migration analysis effective alll

Date of last revision: June 6, 2014

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 for bankers, including whitepapers,

webinars, videos, and templates—accessible at

www.sageworksanalyst.com

Ed Bayer: Managing Director

of Financial Markets

Garrett Morris: Senior Risk

Management Consultant

What is Migration Analysis?

Examples

What Regulation Says

Preparing for Migration Analysis

Benefits of the Methodology

Migration Analysis & CECL

Why many banks do NOT currently use migration analysis

How an automated ALLL solution can help

Migration analysis is a methodology that evaluates a pool of

loans to default or loss over a certain time frame

How is it different from other methodologies: ◦ Historical Loss

◦ Peer Group Data/Call Report

◦ Probability of Default/Loss Given Default

Used by banks able to handle extended loan level gathering

requirements ◦ Adequate number of loans in each pool is necessary

Archived quarterly periods

Individual: ◦ Loan balance

◦ Segmentation

◦ Risk rating/level

◦ Full & partial charge-offs

◦ (Optional) Days past due

Segmentation of loan portfolio into pools

Gather historical loan data

Track individual loans to loss over a selected time horizon

through chosen sub-segments

Apply and document calculated loss rate to today’s sub-

segmentation balances

Detailed sub-segmentation is required to accurately measure

migration

◦ Segment into homogenous pools

◦ Sub-segment by risk level, risk rating, or days past due

Accurately and consistently enforced loan review process

When segments change due to reorganization or merger,

those changes must be pushed back in time

Loss horizons

◦ Segments perform differently over time and may need different

migration periods

Does not specify one, best, method for determining historical loss

experience

“… depends to a large degree upon the capabilities of its

information systems”

Does encourage a “comprehensive” approach, which requires

more robust data and analysis to increase accuracy

Bolster your risk rating system

Set up processes to collect sufficiently granular data

Assure loan-level historical data is accurate

Invest in technologies equipped to manage and deploy as needed

Run multiple scenarios to understand the impact of switching to

migration analysis before switching entirely.

Examiners see it as a more sophisticated methodology

More granular, with extensive segmentation of the portfolio

Should result in a more accurate allowance

Insight into changes in portfolio composition and credit quality

deterioration

Migration analysis adjusts the ALLL provision to reflect the

conditions of the current portfolio

Can more effectively justify a decrease in provisions, if

merited ◦ Subjects institution to less examiner scrutiny

Can drive pro forma projections

Current Historical Loss Rates Future Expected Loss Rates

Data required each quarter Data required each quarter

Charge-offs Charge-offs

Recoveries Recoveries

Aggregate pool data Aggregate pool data

Beginning balance pool Beginning balance pool

Ending balance pool Ending balance pool

Risk rating by individual loan

Individual loan balance

Individual loan charge-offs &

recoveries (partial + full)

Loan duration

Insufficient data history

24%

Not enforced by my

examiners 20% Portfolio

size limitations

13%

Insufficient capabilities to

run 24%

Don't fully understand

19%

Why is your financial institution not using migration analysis?

Difficult to manage in spreadsheets & without due resources

Requires significantly more granular, loan-level data

◦ 1,000 loans require 36,000 lines of data for three year’s worth of

analysis

Portfolios must have sufficient volume to allow for sub-

segmenting—difficult for small institutions

Requires historical, high-quality data and well-managed risk

rating system

Advent of automated ALLL solutions have made process of

migration analysis much easier

Save time in data aggregation and entry

Reduce manual errors in calculations

Generate documentation

Reduce examiner criticism

Benefits

Examiners believe it’s more

sophisticated

More granular

Highlights changes in portfolio

composition and quality

Can drive pro forma projections

Can more effectively justify a

decrease in provisions, if

merited

Assist in preparing for FASB’s

CECL

Challenges

Difficult in spreadsheets

Requires more granular data

Portfolios have to have

sufficient volume

Requires historical, high-quality

data and well-managed risk

rating system

ALLL & stress testing presentations, panels, group discussion

and networking

More info: web.sageworks.com/summit

Ed Bayer Managing Director – Financial Markets

Ed.bayer@sageworks.com

Garrett Morris Senior Risk Management Consultant

Garrett.morris@sageworks.com

Additional resources:

◦ Whitepapers, archived webinars and more: www.sageworksanalyst.com

◦ LinkedIn Group: “ALLL Forum for Bankers”

◦ Risk Management Summit: web.sageworks.com/summit