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Hi, I'm Kathy Moe, Deputy Regional Director
of Risk Management for the San Francisco Region.
In this segment, we will recap important concepts
that we previously discussed, including an overview
of the policy statements, a decision tree relating
to Accounting Standards Codification
or ASC 310 and ASC 450, the Allowance methodology
relating to those two accounting standards,
and the loss migration analysis.
We'll conclude by providing a list of key resources
available for further reference.
In the first segment, we discussed the 2001 and 2006
Interagency Policy Statements emphasizing board
and management responsibilities, conformance with GAAP,
and the necessity of proper documentation to support both
the methodology and level of the Allowance.
We also reviewed directional consistency, highlighting
that changes in the level of the Allowance should be consistent
with changes in risk factors.
Additionally, we noted that while peer comparison
can be helpful in identifying outliers, the comparison
is not, in and of itself, an indicator of ALLL adequacy.
In the second segment, we walked through a decision tree
to determine the applicability of ASC 310 and ASC 450,
emphasizing that the ASC 310 measurement applies
to impaired loans that are individually reviewed
and Troubled Debt Restructurings,
whereas ASC 450 applies to all other loans.
We also discussed the definition of impairment,
which states that based on current information and events,
it is probable that the creditor will be unable
to collect all amounts due according to the contractual
terms of the loan agreement.
We then reviewed the process for identifying impaired loans,
highlighting some of the factors that impact
the impairment decision.
In the third segment, we discussed the various methods
for measuring impairment according to ASC 310.
We emphasized management should use the present value
of expected future cash flows method for measuring
impairment unless the credit is collateral dependent.
When using the cash flows method, we emphasized
that cash flow projections, including any balloon payments
or other terminating cash flows, must be reasonable
and well-supported, and should take into consideration
default assumptions.
Projections should be discounted at the effective interest rate
to derive the present value.
We also emphasized that the fair value of collateral
method is required for, and should only be used for,
all collateral dependent loans.
Collateral dependent loans are defined as loans which
are solely dependent on the sale, or operation,
of the collateral for repayment.
The third method for measuring impairment is the observable
market price of the loan method, which is seldom used
by banks due to the lack of data.
Finally, we emphasized that the measured impairment amount
should rarely equal zero unless there has been
a previous partial charge-off.
We also reviewed two examples of determining and measuring
impairment.
In the fourth segment, we reviewed the steps
in the ASC 450 Allowance analysis.
The first step is to segment the portfolio into groups
with similar risk characteristics.
Typical group characteristics include loan type,
risk rating, and past due status.
The second step is to calculate historical loss rates.
Several methods are available to calculate historical loss rates,
including portfolio loss history analysis,
loss migration analysis,
and probability of default/loss given default modeling.
And, finally, the third step is to apply qualitative factors,
or Q-Factors, that are likely to cause estimated
losses to differ from historical losses.
We concluded by reviewing a sample board report
which aggregated the ASC 310 calculation with the ASC 450
calculation to arrive at the total Allowance amount.
In the fifth segment, we reviewed loss migration
analysis, which is one of several methods
that banks can use to calculate historical loss rates
and estimate current credit losses.
Migration analysis uses changes in loan grades
to provide an estimate of losses inherent in the current
portfolio and is an effective tool for many banks.
We discussed the four steps of a loss migration analysis
which include:
1) Segmenting the portfolio,
2) Calculating the point-in-time loss rate,
3) Repeating the calculation for the look-back period, and
4) Calculating the overall weighted loss rate.
As we conclude, we'd like to remind you that this video
is part of the FDIC's Technical Assistance Video Program.
Other videos can be found on the Directors' Resource Center
webpage at FDIC.gov.
In particular, we direct your attention to the video
presentations that have been developed concerning troubled
debt restructuring, which relates closely to this
presentation.
Additionally, we recommend that you review the tabletop
exercises which provide examples of TDR loans
and ALLL impairment calculations.
These exercises can be found at the Technical Assistance
Video Program webpage at FDIC.gov.
As a reminder, we encourage you to refer to the 2001
and 2006 interagency policy statements
addressing the Allowance.
The policy statements clearly outline
regulatory expectations and include the answers
to several frequently asked questions.
Also, FDIC Regional Accounting Specialists
are an available resource.
If you have additional questions or comments,
please submit them to supervision@fdic.gov.
We appreciate your time and attention.
Thanks for joining us.