View
4
Download
0
Category
Preview:
Citation preview
12/5/2018
1
Financial Services
THOUGHTWARE®
CECL & Business Combinations
December 5, 2018
THOUGHTWARE®
Nancy J. ForingerABV, ASA-BV/IAManaging DirectorForensics & Valuation ServicesKansas City
John Hemmer, CPADirectorOmaha
12/5/2018
2
To Receive CPE Credit
Individuals• Participate in entire webinar
• Answer polls when they are provided
Groups• Group leader is the person who registered & logged on to the webinar
• Answer polls when they are provided
• Complete group attendance form
• Group leader sign bottom of form
• Submit group attendance form to training@bkd.com within 24 hours of webinar
• If all eligibility requirements are met, each participant will be emailed their
CPE certificate within 15 business days of webinar
CECL & Business Combinations
CECL & Business Combinations
• Will you have any remaining acquired loans upon transition to CECL?
• Do you plan to make acquisitions subsequent to CECL implementation?
CECL & Business Combinations
CECL Effective Dates*
2020 2021 2022
SEC Filers PBEs-Non SEC Filers Non-Public
*Annual & interim periods
12/5/2018
3
CECL & Business Combinations
CECL & Business Combinations
Business Combinations: Current Practice• Day 1 ASC 805 Loan Portfolio Valuation• Day 2 Purchase Accounting• Allowance – Incurred Loss
Business Combinations: CECL• New definitions – PCD & Non-PCD• Day 1 ASC 805 Loan Portfolio Valuation• Day 2 Purchase Accounting• Allowance – Expected Credit Loss
Transition Accounting
Business Combinations: Current Practice
• Day 1 ASC 805 Valuation of Loan Portfolio
• Day 2 Purchase Accounting
• ASC 310-20
• ASC 310-30 (PCI)
• Allowance – Incurred Loss Model
CECL & Business Combinations
12/5/2018
4
Current Practice: Day 1 ASC 805
• ASC 820 – Market Participant “Exit Price” (not Topic 326)
• Interest & Credit Components
• Discounted Cash Flows
• Prepayment Assumptions
• CECL Is Not Fair Value
CECL & Business Combinations
ASC 820 CECL
Includes market interest rate Does not consider market rate
Expected credit losses – market participant assumptions Expected credit losses – entity specific assumptions
Prepayments considered Prepayments considered
Discounted cash flow method used to determine FV Does not require a DCF method to determine allowance
Business Combinations: Day 1 ASC 805
After CECL is implemented, there is the potential for three estimates of expected credit loss on a loan or portfolio on the same measurement date
• Target institution ECL Allowance using their data & methodologies
• ASC 805 market participant ECL prepared by a Specialist
• Acquiring institution ECL Allowance using their data & methodologies
CECL & Business Combinations
12/5/2018
5
Current Practice: Day 2 ASC 805
• Day 2 Purchase Accounting: ASC 310-20
• Not impaired
• Credit & Yield discount/premium from Day 1 are combined & accreted over the remaining life of the loan on a level yield basis (typically)
• Uploaded to core to maintain future accounting (typically)
CECL & Business Combinations
Current Practice: Day 2 ASC 805
• Day 2 Purchase Accounting: ASC 310-30
• Purchase Credit Impaired (PCI)
• Nonaccretable & accretable balances are remeasured on a periodic basis subsequent to Day 1 through life of loans/pools
• Usually maintained on spreadsheets or third-party vendor
CECL & Business Combinations
12/5/2018
6
Current Practice: ALLL
• Allowance for Loan Losses – Incurred Model
• ASC 310-20 loans – evaluated periodically & a provision is made if losses expected to differ from recorded net balance under Day 2 purchase accounting
• ASC 310-30 loans – evaluated periodically & a provision is made if losses expected to exceed remaining nonaccretable balance
CECL & Business Combinations
Business Combinations: CECL
• New definitions – PCD & Non-PCD
• Day 1 ASC 805 Loan Portfolio Valuation
• Day 2 Purchase Accounting
• Allowance – Expected Credit Loss
CECL & Business Combinations
12/5/2018
7
Business Combinations: PCD
PCI
Purchased Financial Assets with Credit Deterioration (PCD)
Acquired individual financial assets (or groups of financial assets with similar risk characteristics) that as of the date of acquisition have experienced a more-than-insignificant deterioration in credit quality since origination, as determined by an acquirer’s assessment. (emphasis added)
ASU 2016-13 Glossary
CECL & Business Combinations
Business Combinations: PCD
Some Factors for Assessment of PCD Assets (326-20-55-59)
Financial assets that are delinquent as of the acquisition date
Financial assets that have been downgraded since origination
Financial assets that have been placed on nonaccrual status
Financial assets for which, after origination, credit spreads have widened beyond the threshold specified in its policy
CECL & Business Combinations
12/5/2018
8
Business Combinations: PCD
CECL & Business Combinations
And More
326-20-55-60
Judgment is required when determining whether purchased
financial assets should be recorded as purchased financial assets with credit deterioration. There may be other acceptable considerations &
policies applied by an entity to identify PCD assets.
