Turn the STRESS in Stress Testing (Bank Loan Portfolios) into an Empowering Experience

GATEWAYASSETMANAGEMENT
Turn the “STRESS” in Stress Testing
into an
Empowering Experience
Sponsored By
Gateway Asset Management
Thursday, March 31, 2016
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Property of Gateway Asset Management

About The Company
Gateway Asset Management provides comprehensive financial advisory
services for investors, financial institutions, law firms, other advisory firms and
regulatory agencies. Gateway has provided advisory services for over 200 FDIC
Insured institutions, providing guidance to investment bankers, private equity,
Bank boards, CEO’s, CFO’s and CRO’s. Gateway has analyzed over $500 Billion of
specific pools of performing, under-performing and distressed commercial and
Consumer Assets owned by institutions under regulatory guidance from the
OCC, Federal Reserve, FDIC and State Regulatory Agencies.
www.gatewayassetmanagement.com
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Speakers
Special Guest
Mark A. Shepherd,
Managing Principal,
Thomas L. Danielson,
CPA, Principal, CliftonLarsonAllen
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About CliftonLarsonAllen
• A professional services firm with three, distinct business lines
 Wealth Advisory
 Outsourcing
 Audit, Tax, and Consulting
• Nearly 4,000 employees
• Offices coast to coast
• Serve more than 1,450 financial institutions
• Investment advisory services are offered through CliftonLarsonAllen
Wealth Advisors, LLC.
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Gateway Disclaimer
The information provided in the Gateway Asset Management webinars and
accompanying material is presented for informational purposes only. It should not
be considered regulatory, legal or accounting advice. Your use of the information in
the webinar or materials linked from the Webinar is at your own risk and may not be
specifically relevant to your bank. In addition, the participant or reader should be
aware that the information provided and discussed in the Webinar by Gateway
Asset Management may not represent the opinions of the co-presenter, Thomas L.
Danielson or CliftonLarsonAllen.
Gateway Asset Management does not make any guarantee or other promise as to
any results that may be obtained from using our content. To the maximum extent
permitted by law, Gateway Asset Management disclaims any and all liability in the
event any information, commentary, analysis, opinions, advice and/or
recommendations prove to be inaccurate, incomplete or unreliable.
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CLA Disclaimer
The information contained herein is general in nature and is not intended, and
should not be construed, as legal, accounting, investment or tax advice or opinion
provided by CliftonLarsonAllen LLP to the reader. The reader also is cautioned that
this material may not be applicable to, or suitable for, the reader’s specific
circumstances or needs.
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Webinar attendees will have a chance to compare their Bank’s readiness to comply and
thrive under proposed CECL and Stress Testing requirements as viewed from Industry
participants that have been exposed to hundreds of community banks. Presenters will
share common community banking pitfalls, mistakes, challenges and solutions for making
the most out of pending life-of-loan loss forecasting and related Stress Testing
requirements including a wide range of topics from building the necessary foundation to
evolving towards Best in Class practices.
Focus on Turning Stress into Empowerment
Why is it important to evaluate your Bank’s readiness now?
 Where should we focus our attention and priorities to get ready?
 Common challenges and solutions
 How CECL provides a logical “Baseline” for Stress Testing
 How to ensure the Bank’s unique credit culture is accurately reflected in a life-
of-loan reserve?
 How can a Community Bank afford to implement the same practices as larger
Banks?
 How can I leverage an investment in a strong Risk Management foundation to
benefit related processes within our Bank?
Today’s Major Discussion Theme
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Stress vs. Empowerment
Primary Regulatory and Accounting Catalysts
 CECL- Current Expected Credit Loss Model/ALLL
 Stress Testing – Loan Portfolios
Why Prepare for CECL and Stress Testing At The Same
Time?
Life-of-Loan "Base Case" & Stress Testing - Foundation -
Building Blocks
Models – Different sources and levels of sophistication
Use of Models - Regulatory Guidance
Why Start Preparing for CECL and Stress Testing Now?
Final Thoughts
Questions
Webinar Agenda
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Stress vs. Empowerment
• Trying to defend positions
without adequate
ammunition
• Not being able to properly
illustrate or getting credit for
conservative practices
• Not having information you
want and know you need
• Peer “Broad Brush” grouping
• Having to re-direct significant
valuable resources from
running a profitable bank just
to prepare for
Regulatory/Audit visits and
oversite
• Enhanced portfolio
understanding, every day
• Having the data and
information available to prove
effective Risk Management at
your Bank
• Leveraging day-to-day Risk
Management practices to
satisfy Regulatory and Audit
needs
• Leveraging enhanced portfolio
understanding to enhance
bank profitability and
tolerance to economic
changes
• Drive discussions with
