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CEIS REVIEW QUARTERLY
REPORT Q1-2016
ON MY MIND – CEIS PRESIDENT, JOE
HILL
 Portfolio growth is remaining strong
 As a result some elements of growth should be monitored
closely as illustrated in CRE Underwriting Trends - NY & NJ
 Risk management tool: Stress Testing Program
 Federal Regulation
 Interagency guidance Concentrations in Commercial Real Estate
Lending
 regulators want to make sure the Bank has the internal systems,
and policies and process' to manage those concentrations
INDUSTRY EVENTS
 Recent releases which pertain to our clients
 OCC Releases 2016 Schedule of Workshops for Directors of National
Community Banks and Federal Savings Associations
 FDIC Releases Economic Scenarios for 2016 Stress Testing
 Comptroller of the Currency Discusses Expanding 18-Month Exam
Cycle for More Community Banks and Savings Associations
IN THE SPOTLIGHT – CHRISTOPHER “KIT”
WEBBE
Services
 General Loan Review
 Structured Finance Review
 International Client Loan Review
 Mexico, Costa Rica, Venezuela
Banking History/Past Titles
 Senior Credit Officer, Chief Inspector, and Agency
General Manager
COMMON QUESTIONS ABOUT THE
“ALLL-IMPORTANT” ALLL VALIDATIONS
 Allowance for Loan and Lease Loans has been a topic
of conversation in the news recently
 What we aim to address
 Background on ALLS Validations
 Purpose of ALLL Validations
 Regulatory expectations for having your ALLL
methodology validated
WHY IS AN ALLL METHODOLOGY
VALIDATION NECESSARY
 A regulatory requirement of the Federal Reserve
 The 2006 Interagency Policy Statement on the Allowance
for Loan and Lease Losses requires validation by
independent agents
 The 2011 Supervisory Guidance on Model Risk
Management requires validation to verify that models are
performing as expected
 Validation of balance sheets provides peace of mind for
directors and management
 Use of management’s judgment is particularly important
in the assessment and a validation is particularly useful in
defending these more subjective elements of the
methodology
WHAT SHOULD BE INCLUDED IN ALL
METHODOLOGY VALIDATION
 A validation includes:
 A review of the models assumptions, key data inputs and
calculations
 The supporting analysis and documentation, and the
governance.
 Assessing whether the model and its results “make sense”
given the characteristics of the given loan portfolio and
recent trends and conditions.
 A validation can also provide suggestions to further
enhance the methodology based on industry “best
practices”
DOES USING THIRD PARTIES SOFTWARE
PLATFORM EXCLUDE US FROM HAVING A
VALIDATION?
 No, a methodology validation is still needed to ensure the
software does result in an ALLL methodology that is
appropriate for the Bank’s portfolio and complies with GAAP
and Interagency Guidance.
 A software platform allows users to make selections for
various components of the methodology – a validation is
needed to ensure that those selections appropriate for the
Bank.
 Data quality and accuracy is essential and should be validated.
CAN WE HAVE SOMEONE HERE AT THE
BANK DO THE VALIDATION?
 Yes, the Interagency Policy statement on the ALLL
specifically notes that the party validating the ALLL
could be:
 The internal audit staff
 A risk management unit
 An external auditor (subject to applicable audit independence
standards)
 Another contracted third party from outside the institution
 Validation can even be divided amongst various independent
parties
USING A THIRD PARTY PROVIDES MANY
BENEFITS, THESE INCLUDE:
 A third party should have access to industry “best practices” - Between our
validation work and our loan review engagements, CEIS sees the ALLL
methodologies for well over one hundred banks or credit unions every year;
they are all different!
 You will gain a perspective on current areas of regulatory focus. Based on our
discussions with clients, regulators and other industry experts, we have a good
sense of the current “hot topics”.
 Clear Independence – you may face questions from your regulator about
whether the internal party validating the ALLL is truly independent.
 Expertise spanning the entire process – Internal parties may have the necessary
skills and knowledge to assess certain parts of the process but typically can’t
pose an effective challenge over all aspects of the methodology.
CONCLUSION
 If your regulator hasn’t already asked for your ALLL
validation, they will! Regulators are increasingly
focused on processes and controls, including
validation. Why not get ahead of the issue and
schedule a validation ahead of your next exam?
