Allowance for Loan Loss - CUNA Councils · Tasha Kostick . Assurance Partner McGladrey LLP . Agenda...
Transcript of Allowance for Loan Loss - CUNA Councils · Tasha Kostick . Assurance Partner McGladrey LLP . Agenda...
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Allowance for Loan Loss Presented by Tasha Kostick
Assurance Partner McGladrey LLP
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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
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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
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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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