stakeholders related to your
specific risk – Offense vs.
Defense
Stress Empowerment
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Underlying Approach and Philosophy
“All Banks are different”
“Credit Culture matters”
“Collateral valuation diligence, program LTV’s, Special Asset, Loan
Review, monitoring and other Risk Management practices have a
material influence on potential losses”
“A bottoms up loan level approach based on the specific attributes of
each individual asset, not tops down based on industry trends by
geography, business type or collateral type, etc., is essential to
effectively segmenting risk, capturing and understanding total portfolio
risk and accurately forecasting expected losses.”
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Primary Regulatory and Accounting Catalysts
CECL- Current Expected Credit Loss Model/ALLL
 CECL is a forward looking method for computing the Bank’s ALLL
 Covers expected losses over life of loan
 Take into account “reasonable and supportable forecasts”
 Need to know how the portfolio will be affected by changes to:
 Economic conditions
 Value of collateral
 Written and unwritten changes to underwriting practices
 Staffing levels and experience
 Other qualitative factors
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 CECL Timing
 For most banks, CECL is expected to be effective for year ending
December 31, 2020
 SEC filers have an effective date in 2018
 Public Businesses Entities have an effective date in 2019
 Since CECL will be a data driven exercise, we recommend that banks begin
planning now
 FASB expects to approve CECL in second quarter 2016
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 CECL FAQ’s
 Q: How much can I expect my reserves to go up under CECL?
 A: It depends on the facts and circumstances of each bank. I avoid
making industry-wide predictions about the impact of CECL. Each
bank will need to evaluate the method(s) they will use to compute
the ALLL under CECL. Some banks will see little change, others may
be impacted more.
 Q: Under CECL, will a community bank be limited to using only its loss
history, or will a bank be allowed to use industry data to compute its
ALLL?
 A: The CECL exposure draft clearly mentions using both your bank’s
own data and industry data. I believe that most community banks
will be using their data, augmented with some industry data.
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 CECL Model Allows Banks to Use Many Different Techniques for Computing
their ALLL including:
 Present value of cash flows
 Vintage analysis
 Probability of default/loss given default
 Roll rate methods
 Loss-rate methods
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Stress Testing – Loan Portfolios
OCC BULLETIN 2012-33 (Excerpts ONLY. Please refer to complete Bulletin)
 Purpose
 “To provide guidance to national banks and federal savings
associations (collectively, banks) with $10 billion or less in total
assets on using stress testing to identify and quantify risk in loan
portfolios and help establish effective strategic and capital planning
processes”
 “Community banks, regardless of size, should have the capacity to
analyze the potential impact of adverse outcomes on their
financial conditions.”
 “The OCC encourages community banks to adopt a stress test
method that fits their unique business strategy, size, products,
sophistication, and overall risk profile.”
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 Background and Supervisory Expectations
 “Sound risk management practices should include an
understanding of the key vulnerabilities facing banks.”
 “Many community banks, however, do not have similar processes
in place to quantify risk in loan portfolios, which often are the
largest, riskiest, and highest earning assets.”
 The OCC, however, does consider some form of stress testing or
sensitivity analysis of loan portfolios on at least an annual basis to
be a key part of sound risk management for community banks.
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 Background and Supervisory Expectations, cont.
 “Community banks that have incorporated such concepts and analyses into
their credit risk management and strategic and capital planning processes
have demonstrated the ability to minimize the impact of negative market
developments more effectively than those that did not use stress testing.”
 “Community bank management can use stress testing to establish and
support reasonable risk appetite and tolerances, set concentration limits,
adjust strategies, and appropriately plan for and maintain adequate capital
levels. Bank management should mitigate identified risks and
vulnerabilities through such actions as increased portfolio monitoring,
adjusted underwriting standards, selling or hedging assets, and increasing
capital. In addition, bank management should use the results of stress tests
to establish appropriate action plans that address risks when the results are
inconsistent with risk tolerance levels and the bank’s overall strategic and
capital plans.”
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 Appendix A, Stress Testing Methods and Approaches
 “Transaction stress testing is a method that estimates potential losses at the
loan level by assessing the impact of changing economic conditions on a
borrower’s ability to service debt. Transaction level scenario stress testing
can help in a “bottom up” analysis to gauge a borrower's vulnerability to
