#2 Allowance for Loan and Lease Losses by omq25257

VIEWS: 77 PAGES: 13

									Bank                                                          Date of Exam
Charter                                                        Prepared By


                #2 – ALLOWANCE FOR LOAN AND LEASE LOSSES
                                                (Risk Focused)

ASSIGNMENT OVERVIEW:
The Allowance for Loan and Lease Losses (ALLL) should reflect potential losses inherent in a bank’s loan
portfolio and off-balance sheet lending activities. It is the responsibility of bank management and the board of
directors to maintain an adequate and accurate level in the ALLL through at least quarterly evaluations of the
methodology and the bank’s credit risk. Significant understatement of the ALLL may represent a safety and
soundness risk through overstatement of a bank’s earnings and capital accounts. Significant overstatement of
reserves is inappropriate from an accounting practice, and could lead to complacent loan administration. Refer to
Section 3.1 “Loans” in the FDIC Examination Manual and the Policy Statement on the Allowance for Loan and
Lease Losses Methodologies and Documentation for Banks and Savings Institutions (July 21, 2001) for more
information. The related Reference document for this procedure identifies useful regulations, guidance, and other
issuances by various regulatory authorities.



INSTRUCTIONS:
All examiners performing these procedures must be listed above in the “Prepared By” section. Completion of this
procedure must be done electronically. All of the CORE ANALYSIS PHASE should be completed. Comments
and findings for each step should be made in the comment box below each question. Reference to work paper
documentation should also be included here. Documentation is to be sufficient to allow an audit trail of the
examiner’s thought process and all significant findings.

Based on any significant/critical findings in the CORE ANALYSIS PHASE or as directed by the EIC, the
applicable SAP should also be performed. All findings in the SAP should be summarized in the corresponding
CORE ANALYSIS comment secton. If the SAP is performed, an “X” should be placed in the space provided
next to “Performed SAP” located in the CORE ANALYSIS.

The EIC/AEIC should review this procedure when complete. Acknowledgement that this procedure has been
reviewed by the EIC/AEIC and Regional Office (when appropriate) will be indicated on the SCOPE AND
REVIEW ACKNOWLEDGEMENT FORM.

Navigation through the work program is facilitated by hyperlinks throughout the document. In order to reach the
linked sections, place the cursor over the underlined text, hold down the control key, and click to follow the link.
Links are also provided to return to the CORE ANALYSIS. These links are found whenever a blue arrow ( )
appears.


EXAMINERS ARE RESPONSIBLE FOR EXERCISING SOUND JUDGMENT AND UTILIZING REASONABLE
INVESTIGATIVE AND ANALYTICAL SKILLS TO ARRIVE AT AN ACCURATE ASSESSMENT OF THE RISK PROFILE
OF THIS SEGMENT OF THE INSTITUTION’S OPERATIONS. PERFORMING ALTERNATE PROCEDURES NOT
LISTED WITH THESE GUIDELINES MAY BE NECESSARY TO COMPLETE THIS RISK ANALYSIS.




RF02- ALLL (02/2010)                                 1                                      Texas Department of Banking
                                   CORE ANALYSIS PHASE
 1. Prior Criticism

 1a. Determine whether deficiencies noted in the last examination and most recent
 internal/external audit have been addressed and/or corrected by management. Detail how
 deficiencies were corrected. Include copy of exception and management response, if applicable.

 Comment:

 2. Account Balance and Activity

 Note: All entries to the ALLL account should flow through the appropriate income and expense
 accounts not through the capital accounts.

2a. Reconcile ALLL transcripts to call report Schedules RI-B and RC and review for any
unusual activity. Refer to Appendix for guidance. Explain and document differences and
complete the SAP if unusual activity is noted.
                                                                                                          Performed SAP

Comment:

2b. List any loans classified “Loss” which were not charged off at the last exam and document
the reasons why.

Comment:

2c. Review the procedures for posting charge-offs and recoveries to the ALLL account.
Comment on any inadequacy of these procedures, lack of segregation of duties, and/or board
approval.

Comment:

3. Methodology & Adequacy of Reserves

3a. Review the bank’s methodology for calculating reserves and maintaining the ALLL account.
Comment specifically on compliance with FAS 5 (ASC Topic 450- Contingencies) and FAS 114
(ASC Topic 310 – Receivables)*. Document deficiencies noted and refer to Appendix for
guidance. Include copy of internal ALLL calculation and methodology in work papers.
* FASB Accounting Standards Codification (ASC) organizes accounting standards by topic and sections.
Comment:

3b. Complete ALLL Worksheets 1 through 4. If any deficiencies are noted, document and
discuss with management. Amend call reports if necessary.

Comment:



RF02 - ALLL ( 02/12/2010 )                                  2                                    Texas Department of Banking
4. Final Analysis
4a. Complete the Summary of Findings page.




