Forward-Looking ALLL: Computing Qualitative Adjustments

Garver Moore

Risk Management Consultant

Sageworks Advisory Services

Forward-Looking ALLL:

Computing Qualitative Adjustments

August 24, 2016

P R E S E N T E D B Y

Brandon Russell

ALLL Specialist

Sageworks

About the Webinar.

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• Ask questions throughout the session using the GoToWebinar control panel

• We will answer as many questions as we can at the end of the presentation

About Sageworks.

• Risk management thought leader for institutions and examiners

• Regularly featured in national and trade media

• Origination, Portfolio Administration and Portfolio Risk Management Solutions

• More than 1,000 financial institution clients

• Founded in 1998

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Disclaimer.

This presentation may include statements that constitute “forward-looking statements” relative to publicly available

industry data. Forward-looking statements often contain words such as “believe,” “expect,” “plans,” “project,” “target,” “anticipate,” “will,” “should,” “see,” “guidance,” “confident” and similar terms. There can be no assurance that any of the future

events discussed will occur as anticipated, if at all, or that actual results on the industry will be as expected. Sageworks is not

responsible for the accuracy or validity of this publicly available industry data, or the outcome of the use of this data relative to business or investment decisions made by the recipients of this data. Sageworks disclaims all representations and

warranties, express or implied. Risks and uncertainties include risks related to the effect of economic conditions and

financial market conditions; fluctuation in commodity prices, interest rates and foreign currency exchange rates. No Sageworks employee is authorized to make recommendations or give advice as to any course of action that should be made

as an outcome of this data. The forward-looking statements and data speak only as of the date of this presentation and we

undertake no obligation to update or revise this information as of a later date.

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About Today’s Presenter.

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Garver Moore

Risk Management ConsultantSageworks Advisory Services

Brandon Russell

ALLL SpecialistSageworks

Agenda.

• Information versus insight

• Problems in current GAAP

• Concept: Loss Emergence Period

• Techniques: Regression Analysis

• Techniques: Analysis of the Variance

• Concept: Confidence Intervals

• Objectivizing subjectivity

• Case study

• Product enablement

Poll Questions.

Transitioning to Data-Driven World.

• Global headwind (tailwind?) affecting all industries

• Each industry is creating its own interpretation of best practices and uses for information

• Large institutions are already taking advantage

• Alt-lending and emerging players are, too – niche players (for now)

• “Big data” isn’t meaningful information

• Data = Information: not just bits on a server

• Intelligence is *actionable* insight

Information Analysis Insights

Real World Example: Information vs. Insights.

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35.786234 -78.662548 35.795732 -78.695490 20 2.1

35.785834 -78.662963 35.779972 -78.667196 30 0.6

35.784545 -78.699287 35.772312 -78.719604 65 2.1

35.779522 -78.668100 35.784545 -78.699287 35 1.7

35.795732 -78.695490 35.772312 -78.719604 60 2.4

35.772477 -78.722420 35.763571 -78.726986 35 0.7

35.763574 -78.727006 35.762506 -78.730763 20 0.3

Insight: Take a left on Pullen Road to reach your destination 2.65 minutes faster

Problems in Current GAAP.

• Convention dominating reason in low-loss period

• Benchmark reserves unsupportable by historical experience

• Reaching further and further back to pick up losses

• Net recoveries for shorter periods

• Directional Consistency traps

• No oracles

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Poll.

Concept: Loss Emergence Period.

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Loss Rate

(%)Balance Reserve

What most institutions think they’re doing

What most institutions are actually doing

Loss Rate

(%)Balance Reserve1

Concept: Loss Emergence Period.

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1 yr Loss Emergence Factor:

Past Present Future

DO NOT ENTER

Adverse Event

Detection

LossRealized

Pre-Emergence period Loss Emergence Period

Concept: Loss Emergence Period.

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Past Present Future

Adverse Event

Detection

LossEstimated

Still “Incurred”

Advantages / Drawbacks.

Advantages:

Faithful estimate of incurred loss within the bounds of GAAPUseful number to understand and calculateUseful financial bridge to lifetime loss calculationDon’t need to continuously compute

Disadvantages:

May be greater than one, may be less than oneDifficult to un-ring the bellSignificant measurement risk in low-loss environments

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Poll: Q Factor Reliance.

Peer Study I.

Peer Study II.

Problem with 3-year loss rate.

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Techniques: Regression Analysis.

• “How does a change in unemployment impact my loss experience?”• “What was the impact to my losses when I started writing C&I to a new segment?”• “What is the lead time from an indicator change to a portfolio result?”• “What was the impact of our new management team?”• “How confident am I in my loss experience number?”

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Information Analysis Insights

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“All Else Being Equal”.

Techniques: Analysis of the Variance (ANOVA).

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• Quantify the impact of different “Eras”

• Quantify the impact of different

segmentations

• Test for significance

Thought Experiment: Rocket Bank.

• Rocket Bank has a single analysis and business segment: C&I loans with NAICS code X212221

» Mining asteroids for gold

» Experimental technologies: about 10% of rockets will fail to orbit (default)

» Secured by existing gold stocks and exotic insurance products – about 15% of a loan is exposed to default risk

» Extraordinarily well capitalized; inexhaustible supply of loans

• You enter this space: think of your portfolio loans as a “sample”

» What if you win 10 loans of their business? 50? 500?

• Knowing a priori the “platonic” default rate and LGD for these kinds of loans, let us examine how your portfolio size changes your certainty in calculating your own experience in X212221 lending

Concept: Confidence Intervals.

