ALLOWANCE FOR LOAN AND LEASE LOSSES

54268

Federal Register / Vol. 65, No. 174 / Thursday, September 7, 2000 / Notices

1 The FFIEC consists of representatives from the

Board of Governors of the Federal Reserve System

(FRB), the Federal Deposit Insurance Corporation

(FDIC), the Office of the Comptroller of the

Currency (OCC), the Office of Thrift Supervision

(OTS) (referred to as the ‘‘banking agencies’’), and

the National Credit Union Administration.

However, this guidance is not directed to credit

unions.

not-for-profit institutions, and state,

local or tribal government.

Number of Respondents: 934.

Estimated Time Per Response: 1 hour.

Frequency of Response: On occasion

reporting requirement and

recordkeeping requirement.

Total Annual Burden: 934 hours.

Total Annual Cost: N/A.

Needs and Uses: This collection is

necessary to: lessen the administrative

burden of licensees; determine the

partitioned service areas and geographic

area licensee’s remaining service area of

parties to an agreeement; determine

whether geographic area licensee and

parties to agreements have met the

applicable coverage requirements for

their service areas; to determine

whether the applicant is eligible to

receive bidding credit as a small

business; determine the real parties

interest in any joint bidding agreements;

and determine the appropriate unjust

enrichment compensation to be remitted

to the government.

Federal Communications Commission.

Magalie Roman Salas,

Secretary.

[FR Doc. 00–22918 Filed 9–6–00; 8:45 am]

BILLING CODE 6712–01–P

FEDERAL ELECTION COMMISSION

Sunshine Act Meetings

AGENCY: Federal Election Commission.

DATE AND TIME: Tuesday, September 12,

2000, 10 a.m.

PLACE: 999 E Street, NW., Washington,

D.C.

STATUS: This meeting will be closed to

the public.

ITEMS TO BE DISCUSSED:

Compliance matters pursuant to 2

U.S.C. § 437g.

Audits conducted pursuant to 2

U.S.C. § 437g, § 438(b), and Title 26,

U.S.C.

Matters concerning participation in

civil actions or proceedings or

arbitration.

Internal personnel rules and

procedures or matters affecting a

particular employee

: 999 E Street, NW., Washington,

D.C.

STATUS: This meeting will be closed to

the public.

ITEMS TO BE DISCUSSED:

Compliance matters pursuant to 2

U.S.C. § 437g.

Audits conducted pursuant to 2

U.S.C. § 437g, § 438(b), and Title 26,

U.S.C.

Matters concerning participation in

civil actions or proceedings or

arbitration.

Internal personnel rules and

procedures or matters affecting a

particular employee.

DATE AND TIME: Thursday, September 14,

2000, 10 a.m.

PLACE: 999 E Street, NW., Washington,

DC (Ninth Floor).

STATUS: This meeting will be open to the

public.

ITEMS TO BE DISCUSSED:

Correction and Approval of Minutes.

Dole for President—Statement of

Reasons (LRA#467).

Dole/Kemp ’96, Inc.—Statement of

Reasons (LRA#506).

Buchanan for President, Inc.—

Statements of Reasons (LRA#512).

Advisory Opinion 2000–20:

Committee for Quality Cancer Care by

counsel, Brett G. Kappel.

Advisory Opinion 2000–22: Air

Transportation Association of America,

American Land Title Association,

Council of Insurance Agents and

Brokers, Independent Insurance Agents

of America, and the Society of

Independent Gasoline Marketers of

America by counsel, Scott A. Sinder and

Stephen Gold.

Revisions to Reporting Forms and

Instructions.

Explanation and Justification for

Revisions to FEC Reporting Forms.

Administrative Matters.

PERSON TO CONTACT FOR INFORMATION:

Mr. Ron Harris, Press Officer,

Telephone: (202) 694–1220.

Mary W. Dove,

Acting Secretary of the Commission.

[FR Doc. 00–23158 Filed 9–5–00; 3:30 pm]

BILLING CODE 6715–01–M

FEDERAL FINANCIAL INSTITUTIONS

EXAMINATION COUNCIL

Policy Statement on Allowance for

Loan and Lease Losses Methodologies

and Documentation for Banks and

Savings Institutions

AGENCY: Federal Financial Institutions

Examination Council.

ACTION: Proposed Policy Statement;

request for comment

ry W. Dove,

Acting Secretary of the Commission.

[FR Doc. 00–23158 Filed 9–5–00; 3:30 pm]

BILLING CODE 6715–01–M

FEDERAL FINANCIAL INSTITUTIONS

EXAMINATION COUNCIL

Policy Statement on Allowance for

Loan and Lease Losses Methodologies

and Documentation for Banks and

Savings Institutions

AGENCY: Federal Financial Institutions

Examination Council.

ACTION: Proposed Policy Statement;

request for comment.

SUMMARY: The Federal Financial

Institutions Examination Council

(FFIEC) 1 is requesting comments on a

proposed Policy Statement on

Allowance for Loan and Lease Losses

(ALLL) Methodologies and

Documentation for Banks and Savings

Institutions (Policy Statement). This

proposed Policy Statement is intended

to provide guidance on the design and

implementation of ALLL methodologies

and supporting documentation

practices.

DATES: Comments must be received by

November 6, 2000.

ADDRESSES: Comments should be

directed to Keith J. Todd, Executive

Secretary, Federal Financial Institutions

Examination Council, 2000 K Street,

N.W., Suite 310, Washington, DC 20006,

fax number: (202) 872–7501. Comments

will be available for public inspection

during regular business hours at the

above address. Appointments to inspect

comments are encouraged and can be

arranged by calling the FFIEC at (202)

872–7500.

FOR FURTHER INFORMATION CONTACT:

FDIC: Carol L. Liquori, Examination

Specialist, Division of Supervision,

(202) 898–7289, or Doris L. Marsh,

Examination Specialist, Division of

Supervision, (202) 898–8905, FDIC, 550

17th Street, N.W., Washington, DC

20429.

FRB: Linda V. Griffith, Supervisory

Financial Analyst, (202) 452–3506, or

Arthur Lindo, Supervisory Financial

Analyst, (202) 452–2695, Division of

Banking Supervision and Regulation,

Board of Governors of the Federal

Reserve System, 20th Street and

Constitution Avenue, N.W.,

Washington, DC 20551.

OCC: Richard Shack, Senior

Accountant, Chief Accountant’s Office,

Core Policy Division, (202) 874–5411, or

Louise A

Griffith, Supervisory

Financial Analyst, (202) 452–3506, or

Arthur Lindo, Supervisory Financial

Analyst, (202) 452–2695, Division of

Banking Supervision and Regulation,

Board of Governors of the Federal

Reserve System, 20th Street and

Constitution Avenue, N.W.,

Washington, DC 20551.

OCC: Richard Shack, Senior

Accountant, Chief Accountant’s Office,

Core Policy Division, (202) 874–5411, or

Louise A. Francis, National Bank

Examiner, Chief Accountant’s Office,

Core Policy Division, (202) 874–1306,

Office of the Comptroller of the

Currency, 250 E Street, S.W.,

Washington, DC 20219.

OTS: William Magrini, Policy

Analyst, Policy Division, (202) 906–

5744, or Harrison E. Greene, Jr.,

Securities Accountant, Accounting

Policy Division, (202) 906–7933, Office

of Thrift Supervision, 1700 G Street,

N.W., Washington, DC 20552.

SUPPLEMENTARY INFORMATION:

I. Background

On March 10, 1999, the Federal

Deposit Insurance Corporation, the

Federal Reserve Board, the Office of the

Comptroller of the Currency, the Office

of Thrift Supervision, and the Securities

and Exchange Commission (together,

the Agencies) issued a joint letter to

financial institutions on the allowance

for loan and lease losses (the Joint

Letter). In the Joint Letter, the Agencies

agreed to establish a Joint Working

Group to study ALLL issues and to

assist financial institutions by providing

them with improved guidance on this

topic. The Agencies agreed that the Joint

Working Group would develop and

issue parallel guidance for two key areas

regarding the ALLL:

• Appropriate methodologies and

supporting documentation, and

• Enhanced disclosures.

This proposed Policy Statement

represents the banking agencies’

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gencies agreed that the Joint

Working Group would develop and

issue parallel guidance for two key areas

regarding the ALLL:

• Appropriate methodologies and

supporting documentation, and

• Enhanced disclosures.

This proposed Policy Statement

represents the banking agencies’

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54269

Federal Register / Vol. 65, No. 174 / Thursday, September 7, 2000 / Notices

2 The American Institute of Certified Public

Accountants is developing more specific guidance

on the accounting for loan losses and the

techniques for measuring probable incurred loss in

a loan portfolio. This guidance is expected to be

released in final form in 2001.

3 Institutions should refer to the guidelines

adopted by their primary federal regulator as

follows: For national banks, Appendix A to Part 30;

for state member banks, Appendix D to Part 208;

for state nonmember banks, Appendix A to Part

364; for savings associations, Appendix A to Part

570.

