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Jin Ryu Professional Accounting Fellow Office of the Comptroller of the Currency

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The Institute of Internal Auditors Washington, D.C. Chapter March 7, 2016

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Jin Ryu serves as a Professional Accounting Fellow within the Office of the Chief Accountant at the Office of the Comptroller of the Currency (OCC). He provides accounting policy and regulatory guidance to key stakeholders in the banking industry by monitoring and interpreting accounting rules and regulations. He has over ten years of combined experience in accounting and auditing. Prior to joining the OCC, Jin was a Sr. Manager at Deloitte in the accounting & advisory practice in the financial services industry specializing in advising clients in financial reporting, accounting standards implementation, and technical accounting & valuation of complex financial instruments. Jin is an actively licensed Certified Public Accountant in the state of Virginia with a Bachelor of Science in Accounting from San Diego State University.

Jin Ryu

Professional Accounting Fellow Office of the Comptroller of the Currency

Agenda

• The Allowance for Loan and Lease Losses
• Troubled Debt Restructurings
• Current Expected Credit Losses (CECL)
• Classification & Measurement
• Business Combinations
• OCC Resources and Contact Information
• Questions and Answers

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Allowance for Loan and Lease Losses (ALLL)

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ALLL Releases

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(13,888) (20,099) (16,468) (13,028) (7,643) (3,508) 3,251 9,295 7,692 8,568 10,886 7,797 6,830 4,448 6,316 5,107 6,489 2,476 4,015 4,657 5,447 3,987 2,364 3,063 1,865 1,453 771 852 478 (816) (25,000) (20,000) (15,000) (10,000) (5,000) ‐ 5,000 10,000 15,000 SEP2008 DEC2008 MAR2009 JUN2009 SEP2009 DEC2009 MAR2010 JUN2010 SEP2010 DEC2010 MAR2011 JUN2011 SEP2011 DEC2011 MAR2012 JUN2012 SEP2012 DEC2012 MAR2013 JUN2013 SEP2013 DEC2013 MAR2014 JUN2014 SEP2014 DEC2014 MAR2015 JUN2015 SEP2015 DEC2015

ALLL Releases (Charge-offs > provisions)

Source: Call reports – OCC Integrated Banking Information System

ALLL Increases (Provisions > Charge-offs)

ALLL to Total Loans

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0.00% 0.50% 1.00% 1.50% 2.00% 2.50% 3.00% 3.50% 4.00% 4.50% Mar‐02 Jun‐02 Sep‐02 Dec‐02 Mar‐03 Jun‐03 Sep‐03 Dec‐03 Mar‐04 Jun‐04 Sep‐04 Dec‐04 Mar‐05 Jun‐05 Sep‐05 Dec‐05 Mar‐06 Jun‐06 Sep‐06 Dec‐06 Mar‐07 Jun‐07 Sep‐07 Dec‐07 Mar‐08 Jun‐08 Sep‐08 Dec‐08 Mar‐09 Jun‐09 Sep‐09 Dec‐09 Mar‐10 Jun‐10 Sep‐10 Dec‐10 Mar‐11 Jun‐11 Sep‐11 Dec‐11 Mar‐12 Jun‐12 Sep‐12 Dec‐12 Mar‐13 Jun‐13 Sep‐13 Dec‐13 Mar‐14 Jun‐14 Sep‐14 Dec‐14 Mar‐15 Jun‐15 Sep‐15 Dec‐15 Source: Call reports – OCC Integrated Banking Information System

Allowance Components Reported by U.S. Banks as of Q4 2015

Source: Call reports – OCC Financial Institution Data Retrieval System

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83% 12% 5% ASC 450 ASC 310‐10 ASC 310‐30

ASC 450-20 Allowance

Historical net charge

• ffs

Qualitative Factors Loss Rate

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1. Changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, and recovery practices 2. Changes in international, national, regional, and local economic and business conditions and developments that affect collectibility, including the condition of various market segments 3. Changes in the nature and volume of the portfolio and in the terms of loans 4. Changes in experience, ability, and depth of lending management 5. Changes in volume and severity of past due loans, the volume of nonaccrual loans, and the volume and severity of adversely classified or graded loans 6. Changes in the quality of the institution’s loan review system 7. Changes in the value of underlying collateral for collateral-dependent loans 8. The existence and effect of any concentrations of credit, and changes in the level of such concentrations 9. The effect of other external factors such as competition and legal and regulatory requirements on the level of estimated credit loses