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Documenting reliability in measurement

-4.00%

-2.00%

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

1 10 100 1000 10000

The reliability of a measurement (e.g., Loss Rates or PD) scales with how that measurement is

conducted.

Confidence Intervals 101.

• There’s a huge difference between reserving $15,000,000 +/- $1,000,000 on a $1B portfolio and $15,000,000 +/- $5,000,000 on the same portfolio

• 80, 90, 95% confidence intervals – an illustrative concept

• Key driver: sample size – number of credits, number of observations. Management should know, understand, and use this information! (Arguably, shareholders, too)

• Consider co-performance of credits in a segment

• Uncertainty shows up in number of PLLL transactions, or “surprise” PLLL transactions, reactivity

Tools.

• Excel Data AnalysisPak (Older versions)

• First-class feature in Excel ‘16

• www.r-project.org

• Anaconda (continuum.io)

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Minimize Subjective Vulnerabilities.

A lesson from security risk management concepts:

• Attack surface concept as applied to banking risk management processes:

» Understand how much of your calculation is vulnerable to criticism – Map your attack surface to identify high-risk areas of your examined practices

» Use information and documentation to cover these subjective areas of your calculations

» Defending your attack surface decreases your compliance and model risk

Attack Surface

Case Study: Quantitative Analysis for

Qualitative Drivers.

• $500MM – $1 B in loans

• Consistent, conservative approach

• Active, growing CRE segment

• Two main regions of operation

• Consistent governance

Step 1: Apply Intuition.

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• What are my correlates? What do I suspect might drive my loss experience?

• Certainly, regional macroeconomic indicators

• Internal indicators

• Indicators for boutique segments or regional exposure (snowfall for mountain

communities, spot prices for ag, etc.)

Step 2: Get the lay of the land (Correlation

Analysis).

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1 0.951703 0.875918 0.812415 0.590294 0.615976 0.642744 0.674873 0.462244 0.474898 0.487928 0.501183 0.150649 0.176953 0.20277 0.228824 -0.10808 -0.101 -0.087 -0.08633 -0.48862 -0.50018 -0.50041 -0.4927 0.191453 0.641347 0.60658 0.065434 0.200392 0.437867 0.187977 0.321501 0.182108 0.227831 0.02901 0.210586 0.135496 0.595674 0.229409 0.437867 -0.15503 -0.19875 0.468846 0.459909 -0.00728 -0.03821 0.10876 0.349638 0.49266 0.763975

0.951703 1 0.951703 0.875918 0.574834 0.590294 0.615976 0.642744 0.449815 0.462244 0.474898 0.487928 0.124842 0.150649 0.176953 0.20277 -0.06202 -0.10808 -0.101 -0.087 -0.48323 -0.48862 -0.50018 -0.50041 0.300818 0.606995 0.648213 0.019086 0.075473 0.351816 0.196493 0.273804 0.167911 0.258348 0.00122 0.117485 0.079869 0.55381 0.188914 0.351816 -0.16582 -0.24409 0.457093 0.372515 -0.00881 -0.04841 0.061104 0.331331 0.40601 0.690165

0.875918 0.951703 1 0.951703 0.569034 0.574834 0.590294 0.615976 0.439019 0.449815 0.462244 0.474898 0.106186 0.124842 0.150649 0.176953 -0.02462 -0.06202 -0.10808 -0.101 -0.48477 -0.48323 -0.48862 -0.50018 0.335989 0.56676 0.670999 -0.00643 0.010984 0.311258 0.171565 0.217442 0.251982 0.268228 0.012419 0.090269 0.044528 0.505939 0.24204 0.311258 -0.17629 -0.24162 0.460886 0.303647 0.020517 -0.04349 0.030347 0.224263 0.341099 0.597636

0.812415 0.875918 0.951703 1 0.564811 0.569034 0.574834 0.590294 0.429243 0.439019 0.449815 0.462244 0.095795 0.106186 0.124842 0.150649 -0.04302 -0.02462 -0.06202 -0.10808 -0.48544 -0.48477 -0.48323 -0.48862 0.315151 0.541918 0.641322 -0.02242 0.011987 0.258549 0.235851 0.121635 0.320713 0.291989 0.028783 0.076835 0.009667 0.472465 0.266611 0.258549 -0.19647 -0.21869 0.387394 0.224133 0.014502 0.118294 0.002166 0.117908 0.266358 0.499053

0.590294 0.574834 0.569034 0.564811 1 0.975431 0.931172 0.878244 0.436142 0.458214 0.48249 0.506558 0.508244 0.496213 0.476258 0.446433 0.07415 0.152131 0.209348 0.260719 -0.64019 -0.62397 -0.602 -0.57671 0.054411 0.888768 0.128859 0.597184 0.422468 0.582034 0.040537 0.384413 0.327841 0.246887 0.026543 -0.016 0.629897 0.840016 0.277074 0.582034 -0.29465 -0.04777 0.291041 0.572484 -0.03701 0.2489 0.620152 0.230071 0.581151 0.70312

0.615976 0.590294 0.574834 0.569034 0.975431 1 0.975431 0.931172 0.428155 0.436142 0.458214 0.48249 0.498895 0.508244 0.496213 0.476258 -0.00242 0.07415 0.152131 0.209348 -0.65083 -0.64019 -0.62397 -0.602 0.118011 0.930042 0.216893 0.631828 0.404771 0.648407 0.056478 0.373963 0.22551 0.227636 -0.03202 -0.05032 0.661858 0.896425 0.245142 0.648407 -0.32527 -0.13251 0.394653 0.622425 -0.174 0.210807 0.653365 0.22788 0.636651 0.775245