default and loss, foster early problem loan identification and strategic
decision making, and strengthen strategic decisions about key loans.”
 “Portfolio stress testing is a method that helps identify current and emerging
risks and vulnerabilities within the loan portfolio by assessing the impact of
changing economic9 conditions on borrower performance, identifying credit
concentrations, measuring the resulting change in overall portfolio credit
quality, and ultimately determining the potential financial impact on earnings
and capital. In a “bottom up” approach, this consists of aggregating the
results of individual transaction level stress tests given changes in key
variables driven by economic forecasts under one or more scenarios. In a
“top down” approach, this consists of applying estimated stress loss rates
under one or more scenarios to pools of loans with common risk
characteristics.”
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 Appendix A, Stress Testing Methods and Approaches, Cont.
 “Regardless of the method used, the different scenarios should include a
projected base case and at least one or more adverse scenario(s) based on
macro and local economic data. A bank may have to develop different
variable assumptions for pools of loans with similar characteristics, such as
geography and collateral type, within each scenario. The process of stress
testing portfolios can aid in strategic decision making, credit policy
development, strengthen the quality of concentration risk management,
support reserve methodology, and determine regulatory capital at risk.”
 “Loan migration analysis can be used by banks with larger portfolios and
more comprehensive internal databases to evaluate how a downward
migration in internal loan ratings, consistent with migrations that might be
expected during adverse economic conditions, would impact asset quality,
earnings, and capital. This analysis would also assist banks in determining
possible actions to address potential deterioration in their portfolios.”
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 Appendix A, Stress Testing Methods and Approaches, Cont.
 “Reverse stress testing is a method under which the bank assumes a
specific adverse outcome, such as suffering credit losses sufficient to cause
a breach in regulatory capital ratios, and then deduces the types of events
that could lead to such an outcome. This type of analysis (e.g. a “break the
bank” scenario) can help a bank consider scenarios beyond normal business
expectations and challenge common assumptions about performance and
risk mitigation strategies.”
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An Accountant’s Perspective
 Stress Testing Can be a Component of Determining and Documenting ALLL
Adequacy
 Additional reserves needed under weakening economic conditions
 Lowering provision for loan losses under improving economic
conditions
 Determining when to start adding to reserves
 Determining and documenting when a bank can stop or slow down its
funding of the reserves
 Auditor Concerns and How Stress Testing Help Justify Management’s
Assertions
 Provide documentation of reasonableness of management’s estimate
of future loan losses
 Document management’s understanding of the risks in the loan
portfolio
 Document the quality of loan underwriting
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Stress Testing Loan Portfolios
 Stress Testing Loan Portfolio FAQ’s
 Q: How will running stress scenarios impact my current ALLL levels?
 A: It shouldn’t directly impact a bank’s ALLL. Instead it should provide
additional evidence to support the adequacy and reasonableness of
the bank’s ALLL. However, failing to consider the impact of stresses
on the portfolio leads to greater uncertainty. In the case of
uncertainty, the natural tendency for examiners and auditors is to
push for higher reserves.
 Q: Which loan portfolios are you watching the closest right now?
 Ag loans are a concern right now due to high input costs, low
commodity prices, the strong dollar and weakening global economic
conditions. I am also watching for a stealthy lowering of underwriting
guidelines for commercial real estate.
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Should My Bank Prepare for CECL and Stress Testing
At The Same Time?
 In the opinion of Gateway Asset Management, CECL is basically the
“Base” or “Expected” case or starting point for any additional stress
scenario(s)
 Stress scenarios will be less credible and supportable if a documented,
accurate and back-tested base case has not been established
 Both need to be logically connected
 Both require enhanced data at the loan level
 Both require an array of integrated and well documented assumptions
 Any resources dedicated to preparation, data capture and organization
and analysis, operational changes or reporting will support both
initiatives
 Both require strong risk separation and the ability to layer risk
 Both require life-of-loan loss forecasts
 Both will produce information by-products valuable to effectively
managing risk, profitability, new loan volume strategies, target markets
and products, preferred asset composition, capital adequacy, etc.
 Build ONE Foundation to feed both
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Live
Confidential Polling Question #1:
My Bank has made the following level of preparation and readiness to comply
with CECL and Stress Testing:
o Have not focused on or attempted to assess what will be needed at this point
