Presented by:

Ed Bayer, Senior Risk Management Consultant

Mike Lubansky, Director of Consulting Services

Financial information company that provides credit and risk management solutions to financial institutions

Data and applications used by thousands of financial institutions and accounting firms across North America

Awards ◦ Named to Inc. 500 list of fastest growing privately

held companies in the U.S.

◦ Named to Deloitte’s Technology Fast 500

Ed Bayer ◦ Ed Bayer is a senior risk management consultant at

Sageworks, where he serves as a specialist in assisting financial institutions with accurately interpreting and applying federal accounting guidance.

Mike Lubansky Mike Lubansky is a director of consulting services at

Sageworks and serves as the in-house ALLL expert. He has led the implementation of an automated ALLL solution for more than 70 financial institutions ranging in size from $37 million to $20 billion in assets.

FASB = Financial Accounting Standards Board ◦ Since 1973, the designated organization in the

private sector for establishing standards of financial accounting that govern the preparation of financial reports by nongovernmental entities.

IASB = International Accounting Standards Board ◦ The independent standard-setting body of the

International Financial Reporting Standards (IFRS) Foundation.

October 2002: Norwalk Agreement ◦ Joint projects

◦ Short-term convergence project

◦ IASB member on site at FASB offices

◦ FASB monitoring of IASB projects

◦ Convergence research project

◦ Consideration of convergence potential in all Board agenda decisions

Previous joint proposals

July 2012: The boards split on the impairment model for loan losses ◦ According to FASB Chair Leslie Seidman, “..we believe it is

essential that we address the questions that have been raised in the U.S. before moving forward with an exposure draft..”

FASB’s CECL Model vs. IASB’s Credit Deterioration Model

Exposure draft issued December 2012

Accounting Standards Update (ASU) Financial Instruments-Credit Losses (Subtopic 825-15)

CECL = Current Expected Credit Losses

Comment period extended to May 31, 2013

Forward-looking requirements

“Probable” threshold removed

Longer loss horizon

Time value of money plays a role

Collateral definitions

Impact on ALLL: ◦ Speculation that it may increase 10 to 50 percent

◦ Could lead to one-time adjustment

Issued March 2013

Exposure Draft (ED) Financial Instruments: Expected Credit Losses

Comment period ends July 5, 2013

Amount ◦ Bucket 1: Financial instruments whose credit quality

has not significantly deteriorated since initial recognition

◦ Bucket 2: Financial instruments whose credit quality has significantly deteriorated since initial recognition

◦ Bucket 3: Financial instruments for which there is objective evidence of an impairment as of the reporting date

Recognition

Interest changes

Purchased or originated credit-impaired financial assets

Simplified approach for trade and lease receivables

New disclosures – incl. reconciliation and explanation of assumptions

Impact on ALLL: ◦ Likely would cause an increase, probably less than

CECL model

CECL Model: ◦ Forward-looking

◦ Immediate write-offs

◦ Improved definitions on interest income, collateral dependent, etc.

Credit Deterioration Model: ◦ Also forward-looking

◦ Immediate write-offs

◦ Not requiring lifetime losses for pass-rated loans

◦ Includes financial guarantee contracts

CECL Model ◦ How to calculate future expected losses

◦ Large, immediate increase in ALLL

◦ IASB feels this approach states originated assets as below fair value

Credit Deterioration Model ◦ How to calculate future expected losses

◦ Ambiguity surrounding Stage 2 classification

◦ CECL Model seems to be clearer in terms of PCI

Data requirements

New disclosures

Assumptions

Will there be a re-convergence?

Timeline/Expectations

Sageworks’ Risk Management Consultants ◦ 919-851-7474

◦ surety@sageworks.com

Future ALLL Webinars

Whitepaper on FASB vs. IASB will be available

Sageworks Blog ◦ How the CECL model could affect allowance levels

◦ What are financial institutions saying about FASB’s CECL model?