0.642744 0.615976 0.590294 0.574834 0.931172 0.975431 1 0.975431 0.417546 0.428155 0.436142 0.458214 0.472796 0.498895 0.508244 0.496213 -0.08702 -0.00242 0.07415 0.152131 -0.67489 -0.65083 -0.64019 -0.62397 0.124321 0.947471 0.310015 0.603842 0.358253 0.650222 0.105062 0.356987 0.102819 0.163781 -0.08381 -0.1113 0.634699 0.934862 0.225236 0.650222 -0.35181 -0.20632 0.446778 0.613645 -0.28986 0.099313 0.624655 0.226972 0.633716 0.822844

0.674873 0.642744 0.615976 0.590294 0.878244 0.931172 0.975431 1 0.405871 0.417546 0.428155 0.436142 0.434612 0.472796 0.498895 0.508244 -0.1416 -0.08702 -0.00242 0.07415 -0.68717 -0.67489 -0.65083 -0.64019 0.165865 0.933889 0.410498 0.555106 0.379563 0.701535 0.159633 0.357562 -0.00738 0.125623 -0.1206 -0.14796 0.590939 0.944725 0.202342 0.701535 -0.36057 -0.27089 0.528153 0.658483 -0.37505 0.001812 0.57932 0.260635 0.685594 0.880542

0.462244 0.449815 0.439019 0.429243 0.436142 0.428155 0.417546 0.405871 1 0.999325 0.998366 0.997106 -0.44461 -0.46407 -0.48308 -0.50069 0.017275 0.015176 0.009509 0.002978 -0.82289 -0.82012 -0.8175 -0.81483 -0.13247 -0.64684 -0.55507 -0.20181 -0.14225 -0.41795 -0.23526 -0.27756 0.059737 -0.19368 0.011653 0.246966 -0.25248 -0.72805 -0.24164 -0.41795 0.360378 0.218117 -0.42911 -0.37779 0.348384 0.055139 -0.23153 -0.13661 -0.39871 -0.75716

0.474898 0.462244 0.449815 0.439019 0.458214 0.436142 0.428155 0.417546 0.999325 1 0.999325 0.998366 -0.41886 -0.44461 -0.46407 -0.48308 0.011456 0.017275 0.015176 0.009509 -0.82693 -0.82289 -0.82012 -0.8175 -0.17062 -0.53911 -0.53865 -0.122 -0.08501 -0.37028 -0.19604 -0.18169 0.161471 -0.13253 0.044524 0.288272 -0.15972 -0.63822 -0.22721 -0.37028 0.368037 0.23762 -0.44149 -0.31302 0.400076 0.125602 -0.144 -0.0616 -0.3337 -0.68294

0.487928 0.474898 0.462244 0.449815 0.48249 0.458214 0.436142 0.428155 0.998366 0.999325 1 0.999325 -0.39175 -0.41886 -0.44461 -0.46407 0.017498 0.011456 0.017275 0.015176 -0.82958 -0.82693 -0.82289 -0.82012 -0.16274 -0.40041 -0.55764 -0.01548 -0.06345 -0.31438 -0.13991 -0.05118 0.263595 -0.06475 0.077075 0.379872 -0.03479 -0.51414 -0.14045 -0.31438 0.378801 0.267496 -0.42599 -0.24144 0.456101 0.083424 -0.02539 0.015732 -0.25867 -0.58158

0.501183 0.487928 0.474898 0.462244 0.506558 0.48249 0.458214 0.436142 0.997106 0.998366 0.999325 1 -0.36449 -0.39175 -0.41886 -0.44461 0.02567 0.017498 0.011456 0.017275 -0.83383 -0.82958 -0.82693 -0.82289 -0.11639 -0.24521 -0.52753 0.075513 -0.03557 -0.21725 -0.14878 0.006119 0.35909 -0.0514 0.135187 0.42667 0.060014 -0.37159 -0.09817 -0.21725 0.336529 0.313991 -0.33816 -0.12667 0.504298 0.094029 0.069875 0.096839 -0.1468 -0.45284

0.150649 0.124842 0.106186 0.095795 0.508244 0.498895 0.472796 0.434612 -0.44461 -0.41886 -0.39175 -0.36449 1 0.99321 0.973511 0.940783 -0.01864 0.064065 0.127182 0.1548 0.133861 0.162078 0.196788 0.233426 0.050079 0.870451 0.08067 0.622788 0.377521 0.581198 0.075849 0.377194 0.418163 0.146464 0.081488 0.081209 0.649154 0.799199 0.150397 0.581198 -0.22015 0.035971 0.31505 0.601877 0.041404 0.254357 0.643502 0.295848 0.603375 0.706454

0.176953 0.150649 0.124842 0.106186 0.496213 0.508244 0.498895 0.472796 -0.46407 -0.44461 -0.41886 -0.39175 0.99321 1 0.99321 0.973511 -0.08591 -0.01864 0.064065 0.127182 0.11387 0.133861 0.162078 0.196788 0.083111 0.921756 0.16985 0.632012 0.406192 0.641813 0.099588 0.398175 0.32174 0.14596 0.032692 0.019241 0.664049 0.871157 0.158465 0.641813 -0.26862 -0.04183 0.380484 0.649486 -0.06123 0.18352 0.655824 0.30261 0.655154 0.790653