o Limited to preliminary discussions only
o Understand guidance, identified gaps and have established an informal
approach to comply and thrive
o Have established a formal plan to implement desired enhancements to satisfy
o Currently in process of implementing necessary enhancements to satisfy
o Currently in a position of complete readiness to satisfy
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Life-of-Loan "Base Case" & Stress Testing
Foundation - Building Blocks
o Eliminate information and Analytical Silos within the bank
o Enhance data collection and retention, create a data capture strategy and plan
when applicable and share it with all levels of your bank
o Leverage existing processes to augment data
o Understand exactly how models can most effectively fulfill your long term
needs and choose models that will enhance your risk management and profit
maximization capabilities while supporting Regulatory and Accounting needs
o Use expanded data available to maximize risk segmentation
o Evaluate your current Risk Grading scale, policies and practices with CECL and
Stress Testing in mind and change if limiting or inadequate
o Build Tools to translate data into useful information
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“Eliminate information and Analytical Silos within the bank”
 Too often we see banks erect silos when compiling information to satisfy
regulatory, accounting and audit requirements
 Information is gathered, consolidated and controlled in one area,
usually accounting, for the sole purpose of meeting regulatory or other
external requirements vs. integrating solid risk management
information throughout the decision making processes of the entire
bank that, by the way, can also be used for external compliance
 Accounting is under a significant level of pressure to consistently
comply with existing and proposed rules and regulations, usually with
limited or inadequate information, but don’t let the tail wag the dog
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“Leverage existing processes to augment data”
 All banks have at least temporary access to high levels of detailed loan data
but rarely capture it in a useable form. Chances are, at one point you had or
still do have important data that is not currently available to you for analysis
or reporting.
 Five primary areas where data is usually available but not captured for
analysis;
 Residential 1-4 and other consumer loan Origination data detail
 Updated Credit scores and automated property valuations on
Consumer customers
 Commercial Loan financial statement spreading information and
property detail data at origination
 Incorporating analysis and trends derived from updated
information received from Commercial borrowers to satisfy loan
covenants and during annual loan reviews
 Original and updated Collateral Values
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Live
The following best describes the extent, adequacy and accessibility of your
expanded loan level data:
o Minimally captured and available and difficult to access and use
o A comprehensive level of data exists somewhat within the bank but difficult to
access and use
o Tons of loan level data exists but not currently inventoried or consolidated in
one place, difficult to trust, organize and use for important comprehensive
analysis
o We have a robust data warehouse/data capture process but lack the analytical
tools, structure, and reporting capabilities to maximize
o We currently have the data and tools we need to thrive
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“Understand exactly how models can most effectively fulfill your long
term needs and choose models that will enhance your risk
management and profit maximization capabilities while supporting
Regulatory and Accounting needs”
 The term “model” is loosely used and you need to determine exactly what
the model is designed to do. There are three primary types of models:
1. Sophisticated Loan Level Based: Models that take raw data and use
vast data bases, various assumptions and sophisticated algorithms to
create meaningful information, analysis and forecasts
2. Simple Portfolio level Factor Based: Models that use factors or vectors
derived from historical, industry and peer data to quantify the impact
of different stresses on your portfolio
3. Non-analytic Receptacle: Models that are simply receptacles to
capture information created from previously analyzed data for
reporting purposes. Beware the blank, empty template models.
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Models – Different sources and levels of sophistication
Model Type Primary Use Pros Cons
In-house
Simple
Portfolio Level
Factor Based
Solely useful for
calculating basic
CECL and Stress
outcomes
• Inexpensive
• Limited internal resources to
implement
• No value contribution to overall
Bank Risk Management
• Does not capture bank specific
credit culture or portfolio
uniqueness
• Still need some internal analysis
and modeling expertise
• Leaves a high level of uncertainty
• Exposed to using historic, peer and
industry loss levels
Non-analytic
Receptacle
Translate and
organize data
post analysis into
reporting
formats
• Provides a standardized
output
• Only facilitates the last phase
(reporting) of the Life-of-loan/ALLL
analysis
• Doesn’t aid in creating meaningful
portfolio data
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Models – Different sources and levels of sophistication, cont.
Model Type Primary Use Pros Cons
