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Incorporating Risk Characteristics

 Previous example does not consider changes in underlying risk in the portfolio  Next open pool example considers risk by sub-segmenting the pool by risk grade  To illustrate the vastly different result that could occur we kept all facts the same except we assumed the following:  At December 31, 2013 special mention was 10% and substandard was 5% of the portfolio  At December 31, 2017 special mention was 15% and substandard was 10% of the portfolio  Subsequent losses on the December 31, 2013 balances, as graded on that date, were assumed to be 10% for pass, 30% for special mention and 60% for substandard

Open Pool Migration Excel Example

CECL Loss Rate

CECL Allowance 12/31/17

12/31/2017

Rating

12/31/2013

$

1,237,500

Pass

$

858,500

0.38% 4,716.34 $ 6.29% 15,564.07 24.73% 40,811.20

A

247,500 165,000 1,650,000.00

Special Mention

101,000 B 50,500 C

Substandard

$

$

1,010,000

$

61,091.61

From previous example $ Additional reserve added by considering changes in concentrations in risk ratings $

36,126.83 24,964.78

Pass

12/31/2013

2014 2015 2016 2017

Totals

-

370

760

550

390

$

2,070

D

Net Charge Offs

858,500 A

Starting Loan Balance

0.24%

Loss Percentage (D/A)

0.14% From previous example

Current & Forecat Q-Factor Adjustment Total Pass CECL Lifetime Loss Rate

0.38%

Special Mention Net Charge Offs

12/31/2013

2014 2015 2016 2017

Totals

1,110

2,280

1,650

1,170

$

6,210

E

101,000 B

Starting Loan Balance

6.15%

Loss Percentage (E/B)

0.14% From previous example

Current & Forecat Q-Factor Adjustment Total SMCECL Lifetime Loss Rate

6.29%

Substandard Net Charge Offs

12/31/2013

2014 2015 2016 2017

Totals

2,220

4,560

3,300

2,340

$

12,420

F

50,500 C

Starting Loan Balance

24.59%

Loss Percentage (F/C)

0.14% From previous example

Current & Forecat Q-Factor Adjustment Total Substandard CECL Lifetime Loss Rate

24.73%