0.20277 0.176953 0.150649 0.124842 0.476258 0.496213 0.508244 0.498895 -0.48308 -0.46407 -0.44461 -0.41886 0.973511 0.99321 1 0.99321 -0.13789 -0.08591 -0.01864 0.064065 0.08268 0.11387 0.133861 0.162078 0.109703 0.952653 0.260254 0.625326 0.4155 0.680149 0.13084 0.395167 0.235485 0.168052 -0.00728 -0.02988 0.658593 0.92273 0.173712 0.680149 -0.29398 -0.11416 0.434722 0.674865 -0.1455 0.116622 0.649717 0.298861 0.685089 0.862987

0.228824 0.20277 0.176953 0.150649 0.446433 0.476258 0.496213 0.508244 -0.50069 -0.48308 -0.46407 -0.44461 0.940783 0.973511 0.99321 1 -0.18327 -0.13789 -0.08591 -0.01864 0.055394 0.08268 0.11387 0.133861 0.141063 0.963436 0.353929 0.575988 0.40826 0.696716 0.16063 0.376757 0.161347 0.177353 -0.03633 -0.05618 0.611261 0.953551 0.205347 0.696716 -0.3125 -0.17497 0.487269 0.677887 -0.21049 0.064695 0.601095 0.278993 0.692681 0.915347

-0.10808 -0.06202 -0.02462 -0.04302 0.07415 -0.00242 -0.08702 -0.1416 0.017275 0.011456 0.017498 0.02567 -0.01864 -0.08591 -0.13789 -0.18327 1 0.710852 0.518818 0.415231 0.013667 0.062188 0.095039 0.088966 0.062901 0.294515 -0.12553 0.101266 0.112446 0.148821 0.012448 0.063109 0.579972 0.181187 0.198184 0.195747 0.09484 0.180108 0.106938 0.148821 -0.05032 0.215353 0.093964 0.202835 0.42913 0.227432 0.106211 0.173014 0.192962 0.197668

-0.101 -0.10808 -0.06202 -0.02462 0.152131 0.07415 -0.00242 -0.08702 0.015176 0.017275 0.011456 0.017498 0.064065 -0.01864 -0.08591 -0.13789 0.710852 1 0.710852 0.518818 -0.0174 0.013667 0.062188 0.095039 0.076176 0.375984 -0.06837 0.176538 0.156865 0.207463 -0.03673 0.032174 0.655484 0.0176 0.193188 0.120619 0.163573 0.277735 0.12821 0.207463 -0.09638 0.213061 0.121199 0.200666 0.4028 0.438279 0.174236 -0.01595 0.193185 0.211462

-0.087 -0.101 -0.10808 -0.06202 0.209348 0.152131 0.07415 -0.00242 0.009509 0.015176 0.017275 0.011456 0.127182 0.064065 -0.01864 -0.08591 0.518818 0.710852 1 0.710852 -0.00058 -0.0174 0.013667 0.062188 -0.0983 0.414408 -0.04406 0.241398 0.184899 0.171503 0.162912 0.199524 0.463507 -0.0227 0.132935 0.023327 0.262572 0.332336 0.029942 0.171503 -0.21314 0.150166 -0.00071 0.201131 0.15521 0.720353 0.253453 0.116087 0.189419 0.256277

-0.08633 -0.087 -0.101 -0.10808 0.260719 0.209348 0.152131 0.07415 0.002978 0.009509 0.015176 0.017275 0.1548 0.127182 0.064065 -0.01864 0.415231 0.518818 0.710852 1 -0.0063 -0.00058 -0.0174 0.013667 -0.04427 0.473673 -0.06284 0.420934 0.111119 0.226504 0.167632 0.361798 0.268516 0.054451 0.077872 -0.05107 0.46425 0.415955 -0.00452 0.226504 -0.21831 0.0912 0.060347 0.257559 -0.08521 0.197958 0.446881 0.171984 0.247878 0.297594

-0.48862 -0.48323 -0.48477 -0.48544 -0.64019 -0.65083 -0.67489 -0.68717 -0.82289 -0.82693 -0.82958 -0.83383 0.133861 0.11387 0.08268 0.055394 0.013667 -0.0174 -0.00058 -0.0063 1 0.982976 0.958306 0.937242 -0.22582 -0.6749 -0.60922 -0.13697 -0.17262 -0.43024 -0.19031 -0.22255 -0.14873 -0.2308 0.054274 0.047518 -0.17964 -0.60427 -0.18927 -0.43024 0.384513 0.283211 -0.45465 -0.3918 0.176728 -0.02775 -0.16492 -0.21227 -0.43656 -0.67066

-0.50018 -0.48862 -0.48323 -0.48477 -0.62397 -0.64019 -0.65083 -0.67489 -0.82012 -0.82289 -0.82693 -0.82958 0.162078 0.133861 0.11387 0.08268 0.062188 0.013667 -0.0174 -0.00058 0.982976 1 0.982976 0.958306 -0.24141 -0.64458 -0.61954 -0.14961 -0.18052 -0.42542 -0.17272 -0.1908 -0.0533 -0.20593 0.123999 0.179038 -0.18509 -0.59178 -0.16604 -0.42542 0.432162 0.353007 -0.43752 -0.37232 0.24783 -0.08794 -0.17322 -0.17903 -0.41584 -0.64433

