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Regulatory & Accounting Hot Topics
Jin RyuProfessional Accounting FellowOffice 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 RyuProfessional Accounting FellowOffice 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
5
(13,88
8)
(20,09
9) (16,46
8) (13,02
8)
(7,643
) (3,508
)
3,25
1
9,29
5
7,69
2
8,56
8 10,886
7,79
7
6,83
0
4,44
8 6,31
6
5,10
7
6,48
9
2,47
6
4,01
5
4,65
7
5,44
7
3,98
7
2,36
4
3,06
3
1,86
5
1,45
3
771
852
478
(816
)
(25,000)
(20,000)
(15,000)
(10,000)
(5,000)
‐
5,000
10,000
15,000
SEP2
008
DEC2
008
MAR
2009
JUN2009
SEP2
009
DEC2
009
MAR
2010
JUN2010
SEP2
010
DEC2
010
MAR
2011
JUN2011
SEP2
011
DEC2
011
MAR
2012
JUN2012
SEP2
012
DEC2
012
MAR
2013
JUN2013
SEP2
013
DEC2
013
MAR
2014
JUN2014
SEP2
014
DEC2
014
MAR
2015
JUN2015
SEP2
015
DEC2
015
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. Banksas of Q4 2015
Source: Call reports – OCC Financial Institution Data Retrieval System
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83%
12%
5%
ASC 450ASC 310‐10ASC 310‐30
ASC 450-20 Allowance
Historicalnet charge
offs
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
of the proposed expected credit loss accounting standard.
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Subsequent Restructuringof 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 TDRThe 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 DatesPublic 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 SaleLower 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 $1,000,000Loan-noncredit discount $75,000Allowance for credit losses 175,000Cash 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 or “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
AccountingUnderwriting | Lending
Credit Risk ManagementTreasury | Loan Pricing
Internal AuditCapital Planning | Forecasting
Profitability Analysis
Supervisory Preparation
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OutreachTraining
CommunicationSupervisory 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
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Accounting Standard Update 2016‐01:Classification & Measurement of Financial Instruments
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Classification & Measurement: TimingEffective 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 presentedseparately 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 or 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 ChangingTargeted area Change in accounting
Equity securitiesEquity securities must be measured at fair value (FV) through theincome 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 editionhttp://www.occ.treas.gov/publications/publications‐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 Workoutshttp://www.occ.gov/news‐issuances/bulletins/2009/bulletin‐2009‐32.html
− OCC 2012‐10, TDRs: Supervisory Guidance on Accounting and Reporting Requirementshttp://www.occ.gov/news‐issuances/bulletins/2012/bulletin‐2012‐10.html
− OCC 2013‐26, TDRs: Guidance on Certain Issues Related to Troubled Debt Restructuringshttp://www.occ.gov/news‐issuances/bulletins/2013/bulletin‐2013‐26.html
− OCC 2014‐04, Secured Consumer Debt Discharged in Chapter 7 Bankruptcyhttp://www.occ.gov/news‐issuances/bulletins/2014/bulletin‐2014‐4.html
• Other Real Estate Owned– Comptroller’s Handbook: Other Real Estate Ownedhttp://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 Statementhttp://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 Audithttp://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 Examinershttp://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 Outsourcinghttp://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 Lettershttp://www.occ.gov/news‐issuances/bulletins/2006/bulletin‐2006‐7.html
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OCA Team – Contact DataName Email Telephone
Rusty Thompson, Acting Deputy Comptroller and Chief Accountant [email protected] (214) 720‐7078
Sydney Menefee, Deputy Chief Accountant (Policy) [email protected] (202) 649‐7145
Rob Riordan, Acting Deputy Chief Accountant (Supervision) [email protected] (785) 201‐3473
Jeffrey Geer, Associate Chief Accountant [email protected] (202) 649‐6995
Carol Raskin, Senior Policy Accountant (Policy Team Leader) [email protected] (202) 649‐6996
Joy Palmer, Senior Accounting Policy Advisor (Large Bank Team Leader) [email protected] (415) 396‐5892
Shannon Cross, Secretary to the Deputy Comptroller [email protected] (202) 649‐6994
Policy Team (based in Washington, DC)
Cady Codding, Senior Policy Accountant [email protected] (202) 649‐5764
Jin Ryu, Professional Accounting Fellow [email protected] (202) 649‐7101
Juan J Marroquin, Senior Policy Accountant [email protected] (202) 649‐7102
Megan Bocko, Professional Accounting Fellow [email protected] (202) 649‐6576
Roger M Smith, Senior Policy Accountant [email protected] (202) 649‐6998
Sarah Chae, Senior Policy Accountant [email protected] (202) 649‐8428
Vangjola Gjika, Professional Accounting Fellow [email protected] (202) 649‐6997
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OCA Team – Contact Data
Supervision Team (nationwide)
Audrey Shen, Accounting Policy Advisor (Large Banks) [email protected] (202) 649‐7178
Caren Hill, Accounting Policy Advisor (Western District) [email protected] (720) 475‐7623
Cheryl Malecki, Senior Accounting Policy Advisor (Large Banks) [email protected] (212) 790‐4067
Christine Salvato, Senior Accounting Policy Advisor (Midsize Banks) [email protected] (312) 917‐5026
David J Calvert, Accounting Policy Advisor (Central District) [email protected] (312) 360‐8815
Ethan Baliff, Senior Accounting Policy Advisor (Large Banks) [email protected] (917) 344‐3427
Irina Guberuk, Professional Accounting Fellow (Large Banks) [email protected] (917) 344‐3417
Amanda Freedle, Senior Policy Accountant (Large Banks) [email protected] (980) 386‐5784
Paul A Schneider, Policy Accountant (Northeastern District) [email protected] (917) 344‐3436
Robert J De Tullio, Accounting Policy Advisor (Northeastern District) [email protected] (917) 344‐3434
Questions?
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