want to stress the fact that your policy or your written policies and procedures are supposed to address all these things you should you should have that that you should have that document and siri just thought i was talking to her on my ipad if y'all heard that okay so that's documentation standards so the actual analysis and validation of the overall measure measurement so management should perform an ongoing rigorous and well-documented evaluation of acl those evaluations can include and they they specifically put these in here so i think i think these are what they're expecting to see for a smaller less complex institution comparison of actual versus estimated write-offs your actual write-offs ratio analysis and there's a bit of discussion and then also it references peer group comparisons i will say this about peer group it it says hey you can use this as a benchmark but i would say that wouldn't be okay for it to be your only one i think you need to do the other two as well and uh they're a little leery of folks over relying on peer group comparison so they do mention it but they kind of discourage you over relying on it the estimation process should also be periodically validated by a party with the appropriate knowledge expertise and experience who is independent of the credit approval and estimation process so so your process needs to be periodically validated by somebody who knows what they're doing and is independent of the process and these are all straight out of the standards so these are our requirements they're not suggestions of course it covers board responsibility uh and in this this is the board's responsibility retaining you know qualified management to review management's assessment of the loan review system and again this needs to be documented in their minutes and it needs to be clear that this uh they use they use the phrase throughout this challenge that they are challenging things annual review and approve loss estimation policies the policies we talked about previously reviewing management's assessments of processes and controls over credit credit quality for investments it specifically mentions investments review management's assessment of ingest and justification for their acls and pcls require management to periodically validate loss estimation approve audit plans both internal and external and review findings and monitor remediation so they're expecting the board and this is not unlike what we do today there's just different pieces to it it'll be you know documented differently i would say i think the documentation expectation as as uh indicated in the statement seems to be more than what we do today it seems to be quite a bit more i don't think the board's responsibility is that much different i would build you know this into their responsibilities because these are the specific things that it references and make sure that it's clear that they're engaged in the process and that there is some challenging of the process and that they're they're monitoring these things from a governance perspective management is expected to adopt and adhere to the written policies and procedures that we referred to previously they're expected to maintain appropriate acls both under you know for gaap and regulatory requirements which hopefully are the same at the end of the day to establish and maintain appropriate governance activities periodically compare loss estimates to actual write-offs we talked about that periodically validate the loss estimation process we talked about that and engage in sound risk management of third parties obviously there's third parties involved or could be even if you don't use a model there may be other places where you're relying on third parties where you're pulling data so you need to make sure they're subject to your third party risk management processes and and make sure you document you know who you're relying on what you're relying on them for and make sure your due diligence of that third party is appropriate and sufficient based on their role in the cecil process the last area that's covered by the standard so so the standard you know if you look back it excuse me the statement it covers documentation standards it makes it clear what it expects you to document uh it makes it clear that really it addresses you know designing documenting and validating that's really what it does and it says the and we expect you to to capture this and and and then here's how your board should oversee it here's how management should oversee it you need to demonstrate that you're doing that and then lastly what are the examiners going to do so they're going to evaluate these written policies and procedures and your estimate estimation methods that we've talked about they're going to look at board oversight as well as management's effectiveness and managing credit risk they're going to review overall levels of acls there's also a spot in there that contemplates them doing their own independent qualitative analysis it almost sounds like they might uh you know come up with their own number if you will review acls reported in the regulatory and other reports and reconcile them to your acl estimates so it's kind of interesting so it it specifically says that they're going to take your calculation and make sure it reconciles to the call report essentially verify the models are subject to initial and ongoing validation as we were just talking about and assess the effectiveness of third-party risk management so they're going to hit it hit all points i think it does say in there and it says this for the board too actually when it's talking about pure data as it relates to the board what they specifically say they don't want to see is is an override by either the board or management to achieve a certain number for your allowance whether that be a peer data or whether that be your a budgeted amount they don't want to see an override to get a specific outcome they also say that regulators should not come in and recommend you come to a specific outcome i will say that in the current guidance the current ffic guidance it says that as well yet most of us you know try to get to one and a quarter or one percent or something like that and and we do it because our regulators have an expectation so uh we'll see if that changes and and we'll see if you know what how the the regulatory process is i i don't know we all number one this is this is draft and it's not final but we don't know for sure what the expectation is going to be if we take this literally i would say that there is a lot more there's a high degree of enhanced expectation in and around