4 A bibliography is attached that lists applicable

ALLL GAAP guidance, interagency policy

statements, and other reference materials that may

assist in understanding and implementing an ALLL

in accordance with GAAP. See Appendix B for

additional information on applying GAAP to

determine the ALLL.

guidance to banks and savings

institutions relating to methodologies

and supporting documentation for the

ALLL. The Securities and Exchange

Commission staff is planning to provide

parallel guidance on this topic for

public companies in a future Staff

Accounting Bulletin.2

This Policy Statement clarifies the

banking agencies’ expectations

regarding methodologies and

documentation support for the ALLL

from a generally accepted accounting

principles (GAAP) perspective. For

financial reporting purposes, including

regulatory reporting, the provision for

loan and lease losses and the ALLL

must be determined in accordance with

GAAP and supervisory guidance

ting Bulletin.2

This Policy Statement clarifies the

banking agencies’ expectations

regarding methodologies and

documentation support for the ALLL

from a generally accepted accounting

principles (GAAP) perspective. For

financial reporting purposes, including

regulatory reporting, the provision for

loan and lease losses and the ALLL

must be determined in accordance with

GAAP and supervisory guidance. GAAP

requires that an institution maintain

written documentation to support the

amounts of the ALLL and the provision

for loan and lease losses reported in the

financial statements.

The proposal is not intended to

change existing accounting guidance in,

or modify the documentation

requirements of, GAAP or guidance

provided in the relevant joint

interagency statements issued by the

Agencies. It is intended to supplement,

not replace, the guidance the banking

agencies provided in their Interagency

Policy Statement on the Allowance for

Loan and Lease Losses, which was

issued in December 1993. It is also

intended to supplement guidance the

banking agencies provided in their

interagency guidelines establishing

standards for safety and soundness that

were issued in 1995 and 1996 pursuant

to Section 39 of the Federal Deposit

Insurance Act (FDI Act).3 Under the

guidelines for asset quality, each

institution should estimate and

establish a sufficient ALLL supported by

adequate documentation. The proposed

Policy Statement does not address or

change current guidance regarding loan

charge-offs; therefore, institutions

should continue to follow existing

regulatory guidance that addresses the

timing of charge-offs.

The guidance in this Policy Statement

recognizes that institutions should

adopt methodologies and

documentation practices that are

appropriate for their size and

complexity. For smaller institutions

with fewer and less complex loan

products, the amount of supporting

documentation for the ALLL may be less

exhaustive than for larger institutions

ory guidance that addresses the

timing of charge-offs.

The guidance in this Policy Statement

recognizes that institutions should

adopt methodologies and

documentation practices that are

appropriate for their size and

complexity. For smaller institutions

with fewer and less complex loan

products, the amount of supporting

documentation for the ALLL may be less

exhaustive than for larger institutions.

Recognizing that a primary mission of

the banking agencies is to support a safe

and sound banking system, examiners

will continue to evaluate the overall

adequacy of the ALLL, including the

adequacy of supporting documentation,

to ensure that it is appropriate. While

the proposed Policy Statement generally

does not provide guidance to examiners

in conducting safety and soundness

examinations, examiners may criticize

institutions that fail to document and

maintain an adequate ALLL in

accordance with this Policy Statement

and other banking agency guidance. In

such cases, institution management may

be cited for engaging in unsafe and

unsound banking practices and may be

subject to further supervisory action.

II. Principal Elements of the Policy

Statement

The proposed Policy Statement

clarifies that the board of directors of

each institution is responsible for

ensuring that controls are in place to

determine the appropriate level of the

ALLL. It also emphasizes the banking

agencies’ long-standing position that

institutions should maintain and

support the ALLL with documentation

that is consistent with their stated

policies and procedures, GAAP, and

applicable supervisory guidance.

The proposed Policy Statement

provides guidance on significant aspects

of ALLL methodologies and

documentation practices. Specifically,

the proposal provides guidance on

maintaining and documenting policies

and procedures that are appropriately

tailored to the size and complexity of

the institution and its loan portfolio

ir stated

policies and procedures, GAAP, and

applicable supervisory guidance.

The proposed Policy Statement

provides guidance on significant aspects

of ALLL methodologies and

documentation practices. Specifically,

the proposal provides guidance on

maintaining and documenting policies

and procedures that are appropriately

tailored to the size and complexity of

the institution and its loan portfolio.

The proposed Policy Statement notes

that it is critical for an institution’s

ALLL methodology to incorporate

management’s current judgments about

the credit quality of the loan portfolio.

The methodology must be a thorough,

disciplined, and consistently applied

process that is reviewed and approved

by the institution’s board of directors.

The proposal also discusses the

methodology and documentation

needed to support ALLL estimates

prepared in accordance with GAAP,

which requires loss estimates based

upon reviews of individual loans and

groups of loans. After determining the

allowance on individually reviewed

loans and groups of loans, the proposal

states that management should

consolidate these loss estimates and

summarize the amount to be reported in

the financial statements for the ALLL.

To verify that the ALLL methodology is

effective and conforms to GAAP and

supervisory guidance, a review of the

methodology and its application should

be completed by external or internal

auditors or some other party unrelated

to the ALLL process, as appropriate for

the size and complexity of the

institution.

The proposal includes illustrations of

implementation practices that

institutions may find useful for

enhancing their own ALLL practices, an

appendix that provides examples of

certain key aspects of ALLL guidance, a

summary of applicable GAAP guidance,

and a bibliographical list of relevant

GAAP guidance, joint interagency

statements, and other literature on ALLL

issues.

III. Comments

Comment is requested on all aspects

of the proposed Policy Statement.

IV

ces that

institutions may find useful for

enhancing their own ALLL practices, an

appendix that provides examples of

certain key aspects of ALLL guidance, a

summary of applicable GAAP guidance,

and a bibliographical list of relevant

GAAP guidance, joint interagency

statements, and other literature on ALLL

issues.

III. Comments

Comment is requested on all aspects

of the proposed Policy Statement.

IV. Paperwork Reduction Act

In accordance with the Paperwork

Reduction Act of 1995 (44 U.S.C.

chapter 35), the banking agencies have

reviewed the proposed Policy Statement

and determined that it does not add any

collections of information pursuant to

the Act.

V. Proposed Policy Statement

The text of the proposed Policy

Statement follows:

Policy Statement on Allowance for Loan and

Lease Losses Methodologies and

Documentation for Banks and Savings

Institutions

Boards of directors of banks and savings

institutions are responsible for ensuring that

their institutions have controls in place to

consistently determine the allowance for loan

and lease losses (ALLL) in accordance with

the institutions’ stated policies and

procedures, generally accepted accounting

principles (GAAP), and ALLL supervisory

guidance.4 To fulfill this responsibility,

boards of directors instruct management to

develop and maintain an appropriate,

systematic, and consistently applied process

to determine the amounts of the ALLL and

provisions for loan losses. Management

should create and implement suitable

policies and procedures to communicate the

ALLL process internally to all applicable

personnel. By creating an environment that

encourages personnel to follow these policies

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amounts of the ALLL and

provisions for loan losses. Management

should create and implement suitable

policies and procedures to communicate the

ALLL process internally to all applicable

personnel. By creating an environment that

encourages personnel to follow these policies

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54270

Federal Register / Vol. 65, No. 174 / Thursday, September 7, 2000 / Notices

5 While all institutions are encouraged to

establish audit committees, small institutions

without audit committees should have the board of

directors assume this responsibility.

6 Institutions and their auditors should refer to

Statement on Auditing Standards No. 61,

Communication With Audit Committees (as

amended by Statement on Auditing Standards No.

90, Audit Committee Communications), which

requires certain discussions between the auditor

and the audit committee. These discussions should

include items, such as accounting policies and

estimates, judgments, and uncertainties, that have

a significant impact on the accounting information

included in the financial statements.

7 The banking agencies are the Federal Deposit

Insurance Corporation, the Federal Reserve Board,

the Office of the Comptroller of the Currency, and

the Office of Thrift Supervision.

8 Institutions should refer to the guidelines

adopted by their primary federal regulator as

follows: For national banks, Appendix A to Part 30;

for state member banks, Appendix D to Part 208;

for state nonmember banks, Appendix A to Part

364; for savings associations, Appendix A to Part

570.

9 This position is fully described for public

companies in the Securities and Exchange

Commission’s (SEC) Financial Reporting Release

No. 28 (FRR 28), in which the SEC indicates that

the books and records of public companies engaged

in lending activities should include documentation

of the rationale supporting each period’s

determination that the ALLL and provision

amounts reported were adequate

.

9 This position is fully described for public

companies in the Securities and Exchange

Commission’s (SEC) Financial Reporting Release

No. 28 (FRR 28), in which the SEC indicates that

the books and records of public companies engaged

in lending activities should include documentation

of the rationale supporting each period’s

determination that the ALLL and provision

amounts reported were adequate.

10 Further explanation is presented in the

Methodology section that appears below.

11 11 In addition to the supporting documentation

requirements for financial institutions, as described

in interagency asset quality guidelines, public

companies are required to comply with the books

and records provisions of the Securities Exchange

Act of 1934 (Exchange Act). Under Sections

13(b)(2)–(7) of the Exchange Act, registrants must

make and keep books, records, and accounts,

which, in reasonable detail, accurately and fairly

reflect the transactions and dispositions of assets of

the registrant. Registrants also must maintain

internal accounting controls that are sufficient to

provide reasonable assurances that, among other

things, transactions are recorded as necessary to

permit the preparation of financial statements in

conformity with GAAP. See also SEC Staff

Accounting Bulletin No. 99, Materiality.

and procedures, management improves

procedural discipline and compliance.