Factors to consider in the estimation of credit losses:

Source: OCC Bulletin 2006-47: Guidance on the ALLL

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Loosening Underwriting Standards in Auto Loans

Break-even at month 27 for a 60mo loan Break-even at month 50 for a 84mo loan

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ALLL – OCC Resources & Guidance

• OCC Survey of Credit Underwriting Practices Report
• OCC Semiannual Risk Perspective
• OCC 2012-06, Interagency Guidance on ALLL Estimation Practices for Junior Liens
• Interagency Policy Statement on the Allowance for Loan and Lease Losses ,

Guidance & Frequently Asked Questions on the ALLL – December 2006

• Policy Statement on Allowance for Loan and Lease Losses Methodologies and

Documentation for Banks and Savings Institutions – July 2001

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ALLL Takeaways

• Methodology must follow GAAP (e.g., ASC 310‐10 and ASC 450‐20)

and regulatory guidance.

• ALLL releases (and negative provisions) may be appropriate, but

must be supported.

• Need to take into consideration qualitative factors, including

loosened underwriting standards.

• Not permissible to keep ALLL levels artificially high in anticipation
• f the proposed expected credit loss accounting standard.

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Subsequent Restructuring

• f a Troubled Debt Restructuring

Subsequent Restructurings of a TDR

• Issued by the agencies in response to industry

concerns and diversity in practice.

• U.S. GAAP does not clearly address issue.
• See the September 30, 2014 Call Report

Supplemental Instructions for the full description of this guidance.

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Subsequent Restructurings of a TDR

The banking agencies will not object to removing a TDR designation if, at the time of the subsequent (second or more) restructuring:

• The borrower is no longer experiencing financial difficulty, and
• There is no concession granted, including:

– The loan is extended at market terms (including a market interest rate) consistent with those for other non‐troubled borrowers with similar risk characteristics, and – Any loan for which principal had been forgiven would continue to be designated a TDR, as that is viewed as a continuing concession.

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Current Expected Credit Losses (CECL)

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Current Expected Credit Loss (CECL)

• Principles based
• Removes the probable thresholds and the incurred

loss notion

• Introduces a “lifetime” concept for estimating the

allowance for credit losses

• Considers more forward‐looking information than is

permitted under current U.S. GAAP

Earlier recognition of losses

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FASB’s final issuance and effective dates

The FASB expects to release the final standard later this year. CECL Effective Dates

Public Business Entities (PBEs) that are SEC‐ filers Fiscal year beginning after 12/15/2018, including interim periods within 2019 PBEs (Non‐SEC filers) Fiscal year beginning after 12/15/2019, including interim periods within 2020 Non‐PBEs Fiscal year beginning after 12/15/2019, including interim periods beginning AFTER 12/15/2020 Early Adoption Non‐SEC filer PBEs and non‐PBEs: permit early adoption using the effective dates for PBEs

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Loans Debt Securities

Held for Investment CECL Held to Maturity CECL Held for Sale Lower of cost or market Available for Sale New credit loss model Trading FV‐NI

The CECL Model: Scope

CECL: What’s Changing

• Reduction in the number of credit impairment models

– Distinction between instruments carried at amortized cost vs. fair value

• Enhanced credit disclosure requirements

– Disaggregation by vintage of credit quality indicators, such as loan‐to‐value (LTV) ratios, FICO scores, and risk ratings

• Changes from purchased credit impaired (PCI) to purchased credit

deteriorated (PCD) loans

– New definition – “more than insignificant” credit deterioration since origination – Establishes a day one allowance on PCD loans

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Loan-par amount $1,000,000 Loan-noncredit discount $75,000 Allowance for credit losses 175,000 Cash 750,000

CECL: What’s Not Changing

• Ability to choose an estimation method most appropriate for the bank
• Credit risk review/management processes
• Consideration of historical loss experience on similar assets and

current conditions

• Qualitative considerations
• Interest income recognition and nonaccrual policies
• Write‐off (i.e., charge‐off) policies
• Accounting treatment for loans held for sale

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CECL: Key Considerations

• Leverage processes currently in place (e.g., a bank’s

existing credit risk management function and historical loss rates)

• Small banks DO NOT need big models

– No requirement to hire a team of experts – However, changes to current system necessary for data collection and analysis

• Consider NOW what you will need later

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Implementation Recommendations “Do’s”