RF02 - ALLL ( 02/12/2010 )                   3   Texas Department of Banking
                               SUMMARY OF FINDINGS
                         #2-ALLOWANCE FOR LOAN AND LEASE LOSSES
Describe all strengths evident from the evaluation.




Describe all weaknesses evident from evaluation, including violations of
law/regulation/rules; noncompliance with Departmental policies/guidelines; internal policy
deficiencies/ noncompliance; internal control weaknesses; MIS problems; and deficiencies
in management supervision.
Report Worthy:



Not Report Worthy:



Determine why weaknesses exist and comment on management’s response and plan of
action. Identify bank personnel making the response.




                    SUMMARY RISK RATING ASSIGNED:

Definitions:
1-Strong; 2-Satisfactory; 3-Less than satisfactory; 4-Deficient; 5-Critically deficient; NR-Not Rated


    (Return to Core Analysis)
Provide copy of this page to EIC/AEIC. Receipt and review of this form by the EIC/AEIC will be evidenced
by his/her initials in the appropriate column for this procedure on the SCOPE AND REVIEW
ACKNOWLEDGEMENT FORM (Planning and Control Worksheet #1).




RF02 - ALLL ( 02/12/2010 )                           4                               Texas Department of Banking
                     SUPPLEMENTAL ASSESSMENT PHASE
 2              Account Balance and Activity

 Q2a.           Reconcile ALLL transcripts to call report Schedules RI-B and RC and review
                for any unusual activity. See Appendix for guidance. Explain and document
                differences and complete the SAP if unusual activity is noted.

                              Summarize findings and other comments in the CORE section.



                If unusual activity is noted:

                     •       Perform a random sampling of charged-off loans and/or discuss
                             current practices with employees in the loan department to document
                             or detail unusual activity.

     (Return to Core Analysis)




RF02 - ALLL ( 02/12/2010 )                            5                         Texas Department of Banking
                                          APPENDIX

 2        ACCOUNT BALANCE AND ACTIVITY –
          Identifying unusual activity in the ALLL account.

 The following are some examples of unusual activity which may require additional
 investigation:

      •    Large Items
      •    Reversal Entries
      •    Large charge-offs and/or recoveries in the 1st quarter of the year
      •    Specific types of loans with high charge-off rates
      •    Originating officers with high charge-off rates
      •    Charge-offs within 12 months of origination date
      •    Directors, officers, employees, or principal shareholders and related party (i.e.
           relative or business) with a charge-off
      •    Negative provisions to the ALLL account
      •    Accruals or credits not debited thru provision expense account
      •    Fast recoveries (within 30 days)
      •    Inappropriate expenses (i.e. ORE expenses, accrued interest, service charges)

            (Return to Core Analysis)




                                          APPENDIX

 3        METHODOLOGY & ADEQUACY OF RESERVES –
          Determining the adequacy of the bank’s ALLL Methodology

 In determining the adequacy of the bank’s methodology, consider the following:

      1. Adequacy of policies and the Board’s review/approval of the reserve account.
      2. Compliance with the FFIEC’s “Interagency Policy Statement on the ALLL” dated



RF02 - ALLL ( 02/12/2010 )                           6                            Texas Department of Banking
           July 2, 2001 by considering:
                •    Adequacy of specific reserve allocations
                •    Adequacy of general reserve allocations (i.e. application of % reserves to both
                     classified and non classified loans)
                •    Exclusion of certain loans (i.e. CD secured or government guaranteed loans)
                     from the general reserve
      3. Compliance with FAS 5 - Accounting for Contingencies (FASB ASC Topic 450 –
           Contingencies)
      4. Compliance with FAS 114 – Accounting by Creditors for Impairment of a Loan
           (FASB ASC Topic 310 – Receivables)

           Note: FASB ASC is FASB Accounting Standards Codification which organizes
           accounting standards by topic and sections.

           (Return to Core Analysis)




RF02 - ALLL ( 02/12/2010 )                            7                           Texas Department of Banking
                                       ALLL WORKSHEET – 1 


Some fields within the ALLL Worksheets contain formulas and will calculate a result. To calculate a number,
highlight the shaded area (which indicates a formula exists for this cell) and press F9. Fields do not automatically
recalculate when a cell value changes. Update the calculation by selecting the field and then pressing F9.