The determination of the amounts of the

ALLL and provisions for loan and lease

losses should be based on management’s

current judgments about the credit quality of

the loan portfolio, and should consider all

known relevant internal and external factors

that affect loan collectibility as of the

reporting date. The ALLL methodology, the

associated policies and procedures, and the

amounts to be reported each period for the

provision for loan and lease losses and ALLL

should be reviewed and approved by the

board of directors

judgments about the credit quality of

the loan portfolio, and should consider all

known relevant internal and external factors

that affect loan collectibility as of the

reporting date. The ALLL methodology, the

associated policies and procedures, and the

amounts to be reported each period for the

provision for loan and lease losses and ALLL

should be reviewed and approved by the

board of directors. To ensure the

methodology remains appropriate for the

institution, the board of directors should

have the methodology periodically validated

and, if appropriate, revised. The board of

directors’ audit committee 5 should oversee

and monitor the internal controls over the

ALLL determination process.6

The banking agencies’ 7 have long-standing

examination policies that call for examiners

to review an institution’s lending and loan

review functions and recommend

improvements, if needed. Additionally, in

1995 and 1996, the banking agencies adopted

interagency guidelines establishing standards

for safety and soundness, pursuant to Section

39 of the Federal Deposit Insurance Act (FDI

Act).8 The interagency asset quality

guidelines and the guidance in this paper

assist an institution in estimating and

establishing a sufficient ALLL supported by

adequate documentation, as required under

the FDI Act. Additionally, the guidelines

require operational and managerial standards

that are appropriate for an institution’s size

and the nature and scope of its activities.

For financial reporting purposes, including

regulatory reporting, the provision for loan

and lease losses and the ALLL must be

determined in accordance with GAAP. GAAP

requires that allowances be well

documented, with clear explanations of the

supporting analyses and rationale. This

Policy Statement describes but does not

increase the documentation requirements

already existing within GAAP. Failure to

maintain, analyze, or support an adequate

ALLL in accordance with GAAP and

supervisory guidance is generally an unsafe

and unsound banking practice

with GAAP. GAAP

requires that allowances be well

documented, with clear explanations of the

supporting analyses and rationale. This

Policy Statement describes but does not

increase the documentation requirements

already existing within GAAP. Failure to

maintain, analyze, or support an adequate

ALLL in accordance with GAAP and

supervisory guidance is generally an unsafe

and unsound banking practice.

This guidance applies equally to all

institutions, regardless of the size. Because of

their less complex lending activities and

products, smaller institutions may find it

more efficient to combine a number of

procedures (e.g., information gathering,

documentation, and internal approval

processes) while continuing to ensure the

institution has a consistent and appropriate

methodology. Thus, much of the

documentation that a larger institution might

retain in support of the allowance may be

combined into fewer supporting documents

in a smaller institution. For example,

simplified documentation can include

spreadsheets, check lists, and other summary

documents that many institutions currently

use. Illustrations A and C provide specific

examples of how smaller institutions may

determine and document portions of their

loan loss allowance.

Documentation Standards

Appropriate written supporting

documentation facilitates review of the ALLL

process and reported amounts, builds

discipline into the ALLL determination

process, and improves the process for

estimating loan and lease losses by helping

to ensure that all relevant factors are

appropriately considered in the ALLL

analysis. An institution should document the

relationship between the findings of its

detailed review of the loan portfolio and the

amount of the ALLL and the provision for

loan and lease losses reported in each

period.9

At a minimum, institutions should

maintain written supporting documentation

for the following decisions, strategies, and

processes:

(1) Policies and procedures:

(a) Over the systems and controls that

maintain an appropriate ALLL and

ship between the findings of its

detailed review of the loan portfolio and the

amount of the ALLL and the provision for

loan and lease losses reported in each

period.9

At a minimum, institutions should

maintain written supporting documentation

for the following decisions, strategies, and

processes:

(1) Policies and procedures:

(a) Over the systems and controls that

maintain an appropriate ALLL and

(b) Over the ALLL methodology,

(2) Loan grading system or process,

(3) Summary or ‘‘roll-up’’ of the ALLL

balance,

(4) Validation of the ALLL methodology,

and

(5) Justification for periodic adjustments to

the ALLL process.

The following sections of this Policy

Statement provide guidance on significant

aspects of ALLL methodologies and

documentation practices. Specifically, the

paper provides guidance on:

(1) Policies and Procedures,

(2) Methodology,

(3) ALLL Under Financial Accounting

Standards Board (FASB) Statement of

Financial Accounting Standards No. 114,

Accounting by Creditors for Impairment of a

Loan (FAS 114),

(4) ALLL Under FASB Statement of

Financial Accounting Standards No. 5,

Accounting for Contingencies (FAS 5),

(5) Consolidating the Loss Estimates, and

(6) Validating the ALLL Methodology.

Policies and Procedures

Financial institutions utilize a wide range

of policies, procedures, and control systems

in their ALLL process. Sound policies should

be appropriately tailored to the size and

complexity of the institution and its loan

portfolio.

An institution’s written policies and

procedures for the systems and controls that

maintain an appropriate ALLL should

address but not be limited to:

(1) The roles and responsibilities of the

institution’s departments and personnel

(including the lending function, credit

review, financial reporting, internal audit,

senior management, audit committee, board

of directors, and others, as applicable) who

determine the ALLL to be reported in the

financial statements;

nd controls that

maintain an appropriate ALLL should

address but not be limited to:

(1) The roles and responsibilities of the

institution’s departments and personnel

(including the lending function, credit

review, financial reporting, internal audit,

senior management, audit committee, board

of directors, and others, as applicable) who

determine the ALLL to be reported in the

financial statements;

(2) The institution’s accounting policies for

loans and loan losses, including the policies

for charge-offs and recoveries and for

estimating the fair value of collateral, where

applicable;

(3) The description of the institution’s

systematic methodology, which should be

consistent with the institution’s accounting

policies for determining its ALLL; 10 and

(4) The system of internal controls used to

ensure that the ALLL process is maintained

in accordance with GAAP and supervisory

guidance.

An internal control system for the ALLL

estimation process should:

(1) Include measures to ensure the

reliability and integrity of information and

compliance with laws, regulations, and

internal policies and procedures;

(2) Ensure that the institution’s financial

statements (including regulatory reports) are

prepared in accordance with GAAP and

ALLL supervisory guidance; 11 and

(3) Include a well-defined loan review

process containing:

(a) An effective loan grading system that is

consistently applied, identifies differing risk

characteristics and loan quality problems

accurately and in a timely manner, and

prompts appropriate administrative actions;

ancial

statements (including regulatory reports) are

prepared in accordance with GAAP and

ALLL supervisory guidance; 11 and

(3) Include a well-defined loan review

process containing:

(a) An effective loan grading system that is

consistently applied, identifies differing risk

characteristics and loan quality problems

accurately and in a timely manner, and

prompts appropriate administrative actions;

(b) Sufficient internal controls to ensure

that all relevant loan review information is

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54271

Federal Register / Vol. 65, No. 174 / Thursday, September 7, 2000 / Notices

12 Also, refer to paragraph 7.05 of the American

Institute of Certified Public Accountants’ (AICPA)

Audit and Accounting Guide, Banks and Savings

Institutions, 1999 edition (AICPA Audit Guide).

13 The referenced ‘‘gray box’’ illustrations are

presented to assist institutions in evaluating how to

implement the guidance provided in this document.

The methods described in the illustrations may not

be suitable for all institutions and are not

considered required processes or actions. For

additional descriptions of key aspects of ALLL

guidance, a series of ALLL Questions and Answers

(Q&As) are included in Appendix A of this paper.

appropriately considered in estimating

losses. This includes maintaining appropriate

reports, details of reviews performed, and

identification of personnel involved; and

itable for all institutions and are not

considered required processes or actions. For

additional descriptions of key aspects of ALLL

guidance, a series of ALLL Questions and Answers

(Q&As) are included in Appendix A of this paper.

appropriately considered in estimating

losses. This includes maintaining appropriate

reports, details of reviews performed, and

identification of personnel involved; and

(c) Clear formal communication and

coordination between an institution’s credit

administration function, financial reporting

group, management, board of directors, and

others who are involved in the ALLL

determination process (e.g., written policies

and procedures, management reports, audit

programs, and committee minutes).

Methodology

An ALLL methodology is a system that an

institution designs and implements to

reasonably estimate loan and lease losses as

of the financial statement date. It is critical

that ALLL methodologies incorporate

management’s current judgments about the

credit quality of the loan portfolio through a

disciplined and consistently applied process.

An institution’s ALLL methodology is

influenced by institution-specific factors,

such as an institution’s size, organizational

structure, business environment and strategy,

management style, loan portfolio

characteristics, loan administration

procedures, and management information

systems. However, there are certain common

elements an institution should incorporate in

its ALLL methodology. A summary of

common elements is provided in Appendix

B.12

Documentation of ALLL Methodology in

Written Policies and Procedures

An institution’s formal policies and

procedures should describe the primary

elements of the institution’s ALLL

methodology. Such elements would include

portfolio segmentation, impairment

measurement, and loss rate determination.

