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Moving from the OTS to the OCC: Impact on the ALLL
1. Moving from the OTS to the OCC:
Impact on the ALLL
Ed Bayer, Managing Director
Mike Lubansky, Director of Consulting Services
Sageworks
O - (919) 851-7474 | F - (919) 851-6718
info@sageworks.com
www.sageworksanalyst.com
2. About Sageworks
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
Provides resources, including whitepapers, webinars, videos, and
templates, for bankers—accessible at www.sageworksanalyst.com
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3. About the Presenters
Ed Bayer
Ed is a managing director at Sageworks. He previously was a senior risk
management consultant, with a focus on ALLL provisions and stress testing loan
portfolios. In that role, he consulted with institutions ranging in size from $50M in
assets to several billion, helping them implement defensible and effective
methodologies.
Mike Lubansky
Mike is a director of consulting services at Sageworks, where he oversees product
development, research and implementation in the banking market. He has worked
with more than 100 institutions, helping them fine tune their ALLL calculation.
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4. Risk Management Summit, Dec. 5-6, 2013
Mark your calendars!
2nd Annual Risk Management Summit
When: December 5-6, 2013
Where: Gaylord Opryland Resort &
Convention Center in Nashville, TN
Speakers and panels centered on ALLL and stress testing practices, as well as
breakout sessions for Sageworks Surety and Clarity users. The summit will also
feature plenty of networking and Q&A sessions.
Find out more at web.sageworks.com/risk-management-summit/
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5. Agenda
1. Polls
2. Leading Up to the Merger
3. The Transition from OTS to OCC
4. Impact on ALLL
5. Decreasing ALLL levels
6. Manipulating Qualitative Factors
7. FAS 5 Loss Ratio’s Lookback Period
8. A Path Forward
9. Q & A
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6. Quick Polls
1. Have you gone through a full examination with regulators that are legacy OCC (not
formerly OTS)?
2. What have been the biggest areas of change that you have had to institute as a
result of the transition to OCC?
7. Leading up to the Merger
1980s
The ‘new’ Office of Thrift Supervision (OTS) was
created
• Began to promote itself as lax regulators
2008-2009 OTS was merged into the Office of the Comptroller of
the Currency (OCC)
2011
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OTS supervision officially ended
8. The Transition: OTS to OCC
OTS:
OCC:
1. Little regulator intrusion
1. Rigorous approach
2. Simplified ALLL calculations
2. Scrutiny without solutions
3. Primarily focused on
3. High concentrations of CRE
residential mortgage lending
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and C&I
9. Impact on ALLL
1. Biggest difference: The timing of charge-offs related to a FAS 114 collateral
impairment analysis; inclusion in loss rates
2. Subsequent effect on loss rates, fluctuation
3. Increased scrutiny on segmentation, qualitative factors, impairment analysis
assumptions, and other assumptions inherent in methodology
4. Little guidance provided in transition
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10. Today’s ALLL Environment & Problems
Remaining From the OTS -> OCC Transition
Nationally, ALLL rate is down to 1.81% (6/30/2013 call report data of the
5,900 continuously reporting financial institutions)
Why?
1. Improved lending
2. The drop off of large charge offs stemming from the consequences of the
2008-2009 financial crisis
Former OTS-regulated institutions face the steep drop-off of significant
charge-offs after their first exam with the OCC
Example…
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12. Decreasing ALLL Levels
Options to help smooth the ALLL rate:
1. Drawing a negative provision
2. Using an unallocated reserve
3. Manipulating qualitative factors
4. Extending the FAS 5 loss ratio’s lookback period
However, examiners have been apprehensive about a negative provision
and using an unallocated allowance
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14. FAS 5 Loss Ratio’s Lookback Period
Extend FAS 5 loss ratio’s lookback period from 8-12 quarters to maximum
allowed period of 5 years or 20 quarters
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15. FAS 5 Loss Ratio’s Lookback Period
Drawbacks to implementing a longer-term lookback window:
1. This solution may only delay the problem
2. Goes against the 2006 Interagency Policy Statement
“The best method would to utilize a lookback period that includes a full
economic cycle, while allowing for weighting based on the current point in
the cycle.”
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16. A Path Forward
The challenge: Accounting for the change in ALLL
Some options:
1. Third-party consultants
2. Automated solutions
Banks will find success by reviewing guidance and working to interpret and
implement feedback from their new examiners
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