manage your balance sheet through a sea of … · 15.12.2017 · manage your balance sheet through...

Manage Your Balance Sheet Through a Sea of Regulation

June 26, 2017 3:45 p.m.

Presented by:

Daniel Morrill, CPA Ryan Henley, CFA

Principal Managing Director

Wolf & Company, P.C. Stifel Financial

1500 Main Street 800 Shades Creek Pkwy, Ste 775

Springfield, MA 01115 Birmingham, AL 35209

P: 413-726-6857 P: 205-949-3509

E: dmorrill@wolfandco.com E: henleyr@stifel.com

Managing The Change

Accounting Operational/Strategic

“When the winds of change blow, some people build walls and

others build windmills.” – Chinese Proverb

Managing The Change

Change

ASU 2017-

08

ASU 2016-

01

ASU 2016-

02

ASU 2016-

13

ASU 2016-01 Financial Instruments – Overall (Subtopic 825-10) Recognition and Measurement of Financial Assets

and Financial Liabilities

ASU 2016-01

Key Provisions:

• Equity investments (except those under equity method) measured at fair value through net income

Effective Dates

Public entities – Fiscal years beginning after December 15, 2017, including interim periods within those years

Non-public entities – Fiscal years beginning after December 15, 2018, and interim periods in fiscal years beginning after December 15, 2019

Early adoption is allowed.

ASU 2016-01 – Equity Investments

Accounting

• Equity securities recorded through net income, which could create volatility

• Regulatory capital changes

• Ease of burden for certain investment disclosures

Operational/Strategic

• Depending on strategic direction, will there be a shift in investment asset categories?

• Increase exposure to preferred and convertible investments?

• How important is dividend income?

• Has there been a historical trend of gain harvesting?

• Any regulatory capital concerns?

• Is divesting a better option?

• Other concerns?

Case Study – Equity Investments

Key Characteristics:

• $5.5 billion total assets

• $50mm equity portfolio

• $10mm unrealized gain

• Implications on regulatory capital upon adoption?

Case Study – Equity Investments

Case Study – Equity Investments

ASU 2016-02 Leases (Topic 842)

ASU 2016-02

Key Provisions:

• Operating leases will be recorded on the balance sheet as a right-of-use asset and a lease payment liability

Effective Dates Public entities – Fiscal years beginning after December 15, 2018 including interim periods within those years.

Non-public entities – Fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020

Early application is permitted.

ASU 2016-02 – Leases (continued)

Accounting

• Assets and liabilities increased

• 100% RWA

Operational/Strategic

• Are additional resources needed to account for operating leases?

• Start preparing the present value schedules now?

• Should my leases be re-written?

• Is a sale/leaseback still an attractive option?

• Any material impacts to capital levels?

• Should I lease or buy?

• Do my loan agreements need to be revised due to debt covenant issues?

• How should I structure new leases (gross vs. triple net, option periods vs. fixed period)

• Other concerns?

Case Study – Leases

Key Characteristics:

• $5.5 billion total assets

• $100mm operating leases outstanding

• 100% risk weighting

• Implications on regulatory capital upon adoption?

Case Study – Leases

Case Study – Leases

ASU 2016-13 Financial Instruments – Credit Losses (Topic 326)

ASU 2016-13

Key Provisions: • Record an allowance for credit losses based on the current expected

credit loss over the life of the loan. Additionally, record an allowance for loss on HTM securities.

ASU 2016-13 – Loan Losses

Accounting

• Data integrity important if new methodologies are used to estimate losses

• What are loss drivers?

• What Q Factor analysis needs to be prepared?

• What is a “reasonable and supportable” forecast?

• Effect on accounting policies, e.g. use of practical expedient

• Consideration of internal controls over revised process

Operational/Strategic

• What additional resources do I need to do my allowance for loan losses?

• Use internal or external model for calculations?

• Will CECL effect types/amount of loans made?

• Will CECL impact loan pricing/structure/terms?

• Acclimation to lower capital amounts/targets?

ASU 2016-13 – Loan Losses

Accounting

• Valuation allowance against HTM securities

• Will this change in accounting guidelines be sufficient to reclassify HTM to AFS without tainting?

• Targeted improvements over AFS

Operational/Strategic

• Do I need additional resources to determine my reserve on HTM investments?

• Do I need data from a third party?

• Do I consider to hold investments as HTM?

• Does recoverable allowance effect my decision to sell impaired assets?

Case Study – Loan Losses

Key Characteristics:

• $5.5 billion total assets

• 1% ALLL currently

• Assumed increase to 1.50% reserve

• Implications on regulatory capital upon adoption?

Case Study – Loan Losses

Case Study – Loan Losses

ASU 2017-08 Receivables—Nonrefundable Fees and Other Costs

(Subtopic 310-20)

ASU 2017-08

Key Provisions: • Amortization period for premiums on callable debt securities is to the

earliest call date.

Effective Dates

Public business entities - effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.

All other entities - effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020.

Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period.

ASU 2017-08 – Callable Debentures

Accounting

• Amortization period for callable debt securities will be to the earliest call date.

• Generally speed premium amortization and therefore reduce income on these securities.

Operational/Strategic

• Work with bond accountants to ensure appropriate amortization methodologies being used in software.

• If performed manually, update for new requirements.

• May influence decisions when purchasing callable debt securities as it may affect the net yield on the investment.

Case Study – Callable Debentures

Key Characteristics:

• $5.5 billion total assets

• $250mm in Municipal Debentures

• 3% adjustment necessary

• 25 bps of yield adjustment post transition

• Implications on regulatory capital upon adoption?

• Implications on yield, ROA, ROE, etc.?

Case Study – Callable Debentures

Case Study – Callable Debentures

Case Study – Callable Debentures

Concluding Thoughts

Timeline

FI – Public 2018 • FI – Non-public

• Leases – Public

• Amortization– public

2019

• Leases – Non-public

• Amortization – Non-public

• CECL – Public (SEC)

2020 CECL – Public (Non-SEC) 2021 CECL – Non-

public 2022

Collective Impacts

Collective Impacts

Collective Impacts

Questions?