Specifically, written policies and procedures

should describe the methodology:

(1) For segmenting the portfolio:

(a) How the segmentation process is

performed (i.e., by loan type, industry, risk

rates, etc.),

procedures should describe the primary

elements of the institution’s ALLL

methodology. Such elements would include

portfolio segmentation, impairment

measurement, and loss rate determination.

Specifically, written policies and procedures

should describe the methodology:

(1) For segmenting the portfolio:

(a) How the segmentation process is

performed (i.e., by loan type, industry, risk

rates, etc.),

(b) When a loan grading system is used to

segment the portfolio:

(i) The definitions of each loan grade,

(ii) A reconciliation of the internal loan

grades to supervisory loan grades, and

(iii) The delineation of responsibilities for

the loan grading system.

(2) For determining and measuring

impairment under FAS 114:

(a) The methods used to identify loans to

be analyzed individually;

(b) For individually reviewed loans that are

impaired, how the amount of any impairment

is determined and measured, including:

(i) Procedures describing the impairment

measurement techniques available and

(ii) Steps performed to determine which

technique is most appropriate in a given

situation.

(c) The methods used to determine

whether and how loans individually

evaluated under FAS 114, but not considered

to be individually impaired, should be

grouped with other loans that share common

characteristics for impairment evaluation

under FAS 5.

(3) For determining and measuring

impairment by applying loss rates to loan

balances under FAS 5:

(a) How loans with similar characteristics

are grouped to be evaluated for loan

collectibility (such as loan type, past-due

status, and risk);

(b) How historical loss rates are determined

and what factors are considered when

establishing appropriate time frames over

which to evaluate loss experience; and

For determining and measuring

impairment by applying loss rates to loan

balances under FAS 5:

(a) How loans with similar characteristics

are grouped to be evaluated for loan

collectibility (such as loan type, past-due

status, and risk);

(b) How historical loss rates are determined

and what factors are considered when

establishing appropriate time frames over

which to evaluate loss experience; and

(c) Descriptions of qualitative factors (e.g.,

changes in economic conditions) that may

affect loss rates or other loss measurements.

The supporting documents for the ALLL

may be integrated in an institution’s credit

files, loan review reports or worksheets,

board of directors’ and committee meeting

minutes, computer reports, or other

appropriate documents and files.

ALLL Under FAS 114

An institution’s ALLL methodology related

to FAS 114 loans begins with the use of its

normal loan review procedures to identify

whether a loan is impaired as defined by the

accounting standard. Institutions should

document:

(1) The method and process for identifying

loans to be evaluated under FAS 114 and

(2) The analysis that resulted in an

impairment decision for each loan and the

determination of the impairment

measurement method to be used (i.e., present

value of expected future cash flows, fair

value of collateral less costs to sell, or the

loan’s observable market price).

Once an institution has determined which

of the three available measurement methods

to use for an impaired loan under FAS 114,

it should maintain supporting documentation

as follows:

(1) When using the present value of

expected future cash flows method:

(a) The amount and timing of cash flows,

(b) The effective interest rate used to

discount the cash flows, and

(c) The basis for the determination of cash

flows, including consideration of current

environmental factors and other information

reflecting past events and current conditions.

(2) When using the fair value of collateral

method:

using the present value of

expected future cash flows method:

(a) The amount and timing of cash flows,

(b) The effective interest rate used to

discount the cash flows, and

(c) The basis for the determination of cash

flows, including consideration of current

environmental factors and other information

reflecting past events and current conditions.

(2) When using the fair value of collateral

method:

(a) How fair value was determined,

including the use of appraisals, valuation

assumptions, and calculations,

(b) The supporting rationale for

adjustments to appraised values, if any,

(c) The determination of costs to sell, if

applicable, and

(d) Appraisal quality and expertise of the

appraiser.

(3) When using the observable market price

of a loan method:

(a) The amount, source, and date of the

observable market price.

Illustration A describes a practice used by

a small financial institution to document its

FAS 114 measurement of impairment using

a comprehensive worksheet.13 Q&A #1 and

#2 in Appendix A provide examples of

applying and documenting impairment

measurement methods under FAS 114.

Begin Text Box—Illustration A

(Documenting an ALLL Under FAS 114,

Comprehensive worksheet for the impairment

measurement process): A small institution

utilizes a comprehensive worksheet for each

loan being reviewed individually under FAS

114. Each worksheet includes a description

of why the loan was selected for individual

review, the impairment measurement

technique used, the measurement

calculation, a comparison to the current loan

balance, and the amount of the ALLL for that

loan. The rationale for the impairment

measurement technique used (e.g., present

value of expected future cash flows,

observable market price of the loan, fair

value of the collateral) is also described on

the worksheet. End Text Box

Some loans that are evaluated individually

for impairment under FAS 114 may be fully

collateralized and therefore require no ALLL

and the amount of the ALLL for that

loan. The rationale for the impairment

measurement technique used (e.g., present

value of expected future cash flows,

observable market price of the loan, fair

value of the collateral) is also described on

the worksheet. End Text Box

Some loans that are evaluated individually

for impairment under FAS 114 may be fully

collateralized and therefore require no ALLL.

Q&A #3 in Appendix A presents an example

of an institution whose loan portfolio

includes fully collateralized loans and

describes the documentation maintained to

support the conclusion that no ALLL was

needed for those loans.

ALLL Under FAS 5

Segmenting the Portfolio

For loans evaluated on a group basis under

FAS 5, management should segment the loan

portfolio by identifying risk characteristics

that are common to groups of loans.

Institutions decide how to segment their loan

portfolios based on many factors, which vary

with their business strategies as well as their

information system capabilities. Smaller

institutions that are involved in less complex

activities often segment the portfolio into

broad loan categories. This method of

segmenting the portfolio is likely to be

appropriate in only the smallest of

institutions offering a narrow range of loan

products. Larger institutions typically offer a

more diverse and complex mix of loan

products. Such institutions may start by

segmenting the portfolio into major loan

types but typically have more detailed

information available that allows them to

further segregate the portfolio into product

line segments based on the risk

characteristics of each portfolio segment.

Regardless of the method used,

documentation should be maintained to

support that the loans in each segment have

similar attributes or characteristics.

As economic and other business conditions

change, institutions often modify their

business strategies, which may result in

adjustments to the way in which they

segment their loan portfolio for purposes of

estimating loan losses

h portfolio segment.

Regardless of the method used,

documentation should be maintained to

support that the loans in each segment have

similar attributes or characteristics.

As economic and other business conditions

change, institutions often modify their

business strategies, which may result in

adjustments to the way in which they

segment their loan portfolio for purposes of

estimating loan losses. Illustration B presents

an example in which an institution refined

its segmentation method to more effectively

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14 An example of a loan segment that does not

generally require an ALLL includes loans that are

fully secured by deposits maintained at the lending

institution.

15 Refer to paragraph 8(b) of FAS 5. Also, the

AICPA is currently developing a Statement of

Position that will provide more specific guidance

on accounting for loan losses.

16 Refer to paragraph 23 of FAS 5.

17 Refer to paragraph 7.13 in the AICPA Audit

Guide.

18 Subsequent to adjustments, there should be no

material differences between the consolidated loss

estimate, as determined by the methodology, and

the final ALLL balance reported in the financial

statements.

consider risk factors and maintains

documentation to support this change.

Begin Text Box—Illustration B

(Documenting Segmenting Practices,

Documenting a refinement in a segmentation

method): An institution with a significant

portfolio of consumer loans performed a

review of its ALLL methodology. The

institution had determined its ALLL based

upon historical loss rates in the overall

consumer portfolio. The ALLL methodology

was validated by comparing actual loss rates

(charge-offs) for the past two years to the

estimated loss rates

es,

Documenting a refinement in a segmentation

method): An institution with a significant

portfolio of consumer loans performed a

review of its ALLL methodology. The

institution had determined its ALLL based

upon historical loss rates in the overall

consumer portfolio. The ALLL methodology

was validated by comparing actual loss rates

(charge-offs) for the past two years to the

estimated loss rates. During this process, the

institution decided to evaluate loss rates on

an individual product basis (e.g., auto loans,

unsecured loans, or home equity loans). This

analysis disclosed significant differences in

the loss rates on different products. With this

additional information, the methodology was

amended in the current period to segment the

portfolio by product, resulting in a better

estimation of the loan losses associated with

the portfolio. To support this change in

segmentation practice, the credit review

committee records contain the analysis that

was used as a basis for the change and the

written report describing the need for the

change. End Text Box

Institutions use a variety of documents to

support the segmentation of their portfolios.

Some of these documents include:

(1) Loan trial balances by categories and

types of loans,

(2) Management reports about the mix of

loans in the portfolio,

(3) Delinquency and nonaccrual reports,

and

(4) A summary presentation of the results

of an internal or external loan grading

review.

Reports generated to assess the profitability

of a loan product line may be useful in

identifying areas in which to further segment

the portfolio.

