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

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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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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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

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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/

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

Agenda

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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?

Leading up to the Merger

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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 OTS supervision officially ended

The Transition: OTS to OCC

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OTS:

1. Little regulator intrusion

2. Simplified ALLL calculations

3. Primarily focused on

residential mortgage lending

OCC:

1. Rigorous approach

2. Scrutiny without solutions

3. High concentrations of CRE

and C&I

Impact on ALLL

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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

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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Decreasing ALLL Levels

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Decreasing ALLL Levels

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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

Manipulating Qualitative Factors

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One of the two remaining options

Difficult to justify

May lead to an inflated ALLL reserve

FAS 5 Loss Ratio’s Lookback Period

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Extend FAS 5 loss ratio’s lookback period from 8-12 quarters to maximum

allowed period of 5 years or 20 quarters

FAS 5 Loss Ratio’s Lookback Period

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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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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

A Path Forward

Questions?

Ed Bayer

Mike Lubansky

866.603.7029

info@sageworks.com

Additional whitepapers and archived webinars available at www.sageworksanalyst.com

Recommended whitepaper: Moving from the OTS to the OCC