Pub. 11 2016-2017 Issue 3

September/October 2016 13 Extraordinary Service for Extraordinary Members. F u l l y r e g i s t e r e d D e a l e r B a n k • N o t F D I C I n s u r e d • N o B a n k G u a r a n t e e • M a y L o s e V a l u e 800 288 5489 www. c cbcm. com FROM ONE COMMUNITY BANK TO ANOTHER. We have delivered fixed income strategies and support to banks of all sizes since 1985. Operating in over 30 states, the Capital Markets Group is always ready to meet the needs of our fellow community bankers. We keep investing simple so that banks can focus on what really matters — lending to the communities who support us. We share the same DNA. C A P I T A L M A R K E T S G R O U P • Portfolio Strategy, Sales and Service • Bond and Securities Underwriting/Trading • BancPath®andFlexLoan®via Asset Management Group and lease losses (ALLL) for banks. ALLL is at the heart of bank accounting, as it affects what banks do—lend money and collect principal and interest. Earlier recognition of losses that will result from the implementation of the CECL model will likely increase ALLLs, although the actual impact to individual banks is dependent upon the point in the credit cycle, maturities, future expected conditions, and portfolio credit risk attributes. In general, because a longer time horizon for measuring losses will be instituted, some increase is expected for all banks. While bank regulator estimates made in 2011 indicated 30 percent to 50 percent increases in ALLL, more recent projections performed by bank consultants were far lower. 5 In any event, the extent of the impact for individual banks could vary widely, as the provision amounts will depend primarily on the credit risk profile of each bank. Although banks should not begin increasing their allow- ance levels beyond those appropriate under existing GAAP in advance of CECL’s effective date, banks are encouraged by regulators to take steps to assess the potential impact on capital. 6 How Good Do My Forecasts Need to Be? Forecasts are difficult and never precise, even for the experts. Nevertheless, the FASB “life of loan” loss concept requires a forecast of the future. Bankers make forecasts of the future often in operating their bank. Budgeting, capital plans, and asset/liability management processes require forecasting. FASB has said it is merely requiring banks to use the forecasts currently used in operations. Some banks may decide to start with forecasts published by the Federal Reserve or by other economic forecasting organizations provided that such forecasts are reasonable and support- able for such bank’s circumstances (e.g., its loan portfolio). CECL does not provide prescriptive guidance regard- ing how to develop an estimate of expected credit losses. A degree of judgment is involved in estimating expected credit losses, and selecting different methodologies may result in a range of acceptable outcomes. The selection of a forecasting methodology is therefore one of the key deci- sions when adopting CECL. Because FASB does not provide a definition, different banks may have different views on what constitutes a “reasonable and supportable forecast.” Implementation Dates Generally, CECL will be effective for public business entities (PBEs) that are U.S. Securities and Exchange Com- mission (SEC) filers 7 for fiscal years beginning after Dec. 15, 2019, including interim periods, i.e., 2020 for calendar year-end companies. The effective date for PBEs that are  Counselor’s Corner — continued on page 14