Estimating Loss on Groups of Loans

Based on the segmentation of the portfolio,

an institution estimates the loan and lease

losses to determine the appropriate level of

the FAS 5 portion of the ALLL.14 For those

segments that require an ALLL, the

institution estimates the loan and lease

losses, on at least a quarterly basis, based

upon its ongoing loan review process and

analysis of loan performance

stimating Loss on Groups of Loans

Based on the segmentation of the portfolio,

an institution estimates the loan and lease

losses to determine the appropriate level of

the FAS 5 portion of the ALLL.14 For those

segments that require an ALLL, the

institution estimates the loan and lease

losses, on at least a quarterly basis, based

upon its ongoing loan review process and

analysis of loan performance. The institution

should follow a systematic and consistently

applied approach to select the most

appropriate loss measurement methods and

support its conclusions and rationale with

written documentation. Regardless of the

method used to determine loss rates, an

institution should demonstrate and

document that the loss rates used to estimate

the ALLL for each segment are determined in

accordance with GAAP as of the financial

statement date.15

One method of estimating loan losses for

groups of loans is through the application of

loss rates to the groups’ aggregate loan

balances. Such loss rates typically reflect

historical loan loss experience for each group

of loans, adjusted for relevant environmental

factors (e.g., industry, geographical,

economic, and political factors) over a

defined period of time. If an institution does

not have loss experience of its own, it may

be appropriate to reference the loss

experience of other institutions, provided

that the institution demonstrates that the

attributes of the loans in its portfolio segment

are similar to those of the loans included in

the portfolio of the institution providing the

loss experience.16 Institutions should

maintain supporting documentation for the

technique used to develop their loss rates,

including the period of time over which the

losses were incurred. Institutions that

determine losses based upon a range of loss

should maintain documentation to support

the identified range of loss and the rationale

used for determining which estimate is the

best estimate within the range of loan losses

ns should

maintain supporting documentation for the

technique used to develop their loss rates,

including the period of time over which the

losses were incurred. Institutions that

determine losses based upon a range of loss

should maintain documentation to support

the identified range of loss and the rationale

used for determining which estimate is the

best estimate within the range of loan losses.

An example of how a small institution

performs a comprehensive historical loss

analysis is provided as the first item in

Illustration C.

Begin Text Box—Illustration C

(Documenting Setting Loss Rates, First

Illustration, Comprehensive historical loss

analysis in a small institution): A small

institution determines its historical loss rates

based on annual loss rates over a three-year

historical period. The analysis is conducted

by type of loan and is further segmented by

originating branch office. The analysis

considers charge-offs and recoveries in

determining the loss rate. The institution also

considers the loss rates for each loan grade

and compares them to historical losses on

similarly rated loans in arriving at the

historical loss factor. The institution

maintains supporting documentation for its

loss factor analysis, including historical

losses by type of loan, originating branch

office, and loan grade for the three-year

period.

(Second Illustration, Adjustment of

historical rates for changes in local economic

conditions): An institution develops a factor

to adjust historical loss rates for its

assessment of the impact of changes in the

local economy. For example, when analyzing

the loss rate on commercial real estate loans,

the assessment identifies changes in recent

commercial building occupancy rates. The

institution generally finds the occupancy

statistics to be a good indicator of probable

losses on these types of loans. The institution

maintains documentation that summarizes

the relationship between current occupancy

rates and its loss experience

ple, when analyzing

the loss rate on commercial real estate loans,

the assessment identifies changes in recent

commercial building occupancy rates. The

institution generally finds the occupancy

statistics to be a good indicator of probable

losses on these types of loans. The institution

maintains documentation that summarizes

the relationship between current occupancy

rates and its loss experience. End Text Box

Before employing a loss estimation model,

an institution should evaluate and modify, as

needed, the model’s assumptions to ensure

that the resulting loss estimate is consistent

with GAAP. Institutions that use loss

estimation models typically document the

evaluation, the conclusions regarding the

appropriateness of estimating loan losses

with a model or other loss estimation tool,

and the support for adjustments to the model

or its results.

To adjust historical loss rates for current

conditions, institutions should consider

environmental factors and then document

which factors were used in the analysis.

Factors that should be considered in

adjusting historical loss rates include the

following: 17

(1) Levels of and trends in delinquencies

and impaired loans;

(2) Levels of and trends in charge-offs and

recoveries;

(3) Trends in volume and terms of loans;

(4) Effects of any changes in risk selection

and underwriting standards, and other

changes in lending policies, procedures, and

practices;

(5) Experience, ability, and depth of

lending management and other relevant staff;

(6) National and local economic trends and

conditions, and industry conditions; and

) Levels of and trends in charge-offs and

recoveries;

(3) Trends in volume and terms of loans;

(4) Effects of any changes in risk selection

and underwriting standards, and other

changes in lending policies, procedures, and

practices;

(5) Experience, ability, and depth of

lending management and other relevant staff;

(6) National and local economic trends and

conditions, and industry conditions; and

(7) Effects of changes in credit

concentrations.

For any adjustment of historical loss rates,

the institution should document that the

adjustment is necessary to reflect current

information, events, circumstances, and

conditions in the loss rates. The second item

in Illustration C provides an example of how

an institution adjusts its commercial real

estate historical loss rates for changes in local

economic conditions. Q&A #4 in Appendix A

provides an example of maintaining

supporting documentation for adjustments to

portfolio segment loss rates for an

environmental factor related to an economic

downturn in the borrower’s primary

industry. Q&A #5 in Appendix A describes

one institution’s process for determining and

documenting an ALLL for loans that are not

individually impaired but have

characteristics indicating there are loan

losses on a group basis.

Consolidating the Loss Estimates

To verify that ALLL balances are presented

fairly in accordance with GAAP and are

auditable, management should prepare a

document that summarizes the amount to be

reported in the financial statements for the

ALLL. The board of directors should review

and approve this summary.

Common elements in such summaries

include:

(1) An estimate of the probable loss or

range of loss incurred for each category

evaluated (e.g., individually evaluated

impaired loans, homogeneous pools, and

other groups of loans that are collectively

evaluated for impairment);

(2) The aggregate probable loss estimated

using the institution’s methodology;

(3) A summary of the current ALLL

balance;

(4) The amount, if any, by which the ALLL

is to be adjusted; 18 and

he probable loss or

range of loss incurred for each category

evaluated (e.g., individually evaluated

impaired loans, homogeneous pools, and

other groups of loans that are collectively

evaluated for impairment);

(2) The aggregate probable loss estimated

using the institution’s methodology;

(3) A summary of the current ALLL

balance;

(4) The amount, if any, by which the ALLL

is to be adjusted; 18 and

(5) Depending on the level of detail that

supports the ALLL analysis, detailed

subschedules of loss estimates that reconcile

to the summary schedule.

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Illustration D describes how institutions

may document their estimated ALLL by

adding comprehensive explanations to their

summary schedules.

Begin Text Box—Illustration D

(Consolidating Estimates, Descriptive

comments added to the consolidated ALLL

summary schedule): To simplify the

supporting documentation process and to

eliminate redundancy, some institutions

include detailed supporting information on

their summary schedules. For example, in

the summary schedule that presents FAS 114

allowances, some institutions describe their

policy for selecting loans for evaluation

under FAS 114. Institutions identify which

FAS 114 impairment measurement method

was used for each individually reviewed

impaired loan. Other items include brief

descriptions of loss factors for particular

segments of the loan portfolio, the basis for

adjustments to loss rates, and explanations

of changes in ALLL amounts from period to

period. End Text Box

Generally, an institution’s review and

approval process for the ALLL relies upon

the data provided in these consolidated

summaries

for each individually reviewed

impaired loan. Other items include brief

descriptions of loss factors for particular

segments of the loan portfolio, the basis for

adjustments to loss rates, and explanations

of changes in ALLL amounts from period to

period. End Text Box

Generally, an institution’s review and

approval process for the ALLL relies upon

the data provided in these consolidated

summaries. There may be instances in which

individuals or committees that review the

ALLL methodology and resulting allowance

balance identify adjustments that need to be

made to the loss estimates to provide a better

estimate of loan losses. These changes may

be due to information not known at the time

of the initial loss estimate (e.g., information

that surfaces after determining and adjusting,

as necessary, historical loss rates, or a recent

decline in the marketability of property after

conducting a FAS 114 valuation based upon

the fair value of collateral). It is important

that these adjustments are consistent with

GAAP and are reviewed and approved by

appropriate personnel. Additionally, the

summary should provide each subsequent

reviewer with an understanding of the

support behind these adjustments. Therefore,

management should document the nature of

any adjustments and the underlying rationale

for making the changes. This documentation

should be provided to those making the final

determination of the ALLL amount. Q&A #6

in Appendix A addresses the documentation

of the final amount of the ALLL.

Validating the ALLL Methodology

To verify that the ALLL methodology is

effective and conforms to GAAP and

supervisory guidance, an institution’s

directors should establish internal control

procedures, appropriate for the size and

complexity of the institution. These

procedures should include an independent

review of the methodology and its

application

documentation

of the final amount of the ALLL.

Validating the ALLL Methodology

To verify that the ALLL methodology is

effective and conforms to GAAP and

supervisory guidance, an institution’s

directors should establish internal control

procedures, appropriate for the size and

complexity of the institution. These

procedures should include an independent

review of the methodology and its

application.

In practice, financial institutions employ

numerous procedures when validating the

reasonableness of their ALLL methodology

and determining whether there may be

deficiencies in their overall methodology or

loan grading process. Examples are:

(1) A review of trends in loan volume,

delinquencies, restructurings, and

concentrations.