documenting very your policies and procedures what you're doing why you're doing it and um and supporting your outcomes and and the required requirement for an independent validation it does not sound to me like you know your auditor signing your audit opinion uh on the financial statements as a whole and that includes you know your allowance because number one that that opinion is not on your allowance it's on your financial statements as a whole i do think there will be the requirement for some type of of relevant independent validation but again that doesn't have to be outside your organization if that skill set exists and someone and you have the capacity to do it so that covers the standard and we're 11 55 so a pretty good time and i feel like i went very fast there was a lot of information in there s um i apologize if i was running i i again that's why there's a lot of data on ours excuse me information on the on the uh on the the slides so that you can reference it later certainly happy to to field any we'll fill some questions in a minute or later if you come up with some but so what i would say i i tried to come up with something that was really uh you know profound here on this last slide but i couldn't really come up with anything i would say this you need to get to work because i think you really need to be in a position truly where you run parallel in 22 if not 21 so you really know what you're looking at i i i don't expect this is you know you're going to tell me i'm wrong later but i don't expect a significant intervention from a a regulatory body to delay this again i think 23 is coming and i think it's coming you can play that game but as the saying goes denial is not a river in egypt and i i think we need to just embrace cecil and get ready for it and if somehow it doesn't happen and we enhance all of our documentation in and around the allowance and we have a little bit better model than we had before then we just all got better and uh and and we improved our processes and we refined in our allowance and gave it a higher level of precision so there's an opportunity to uh to get better so i would say get to work if you haven't already don't go it alone there's a lot of advisors out there you have some you have internal auditors you have external auditors you have internal resources you have consultants that you've dealt with in the past certainly engage those folks use their knowledge and and let them tell you what they're seeing and i would go back to the documentation standard uh there's a lot of documentation in this so it's more than just coming up with the calculation that may seem overly easy just coming up with the calculation or that may seem like the only goal the reason i say get started is because i think there's robust uh there's a lot of time that will need to be invested to meet these documentation standards as as written so i would i would encourage you to get to work so again the focus is on the designing documenting and validating in this standard excuse in this statement i keep saying standard but hey they're they're largely consistent so they're the same and there's our cecil roadmap so we have time now let's see i'll i'll this will be in your package i won't i won't go through the cesar roadmap and then we also have partnered with a third party and we'll give you some more information on that but we do have a cecil dashboard that we're using to uh to uh that we can actually work with you on to for implementation and so we can we have a spreadsheet based software that we can offer you and we can also provide significant consulting around that but i won't give you a sales pitch it's just out there and with that we have a couple of minutes literally several questions come through and some i'm going to let you respond to uh individually back to the the person asked the question but there's a couple that may be good for the entire audience and the first one is what do you think would be the regulatory expectations relative to cecil in the 2020 exam cycle well if i would i would think that they would expect at this point for everybody to be moving in a direction and i think for me the starting point in a community bank or a credit union would be who is going to own this is there a person who's going to drive the process or is it going to be by committee or you're going to have a cecil committee now certainly it's going to take a village uh to do it but if there's an owner or a a committee that that you have in place i think they want to see that you're going through the process and i think their first question is going to be if you talk to your your core provider about data and i think you need to be able to answer that question in the affirmative that you have talked about them and you know where you are on data at a minimum so i think they're going to start wanting to see progress they indicate that they're going to train their folks pretty uh significantly on on the standard and the statement and that they're going to come in your bank with a a good working knowledge of topic 326 and this in this statement so i i wouldn't want to not be making progress when you're when your regulators come in okay just one more quick minute we only got like 30 seconds to answer this but are community banks seeing significant increases in the reserves under cecil yeah well so most of the folks that have run parallel or sec registrants which does include community banks there are some folks that thought they were going to have to do it and when when and then when the delay came they they determined they didn't have to do it right so they've got till 23. i would say on the whole community banks that i've seen and the people i've talked to are not seeing significant increases that's what i'm seeing now that's not might not be true in bank of america and you know whomever else but you know bread and butter community banks are not seeing a substantial increase in their allowance for credit losses based on the new methodology at this point okay well that's good well doug we're at the 11 o'clock mark so you did perfect and then uh do answer those couple questions that came in um that you're going to have to answer directly but anyway that concludes our session and thank you all for joining and if any questions again doug mims is the presenter today and phil his contact information is at the back of the slide feel free to email him or contact him with any questions that you have and he'll be happy to help you so thank you and have a great day and thank you again for attending this third cecil webinar thanks everybody thanks phyllis thank you doug you