alll methodology: how to justify and document your q factors
TRANSCRIPT
Presented by: Ancin Cooley
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
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held companies in the U.S.
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Ancin Cooley, CIA, CISA, is the Founder and Managing Principal of Synergy Bank Consulting, Inc., the risk management advisory firm dedicated to helping financial institutions optimize their security, compliance and business performance.
Ancin brings deep, first-hand experience gained from working for the Office of the Comptroller of the Currency (OCC) as an examiner. During his tenure at the OCC, he performed safety and soundness examinations at community and mid-size banks that ranged from $100 million to $4 billion dollars in total assets located in Georgia, South Carolina, North Carolina, and Florida. After leaving the OCC, Ancin worked for a regional accounting firm where he led loan reviews and internal audits.
Ancin specializes in preparing financial institutions for regulatory exams, process improvement, and project management. When not advising clients, training for triathlons, or hanging out with his young son, Ancin designs and conducts targeted professional development trainings for the banking industry.
ANCIN COOLEY, CIA, CISA Principal, Synergy Bank Consulting Inc. www.synbc.com
Your ALLL
Your Earnings
Your ALLL
Your Earnings
ALLL Committee Meeting
What are Qualitative Factors (Q-Factors)?
What are the regulatory expectations?
How can we improve the documentation of our Q-Factors?
Interagency Policy Statement on the Allowance for
Loan and Leases (the guidance), requires that the
ALLL methodology must estimate credit losses on
groups of loans with similar risk characteristics
(homogeneous pools) in accordance with Generally
Accepted Accounting Principles (GAAP) under ASC
450-20, Accounting for Contingencies.
Commercial Loans Loans to Individuals Real Estate Loans
Historical Net
Charge-offs Qualitative
Factors
ASC 450-20 (formerly FAS 5)
Commercial Loans Loans to Individuals Real Estate Loans
Net Avg. Loss 2.25%
Net Avg. Loss
1.15%
Net Avg. Loss
1.75%
Environmental factors are used to reflect
changes in the collectability of the portfolio
not captured by the historical loss data.
These factors augment actual loss experience
and help to estimate the probability of loss
within a loan portfolio based upon emerging
or inherent risk trends.
Changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, and recovery practices not considered elsewhere in estimating credit losses.
Changes in international, national, regional, and local economic and business conditions and developments that affect the collectability of the portfolio.
Changes in the nature and volume of the portfolio and in the terms of loans.
Changes in the experience, ability, and depth of lending management and other relevant staff.
Changes in the volume and severity of past due loans, the volume of nonaccrual loans, and the volume and severity of adversely classified or graded loans.
Changes in the quality of the institution’s loan review system.
Changes in the value of underlying collateral for collateral-dependent loans.
The existence and effect of any concentrations of credit, and changes in the level of such concentrations.
Historical Net
Charge-offs Q-Factors
ASC 450-20 (formerly FAS 5)
Q-factors are used to reflect
changes in the collectability of
the portfolio not captured by the
historical loss data
Sound Judgment and Documentation
Excerpts from 2006 Interagency Policy Statement on the ALLL
The determination of the amounts of the ALLL should be based on management’s current judgments
about the credit quality of the loan portfolio, and should consider all known relevant internal and external factors that affect loan collectability as of the evaluation date. Management’s evaluation is subject to review by examiners.
The board of directors is responsible for overseeing management’s significant judgments and
estimates pertaining to the determination of an appropriate ALLL.
Determining the appropriate level for the ALLL is inevitably imprecise and requires a high degree of
management judgment. Management’s analysis should reflect a prudent, conservative, but not
excessive ALLL that falls within an acceptable range of estimated credit losses.
Management should maintain reasonable documentation to support which factors affected the analysis and the impact of those factors on the loss measurement..
Assess appropriateness of ALLL and supporting documentation
Assess effectiveness of board oversight and the quality of the loan review system
Evaluate ALLL policies, procedures, and methodology
Assess whether institution appropriately considered historical loss experience and all significant qualitative or environmental factors
Ensure that management appropriately applied FAS 114 and
FAS 5
Review any loss estimation models
Review appropriateness and reasonableness of the overall level of the ALLL
Review the adequacy of ALLL documentation
Poor Portfolio Segmentation (i.e. geographic area)
Lack of Directional Consistency
Poor Documentation
Changes in
Lending
Policies and
Procedures
High degree of
loan
documentation
waivers
Financial
statement
exceptions
Financial statement
exceptions or
originations without
them
Problem
Loan Trends Level of TDR’s
Volume and
severity of past
dues
Level of classified
assets
Changes in
Collateral
Values
Declining valuation
environment
Financial
statement
exceptions
Financial statement
exceptions or
originations without
them
Declining
Valuation
Environment
Information from your
local realtor on
housing trends
Corelogic and Case
Schiller
Changes in the experience, ability, and depth of lending management and other relevant staff.
Changes in the volume and severity of past due loans, the volume of nonaccrual loans, and the volume and severity of adversely classified or graded loans.
Changes in the quality of the institution’s loan review system.
Changes in the value of underlying collateral for collateral-dependent loans.
The existence and effect of any concentrations of credit, and changes in the level of such concentrations.
①Don’t wait to last day before the meeting to document your Q- Factors.
①Share the load. Use a team approach to documenting your ALLL.
②Every time you change your Q-factors make sure you have the corresponding data to support the change. Directional Consistency is key.
③Document in your ALLL methodology the financial indicators that drive the changes to your Q-factors
⑤ Use the free information available on the internet. http://research.stlouisfed.org
Uniform Bank Performance Report
⑥ Use the process of documenting your qualitative factors as an opportunity to assess your current economic environment, trends in your loan portfolio, and risk management practices.
⑤ Incorporate the data from your portfolio stress process into your ALLL documentation.
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