(2) A review of previous charge-off and

recovery history, including an evaluation of

the timeliness of the entries to record both

the charge-offs and the recoveries.

(3) A review by an independent party, such

as an independent loan review committee,

external auditors, or internal audit staff. This

often involves the independent party

reviewing, on a test basis, source documents

and underlying assumptions to determine

that the established methodology develops

reasonable loss estimates.

(4) An evaluation of the appraisal process

of the underlying collateral. This may be

accomplished by periodically comparing the

appraised value to the actual sales price on

selected properties sold.

Supporting Documentation for the Validation

Process

Management usually supports the

validation process with the workpapers from

the review of the ALLL function. Additional

documentation often includes the summary

findings of the independent third party

reviewer. The institution’s board of directors,

or its designee, reviews the findings and

acknowledges its review in its meeting

minutes. If the methodology is changed based

upon the findings of the validation process,

documentation that describes and supports

the changes should be maintained

ALLL function. Additional

documentation often includes the summary

findings of the independent third party

reviewer. The institution’s board of directors,

or its designee, reviews the findings and

acknowledges its review in its meeting

minutes. If the methodology is changed based

upon the findings of the validation process,

documentation that describes and supports

the changes should be maintained.

Appendix A.—ALLL Questions and

Answers

Q&A #1—ALLL Under FAS 114—Measuring

and Documenting Impairment

Facts: Approximately one-third of

Institution A’s commercial loan portfolio

consists of large balance, non-homogeneous

loans. Due to their large individual balances,

these loans meet the criteria under Institution

A’s policies and procedures for individual

review for impairment under FAS 114. Upon

review of the large balance loans, Institution

A determines that certain of the loans are

impaired as defined by FAS 114.

Question: For the commercial loans

reviewed under FAS 114 that are

individually impaired, how should

Institution A measure and document the

impairment on those loans? Can it use an

impairment measurement method other than

the methods allowed by FAS 114?

Interpretive Response: For those loans that

are reviewed individually under FAS 114

and considered individually impaired,

Institution A must use one of the methods for

measuring impairment that is specified by

FAS 114 (that is, the present value of

expected future cash flows, the loan’s

observable market price, or the fair value of

collateral). Accordingly, in the circumstances

described above, for the loans considered

individually impaired under FAS 114, it

would not be appropriate for Institution A to

choose a measurement method not

prescribed by FAS 114. For example, it

would not be appropriate to measure loan

impairment by applying a loss rate to each

loan based on the average historical loss

percentage for all of its commercial loans for

the past five years

mstances

described above, for the loans considered

individually impaired under FAS 114, it

would not be appropriate for Institution A to

choose a measurement method not

prescribed by FAS 114. For example, it

would not be appropriate to measure loan

impairment by applying a loss rate to each

loan based on the average historical loss

percentage for all of its commercial loans for

the past five years.

Institution A should maintain written

documentation to support its measurement of

loan impairment under FAS 114. If it uses

the present value of expected future cash

flows to measure impairment of a loan, it

should document the amount and timing of

cash flows, the effective interest rate used to

discount the cash flows, and the basis for the

determination of cash flows, including

consideration of current environmental

factors and other information reflecting past

events and current conditions. When using

the fair value of collateral to measure

impairment, Institution A should document

how it determined the fair value, including

the use of appraisals, valuation assumptions

and calculations, the supporting rationale for

adjustments to appraised values, if any, and

the determination of costs to sell, if

applicable. Similarly, Institution A should

document the amount, source, and date of

the observable market price of a loan, if that

method of measuring loan impairment is

used.

Q&A #2—ALLL Under FAS 114—Measuring

Impairment for a Collateral Dependent Loan

Facts: Institution B has a $10 million loan

outstanding to Company X that is secured by

real estate, which Institution B individually

evaluates under FAS 114 due to the loan’s

size. Company X is delinquent in its loan

payments under the terms of the loan

agreement. Accordingly, Institution B

determines that its loan to Company X is

impaired, as defined by FAS 114. Because

the loan is collateral dependent, Institution B

measures impairment of the loan based on

the fair value of the collateral

ate, which Institution B individually

evaluates under FAS 114 due to the loan’s

size. Company X is delinquent in its loan

payments under the terms of the loan

agreement. Accordingly, Institution B

determines that its loan to Company X is

impaired, as defined by FAS 114. Because

the loan is collateral dependent, Institution B

measures impairment of the loan based on

the fair value of the collateral. Institution B

determines that the most recent valuation of

the collateral was performed by an appraiser

eighteen months ago and, at that time, the

estimated value of the collateral (fair value

less costs to sell) was $12 million.

Institution B believes that many of the

assumptions that were used to value the

collateral eighteen months ago do not reflect

current market conditions and, therefore, the

appraiser’s valuation does not approximate

current fair value of the collateral. Several

buildings, which are comparable to the real

estate collateral, were recently completed in

the area, increasing vacancy rates, decreasing

lease rates, and attracting several tenants

away from the borrower. Accordingly, credit

review personnel at Institution B adjust

certain of the valuation assumptions to better

reflect the current market conditions as they

relate to the loan’s collateral. After adjusting

the collateral valuation assumptions, the

credit review department determines that the

current estimated fair value of the collateral,

less costs to sell, is $8 million. Given that the

recorded investment in the loan is $10

million, Institution B concludes that the loan

is impaired by $2 million and records an

allowance for loan losses of $2 million.

Question: What type of documentation

should Institution B maintain to support its

determination of the allowance for loan

losses of $2 million for the loan to Company

X?

Interpretive Response: Institution B should

document that it measured impairment of the

loan to Company X by using the fair value

of the loan’s collateral, less costs to sell,

which it estimated to be $8 million

ses of $2 million.

Question: What type of documentation

should Institution B maintain to support its

determination of the allowance for loan

losses of $2 million for the loan to Company

X?

Interpretive Response: Institution B should

document that it measured impairment of the

loan to Company X by using the fair value

of the loan’s collateral, less costs to sell,

which it estimated to be $8 million. This

documentation should include the

institution’s rationale and basis for the $8

million valuation, including the revised

valuation assumptions it used, the valuation

calculation, and the determination of costs to

sell, if applicable. Because Institution B

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Federal Register / Vol. 65, No. 174 / Thursday, September 7, 2000 / Notices

19 In accordance with the FFIEC’s Federal

Register Notice, Implementation Issues Arising

from FASB No. 114, ‘‘Accounting by Creditors for

Impairment of a Loan,’’ published February 10,

1995 (60 FR 7966, February 10, 1995), impaired,

collateral-dependent loans must be reported at the

fair value of collateral, less costs to sell, in

regulatory reports. This treatment is to be applied

to all collateral-dependent loans, regardless of type

of collateral.

20 These groups of loans do not include any loans

that have been individually reviewed for

impairment under FAS 114 and determined to be

impaired as defined by FAS 114.

arrived at the valuation of $8 million by

modifying an earlier appraisal, it should

document its rationale and basis for the

changes it made to the valuation assumptions

that resulted in the collateral value declining

from $12 million eighteen months ago to $8

million in the current period.19

Q&A #3—ALLL Under FAS 114—Fully

Collateralized Loans

Facts: Institution C has $10 million in

loans that are fully collateralized by highly

rated debt securities with readily

determinable market values

ts rationale and basis for the

changes it made to the valuation assumptions

that resulted in the collateral value declining

from $12 million eighteen months ago to $8

million in the current period.19

Q&A #3—ALLL Under FAS 114—Fully

Collateralized Loans

Facts: Institution C has $10 million in

loans that are fully collateralized by highly

rated debt securities with readily

determinable market values. The loan

agreement for each of these loans requires the

borrower to provide qualifying collateral

sufficient to maintain a loan-to-value ratio

with sufficient margin to absorb volatility in

the securities’ market prices. Institution C’s

collateral department has physical control of

the debt securities through safekeeping

arrangements. In addition, Institution C

perfected its security interest in the collateral

when the funds were originally distributed.

On a quarterly basis, Institution C’s credit

administration function determines the

market value of the collateral for each loan

using two independent market quotes and

compares the collateral value to the loan

carrying value. If there are any collateral

deficiencies, Institution C notifies the

borrower and requests that the borrower

immediately remedy the deficiency. Due in

part to its efficient operation, Institution C

has historically not incurred any material

losses on these loans. Institution C believes

these loans are fully-collateralized and

therefore does not maintain any ALLL

balance for these loans.

Question: What documentation does

Institution C maintain to adequately support

its determination that no allowance is needed

for this group of loans?

Interpretive Response: Institution C’s

management summary of the ALLL includes

documentation indicating that, in accordance

with the institution’s ALLL policy, the

collateral protection on these loans has been

verified by the institution, no probable loss

has been incurred, and no ALLL is necessary

aintain to adequately support

its determination that no allowance is needed

for this group of loans?

Interpretive Response: Institution C’s

management summary of the ALLL includes

documentation indicating that, in accordance

with the institution’s ALLL policy, the

collateral protection on these loans has been

verified by the institution, no probable loss

has been incurred, and no ALLL is necessary.

