Category: 2015 Sessions

What to Expect When Your Auditors Are Expected

Steve Wagner Auditors are digging deeper into the bank’s internal controls and internal control documentation relative to the allowance calculation and loan grading. They are looking design effectiveness of controls and precision of those controls. Control precision refers to documenting to what level of detail items are being reviewed, that there is supportable evidence that…

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Economics That Matter

Dalton T. Sirmans and Gus Alexander Under the current incurred loss model for determining the ALLL, adjustment factors include changes in national and local economic and business conditions over the look-back period of the model. Under the coming CECL model, the bank will be required to forecast economic factors. MST polled bankers to find out…

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Leveraging ALLL to Support Pricing and Profitability

John Robertson Pricing is powerful, three times as powerful as expense reduction in impacting earnings. An increase of 2.5 percent in loan interest income equals a gain of more than 7 percent in net income; a decrease of 2.5 percent in operating expenses increases net income by the same amount. A dollar in added pretax…

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Introduction to Modeling Expected Losses

Steven Lackowski Expected losses are a current estimate of all contractual cash flows not expected to be collected; a model is a set of ideas and numbers that describe a particular state. There are several approaches to expected loss modeling: Cohort Approach: Consider the loss accumulations period. Group loans outstanding at the beginning of that…

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ALLL Model Validation

John Hurlock ALLL model validation has gained in emphasis and importance due to advances associated with new technology used to determine the ALLL, as a result of the banking crisis and in preparation of moving to an expected loss accounting model. Can you have a valid model and still fail an audit? Yes. A wrong…

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Loss Emergence Period: Why Is Everyone So Concerned

Benjamin Hoffman, KPMG While many banks currently include consideration of a loss emergence period (LEP) in their ALLL estimation, or one other than a single year, auditors and regulators are putting more emphasis on its use. As losses decline, an LEP of more than a year can serve to maintain a higher allowance that is…

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Developing Historical Losses

Dorsey Baskin / Graham Dyer Historical experience is the basis for ALLL estimates;whether for incurred or expected losses, it is the starting point. Historical loss is usually measured using the charge-off rate over time, that is, the confirmation of losses that happened earlier in time. The breakdown of the loan portfolio for purposes of measuring…

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Acquired Loans

Chris Emery | Senior Systems Engineer | MST Acquired loans must be accounted for under ASC 310-20 (formerly FAS 91) or ASC 310-30 (formerly SOP 03-3) rules. Key issues to consider and potential methodologies of dealing with acquired loans include: Address primary areas of logistical concern: the timing of the consolidation of the acquired portfolio…

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Transitioning Loss Methodologies

Chris Emery | Senior Systems Engineer | MST There are multiple reasons for considering a different allowance methodology. Often the bank’s regulators suggest a change, though that is usually supported by other causations. One reason regulators might recommend and the bank make a change is to improve the accuracy of its allowance results. In particular,…

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