Sophisticated
Loan Level Based
– Build or Buy
Provides “Bottom
up” /loan level
based analysis and
outcomes, cash
flows, etc..
• Captures portfolio uniqueness and
specific loan/customer attributes,
accurate base for stress scenarios
• Allows for highly customized
assumptions to take advantage of
your Bank’s positive loan
attributes
• Automatically adapts to portfolio
composition changes
• Allows for aggregations for
advanced risk segmentation and
layered risk
• Provides a high degree of
transparency
• Will bring advanced risk
management practices into the
bank
• Can provide other full financial
information, interest collected,
fees, etc.
• Extremely expensive
• Usually only viable when the bank has a
high degree of Risk and Project
Management resources and expertise
• Still requires extensive internal &
external data procurement and updating
• Subject to standard vendor management
approval processes
• High degree of Vendor Risk
• Will require bank management
involvement in establishing and
modifying assumptions and Back Testing
• Requires ongoing internal maintenance
and support, more for Build
• Project Failure risk
Sophisticated
Loan Level Based
– Rent
Provides “Bottom
up” /loan level
based analysis and
outcomes, cash
flows, etc..
• All of the above for Build or Buy
• Limited Internal resources to
implement
• Low transaction risk
• Access to millions of dollars of
development at a reasonable and
affordable cost
• Some additional cost (Usually a fraction
of an FTE)
• Low Degree of Vendor Risk
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 Sophisticated Models
 Why is it important that Sophisticated models can provide other
financial forecasts beyond losses?
 Whether your are trying to establish a “Base Case” (CECL) or
applying Economic or Rate Shock Stress scenarios to your
portfolios, there is a very good chance that your portfolio will
demonstrate positive financial characteristics under these
scenarios that will mitigate or completely cancel out increased
defaults.
 i.e. An adverse economic environment may:
 Increase loss frequency
 But may reduce overall severity
 Reduce voluntary pre-payments
 Extend the average life and,
 Increase interest/margin collected
 Additional model forecast information may provide important
information for other Stress analysis at the bank, ALM, etc.
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Sophisticated Models
Some Bank Operational Areas That Could Benefit From Enhanced Analysis
Sophisticated
Model
Preferred
Customer
Retention
Product
Pricing
Cost
Rationalization
Growth
Strategy
ALM
Product
Profitability
UW
Guidelines
Product
Development
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Use of Models
Regulatory Guidance
 Some Relevant Bulletin Examples (Not intended to be a complete
reference list. Consult your Regulator to ensure you have all relevant
guidance):
 OCC 2011-12, SUPERVISORY GUIDANCE ON MODEL RISK MANAGEMENT
 SR Letter 11-7, SUPERVISORY GUIDANCE ON MODEL RISK
MANAGEMENT
 FFIEC IT Examination Handbook, Strengthening the Resilience of
Outsourced Technology Services, Appendix J
 Bulletins include a wealth of information
 Don’t be intimidated or discouraged from using models based on the
sheer extent of guidance. Don’t over think it.
 No such thing as a perfect “Crystal Ball” model. All models require close
attention to details, inputs, assumptions, refinements, reasonableness
scrutiny, challenges, etc.
 Models are an important tool toward achieving required Risk
Management standards
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Use of Models
 Auditor Concerns and Advice Regarding Models
 Validate the model
 Understand modeling risk
 Review input for accuracy
 Review output for reasonableness
 Don’t mistake beauty for truth
 Sophistication of the modeling should match the sophistication of the
bank. Simple banks probably don’t need complex models.
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“Use expanded data available to maximize Risk Segmentation”
 Must do a great job of Risk Segmentation, well beyond standard Risk
Grading
 Strong Risk Segmentation provides:
 Full credit for conservative lending practices
 Early warning system for negative composition changes and early
recognition of positive ones. Supportable increases to or recapture of
reserves.
 Eliminates risk of “Broad Brush” Loss assumptions being inferred
 Isolates and correctly represents risky assets
 Properly aligns loss reserves. A misaligned ALLL is a huge problem, even
when the total level is adequate
 Confirms managements ability to identify and manage risk
 Reduces “Portfolio” uncertainty and provides comfort to stakeholders
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All Commercial:
Full Recourse or limited or NO
Recourse
Guarantor strength and liquidity.
Is it a viable guarantor or just a
guarantee?
CRE OO:
Operating trends, business type
and DSC cushion may be more
predictive than CAP Rates/market
values
CRE NOO:
Tracking property specific rent
rolls, lease terms, tenant strength,
concentration and DSC may be the
best way to rank risk
 C&I:
 Monitored vs. Non-monitored
and collateral type/expected loss
given default should provide
better segmentation than
product type
 Resi 1-4:
 Extent of Deposit relationships
 CLTV for junior Liens
 Origination year/vintage
 IO reset dates
 Amortization type
 Income Documentation type
 Multiple Layers of risk
Some Examples of important segmentation data available by Asset Class:
Page 37 of 50