Documentation in Institution C’s loan files

includes the two independent market quotes

obtained each quarter for each loan’s

collateral amount, the documents evidencing

the perfection of the security interest in the

collateral, and other relevant supporting

documents. Additionally, Institution C’s

ALLL policy includes a discussion of how to

determine when a loan is considered ‘‘fully

collateralized’’ and does not require an

ALLL. The policy requires the following

factors, at a minimum, to be considered and

the institution’s findings concerning these

factors to be fully documented:

(1) Volatility of the market value of the

collateral

(2) Recency and reliability of the appraisal

or other valuation

(3) Recency of the bank or other third party

inspection of the collateral

(4) Historical losses on similar loans

(5) Confidence in the bank’s lien or

security position including appropriate:

(a) Type of security perfection (e.g.,

physical possession of collateral or secured

filing)

(b) Filing of security perfection (i.e., correct

documents and with the appropriate

officials), and

r other valuation

(3) Recency of the bank or other third party

inspection of the collateral

(4) Historical losses on similar loans

(5) Confidence in the bank’s lien or

security position including appropriate:

(a) Type of security perfection (e.g.,

physical possession of collateral or secured

filing)

(b) Filing of security perfection (i.e., correct

documents and with the appropriate

officials), and

(c) Relationship to other liens.

Q&A #4—ALLL Under FAS 5—Adjusting

Loss Rates

Facts: Institution D’s lending area includes

a metropolitan area that is financially

dependent upon the profitability of a number

of manufacturing businesses. These

businesses use highly specialized equipment

and significant quantities of rare metals in

the manufacturing process. Due to increased

low-cost foreign competition, several of the

parts suppliers servicing these manufacturing

firms declared bankruptcy. The foreign

suppliers have subsequently increased prices

and the manufacturing firms have suffered

from increased equipment maintenance costs

and smaller profit margins. Additionally, the

cost of the rare metals used in the

manufacturing process increased and has

now stabilized at double last year’s price.

Due to these events, the manufacturing

businesses are experiencing financial

difficulties and have recently announced

downsizing plans.

Although Institution D has yet to confirm

an increase in its loss experience as a result

of these events, management knows that the

institution lends to a significant number of

businesses and individuals whose repayment

ability depends upon the long-term viability

of the manufacturing businesses. Institution

D’s management has identified particular

segments of its commercial and consumer

customer bases that include borrowers highly

dependent upon sales or salary from the

manufacturing businesses. Institution D’s

management performs an analysis of the

affected portfolio segments to adjust its

historical loss rates used to determine the

ALLL

ng-term viability

of the manufacturing businesses. Institution

D’s management has identified particular

segments of its commercial and consumer

customer bases that include borrowers highly

dependent upon sales or salary from the

manufacturing businesses. Institution D’s

management performs an analysis of the

affected portfolio segments to adjust its

historical loss rates used to determine the

ALLL.

Question: How should Institution D

document its support for the loss rate

adjustments that result from considering

these manufacturing firms’ financial

downturns?

Interpretive Response: Institution D should

document its identification of the particular

segments of its commercial and consumer

loan portfolio for which it is probable that

the manufacturing business’ financial

downturn has resulted in loan losses. In

addition, Institution D should document its

analysis that resulted in the adjustments to

the loss rates for the affected portfolio

segments. As part of its documentation,

Institution D maintains copies of the

documents supporting the analysis,

including relevant newspaper articles,

economic reports, and economic data.

Because Institution D has had similar

situations in the past, its supporting

documentation also includes an analysis of

how the current situation compares to the

institution’s previous loss experiences in

similar circumstances. A summary of the

amount and rationale for the adjustment

factor is presented to the audit committee

and board for their review and approval prior

to the issuance of the financial statements.

Q&A #5—ALLL Under FAS 5—Estimating

Losses on Loans Individually Reviewed for

Impairment but Not Considered Individually

Impaired

Facts: Institution E has outstanding loans

of $2 million to Company Y and $1 million

to Company Z, both of which are paying as

agreed upon in the loan documents. The

institution’s ALLL policy specifies that all

loans greater than $750,000 must be

individually reviewed for impairment under

FAS 114

timating

Losses on Loans Individually Reviewed for

Impairment but Not Considered Individually

Impaired

Facts: Institution E has outstanding loans

of $2 million to Company Y and $1 million

to Company Z, both of which are paying as

agreed upon in the loan documents. The

institution’s ALLL policy specifies that all

loans greater than $750,000 must be

individually reviewed for impairment under

FAS 114. Company Y’s financial statements

reflect a strong net worth, good profits, and

ongoing ability to meet debt service

requirements. In contrast, recent information

indicates Company Z’s profitability is

declining and its cash flow is tight.

Accordingly, this loan is rated substandard

under the institution’s loan grading system.

Despite its concern, management believes

Company Z will resolve its problems and

determines that neither loan is individually

impaired as defined by FAS 114.

Institution E segments its loan portfolio to

estimate loan losses under FAS 5. Two of its

loan portfolio segments are Segment 1 and

Segment 2. The loan to Company Y has risk

characteristics similar to the loans included

in Segment 1 and the loan to Company Z has

risk characteristics similar to the loans

included in Segment 2.20

Question: How does Institution E

adequately support and document an ALLL

under FAS 5 for these loans that were

individually reviewed for impairment but are

not considered individually impaired?

Interpretive Response: In its determination

of the ALLL under FAS 5, Institution E

includes its loans to Company Y and

Company Z in the groups of loans with

similar characteristics (i.e., Segment 1 for

Company Y’s loan and Segment 2 for

Company Z’s loan). Management’s analyses

of Segment 1 and Segment 2 indicates that

it is probable that each segment includes

some losses, even though the losses cannot

be identified to one or more specific loans

he ALLL under FAS 5, Institution E

includes its loans to Company Y and

Company Z in the groups of loans with

similar characteristics (i.e., Segment 1 for

Company Y’s loan and Segment 2 for

Company Z’s loan). Management’s analyses

of Segment 1 and Segment 2 indicates that

it is probable that each segment includes

some losses, even though the losses cannot

be identified to one or more specific loans.

Management estimates that the use of its

historical loss rates for these two segments,

with adjustments for changes in

environmental factors, such as current local

economic conditions, provides a reasonable

estimate of the institution’s probable loan

losses in these segments.

Institution E documents its decision to

include its loans to Company Y and

Company Z in its determination of its ALLL

under FAS 5. It also documents the specific

characteristics of the loans that were the

basis for grouping these loans with other

loans in Segment 1 and Segment 2,

respectively. Institution E maintains

documentation to support its method of

estimating loan losses for Segment 1 and

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Federal Register / Vol. 65, No. 174 / Thursday, September 7, 2000 / Notices

21 This Appendix provides guidance on the ALLL

and does not address allowances for credit losses

for off-balance sheet instruments (e.g., loan

commitments, guarantees, and standby letters of

credit). Institutions should record liabilities for

these exposures in accordance with GAAP. Further

guidance on this topic is presented in the American

Institute of Certified Public Accountants’ Audit and

Accounting Guide, Banks and Savings Institutions

(AICPA Audit Guide). Additionally, this Appendix

does not address allowances or accounting for

assets or portions of assets sold with recourse,

which is described in Statement of Financial

Accounting Standards No

in accordance with GAAP. Further

guidance on this topic is presented in the American

Institute of Certified Public Accountants’ Audit and

Accounting Guide, Banks and Savings Institutions

(AICPA Audit Guide). Additionally, this Appendix

does not address allowances or accounting for

assets or portions of assets sold with recourse,

which is described in Statement of Financial

Accounting Standards No. 125, Accounting for

Transfers and Servicing of Financial Assets and

Extinguishments of Liabilities (FAS 125).

22 Refer to FASB Interpretation No. 14,

Reasonable Estimation of the Amount of a Loss, and

Emerging Issues Task Force Topick No. D–80,

Application of FASB Statements No. 5 and No. 114

to a Loan Portfolio (EITF Topic D–80).

23 EITF Topic D–80 includes additional guidance

on the requirements of FAS 5 and FAS 114 and how

they relate to each other. The AICPA is currently

developing a Statement of Position (SOP) that will

provide more specific guidance on accounting for

loan losses.

24 In addition, FAS 114 does not apply to loans

measured at fair value or at the lower of cost or fair

value, leases, or debt securities.

25 According to the Federal Financial Institutions

Examination Council’s Federal Register Notice,

Implementation Issues Arising from FASB

Statement No. 114, Accounting by Creditors for

Impairment of a Loan, published February 10, 1995,

institution-specific issues should be reviewed when

estimating loan losses under FAS 114. This analysis

should be conducted as part of the evaluation of

each individual loan reviewed under FAS 114 to

avoid potential ALLL layering.

26 Refer to paragraph 7.05 of the AICPA Audit

Guide.

Segment 2, including the average loss rate

used, the analysis of historical losses by loan

type and by internal risk rating, and support

for any adjustments to its historical loss rates.

The institution also maintains copies of the

economic and other reports that provided

source data

loan reviewed under FAS 114 to

avoid potential ALLL layering.

26 Refer to paragraph 7.05 of the AICPA Audit

Guide.

Segment 2, including the average loss rate

used, the analysis of historical losses by loan

type and by internal risk rating, and support

for any adjustments to its historical loss rates.