• Become familiar with the standard and draft a CECL plan
• Discuss the proposed changes with external auditors, industry peers, and

regulators

• Develop multidisciplinary teams in preparation for implementation
• Review current allowance and credit risk management practices to identify

existing processes & methodologies that can be leveraged

• Consider data availability (e.g., origination, maturity dates, types of loan

losses, charge‐off dates, lifetime loss amounts)

• Use industry available resources (e.g., OCC Semiannual Risk Perspective,

OCC Mortgage Metrics)

• Consider capital adequacy
• Keep your regulatory team up to date

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Implementation Recommendations “Don’ts”

• No early incorporation of “expected loss” concepts
• r “soft adoption”
• No artificial inflation of ALLL to smooth impact
• Don’t wait to prepare
• Don’t overload at adoption

– Day 1 adoption through retained earnings, not P&L – No “cookie jar” reserves

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Supervisory Expectations

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CECL: An Integrated Approach to Credit Risk Management

Accounting Underwriting | Lending Credit Risk Management Treasury | Loan Pricing Internal Audit Capital Planning | Forecasting Profitability Analysis

Supervisory Preparation

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Outreach Training Communication Supervisory Guidance

OCC NCUA FDIC FRB

• Inventory existing supervisory

guidance to be updated

• Develop additional guidance and

tools – Regulatory capital impact – Transition specific and on‐going accounting considerations

• Established an interagency steering committee
• Conduct Established an interagency steering committee
• Conduct outreach with bankers and auditors
• Develop internal and external training and communication

plan with bankers and auditors

Please send them to:

CECL@occ.treas.gov

CECL Questions??

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Accounting Standard Update 2016‐01: Classification & Measurement of Financial Instruments

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Classification & Measurement: Timing

Effective Dates

Public Business Entities (PBEs) Fiscal year beginning after 12/15/2017, including interim periods within 2018 Non-PBEs Fiscal year beginning after 12/15/2018, including interim periods beginning after 12/15/2019 Early Adoption Early adoption immediately allowed for the following two changes: 1) Changes in fair value for instrument-specific credit risk for fair value option liabilities presented separately in OCI rather than earnings; 2) Elimination of fair value disclosure requirements for financial instruments measured on a recurring basis for non-PBEs Non-PBEs are permitted to early adoption other areas using effective dates for PBEs

Classification & Measurement: What’s Not Changing

Loans (ASC 310) Debt Securities (ASC 320) Held for Investment Amortized Cost Held to Maturity Amortized Cost Held for Sale Lower of Cost

• r Fair Value

Available for Sale FV‐OCI* Trading FV‐NI

* Credit losses would be included in net income The recognition and measurement principles for most financial assets will remain the same:

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Classification & Measurement: What’s Changing

Targeted area Change in accounting

Equity securities Equity securities must be measured at fair value (FV) through the income statement (i.e., equity securities can no longer be classified as AFS securities using FV-OCI) Equity securities with no readily determinable FV Practical expedient: may elect to measure at cost less impairment +/- observable price changes FV option liabilities Instrument-specific credit risk associated with FV option liabilities will be recognized through OCI instead of the income statement FV disclosures - “FAS 107” table PBEs: No longer required to disclose the methods and significant assumptions, and a description of any changes to the latter that are used to estimate FV. However, other FV disclosures should be made in accordance with the exit price notion in ASC 820, not entry price. Non-PBEs: Re-affirmed decision to drop FV disclosures Valuation allowance for deferred tax assets (DTAs) Valuation allowance for DTAs for available-for-sale securities will be evaluated in combination with other DTAs (current practice allows separate assessment)

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Business Combinations (Topic 805)

Business Combinations (Topic 805): Pushdown Accounting

• ASU 2014‐17 was effective upon issuance in November 2014.
• Pushdown accounting is no longer required, but optional for

entities that undergo a change in control.

– Banking agencies may require pushdown to be used for the call report in certain circumstances.

• Bargain purchase gains are not recognized in the earnings of the

acquired entity.

• Bargain purchase gains are reflected as additional paid‐in capital

when pushdown accounting is elected by the acquired entity.

• Acquisition debt remains at parent level, unless required to push

down.

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Business Combinations (Topic 805): Pushdown Accounting

• Pushdown accounting may be elected in the period the change in

control occurs, or any subsequent period (as a change of accounting policy).

• Cannot “un‐elect” – Once pushdown accounting has been

applied, it is irrevocable.