-0.50041 -0.50018 -0.48862 -0.48323 -0.602 -0.62397 -0.64019 -0.65083 -0.8175 -0.82012 -0.82289 -0.82693 0.196788 0.162078 0.133861 0.11387 0.095039 0.062188 0.013667 -0.0174 0.958306 0.982976 1 0.982976 -0.20931 -0.59229 -0.6262 -0.13397 -0.09774 -0.33579 -0.16807 -0.25063 0.06136 -0.23105 0.157141 0.252242 -0.18482 -0.55662 -0.15854 -0.33579 0.448025 0.391576 -0.3683 -0.29287 0.323084 -0.05298 -0.1653 -0.19957 -0.33673 -0.59587

-0.4927 -0.50041 -0.50018 -0.48862 -0.57671 -0.602 -0.62397 -0.64019 -0.81483 -0.8175 -0.82012 -0.82289 0.233426 0.196788 0.162078 0.133861 0.088966 0.095039 0.062188 0.013667 0.937242 0.958306 0.982976 1 -0.2138 -0.53624 -0.58865 -0.136 -0.07366 -0.3002 -0.14885 -0.27211 0.15187 -0.22609 0.173215 0.267913 -0.19378 -0.51893 -0.22302 -0.3002 0.447299 0.394731 -0.33067 -0.24902 0.42808 0.053204 -0.17013 -0.15222 -0.29132 -0.53875

0.191453 0.300818 0.335989 0.315151 0.054411 0.118011 0.124321 0.165865 -0.13247 -0.17062 -0.16274 -0.11639 0.050079 0.083111 0.109703 0.141063 0.062901 0.076176 -0.0983 -0.04427 -0.22582 -0.24141 -0.20931 -0.2138 1 0.148015 0.21173 0.001238 -0.0706 0.262057 -0.05116 0.061025 0.000932 0.013771 0.048028 0.010658 0.016496 0.148698 -0.04998 0.262057 0.043692 -0.02292 0.457046 0.223084 -0.05389 -0.05179 0.03368 0.003524 0.237467 0.165991

0.641347 0.606995 0.56676 0.541918 0.888768 0.930042 0.947471 0.933889 -0.64684 -0.53911 -0.40041 -0.24521 0.870451 0.921756 0.952653 0.963436 0.294515 0.375984 0.414408 0.473673 -0.6749 -0.64458 -0.59229 -0.53624 0.148015 1 0.349924 0.533191 0.402775 0.661859 0.150243 0.290351 0.200951 0.189116 -0.02818 -0.02593 0.551389 0.967644 0.226631 0.661859 -0.33534 -0.16707 0.460347 0.630926 -0.17005 0.081862 0.549282 0.257266 0.657393 0.888055

0.60658 0.648213 0.670999 0.641322 0.128859 0.216893 0.310015 0.410498 -0.55507 -0.53865 -0.55764 -0.52753 0.08067 0.16985 0.260254 0.353929 -0.12553 -0.06837 -0.04406 -0.06284 -0.60922 -0.61954 -0.6262 -0.58865 0.21173 0.349924 1 -0.07785 -0.07614 0.315164 0.207355 0.217026 -0.00936 0.209564 0.067433 -0.06188 -0.01301 0.366556 0.076585 0.315164 -0.17348 -0.28638 0.569001 0.29252 -0.2843 -0.09808 -0.04081 0.178714 0.327994 0.458549

0.065434 0.019086 -0.00643 -0.02242 0.597184 0.631828 0.603842 0.555106 -0.20181 -0.122 -0.01548 0.075513 0.622788 0.632012 0.625326 0.575988 0.101266 0.176538 0.241398 0.420934 -0.13697 -0.14961 -0.13397 -0.136 0.001238 0.533191 -0.07785 1 0.288187 0.516612 0.046755 0.301256 0.166679 0.118021 -0.07908 -0.04118 0.973082 0.490659 -0.03937 0.516612 -0.07195 -0.069 0.133219 0.535237 -0.0787 -0.06915 0.991817 0.287572 0.532854 0.397329

0.200392 0.075473 0.010984 0.011987 0.422468 0.404771 0.358253 0.379563 -0.14225 -0.08501 -0.06345 -0.03557 0.377521 0.406192 0.4155 0.40826 0.112446 0.156865 0.184899 0.111119 -0.17262 -0.18052 -0.09774 -0.07366 -0.0706 0.402775 -0.07614 0.288187 1 0.703381 -0.05123 0.121203 0.049908 0.157395 -0.07055 0.025952 0.288879 0.405475 0.074587 0.703381 -0.12814 -0.06618 0.157616 0.65903 -0.06535 0.024857 0.288547 0.1118 0.657617 0.455281

0.437867 0.351816 0.311258 0.258549 0.582034 0.648407 0.650222 0.701535 -0.41795 -0.37028 -0.31438 -0.21725 0.581198 0.641813 0.680149 0.696716 0.148821 0.207463 0.171503 0.226504 -0.43024 -0.42542 -0.33579 -0.3002 0.262057 0.661859 0.315164 0.516612 0.703381 1 -0.01615 0.239901 0.093736 0.153684 -0.04974 -0.05399 0.524781 0.667166 0.023208 1 -0.19827 -0.17263 0.759586 0.959006 -0.20456 -0.04214 0.529745 0.28262 0.964729 0.726108