Business Combinations: PCD
CECL & Business Combinations
• Generally expected that more acquired loans will meet the definition of PCD versus prior PCI definition
• Does not mean that all loans acquired with a purchase discount will meet definition of PCD
PCD is not just the new PCI
12/5/2018
9
Business Combinations: PCD
CECL & Business Combinations
• Determination may be made at individual or group level if similar risk characteristics exist (326-20-55-5)
• Requires entity’s development & documentation of policies related to assessment of determination of PCD assets for consistency
Business Combinations: PCD
CECL & Business Combinations
• Why does it matter?
• There is a big difference in the accounting treatment for PCD vs. non-PCD assets
12/5/2018
10
Business Combinations: PCD vs. Non-PCD
PCD Loans
(326-20-30-13)
• Allowance added to the purchase price to determine the initial amortized cost basis
• “Gross Up”
Non-PCD Loans
(326-20-30-15 & 805-20-30-4A)
• Allowance accounted for in a manner consistent with originated assets
• Not permitted to net any purchase discount with the allowance
• “Double Count”
CECL & Business Combinations
Business Combinations: CECL-PCD Loans
• Fair Value is the purchase price. Includes an interest component & a credit component measured at acquisition under ASC 805
• Allowance for expected credit losses is calculated by the acquirer at acquisition under ASC 326 & adds this amount to the fair value (grosses up) to calculated amortized cost
• Noncredit component is accreted on a level yield basis at EIR
CECL & Business Combinations
PCD: Amortized Cost
Fair Value (Market Participant) Interest Component Credit Component
Allowance (Acquirer) PLUS: Expected Credit Loss
12/5/2018
11
Business Combinations: CECL-PCD Loans
• Day 1: Example 13 (No DCF)
CECL & Business Combinations
Purchase Price 1,918,559 Acquirer loss rate 10%Acquirer allowance 217,620 Default Year 5
Day 1 EntryLoan 2,176,204 A
Loan-noncredit discount 40,025 A-B-C
Allowance for credit losses 217,620 C
Cash 1,918,559 B
Amortized cost 2,136,179 B+C
Effective interest rate 7.33% solved to amort cost using contractual payment/term
Business Combinations: CECL-PCD Loans
• Day 2
• Noncredit Accretion
• Allowance rollforward
Note: assumes no change in ECL. Example 13.
CECL & Business Combinations
Loan Principal Bal 2,176,204 Purchase Price 1,918,559 Amortized Cost 2,136,179 Allowance 217,620
Day 2 Accretion (noncredit)*Year 1 26,103 Year 2 13,921
40,025
Day 2 Charge-offYear 1 - Year 2 217,620 Allowance rollforwardYear 1 Beg 217,620 Plus expense - less charge offs - Year 1 Ending 217,620 Amortized Cost 2,136,179
Year 2 Beg 217,620 Plus expense - less charge offs (217,620) Year 2 Ending -
12/5/2018
12
Business Combinations: CECL – Non-PCD Loans
Non-PCD Amortized Cost
Fair Value (Market Participant) Credit Component Interest Component
CECL & Business Combinations
Acquirer - Day 110,000,000 Principal Balance
- Accrued fees and interest (do not carry over)
9,750,000 Fair Value (ASC 805)Market Participant (175,000) Credit Component (accreted to income over time)
(75,000) Non-Credit Component (accreted to income over time)
9,750,000 Amortized CostAcquirer Mgmt (175,000) Allowance
9,575,000 Carrying value
Business Combinations: CECL – Non-PCD Loans
Acquirer - Day 2
Valuation Discount* Allowance Net Income(225,000) (175,000) (400,000)
Year 1 75,000 - 75,000 Balance (150,000) (175,000) (325,000)
Year 2 75,000 100,000 175,000 Balance (75,000) (75,000) (150,000)
Year 3 75,000 75,000 150,000 Balance - - -
* ratable over three years for illustration purposes
CECL & Business Combinations
12/5/2018
13
Business Combinations: Summary Comparison
Acquirer - Day 2Non-PCD
Valuation Discount* Allowance Net IncomeBalance (225,000) (175,000) (400,000)
Year 1 75,000 - 75,000 Balance (150,000) (175,000) (325,000)
Year 2 75,000 100,000 175,000 Balance (75,000) (75,000) (150,000)
Year 3 75,000 75,000 150,000 Balance - - -
* ratable over three years for illustration purposes
PCD (Example 13)Valuation Discount Allowance Net Income
Balance (40,025) (217,620) (257,645) Year 1 26,103 - 26,103
Balance (13,922) (217,620) (231,542) Year 2 13,922 217,620 231,542
Balance - - -
CECL & Business Combinations
Business Combinations: CECL
There will likely be more volatility introduced in the financial statements under CECL, especially for institutions that are acquisitive depending on the mix of PCD & non-PCD loans
• PCD – less accretion related to valuation discount (noncredit only)
• Non-PCD – higher accretion related to valuation discount (both interest & credit mark)
CECL & Business Combinations
12/5/2018
14
Business Combinations: Summary Comparison
CECL & Business Combinations
PCD Non-PCD
Day 1 Day 2 Day 1 Day 2
Principal Balance Principal Balance
Less/Plus: Interest Component Do not accrete Less/Plus: Interest Component Accrete
Less: Credit Component Do not accrete Less: Credit Component Accrete
Equals: Fair Value Equals: Fair Value
Plus: Allowance Remeasure Equals: Amortized Cost
Equals: Amortized Cost Less: Allowance Remeasure
Equals: Carrying Value Equals: Carrying Value
Difference between carrying value/amortized cost & fair value is
noncredit component
Accrete
Business Combinations: CECL
Recording an ECL upon acquisition of non-PCD loans has the potential to improve comparability among institutions. Currently, banks with a large portion of the portfolio from acquisitions have a lower allowance than banks with originated loans, making it difficult to compare reserve balances across institutions.