 Contact CEIS to discuss your options
 Phone #: 888-967-7380

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CEIS Review Q1 2016

  • 2. ON MY MIND – CEIS PRESIDENT, JOE HILL  Portfolio growth is remaining strong  As a result some elements of growth should be monitored closely as illustrated in CRE Underwriting Trends - NY & NJ  Risk management tool: Stress Testing Program  Federal Regulation  Interagency guidance Concentrations in Commercial Real Estate Lending  regulators want to make sure the Bank has the internal systems, and policies and process' to manage those concentrations
  • 3. INDUSTRY EVENTS  Recent releases which pertain to our clients  OCC Releases 2016 Schedule of Workshops for Directors of National Community Banks and Federal Savings Associations  FDIC Releases Economic Scenarios for 2016 Stress Testing  Comptroller of the Currency Discusses Expanding 18-Month Exam Cycle for More Community Banks and Savings Associations
  • 4. IN THE SPOTLIGHT – CHRISTOPHER “KIT” WEBBE Services  General Loan Review  Structured Finance Review  International Client Loan Review  Mexico, Costa Rica, Venezuela Banking History/Past Titles  Senior Credit Officer, Chief Inspector, and Agency General Manager
  • 5. COMMON QUESTIONS ABOUT THE “ALLL-IMPORTANT” ALLL VALIDATIONS  Allowance for Loan and Lease Loans has been a topic of conversation in the news recently  What we aim to address  Background on ALLS Validations  Purpose of ALLL Validations  Regulatory expectations for having your ALLL methodology validated
  • 6. WHY IS AN ALLL METHODOLOGY VALIDATION NECESSARY  A regulatory requirement of the Federal Reserve  The 2006 Interagency Policy Statement on the Allowance for Loan and Lease Losses requires validation by independent agents  The 2011 Supervisory Guidance on Model Risk Management requires validation to verify that models are performing as expected  Validation of balance sheets provides peace of mind for directors and management  Use of management’s judgment is particularly important in the assessment and a validation is particularly useful in defending these more subjective elements of the methodology
  • 7. WHAT SHOULD BE INCLUDED IN ALL METHODOLOGY VALIDATION  A validation includes:  A review of the models assumptions, key data inputs and calculations  The supporting analysis and documentation, and the governance.  Assessing whether the model and its results “make sense” given the characteristics of the given loan portfolio and recent trends and conditions.  A validation can also provide suggestions to further enhance the methodology based on industry “best practices”
  • 8. DOES USING THIRD PARTIES SOFTWARE PLATFORM EXCLUDE US FROM HAVING A VALIDATION?  No, a methodology validation is still needed to ensure the software does result in an ALLL methodology that is appropriate for the Bank’s portfolio and complies with GAAP and Interagency Guidance.  A software platform allows users to make selections for various components of the methodology – a validation is needed to ensure that those selections appropriate for the Bank.  Data quality and accuracy is essential and should be validated.
  • 9. CAN WE HAVE SOMEONE HERE AT THE BANK DO THE VALIDATION?  Yes, the Interagency Policy statement on the ALLL specifically notes that the party validating the ALLL could be:  The internal audit staff  A risk management unit  An external auditor (subject to applicable audit independence standards)  Another contracted third party from outside the institution  Validation can even be divided amongst various independent parties
  • 10. USING A THIRD PARTY PROVIDES MANY BENEFITS, THESE INCLUDE:  A third party should have access to industry “best practices” - Between our validation work and our loan review engagements, CEIS sees the ALLL methodologies for well over one hundred banks or credit unions every year; they are all different!  You will gain a perspective on current areas of regulatory focus. Based on our discussions with clients, regulators and other industry experts, we have a good sense of the current “hot topics”.  Clear Independence – you may face questions from your regulator about whether the internal party validating the ALLL is truly independent.  Expertise spanning the entire process – Internal parties may have the necessary skills and knowledge to assess certain parts of the process but typically can’t pose an effective challenge over all aspects of the methodology.
  • 11. CONCLUSION  If your regulator hasn’t already asked for your ALLL validation, they will! Regulators are increasingly focused on processes and controls, including validation. Why not get ahead of the issue and schedule a validation ahead of your next exam?  Contact CEIS to discuss your options  Phone #: 888-967-7380