Why will incorporating enhanced loan level risk attributes and risk separation
when building my CECL model and stressing my portfolios, positively impact my
Bank’s ability to accurately perform and support the outcomes and minimize
pressure on reserves and capital levels?
 Economic stress amplifies the loss characteristics on loans with
predominantly “Bad” attributes, but has a minimal affect on loans
with predominantly “Good” ones.
 Accurately captures current portfolio composition and highlights
composition trends, new loan volume impact and changes, positive
and negative.
Page 38 of 50

“Evaluate your current Risk Grading scale, policies and practices with
CECL and Stress Testing in mind and change if limiting or inadequate”
 Too often we see inadequate grading scales and/or a limited use of the grades
available
 Gateway strongly recommend a 10 point scale.
 Use the grades available. Too often we see poor use of grades. If you have a
concentration of loans in one grade, routinely experience double grade
downgrades or upgrades or jumps from Pass to Criticized, there is room for
better grade use.
 Review your grading practices and policies with a desire to enhance risk
separation and support CECL and Stress Testing go forward
 Consider adding stress case scenarios to your internal and external loan
reviews, new originations and renewals to build stress data at the loan level
and further define risk within a single grade, especially Pass grades.
 i.e., a DSC of 1.1 may still qualify for a regulatory Pass grade, but it clearly
won’t perform the same as a property that is at 1.6 DSC, that shares that
grade, under normal and especially economic stress situations.
Page 39 of 50