CECL & Business Combinations
12/5/2018
15
CECL Measurement
• Portion of the amortized cost basis of a financial asset that an entity does not expect to collect – “Net amount expected to be collected”
• Expected credit losses (ECL) measured over the loan’s contractual term
• Current economic conditions & management’s expectations of future economic conditions that are reasonable & supportable
CECL & Business Combinations
CECL Measurement
CECL & Business Combinations
• Unpaid Principal Balance• Accrued Interest• Premiums/Discounts• Net Deferred Fees/Costs• Write-Offs• Foreign Exchange
Amortized Cost
12/5/2018
16
CECL Measurement
• Flexibility to select from various methods
• Loss-rate methods
• Vintage
• Roll-rate methods
• DCF
• PD/LGD
CECL & Business Combinations
CECL Measurement: Method Comparison
CECL & Business Combinations
DCF
• ECL discounted at EIR• Allowance = difference between
amortized cost & PV of expected cash flows
• ECL may change due to time value & timing & amount of expected future cash flows
Non-DCF
• ECL is not discounted• Not affected by timing &
amount of expected cash flows or by time value
12/5/2018
17
Business Combinations: CECL
Using a DCF method generally results in an initial lower credit expense for the allowance but higher accretion expense in future periods
CECL & Business Combinations
CECL Impact to Net Income
When a DCF Method Is Used
• Entire change in PV recorded as credit loss expense (326-20-45-3)
OR
• Change in PV related to time value component may be recorded as interest income (326-20-50-12)
CECL & Business Combinations
12/5/2018
18
Transition Accounting: PCI Loans
• Existing PCI loans• PCI loans will become PCD loans upon implementation of CECL OR
• Can make accounting policy election to maintain pool of PCI loans under ASC 310-30 (June 2017 TRG meeting)
• Do not reassess whether previously acquired PCI loans meet the definition of PCD loans
• Do not move non-PCI loans to PCD; keep pools of non-PCI & PCI the same from previous acquisitions
• If system (or manual tracking) has capabilities, will be beneficial to tag which loans are previously acquired PCI loans
CECL & Business Combinations
Transition Accounting: PCI Loans
• Existing PCI loans
• Apply the new PCD asset gross-up at transition to all PCI loans now included as PCD
• Change in ALLL under CECL is an adjustment to the amortized cost basis
• It is not part of the cumulative-effect one-time adjustment
CECL & Business Combinations
12/5/2018
19
Transition Accounting: PCI/PCD Modifications
• DO NOT reassess on adoption date if prior PCI modifications constitute a TDR classification
• After CECL is adopted PCD modifications must be evaluated to determine if they are TDRs
• If maintain PCI loan pools revert back to old TDR rules of ASC 310-30
CECL & Business Combinations
Transition Accounting: Non-PCI Loans
• Existing non-PCI acquired portfolio remains as non-PCI
• Non-PCI loans will continue to accrete the valuation adjustment as they do currently
• Allowance accounted for in a manner consistent with originated assets
• Initial impact recorded as part of retained earnings adjustment
CECL & Business Combinations
12/5/2018
20
Transition Accounting
As many do currently, it may be helpful to code acquired loans by acquisition to facilitate measurement of ECL
CECL & Business Combinations
Summary
• Key differences in accounting for loans acquired under ASC 326 versus today
• Impacts to income statement & capital
• Planning for transition
CECL & Business Combinations
12/5/2018
21
Continuing Professional Education (CPE) Credit
BKD, LLP is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of accountancy have final authority on the acceptance of individual courses for CPE credit. Complaints regarding registered sponsors may be submitted to the National Registry of CPE Sponsors through its website: www.nasbaregistry.org.
The information contained in these slides is presented by professionals for your information only & is not to be considered as legal advice. Applying specific information to your situation requires careful consideration of facts & circumstances. Consult your BKD advisor or legal counsel before acting on any matters covered.
12/5/2018
22
To Receive CPE Credit
• CPE credit may be awarded upon verification of participant attendance
• For questions, concerns or comments regarding CPE credit, please email the BKD Learning & Development Department at training@bkd.com
bkd.com/FS | @BKDFS
Recommended