0.187977 0.196493 0.171565 0.235851 0.040537 0.056478 0.105062 0.159633 -0.23526 -0.19604 -0.13991 -0.14878 0.075849 0.099588 0.13084 0.16063 0.012448 -0.03673 0.162912 0.167632 -0.19031 -0.17272 -0.16807 -0.14885 -0.05116 0.150243 0.207355 0.046755 -0.05123 -0.01615 1 0.074883 0.085925 -0.0665 -0.01463 0.024096 0.061325 0.166699 -0.00305 -0.01615 -0.0412 -0.07362 -0.04247 -0.03918 -0.02458 -0.0271 0.053002 -0.07301 -0.03287 0.171064

0.321501 0.273804 0.217442 0.121635 0.384413 0.373963 0.356987 0.357562 -0.27756 -0.18169 -0.05118 0.006119 0.377194 0.398175 0.395167 0.376757 0.063109 0.032174 0.199524 0.361798 -0.22255 -0.1908 -0.25063 -0.27211 0.061025 0.290351 0.217026 0.301256 0.121203 0.239901 0.074883 1 0.09128 0.07703 0.003802 0.078545 0.51149 0.255998 0.324208 0.239901 -0.07193 -0.07708 0.089149 0.263848 -0.09256 -0.06254 0.418257 0.226953 0.277128 0.277065

0.182108 0.167911 0.251982 0.320713 0.327841 0.22551 0.102819 -0.00738 0.059737 0.161471 0.263595 0.35909 0.418163 0.32174 0.235485 0.161347 0.579972 0.655484 0.463507 0.268516 -0.14873 -0.0533 0.06136 0.15187 0.000932 0.200951 -0.00936 0.166679 0.049908 0.093736 0.085925 0.09128 1 0.294981 0.397914 0.573784 0.163699 0.054479 0.091618 0.093736 0.320912 0.362149 0.0275 0.131751 0.65057 0.243944 0.170662 0.070839 0.139586 -0.0044

0.227831 0.258348 0.268228 0.291989 0.246887 0.227636 0.163781 0.125623 -0.19368 -0.13253 -0.06475 -0.0514 0.146464 0.14596 0.168052 0.177353 0.181187 0.0176 -0.0227 0.054451 -0.2308 -0.20593 -0.23105 -0.22609 0.013771 0.189116 0.209564 0.118021 0.157395 0.153684 -0.0665 0.07703 0.294981 1 0.367182 0.264834 0.118992 0.127748 0.160971 0.153684 0.203973 0.167949 0.060111 0.141533 0.091191 -0.07576 0.122774 0.044562 0.17206 0.161998

0.02901 0.00122 0.012419 0.028783 0.026543 -0.03202 -0.08381 -0.1206 0.011653 0.044524 0.077075 0.135187 0.081488 0.032692 -0.00728 -0.03633 0.198184 0.193188 0.132935 0.077872 0.054274 0.123999 0.157141 0.173215 0.048028 -0.02818 0.067433 -0.07908 -0.07055 -0.04974 -0.01463 0.003802 0.397914 0.367182 1 0.363344 -0.07917 -0.04484 -0.09307 -0.04974 0.324161 0.929226 0.013034 0.019003 0.154993 0.051346 -0.07367 0.057465 0.017698 -0.04722

0.210586 0.117485 0.090269 0.076835 -0.016 -0.05032 -0.1113 -0.14796 0.246966 0.288272 0.379872 0.42667 0.081209 0.019241 -0.02988 -0.05618 0.195747 0.120619 0.023327 -0.05107 0.047518 0.179038 0.252242 0.267913 0.010658 -0.02593 -0.06188 -0.04118 0.025952 -0.05399 0.024096 0.078545 0.573784 0.264834 0.363344 1 -0.02382 -0.13212 0.198132 -0.05399 0.597761 0.348675 -0.09433 0.0126 0.510657 0.000322 -0.02877 0.08852 0.028813 -0.08666

0.135496 0.079869 0.044528 0.009667 0.629897 0.661858 0.634699 0.590939 -0.25248 -0.15972 -0.03479 0.060014 0.649154 0.664049 0.658593 0.611261 0.09484 0.163573 0.262572 0.46425 -0.17964 -0.18509 -0.18482 -0.19378 0.016496 0.551389 -0.01301 0.973082 0.288879 0.524781 0.061325 0.51149 0.163699 0.118992 -0.07917 -0.02382 1 0.506873 0.045723 0.524781 -0.08817 -0.09038 0.144087 0.542906 -0.10775 -0.07636 0.993825 0.300076 0.544146 0.427306

0.595674 0.55381 0.505939 0.472465 0.840016 0.896425 0.934862 0.944725 -0.72805 -0.63822 -0.51414 -0.37159 0.799199 0.871157 0.92273 0.953551 0.180108 0.277735 0.332336 0.415955 -0.60427 -0.59178 -0.55662 -0.51893 0.148698 0.967644 0.366556 0.490659 0.405475 0.667166 0.166699 0.255998 0.054479 0.127748 -0.04484 -0.13212 0.506873 1 0.224512 0.667166 -0.37846 -0.18114 0.485863 0.621288 -0.28431 0.030788 0.504321 0.201565 0.64259 0.899129