0
1
2
3
4
5
6
7
8
9
10
Degree of Forecasting Difficulty & Complexity
Degree of Forecasting
Difficulty & Complexity
Simpler: Known Risk.
Recoverability and
Severity are primary
variables . Smallest
component
More Complex.
Impairment probability is
less obvious
Most Complex. Largest
component, least amount
of attention, most
surprises.
Page 40 of 50

“Build Tools to translate data into useful information”
 There are a number of fairly straight forward tools you can build internally or
with a little help that will quickly advance your readiness for CECL and Stress
Testing and aid in forecast validation and model back testing
 Historic Roll Rate analysis for consumer asset classes or sub-segments
 Monthly or at least quarterly because of potential early loss
recognition
 Historic Grade migration tables for commercial asset classes or sub-
segments, six month migration periods are adequate
 Focus on grouping like sub-segments within asset classes for analysis
and forward looking assumptions
 Expanded Risk segmented analysis of loss severities by asset class and
sub-segments
Page 41 of 50

Consumer/Resi 1-4 HELOC Static Migration Outcome Example
Accounts less than 30 DPD at
12/31/14 - Outcome at 12/31/15
Count of Note
Number
Sum of Net
Active
Principal
Balance
6/30/13
Sum of
Available
Credit
6/30/13
Sum of
Active +
Available
6/30/13
Sum of
OREO
Expense
Sum of
Updated
Charged Off
Sum of
Updated Net
Active
Principal
Balance
12/31/15
% of Total
Active - Current 2334 120,243,097 76,702,095 196,945,193 0 0 118,182,045 77.47%
Non-Accrual Paid Off 8 775,385 12,557 787,943 0 0 0 0.50%
TDR Current 2 289,506 0 289,506 0 0 289,506 0.19%
Voluntary Payoff 543 30,692,483 16,737,955 47,430,438 0 0 0 19.77%
Not TDR Delinquent 30-59 13 1,943,153 8,015 1,951,168 0 0 1,938,116 1.25%
Not TDR Delinquent 60-89 3 123,421 11,000 134,421 0 0 123,421 0.08%
Not TDR Delinquent 90+ 1 87,987 6,000 93,987 0 0 87,987 0.06%
TDR 30-59 4 280,000 0 280,000 0 0 280,000 0.18%
TDR 60-89 1 36,000 0 36,000 0 0 36,000 0.02%
TDR 90+ 1 48,000 0 48,000 0 0 48,000 0.03%
Charge Off, Not OREO 12 528,025 16,660 544,686 0 412,230 0 0.34%
OREO 2 165,404 0 165,404 25,943 16,540 0 0.11%
Grand Total 2923 155,212,462 93,494,283 248,706,745 25,943 428,770 120,985,075 100.00%
Can Document
Migration to loss
Can Document Credit Line
Management Effectiveness
Can Document
Migration to
Impaired
Can Duplicate for
Different Economic
Periods to
Document the
Impact of Stress
Page 42 of 50

Consumer/Resi 1-4 Static Three Way Roll Rate Example
Accounts
Dec-15
D
e
c
-
1
4
MPD 0 1 2 3 4 5 6+ Loss Total
0 98.4% 0.4% 0.1% 0.1% 0.1% 0.1% 0.3% 0.6% 100%
1 55.6% 13.9% 2.8% 8.3% 5.6% 5.6% 2.8% 5.6% 100%
2 11.1% 16.7% 11.1% 5.6% 5.6% 11.1% 11.1% 27.8% 100%
3 7.7% 7.7% 0.0% 7.7% 0.0% 0.0% 23.1% 53.8% 100%
4 9.1% 9.1% 0.0% 0.0% 0.0% 0.0% 9.1% 72.7% 100%
5 0.0% 0.0% 9.1% 0.0% 0.0% 0.0% 9.1% 81.8% 100%
6+ 0.0% 12.5% 0.0% 0.0% 0.0% 0.0% 0.0% 87.5% 100%
Can Duplicate for Different
Economic Periods to Document the
Impact of Stress
Three Way: Rolled Forward, Rolled
Back, Stayed The Same, From One
Period to Another
Page 43 of 50

Commercial Grade Migration Example
Migrations on Reviewed Loans- Gateway Due
Diligence
Previous Bank Grade to Current Bank Grade Migration on Reviewed: Risk Ratings and Loan Balances as of 12/31/15
Bank Risk
Rating
12/31/12
Bank Grade
Description
Loan
Balance
Reviewed
% of
Portfolio
1 2 3 4 5 6 7 8 + 8
Voluntarily
Paid Off/
Renewed
Charged
Off Total
1 Excellent 1,050,812 0.6% 58.9% 25.8% 0.0% 10.4% 0.0% 0.0% 0.0% 0.0% 0.0% 5.0% 0.0% 100.0%
2
Above
Average 24,806,085 14.1% 0.0% 53.1% 24.6% 3.3% 12.6% 0.4% 0.0% 0.0% 0.0% 6.0% 0.0% 100.0%
3 Good 34,062,394 19.3% 0.0% 0.4% 80.3% 8.9% 2.9% 0.7% 0.0% 0.0% 0.0% 7.0% 0.0% 100.0%
4 Average 49,127,061 27.9% 0.0% 0.0% 0.4% 71.1% 10.3% 7.2% 2.0% 0.1% 0.0% 9.0% 0.1% 100.0%
5 Acceptable 46,866,553 26.6% 0.0% 0.0% 0.6% 5.8% 69.4% 12.1% 0.6% 0.5% 0.0% 11.0% 0.5% 100.0%
6 Watch 18,614,069 10.6% 0.0% 0.0% 0.4% 2.4% 3.2% 71.1% 16.1% 2.8% 0.8% 4.0% 2.0% 100.0%
7
Special
Mention 355,581 0.2% 0.0% 0.0% 0.0% 0.0% 0.0% 4.0% 65.00% 30.0% 10.0% 1.0% 20.0% 100.0%
8 Substandard 1,170,631 0.7% 0.0% 0.0% 0.0% 0.0% 0.0% 1.0% 14.0% 85.0% 10.0% 0.0% 75.0% 100.0%
9 Doubtful 435,009 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 100.0% 5.0% 0.0% 95.0% 100.0%
10 Loss 165,900 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 100.0% 0.0% 0.0% 100.0% 100.0%
Totals 176,654,095 100.0% 0.4% 7.7% 19.2% 23.8% 23.9% 12.9% 2.6% 1.4% 0.2% 8.1% 1.2% 100.0%
176,654,095 618,806 13,568,623 33,969,050 42,040,273 42,252,428 22,774,444 4,666,529 2,513,795 329,806 14,250,148 2,183,989 176,654,095
Compares
Migration from one
period to another
Can Duplicate for Different
Portfolio sub-segments and
Economic Periods to Document
the Impact of Stress
Must account for
100% of the starting
loan population
Your Analysis
should only use
Reviewed Loans
Page 44 of 50

