This deck explains how banks and credit unions calculate the FAS 5 or pooled loans part of the reserve under the incurred loss model. The session defines available methodologies, explains some of the pros and cons of each and helps bankers plan for that part of the allowance for loan and lease losses. (ALLL) To see how your bank or credit union can comply with FAS 5 regulations, watch a video of Sageworks ALLL http://web.sageworks.com/alll/

1. Presented By:
Regan Camp, Senior Risk Management Consultant
Moderated By:
Ed Bayer, Managing Director – Financial Institutions

2. To ask a question during the webinar, feel free to enter it into the chat
box along the right hand side of your screen. Slides are available there,
too.
Link to download slides
Area to enter questions or
write-in poll answers

3. 


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
Awards
◦ Named to Inc. 500 list of fastest growing privately held companies
in the U.S.
◦ Named to Deloitte’s Technology Fast 500

4. 
Regan Camp
◦ Regan is a senior risk management consultant at Sageworks,
where he serves as a specialist in assisting financial institutions
with accurately interpreting and applying federal accounting
guidance. His primary focus is allowance for loan and lease loss
provisions (ALLL) and stress testing loan portfolios.
◦ Prior to joining Sageworks, he served in various consulting
capacities at Deloitte & Touche, L.P. and Dittrich & Associates LLC,
where he assisted financial institutions in the administration of
FDIC Loss Share Agreements and managed the establishment of
special asset divisions and the resolution of troubled portfolios.
He also represented the FDIC in overseeing the day-to-day
operations and eventual liquidations of failed financial
institutions.

5. 
What is FAS 5 (ASC 450-20)

Difference between FAS 5 (ASC 450-20) and FAS 114 (ASC
310-10-35)

Key characteristics of FAS 5 (ASC 450-20) loan pools

Specific challenges related to creating FAS 5 Pools

Historical loss rates

Qualitative and environmental factors

Understand different historical loss rate methodologies

How automated ALLL solutions help in complying with FAS 5

6. 
Formerly known as the Statement of Financial
Accounting Standards No. 5, Accounting for
Contingencies (FAS 5), Accounting Standards
Codification Subtopic 450-20 is a principal source
of guidance on accounting for impairment in a loan
portfolio under GAAP. It provides guidance on loss
estimates for groups, or pools, of non-impaired
and/or homogeneous loans grouped together
based on similar risk characteristics.

7. 
Homogeneous pools vs. Individual loans

General reserve vs. Specific reserve

Non-impaired loans vs. Impaired loans

8. 
Homogeneous pools

Historical loss rates

Qualitative/environmental adjustments

9. 
Appropriate segmentation varies based on
institution’s size and portfolio composition

It is possible to be too granular and too broad

To sub-segment or not to sub-segment

Breaking out CRE portfolio

Separating HELOCs from other pools

10. 
Peer banks
◦ When to use peer banks
◦ How to navigate away from peer banks

Your historical loss rates
◦ Previous call reports
◦ Internal loss rates

Migration analysis

11. 
Determining appropriate loss horizon

Challenges in aggregating data if breaking into
new segments or attempting migration analysis for
first time

Weighted average or straight average?

Annualizing loss rates correctly

12. 

Migration analysis is a methodology for
determining, through the bank’s experience over a
historical analysis period, the rate of loss incurred
on pools of similar loans by migration to loss from
a risk sub-segment within that particular loan type
(or portfolio wide by risk classification).
May take many forms, ranging from a portfolio
wide tracking of the volume of loans that migrated
to a loss from a set risk rating or delinquency
bucket within a defined loss horizon to a more
granular analysis by loan type and risk rating.

16. 
Q factors are used to reflect risk in 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.

17. 
Utilize standard factors from Interagency Guidance

Many are inherently subjective, but use quantitative
support where possible
◦ Changes in Delinquency
◦ Changes in Collateral Values
◦ Economic Conditions

Determine drivers for each factor

Trend from previous quarter

18. 
Demonstrate directional consistency

Adequate support for assumptions

Consider establishing a qualitative scoring matrix

Document, justify and defend

19. 
Changes in lending policies and procedures,
including changes in underwriting standards and
collections, charge offs, and recovery practices.

Changes in international, national, regional, and
local conditions.

Changes in the nature and volume of the portfolio
and terms of loans.

20. 
Changes in the experience, depth, and ability of
lending management.

Changes in the volume and severity of past due
loans and other similar conditions.

Changes in the quality of the institution’s loan
review system.

Changes in the value of underlying collateral for
collateral-dependent loans.

21. 
The existence and effect of any concentrations of
credit and changes in the level of such
concentrations.

The effect of other external factors (i.e.
competition, legal and regulatory requirements) on
the level of estimated credit losses.

22. 
Can a loan be FAS 114, but non-impaired?

Nonaccruals that return to performing status

What about TDRs?

What if I evaluate all my substandard loans
individually at first?

Can I apply a FAS 5 reserve rate instead of a
specific reserve rate even if a loan is actually
impaired?

23. 
Save time in data aggregation and entry

Reduce manual errors in calculations

Generate documentation

Reduce examiner criticism

Create custom reports

25. 
Ed Bayer
◦ Ed.bayer@sageworks.com

Regan Camp
◦ regan.camp@sageworks.com

www.sageworksanalyst.com
◦ Future webinars
◦ Whitepapers & articles

LinkedIn: ALLL Forum for Bankers