0.229409 0.188914 0.24204 0.266611 0.277074 0.245142 0.225236 0.202342 -0.24164 -0.22721 -0.14045 -0.09817 0.150397 0.158465 0.173712 0.205347 0.106938 0.12821 0.029942 -0.00452 -0.18927 -0.16604 -0.15854 -0.22302 -0.04998 0.226631 0.076585 -0.03937 0.074587 0.023208 -0.00305 0.324208 0.091618 0.160971 -0.09307 0.198132 0.045723 0.224512 1 0.023208 -0.08874 -0.13902 -0.0262 0.001964 0.040453 0.060757 0.003326 -0.03525 0.017153 0.167271

0.437867 0.351816 0.311258 0.258549 0.582034 0.648407 0.650222 0.701535 -0.41795 -0.37028 -0.31438 -0.21725 0.581198 0.641813 0.680149 0.696716 0.148821 0.207463 0.171503 0.226504 -0.43024 -0.42542 -0.33579 -0.3002 0.262057 0.661859 0.315164 0.516612 0.703381 1 -0.01615 0.239901 0.093736 0.153684 -0.04974 -0.05399 0.524781 0.667166 0.023208 1 -0.19827 -0.17263 0.759586 0.959006 -0.20456 -0.04214 0.529745 0.28262 0.964729 0.726108

-0.15503 -0.16582 -0.17629 -0.19647 -0.29465 -0.32527 -0.35181 -0.36057 0.360378 0.368037 0.378801 0.336529 -0.22015 -0.26862 -0.29398 -0.3125 -0.05032 -0.09638 -0.21314 -0.21831 0.384513 0.432162 0.448025 0.447299 0.043692 -0.33534 -0.17348 -0.07195 -0.12814 -0.19827 -0.0412 -0.07193 0.320912 0.203973 0.324161 0.597761 -0.08817 -0.37846 -0.08874 -0.19827 1 0.353917 -0.17087 -0.18524 0.328812 -0.05244 -0.0768 -0.14667 -0.17985 -0.30865

-0.19875 -0.24409 -0.24162 -0.21869 -0.04777 -0.13251 -0.20632 -0.27089 0.218117 0.23762 0.267496 0.313991 0.035971 -0.04183 -0.11416 -0.17497 0.215353 0.213061 0.150166 0.0912 0.283211 0.353007 0.391576 0.394731 -0.02292 -0.16707 -0.28638 -0.069 -0.06618 -0.17263 -0.07362 -0.07708 0.362149 0.167949 0.929226 0.348675 -0.09038 -0.18114 -0.13902 -0.17263 0.353917 1 -0.18055 -0.09497 0.23577 0.0932 -0.0763 -0.00673 -0.11183 -0.22203

0.468846 0.457093 0.460886 0.387394 0.291041 0.394653 0.446778 0.528153 -0.42911 -0.44149 -0.42599 -0.33816 0.31505 0.380484 0.434722 0.487269 0.093964 0.121199 -0.00071 0.060347 -0.45465 -0.43752 -0.3683 -0.33067 0.457046 0.460347 0.569001 0.133219 0.157616 0.759586 -0.04247 0.089149 0.0275 0.060111 0.013034 -0.09433 0.144087 0.485863 -0.0262 0.759586 -0.17087 -0.18055 1 0.723564 -0.22787 -0.05231 0.149719 0.220315 0.733588 0.567253

0.459909 0.372515 0.303647 0.224133 0.572484 0.622425 0.613645 0.658483 -0.37779 -0.31302 -0.24144 -0.12667 0.601877 0.649486 0.674865 0.677887 0.202835 0.200666 0.201131 0.257559 -0.3918 -0.37232 -0.29287 -0.24902 0.223084 0.630926 0.29252 0.535237 0.65903 0.959006 -0.03918 0.263848 0.131751 0.141533 0.019003 0.0126 0.542906 0.621288 0.001964 0.959006 -0.18524 -0.09497 0.723564 1 -0.09681 -0.04313 0.549638 0.524172 0.995774 0.714566

-0.00728 -0.00881 0.020517 0.014502 -0.03701 -0.174 -0.28986 -0.37505 0.348384 0.400076 0.456101 0.504298 0.041404 -0.06123 -0.1455 -0.21049 0.42913 0.4028 0.15521 -0.08521 0.176728 0.24783 0.323084 0.42808 -0.05389 -0.17005 -0.2843 -0.0787 -0.06535 -0.20456 -0.02458 -0.09256 0.65057 0.091191 0.154993 0.510657 -0.10775 -0.28431 0.040453 -0.20456 0.328812 0.23577 -0.22787 -0.09681 1 0.102135 -0.08831 0.226845 -0.09747 -0.24308

-0.03821 -0.04841 -0.04349 0.118294 0.2489 0.210807 0.099313 0.001812 0.055139 0.125602 0.083424 0.094029 0.254357 0.18352 0.116622 0.064695 0.227432 0.438279 0.720353 0.197958 -0.02775 -0.08794 -0.05298 0.053204 -0.05179 0.081862 -0.09808 -0.06915 0.024857 -0.04214 -0.0271 -0.06254 0.243944 -0.07576 0.051346 0.000322 -0.07636 0.030788 0.060757 -0.04214 -0.05244 0.0932 -0.05231 -0.04313 0.102135 1 -0.07526 -0.0614 -0.05131 -0.01086

0.10876 0.061104 0.030347 0.002166 0.620152 0.653365 0.624655 0.57932 -0.23153 -0.144 -0.02539 0.069875 0.643502 0.655824 0.649717 0.601095 0.106211 0.174236 0.253453 0.446881 -0.16492 -0.17322 -0.1653 -0.17013 0.03368 0.549282 -0.04081 0.991817 0.288547 0.529745 0.053002 0.418257 0.170662 0.122774 -0.07367 -0.02877 0.993825 0.504321 0.003326 0.529745 -0.0768 -0.0763 0.149719 0.549638 -0.08831 -0.07526 1 0.303503 0.549444 0.419422

