1 ALLL Questions What is the relationship between the loan classifications of Substandard, Doubtful,...
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Transcript of 1 ALLL Questions What is the relationship between the loan classifications of Substandard, Doubtful,...
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ALLL QuestionsALLL Questions
What is the relationship between What is the relationship between the loan classifications of the loan classifications of Substandard, Doubtful, and Loss Substandard, Doubtful, and Loss and the identification of loan and the identification of loan impairment?impairment?
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ALLL QuestionsALLL Questions Under FAS 114, an individually reviewed, Under FAS 114, an individually reviewed,
collateral dependent loan that is found collateral dependent loan that is found to be impaired should not have an to be impaired should not have an allowance if the fair value of the allowance if the fair value of the collateral less cost to sell exceeds the collateral less cost to sell exceeds the recorded investment in the loan. recorded investment in the loan.
Shouldn’t there be at least some amount Shouldn’t there be at least some amount of allowance for this loan regardless of of allowance for this loan regardless of the amount of collateral protection? the amount of collateral protection?
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ALLL QuestionsALLL Questions If a loan is individually reviewed and If a loan is individually reviewed and
found not to be impaired, it is found not to be impaired, it is supposed to be included in a pool of supposed to be included in a pool of loans with similar characteristics that is loans with similar characteristics that is evaluated for impairment under FAS 5. evaluated for impairment under FAS 5.
Why is the loan included in a pool after Why is the loan included in a pool after it has already been determined not to it has already been determined not to be impaired and not to need an be impaired and not to need an allowance under FAS 114?allowance under FAS 114?
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ALLL QuestionsALLL Questions A bank correctly applies FAS 114 and FAS A bank correctly applies FAS 114 and FAS
5 and its ALLL analysis is well documented. 5 and its ALLL analysis is well documented. The total amount of the FAS 114 and FAS 5 The total amount of the FAS 114 and FAS 5 allowances is significantly lower than the allowances is significantly lower than the ALLL on the bank’s books. ALLL on the bank’s books.
Should Examiners tell the bank that the Should Examiners tell the bank that the ALLL on its books is not adequately ALLL on its books is not adequately documented or should they tell the bank documented or should they tell the bank the ALLL is excessive and should be the ALLL is excessive and should be reduced?reduced?
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ALLL QuestionsALLL Questions A bank has loan administration A bank has loan administration
problems that indicate that the amount problems that indicate that the amount of past-due loans is understated. It will of past-due loans is understated. It will take the bank some time to determine take the bank some time to determine the amount of the understatement and the amount of the understatement and obtain more accurate data. obtain more accurate data.
Should examiners recommend that the Should examiners recommend that the bank increase its ALLL or should this be bank increase its ALLL or should this be part of the capital analysis?part of the capital analysis?
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ALLL QuestionsALLL Questions
A bank has had no net charge-offs A bank has had no net charge-offs for several years. How should the for several years. How should the bank take this historical loss bank take this historical loss experience, or lack thereof, into experience, or lack thereof, into account in calculating its ALLL? account in calculating its ALLL?
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ALLL ChecklistALLL Checklist Are effective loan review/credit grading Are effective loan review/credit grading
systems in place?systems in place? Are loans deemed uncollectible promptly Are loans deemed uncollectible promptly
charged off?charged off? Are policies and procedures in place that Are policies and procedures in place that
describe how the loan portfolio is segmented?describe how the loan portfolio is segmented? Does the ALLL evaluation include an analysis Does the ALLL evaluation include an analysis
of impairment for individual loans under FAS of impairment for individual loans under FAS 114?114?
Are individual FAS 114 impairment Are individual FAS 114 impairment determinations and measurements of determinations and measurements of impairment well documented and supported?impairment well documented and supported?
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ALLL Checklist (Cont.)ALLL Checklist (Cont.) Does the ALLL evaluation include an Does the ALLL evaluation include an
analysis of impairment for pools of analysis of impairment for pools of loans under FAS 5?loans under FAS 5?
Are FAS 5 loss rates reasonable, well Are FAS 5 loss rates reasonable, well supported, and incorporate historical supported, and incorporate historical loss experience and other factors?loss experience and other factors?
Is the ALLL analysis performed by Is the ALLL analysis performed by management and reviewed by the management and reviewed by the Board at least quarterly?Board at least quarterly?
Does the reported ALLL level on the Does the reported ALLL level on the balance sheet differ significantly from balance sheet differ significantly from the most recent quarterly calculation?the most recent quarterly calculation?
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Deadly Sins of the Deadly Sins of the ALLLALLL
Impaired loans are not segregated from pools of Impaired loans are not segregated from pools of loansloans
Impaired loans are double counted in the ALLL Impaired loans are double counted in the ALLL calculationcalculation
Recorded ALLL materially greater or less than Recorded ALLL materially greater or less than bank’s calculationbank’s calculation
Percentages mentioned in the 1993 Interagency Percentages mentioned in the 1993 Interagency Policy Statement (FIL 89-93) for Substandard (15%) Policy Statement (FIL 89-93) for Substandard (15%) and Doubtful (50%) loans are used without and Doubtful (50%) loans are used without substantiationsubstantiation
Provisions for loan and lease losses are based on Provisions for loan and lease losses are based on budgeted amounts rather than on an analysis of the budgeted amounts rather than on an analysis of the loan portfolioloan portfolio
Unfunded commitments and unused lines of credit Unfunded commitments and unused lines of credit included in the ALLL calculationincluded in the ALLL calculation
ALLL is determined based on target and/or peer ALLL is determined based on target and/or peer statistics (e.g. ALLL to Total Loans)statistics (e.g. ALLL to Total Loans)
ORE allowances are included in the ALLLORE allowances are included in the ALLL
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Worksheet for Estimating Credit LossesWorksheet for Estimating Credit Losses
Estimated CreditEstimated Credit
Loss AmountLoss Amount
CategoryCategory Recorded Recorded InvestmentInvestment
HighHigh LowLow
$$ $$ $$
Allowance for Estimated Loan LossesAllowance for Estimated Loan Losses
I Individually identified I Individually identified
No impairment identifiedNo impairment identified NANA NANA
II Large groups of smaller-balance homogeneous loans collectively evaluated for II Large groups of smaller-balance homogeneous loans collectively evaluated for impairmentimpairment
Credit cardCredit card
Residential mortgage Residential mortgage
Consumer Consumer
OtherOther
III Other large groups of loan containing unidentified, impaired loansIII Other large groups of loan containing unidentified, impaired loans
IV Loans measured at fair value or at the lower cost or fair value IV Loans measured at fair value or at the lower cost or fair value NANA NANA
Total allowance for estimated loan lossesTotal allowance for estimated loan losses
Liability for Losses on Credit Instruments and Other Credit ExposuresLiability for Losses on Credit Instruments and Other Credit Exposures
Standby letters of creditStandby letters of credit
CommitmentsCommitments
Loans sold with recourseLoans sold with recourse
Loans on guarantees Loans on guarantees
OtherOther
Total liability for credit instruments and other credit exposuresTotal liability for credit instruments and other credit exposures
AICPA Audit and Accounting Guide ALLL Example