• Companies can retrospectively elect to apply pushdown

accounting as of the most recent change in control event if pushdown accounting was not previously applied.

• SEC rescinded SAB Topic 5.J. to comply with new ASU.

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Push Down Accounting

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ASU No. 2015‐16 ‐ Business Combinations (Topic 805), Simplifying the Accounting for the Measurement‐ Period Adjustments

• Issued on September 25, 2015
• PBEs – effective for fiscal years (including interim periods) beginning

after December 15, 2015

• All other entities – effective for fiscal years beginning after December

15, 2016 and interim periods within fiscal years beginning after December 15, 2017

• Eliminates the requirement to restate prior period financial statements

for measurement period adjustments.

• Requires that the cumulative impact of a measurement period

adjustment (including the impact on prior periods) be recognized in the reporting period in which the adjustment is identified.

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Other OCC Resources & OCA Contact Information

Resources Available to Internal Auditors

• Bank Accounting Advisory

Series (BAAS)

– OCC OCA’s interpretation of U.S. GAAP and regulatory guidance on accounting topics relevant to national banks and federal savings associations. – 2015 edition

http://www.occ.treas.gov/publications/publicatio ns‐by‐type/other‐publications‐reports/baas.pdf

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Resources Available to Internal Auditors

• Call Report

–Instructions –Supplemental Instructions –Main Instruction Updates –Glossary

http://www.ffiec.gov/ffiec_report_forms.htm

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Revised Capital Rule Resources

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Resources Available to Internal Auditors – Other OCC OCA Issuances (**)

• General

– Quarterly Accounting Snapshot (available to bankers on BankNet)

• Investment Securities

− OCC 2009‐11, Other‐than‐Temporary Impairment Accounting

http://www.occ.gov/news‐issuances/bulletins/2009/bulletin‐2009‐11.html

• Loans

− OCC 2001‐15, Loans Held for Sale Guidance

http://el.occ/news‐issuances/bulletins/2001/bulletin‐2001‐15.html

− OCC 2003‐09, Interagency Advisory on Mortgage Banking

http://www.occ.gov/news‐issuances/bulletins/2003/bulletin‐2003‐9.html

− OCC 2005‐18, Interagency Advisory on Accounting and Reporting for Commitments to Originate

and Sell Mortgage Loans

http://www.occ.gov/news‐issuances/bulletins/2005/bulletin‐2005‐18.html

− OCC 2014‐29, Interagency Guidance on Risk Management of Home Equity Lines of Credit

Approaching the End‐of‐Draw Periods

http://www.occ.gov/news‐issuances/bulletins/2014/bulletin‐2014‐29.html

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Resources Available to Internal Auditors – Other OCC OCA Issuances

• Troubled Debt Restructurings (TDRs)

– OCC 2009‐32, Commercial Real Estate (CRE) Loans: Guidance on Prudent CRE Loan Workouts

http://www.occ.gov/news‐issuances/bulletins/2009/bulletin‐2009‐32.html

− OCC 2012‐10, TDRs: Supervisory Guidance on Accounting and Reporting Requirements

http://www.occ.gov/news‐issuances/bulletins/2012/bulletin‐2012‐10.html

− OCC 2013‐26, TDRs: Guidance on Certain Issues Related to Troubled Debt Restructurings

http://www.occ.gov/news‐issuances/bulletins/2013/bulletin‐2013‐26.html

− OCC 2014‐04, Secured Consumer Debt Discharged in Chapter 7 Bankruptcy

http://www.occ.gov/news‐issuances/bulletins/2014/bulletin‐2014‐4.html

• Other Real Estate Owned

– Comptroller’s Handbook: Other Real Estate Owned

http://www.occ.gov/publications/publications‐by‐type/comptrollers‐handbook/a‐oreo.pdf

• Miscellaneous Accounting

– Comptroller’s Handbook: Other Assets & Liabilities

http://el.occ/publications/publications‐by‐type/comptrollers‐handbook/otherassets1.pdf

– OCC 2014‐30, Addendum to the Interagency Policy Statement on Income Tax Allocation in a Holding Company Structure: Joint Statement

http://www.occ.gov/news‐issuances/bulletins/2014/bulletin‐2014‐30.html

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Resources Available to Internal Auditors – Other OCC OCA Issuances

• External and Internal Audit

– Comptroller’s Handbook: Internal and External Audit

http://www.occ.gov/publications/publications‐by‐type/comptrollers‐handbook/2003AuditHB.pdf