0.349638 0.331331 0.224263 0.117908 0.230071 0.22788 0.226972 0.260635 -0.13661 -0.0616 0.015732 0.096839 0.295848 0.30261 0.298861 0.278993 0.173014 -0.01595 0.116087 0.171984 -0.21227 -0.17903 -0.19957 -0.15222 0.003524 0.257266 0.178714 0.287572 0.1118 0.28262 -0.07301 0.226953 0.070839 0.044562 0.057465 0.08852 0.300076 0.201565 -0.03525 0.28262 -0.14667 -0.00673 0.220315 0.524172 0.226845 -0.0614 0.303503 1 0.518237 0.339195

0.49266 0.40601 0.341099 0.266358 0.581151 0.636651 0.633716 0.685594 -0.39871 -0.3337 -0.25867 -0.1468 0.603375 0.655154 0.685089 0.692681 0.192962 0.193185 0.189419 0.247878 -0.43656 -0.41584 -0.33673 -0.29132 0.237467 0.657393 0.327994 0.532854 0.657617 0.964729 -0.03287 0.277128 0.139586 0.17206 0.017698 0.028813 0.544146 0.64259 0.017153 0.964729 -0.17985 -0.11183 0.733588 0.995774 -0.09747 -0.05131 0.549444 0.518237 1 0.737494

0.763975 0.690165 0.597636 0.499053 0.70312 0.775245 0.822844 0.880542 -0.75716 -0.68294 -0.58158 -0.45284 0.706454 0.790653 0.862987 0.915347 0.197668 0.211462 0.256277 0.297594 -0.67066 -0.64433 -0.59587 -0.53875 0.165991 0.888055 0.458549 0.397329 0.455281 0.726108 0.171064 0.277065 -0.0044 0.161998 -0.04722 -0.08666 0.427306 0.899129 0.167271 0.726108 -0.30865 -0.22203 0.567253 0.714566 -0.24308 -0.01086 0.419422 0.339195 0.737494 1

Step 3: Regression Analysis.

31

Step 4: Refinement.

32

Step 5: Summary & Application.

33

Step 5: Summary & Application.

34

Product Enablement.

Poll Questions.

Takeaways.

• Use of “advanced” analysis can uncover useful insight and levers in current and future GAAP

• Use of Loss Emergence Period can be supported by application data or these techniques, but may not be right for every bank

• Consider the reliability and weaknesses of your analysis and defend judgment within those bounds

• Monitor our release notes at web.sageworks.com/enhancements for continuous updates to the application

37

2016 Risk Management Summit.

38

• Topics include:

» CECL

» Current ALLL best practices

» Stress Testing

• Speakers from CliftonLarsonAllen, Grant Thornton, Sageworks and more

• sageworks.com/summit

Q&A, Contact Information.

39

GARVER MOORERisk Management [email protected] ext. 2720

BRANDON RUSSELLALLL [email protected] ext. 2537

Thought leader to help

you navigate changing

regulatory landscape

Responsive service

& support from

product experts

Insight into the best

practices & templates

used at 1,000+ financial

institutions

Eliminate data entry with

the Electronic Tax Return

Reader, core integrations &

credit bureau debt

Integrated platform for the

customer lifecycle

Exclusive benchmarks &

risk models to support

decision-making

Sageworks Advisory Services.

Use Sageworks as a partner and an extension of your team. Leverage industry expertise and market experience for various projects that

arise within your institution.

Services include:

• CECL Transition Assistance

• Analytics Support

• Data Auditing

• Peer Analysis

• Segmentation Analysis

• Qualitative Component Analysis

• Policy and Process Review

• Concentration Reporting

• Stress Testing Board Reports

• Management Reporting

• Staff Enablement

• Board Training

“Sageworks is unlike many of the other financial software providers out there, who are represented by individuals terrific at navigating through their products, but have little depth of subject matter expertise beyond that.

Sageworks offers consultants that are truly experts in not only the intricacies of their products, but also in the associated and underlying standards, accounting guidance and regulatory requirements. These consultants have been and continue to be a tremendous resource every step of the way – from initial product implementation and training to ongoing support.”

Franklin Synergy Bank

Additional Resources.

• ALLL.com – Everything ALLL, including news articles, whitepapers, and peer discussions

• ALLL Forum for Bankers – LinkedIn group for ALLL news & discussion

• FASB’s CECL Prep Kit - complimentary toolkit, to help you better prepare

• Interested in talking with a specialist?

» Email us now: [email protected] or [email protected]

41

Sageworks ALLL.

Sageworks ALLL gives banks and credit unions a consistent and defensible allowance for loan and lease losses methodology, proven to satisfy auditors, examiners and the board.

• Spend 80% less time on your ALLL each quarter

• Partner with the industry leader for CECL

• Reduce manual errors and examiner criticism

• View more solution information

42

THE MOST TRUSTED ALLL SOLUTION IN BANKING

“Previously with Excel, if we wanted to look at a monthly interim calculation, we would have to run the core reports and manually input them. With Sageworks, the numbers are inside the software and available with just a few clicks of a button – giving us significant quarterly time-savings.“

Lugie BrownSenior Vice PresidentFirst American National Bank