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Allowance for Loan Loss Presented by Tasha Kostick
Assurance Partner McGladrey LLP
Agenda • Review Historical Trends for loan growth,
allowance and key indicators • Review of the 2013 McGladrey Allowance for
Loan Loss Reserve Survey • Expectations for the future • Changes on the horizon that could impact the
Allowance for Loan Losses
2
Ready set go…
Who feels like they have been on a roller coaster when it comes to the allowance for loan losses?
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Historical Trends
• Allowance for loan losses • Delinquencies • Charge offs
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Historical Trends over the past 10 years
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Historical Trends over the past 10 years
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Historical Trends over the past 10 years
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2013 McGladrey Loan Loss Reserve Survey
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Overview • Gathered key data on reserve requirements • Charted into 6 subgroups based on asset size • Nationally and 5 separate U.S. geographic
regions • 9th annual year of the survey
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Profile by assets and Region • Participants Assets
– <$250 M - 36% – $250-$500 M - 19% – $500-$750 M – 16% – $750 M-$1 B – 7% – $1 -$2 B – 14% – >$2 B – 7%
• Region – West - 20% – Central – 29% – Great Lakes – 11% – Southeast – 8% – Northeast – 31%
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Local Economic Conditions
How would
you assess your local economic
conditions?
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Local Economic Conditions
• Mixed Results • Over 50% of all institutions reported their
local market conditions were significantly improving or improving.
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0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
Northeast Southeast West Great Lakes Central
Significantly improving
Improving
Stable
Declining
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Historical Losses
Number of years historical
charge-offs are used in
determining the historical factor.
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0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
1 year 2 years 3 years 4 years 5 years 6 years 7 years >7 years
Series1
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Has the historical loss period you use changed within the last year?
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No change
Increase
Decrease
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Based on the credit trends in your market,
are you anticipating recording a credit to your loan loss provision in
the next 12 months?
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0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
National Northeast Southeast West Great Lakes Central
Increasing
Remains the same
Decreasing
Significantly decreasing
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Historical Trends over the past 10 years
Future Expectations •Are we over the severe funding requirements? •Decreasing or remaining consistent with prior year •How do you expect to adjust for loan growth? •Increasing in some portfolios
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Expectation of Change in the future general reserve
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
National Northeast Southeast West Great Lakes Central
Increase
Remain the same
Decrease
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Components for reserve requirements • General Reserve (ASC 450-20)
– average of 60% • Specific Reserve (ASC 310-10)
– average of 24% • Unallocated Reserve
– average of 12% • Total loan loss reserve
– average of 2%
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General Reserve (ASC 450-20)
• 18 categories assessed
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Time • Time to prepare, document and review the
allowance for loan loss calculation – Average of 26 hours
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Primary Responsibility for Calculation • Who performs these duties?
– 48% stated accounting or finance staff – 39% stated credit/ lending/ risk staff
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0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
National Northeast Southeast West Great Lakes Central
Yes
No
Do you use a software tool to assist with the calculation?
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Board of Directors review or oversight
• High-involvement – “detailed review of the loan committee level, high
level review of the full board” – “thorough review by the board” – “reviews of loan factors, specific reserves and
trends”
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Board of Directors review or oversight
• Low-involvement – Minimal roles in the loan loss reserve review – With awareness limited to high-level discussions
of ratios – Or simple review of the staff reports in the
meeting minutes
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Assuming the FASB proposed credit impairment model is finalized in its
current state, what is the approximate anticipated impact on
your ratio of allowance for loan losses to total loans?
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Little to no impact
Increase 50 basis points
increase 100 basis points
increase 150 basis points
increase 200 basis points or greater
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Financial Instruments Impact • Further redeliberations through March 2014 • When estimating allowance for current expected credit losses
– Recognize lifetime expected losses rather than losses that are probable at the balance sheet date
– Revert to historical loss experience for future periods when you cannot make or obtain reasonable and supportable forecasts
– Consider lifetime contractual cashflows and expected prepayments (unless you expect to execute a TDR, ignore expected extensions/ renewals/ modifications)
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Financial Instruments Impact • When estimating current expected credit losses, continued:
– Reflect risk of loss even if remote, however amount of expected loss may be zero
– Can use discounted cash flow model as well as loss-rate or probability of default methods and provision matrix
– Implementation guidance will address how to adjust historical experience for current and forecasted conditions
• Slated for 2nd half 2014 issuance
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Questions
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