– BB 1992‐42, Interagency Policy Statement on Coordination and Communication Between External Auditors and Examiners

http://www.occ.gov/static/news‐issuances/bulletins/pre‐1994/banking‐bulletins/bb‐1992‐42.pdf

− OCC 1999‐ 37, Interagency Policy Statement on External Audit Programs

http://www.occ.gov/news‐issuances/bulletins/1999/bulletin‐1999‐37.html

− OCC 2003‐12, Interagency Policy Statement on Internal Audit and Internal Audit Outsourcing

http://www.occ.gov/news‐issuances/bulletins/2003/bulletin‐2003‐12.html

− OCC 2003‐38, Removal, Suspension, and Debarment of Accountants from Performing Annual Audit

Services http://www.occ.gov/news‐issuances/bulletins/2003/bulletin‐2003‐38.html

− OCC 2006‐07, Interagency Advisory on the Unsafe and Unsound Use of Limitation of Liability

Provisions in External Audit Engagement Letters

http://www.occ.gov/news‐issuances/bulletins/2006/bulletin‐2006‐7.html

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OCA Team – Contact Data

Name Email Telephone

Rusty Thompson, Acting Deputy Comptroller and Chief Accountant Rusty.Thompson@occ.treas.gov (214) 720‐7078 Sydney Menefee, Deputy Chief Accountant (Policy) Sydney.Menefee@occ.treas.gov (202) 649‐7145 Rob Riordan, Acting Deputy Chief Accountant (Supervision) Robert.Riordan@occ.treas.gov (785) 201‐3473 Jeffrey Geer, Associate Chief Accountant Jeffrey.Geer@occ.treas.gov (202) 649‐6995 Carol Raskin, Senior Policy Accountant (Policy Team Leader) Carol.Raskin@occ.treas.gov (202) 649‐6996 Joy Palmer, Senior Accounting Policy Advisor (Large Bank Team Leader) Joy.Palmer@occ.treas.gov (415) 396‐5892 Shannon Cross, Secretary to the Deputy Comptroller Shannon.Cross@occ.treas.gov (202) 649‐6994

Policy Team (based in Washington, DC)

Cady Codding, Senior Policy Accountant Cady.Codding@occ.treas.gov (202) 649‐5764 Jin Ryu, Professional Accounting Fellow Jin.Ryu@occ.treas.gov (202) 649‐7101 Juan J Marroquin, Senior Policy Accountant Juan.Marroquin@occ.treas.gov (202) 649‐7102 Megan Bocko, Professional Accounting Fellow Megan.Bocko@occ.treas.gov (202) 649‐6576 Roger M Smith, Senior Policy Accountant SmithR@occ.treas.gov (202) 649‐6998 Sarah Chae, Senior Policy Accountant Sarah.Chae@occ.treas.gov (202) 649‐8428 Vangjola Gjika, Professional Accounting Fellow Vangjola.Gjika@occ.treas.gov (202) 649‐6997

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OCA Team – Contact Data

Supervision Team (nationwide)

Audrey Shen, Accounting Policy Advisor (Large Banks) Audrey.Shen@occ.treas.gov (202) 649‐7178 Caren Hill, Accounting Policy Advisor (Western District) Caren.Hill@occ.treas.gov (720) 475‐7623 Cheryl Malecki, Senior Accounting Policy Advisor (Large Banks) Cheryl.Malecki@occ.treas.gov (212) 790‐4067 Christine Salvato, Senior Accounting Policy Advisor (Midsize Banks) Christine.Salvato@occ.treas.gov (312) 917‐5026 David J Calvert, Accounting Policy Advisor (Central District) David.Calvert@occ.treas.gov (312) 360‐8815 Ethan Baliff, Senior Accounting Policy Advisor (Large Banks) Ethan.Baliff@occ.treas.gov (917) 344‐3427 Irina Guberuk, Professional Accounting Fellow (Large Banks) Irina.Guberuk@occ.treas.gov (917) 344‐3417 Amanda Freedle, Senior Policy Accountant (Large Banks) Amanda.Freedle@occ.treas.gov (980) 386‐5784 Paul A Schneider, Policy Accountant (Northeastern District) Paul.Schneider@occ.treas.gov (917) 344‐3436 Robert J De Tullio, Accounting Policy Advisor (Northeastern District) DetullioRJ@occ.treas.gov (917) 344‐3434

Questions?

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