Live
Other than the potential financial impact on loss reserves, my biggest concern
regarding the preparation and implementation of adequate CECL models and
Stress Testing is:
o Not exactly sure where to start
o The current level and extent of Risk Management expertise within our Bank
o The potential cost of supplementing our current in-house talent with
additional hires or outside consultants
o The human resource drain on our organization to implement the necessary
changes and enhancements
o The complexity of implementing the necessary enhancements
o No concerns
Page 45 of 50

Why Start Preparing for CECL and Stress Testing
Now?
 There is a window of time to materially augment loan level data available for
analysis through existing practices within the bank for little or no cost
 Plenty of things to do for many banks and all of them will likely have a
positive impact on the overall performance of the bank
 Even the best Life-of-Loan forecasting model can get better with time,
monitoring and refinement
 Empowerment, enhanced portfolio understanding and solid Risk
Management practices is everyone’s goal. Empowerment has nothing to do
with the implementation timeline of a rule or regulation, luckily, it just
happens to share the same path
 The migration of “Big Bank” Risk Management expectations is inevitable.
 When it is time for your bank to produce more advanced and supportable
analysis and forecasts, it is almost a certainty that you will wish you had
more time.
Page 46 of 50

Final Thoughts
 Both CECL and regulatory guidance on stress testing is pushing your bank to
understand your loan portfolio better.
 Life of loan losses
 Prepayment speeds
 Forecasting the impact of changing local, regional and national economic
conditions, collateral values, interest rates and unemployment rates
Page 47 of 50

Final Thoughts
 The capture & use of enhanced Loan Level data is inevitable and especially
critical if you have a solid credit culture and run a good bank. Don’t waste your
hard work by getting inappropriately grouped with peers or geographic
regions.
 Don’t think of CECL and Stress Testing as regulatory and accounting changes
but as a road map and stepping stone toward stronger Risk Management
practices.
 Constantly look for ways to improve risk segmentation
 Drive the constant improvement of Risk Management practices and meeting
regulatory demands will automatically be a welcome by-product.
 You will need to find a way to bring some advanced skills and processes into
your bank at a cost that is a fraction of what a big bank can pay. Find a good
partner and you will be successful.
 Smart Risk Management investments will pay for themselves ten fold
 Don’t compromise. If you think you need to know it, make sure you get it.
 You must work to eliminate uncertainty. Lack of information and in-depth
analysis increases uncertainty and uncertainty translates into higher loss
reserves and capital levels. Credibility has real value.
Page 48 of 50

Final Thoughts
 For the past few years Gateway Asset Management has realized that bringing
access to sophisticated Risk Management tools employed by big banks to
community banks at an affordable cost is an absolute necessity. We have made
it our mission to accomplish this goal.
Page 49 of 50

Mark A. Shepherd
612-720-3916
mshepherd@gamcolp.com
www.gatewayassetmanagement.com
CliftonLarsonAllen
Thomas L. Danielson
Direct 612-376-4795
thomas.danielson@CLAconnect.com
www.claconnect.com
Contact Us
Page 50 of 50

Turn the STRESS in Stress Testing (Bank Loan Portfolios) into an Empowering Experience

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