                                         Specific Loan Method
Total Loans (net unearned discount)

Less:
Loans classified at this examination
Cash-secured loans
Government guaranteed loans
Other – Specify
Other – Specify
      Total Deductions                                                                        (    0 )

Balance of uncriticized loans subject to allocation

Percent allocation based on historic, peer group, portfolio
       risk characteristics, bank’s calculation, etc.*                               x                     %

Reserves allocated against uncriticized loans                                                            0.00

Specific reserves allocated against loans classified at this
       examination as well as off-balance sheet items such
       as letters of credit and unfunded loan
       commitments.**

Total estimated ALLL required using Specific Loan
       Method                                                                                               0

*    Document source of “percent allocation” employed:




    (Return to Core Analysis)




RF02 ALLL (01/2010)                                      8                                  Texas Department of Banking
                                 ALLL WORKSHEET – 2

                               Historic Loan Loss Method*


REAL ESTATE LOANS


                                     Net Losses/
     Year                         Real Estate Loans
                                                      %
                                                      %
                                                      %
                                                      %
                                                      %

                      Total               /5 = Avg. Historic Loss Ratio
                                                                                    %

Total real estate loans at examination date                         x

Estimated ALLL required using Historic Loan Loss Method           (a)


AGRICULTURE LOANS

                                     Net Losses/
     Year                         Agriculture Loans
                                                      %
                                                      %
                                                      %
                                                      %
                                                      %

                      Total               /5 = Avg. Historic Loss Ratio
                                                                                    %

Total agriculture loans at examination date                        x

Estimated ALLL required using Historic Loan Loss Method           (b)




RF02 ALLL (01/2010)                             9                         Texas Department of Banking
COMMERCIAL LOANS


                                   Net Losses/                   

      Year                      Commercial Loans 

                                                %
                                                %
                                                %
                                                %
                                                %

                      Total                /5 = Avg. Historic Loss Ratio
                                                                                     %

Total commercial loans at examination date                            x

Estimated ALLL required using Historic Loan Loss Method              (c)


LOANS TO INDIVIDUALS (CONSUMER)

                                   Net Losses/                   

      Year                       Consumer Loans 

                                                 %
                                                 %
                                                 %
                                                 %
                                                 %

                      Total                /5 = Avg. Historic Loss Ratio
                                                                                         %

Total consumer loans at examination date                             x

Estimated ALLL required using Historic Loan Loss Method              (d)



TOTAL (a), (b), (c), and (d)


* All net loss percentages can be found on page 7 of the UBPR.

   (Return to Core Analysis)




RF02 - ALLL ( 02/12/2010 )                       10                        Texas Department of Banking
                                 ALLL WORKSHEET – 3

                             Other Factors to be Considered

Underwriting standards, including compliance with written lending policies, are:
          Strong        

          Average         

          Weak        


Lending policies and procedures, including charge-offs, collection, and recoveries, are:
         Strong
         Some improvement needed
         Weak

Lending and loan review personnel’s experience, abilities, and depth are:
         Strong
         Average
         Weak

Level of significant documentation exceptions is:
           Low/negligible

           Moderate        

           High/excessive       


Effectiveness of internal loan review and ALLL methodology is:
          Strong
          Some improvement needed
          Weak

Level of delinquencies, nonaccruals, and problem loans is:
          Decreasing
          Stable
          Increasing

Local economic conditions are:
          Improving/expansionary                

          Stable      

          Declining/recessionary            


Concentrations in the loan portfolio are:
         Diverse
         Moderate Concentrations
         Large Concentrations


RF02 - ALLL ( 02/12/2010 )                          11                        Texas Department of Banking
                              ALLL WORKSHEET – 3 (Continued)

                                Other Factors to be Considered

Growth trends in loans show:
          Low/negligible growth             

          Moderate growth       

          High rate of growth 

Composition of portfolio is:

            Traditional, in-area lending        

            Some nontraditional         

            New business lines,

            out-of-area lending 


Level of off-balance sheet credit exposure is:
          Low/negligible
          Moderate
          High

Risk in international lending is:
           Low/negligible
           Moderate
           High/excessive

Historic loss experience is:
           Low
           Moderate
           High

Compared to peer, ALLL coverage (total loans/net losses/non accruals) is:
        Higher than peer
        Comparable to peer
        Below peer

If any responses indicate that the loan portfolio has a higher risk profile than area or peer
banks, comment below:




  (Return to Core Analysis)



RF02 ALLL (01/2010)                                 12                      Texas Department of Banking
                                    ALLL WORKSHEET – 4

                          Reconciliation of Reserve Methodologies

Levels indicated using:
       Bank’s Internal Method (Adjusted for
       loan ratings determined at exam)

         Specific Loan Method

         Historic Loan Loss Method

If necessary, give additional weight toward a particular methodology and/or adjust the range for
items rated under “Other Factors to be Considered.” Please document briefly as needed below.

Acceptable Range:                      to


Comments:




ALLL Balance at Beginning of Examination

Less:
         Loan Losses at this examination

         Eligible OREO Losses

         Other

                 Total Deductions                                                        (     0     )

Net ALLL Balance                                                                                     0

EIC’s Recommended ALLL Balance

Adjustment Indicated                                                                                 0




  (Return to Core Analysis)


RF02 ALLL (01/2010)                            13                           Texas Department of Banking

								
To top