The institution also maintains copies of the

economic and other reports that provided

source data.

Q&A #6—Consolidating the Loss Estimates—

Documenting the Reported ALLL

Facts: Institution F determines its ALLL

using an established systematic process. The

accounting department prepares supporting

schedules that include the amount of each of

the components of the ALLL, as well as the

total ALLL amount, for review by senior

management and the Credit Committee.

Members of senior management and the

Credit Committee meet to discuss the ALLL.

During these discussions, they identify

changes to be made to certain of the ALLL

estimates. As a result of the adjustments

made by management, the total amount of the

ALLL changes. The supporting schedules are

not updated to reflect the adjustments made

by senior management and the Credit

Committee. When performing their audit of

the financial statements, the independent

accountants are provided with the original

ALLL supporting schedules that were

reviewed by management and the Credit

Committee, as well as a verbal explanation of

the changes made by management and the

Credit Committee when they met to discuss

the loan loss allowance.

Question: Are Institution F’s

documentation practices related to the

balance of its loan loss allowance

appropriate?

Interpretive Response: No. An institution

must maintain supporting documentation for

the loan loss allowance amount reported in

its financial statements

a verbal explanation of

the changes made by management and the

Credit Committee when they met to discuss

the loan loss allowance.

Question: Are Institution F’s

documentation practices related to the

balance of its loan loss allowance

appropriate?

Interpretive Response: No. An institution

must maintain supporting documentation for

the loan loss allowance amount reported in

its financial statements. An institution

should document not only the determination

of the ALLL using its methodology, but also

any subsequent adjustments to the amount of

the ALLL and the rationale for those

adjustments, such as adjustments made by

management or board committees as in the

circumstances described above.

Appendix B—Application of GAAP

An ALLL recorded pursuant to GAAP is an

institution’s best estimate of the probable

amount of loans and lease-financing

receivables that it will be unable to collect

based on current information and events.21 A

creditor should record an ALLL when the

criteria for accrual of a loss contingency as

set forth in GAAP have been met. Estimating

the amount of an ALLL involves a high

degree of management judgment and is

inevitably imprecise. Accordingly, an

institution may determine that the amount of

loss falls within a range. An institution

should record its best estimate within the

range of loan losses.22

Under GAAP, Statement of Financial

Accounting Standards No. 5, Accounting for

Contingencies (FAS 5), provides the basic

guidance for recognition of a loss

contingency, such as the collectibility of

loans (receivables), when it is probable that

a loss has been incurred and the amount can

be reasonably estimated. Statement of

Financial Accounting Standards No. 114,

Accounting by Creditors for Impairment of a

Loan (FAS 114) provides more specific

guidance about the measurement and

disclosure of impairment for certain types of

loans.23 Specifically, FAS 114 applies to

loans that are identified for evaluation on an

individual basis

able that

a loss has been incurred and the amount can

be reasonably estimated. Statement of

Financial Accounting Standards No. 114,

Accounting by Creditors for Impairment of a

Loan (FAS 114) provides more specific

guidance about the measurement and

disclosure of impairment for certain types of

loans.23 Specifically, FAS 114 applies to

loans that are identified for evaluation on an

individual basis. Loans are considered

impaired when, based on current information

and events, it is probable that the creditor

will be unable to collect all interest and

principal payments due according to the

contractual terms of the loan agreement.

For individually impaired loans, FAS 114

provides guidance on the acceptable methods

to measure impairment. Specifically, FAS

114 states that when a loan is impaired, a

creditor should measure impairment based

on the present value of expected future

principal and interest cash flows discounted

at the loan’s effective interest rate, except

that as a practical expedient, a creditor may

measure impairment based on a loan’s

observable market price or the fair value of

collateral, if the loan is collateral dependent.

When developing the estimate of expected

future cash flows for a loan, an institution

should consider all available information

reflecting past events and current conditions,

including the effect of existing environmental

factors. The following Illustration provides

an example of an institution estimating a

loan’s impairment when the loan has been

partially charged-off.

Begin Text Box—Illustration (Interaction of

FAS 114 With an Adversely Classified Loan,

Partial Charge-Off, and the Overall ALLL): An

institution determined that a collateral

dependent loan, which it identified for

evaluation, was impaired. In accordance with

FAS 114, the institution established an ALLL

for the amount that the recorded investment

in the loan exceeded the fair value of the

underlying collateral, less costs to sell

eraction of

FAS 114 With an Adversely Classified Loan,

Partial Charge-Off, and the Overall ALLL): An

institution determined that a collateral

dependent loan, which it identified for

evaluation, was impaired. In accordance with

FAS 114, the institution established an ALLL

for the amount that the recorded investment

in the loan exceeded the fair value of the

underlying collateral, less costs to sell.

Consistent with relevant regulatory guidance,

the institution classified a portion of the

recorded investment as ‘‘Loss’’ and the

remaining recorded investment as

‘‘Substandard.’’ For this loan, the amount

classified ‘‘Loss,’’ which was deemed to be

the confirmed loss, was less than the

impairment amount (as determined under

FAS 114). The institution charged off the

‘‘Loss’’ portion of the loan. After the charge-

off, the portion of the ALLL related to this

‘‘Substandard’’ loan (1) reflects an

appropriate measure of impairment under

FAS 114, and (2) is included in the aggregate

FAS 114 ALLL for all loans that were

identified for evaluation and individually

considered impaired. The aggregate FAS 114

ALLL is included in the institution’s overall

ALLL. End Text Box

Large groups of smaller-balance

homogeneous loans that are collectively

evaluated for impairment are not included in

the scope of FAS 114.24 Such groups of loans

may include, but are not limited to, credit

card, residential mortgage, and consumer

installment loans. FAS 5 addresses the

accounting for impairment of these loans.

Also, FAS 5 provides the accounting

guidance for impairment of loans that are not

identified for evaluation on an individual

basis and loans that are individually

evaluated but are not individually considered

impaired.

Institutions should ensure that they do not

layer their loan loss allowances. Layering is

the inappropriate practice of recording in the

ALLL more than one amount for the same

probable loan loss

rovides the accounting

guidance for impairment of loans that are not

identified for evaluation on an individual

basis and loans that are individually

evaluated but are not individually considered

impaired.

Institutions should ensure that they do not

layer their loan loss allowances. Layering is

the inappropriate practice of recording in the

ALLL more than one amount for the same

probable loan loss. Layering can happen

when an institution includes a loan in one

segment, determines its best estimate of loss

for that loan either individually or on a group

basis (after taking into account all

appropriate environmental factors,

conditions, and events), and then includes

the loan in another group, which receives an

additional ALLL amount.25

There are certain common elements an

institution should incorporate in its loan loss

allowance methodology. Generally, an

institution’s methodology should: 26

(1) Include a detailed analysis of the loan

portfolio, performed on a regular basis;

(2) Consider all loans (whether on an

individual or group basis);

(3) Identify loans to be evaluated for

impairment on an individual basis under

FAS 114 and segment the remainder of the

portfolio into groups of loans with similar

risk characteristics for evaluation and

analysis under FAS 5;

(4) Consider all known relevant internal

and external factors that may affect loan

collectibility;

(5) Be applied consistently but, when

appropriate, be modified for new factors

affecting collectibility;

(6) Consider the particular risks inherent in

different kinds of lending;

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Federal Register / Vol. 65, No. 174 / Thursday, September 7, 2000 / Notices

27 Institutions should refer to the guidance on

materiality in SEC Staff Accounting Bulletin No. 99,

Materiality.

(7) Consider collateral values (less costs to

sell), where applicable;

ding;

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Federal Register / Vol. 65, No. 174 / Thursday, September 7, 2000 / Notices

27 Institutions should refer to the guidance on

materiality in SEC Staff Accounting Bulletin No. 99,

Materiality.

(7) Consider collateral values (less costs to

sell), where applicable;

(8) Require that analyses, estimates,

reviews and other ALLL methodology

functions be performed by competent and

well-trained personnel;

(9) Be based on current and reliable data;

(10) Be well documented with clear

explanations of the supporting analyses and

rationale; and

(11) Include a systematic and logical

method to consolidate the loss estimates and

ensure the ALLL balance is recorded in

accordance with GAAP.

A systematic methodology that is properly

designed and implemented should result in

an institution’s best estimate of the ALLL.

Accordingly, institutions should adjust their

ALLL balance, either upward or downward,

in each period for material differences

between the results of the systematic

determination process and the unadjusted

ALLL balance in the general ledger.27

Bibliography

GAAP and Auditing Guidance

American Institute of Certified Public

Accountants’ Audit and Accounting Guide,

Banks and Savings Institutions, 1999

edition

Auditing Standards Board Statement on

Auditing Standards No. 61,

Communication With Audit Committees

(AICPA, Professional Standards, vol. 1, AU

sec. 380)

Emerging Issues Task Force Topic No. D–80,

Application of FASB Statements No. 5 and

No. 114 to a Loan Portfolio (EITF Topic D–

80 and attachments), discussed on May 19–

20, 1999

Financial Accounting Standards Board

Interpretation No. 14, Reasonable

Estimation of the Amount of a Loss (An

Interpretation of FASB Statement No. 5)

Financial Accounting Standards Board

Statement of Financial Accounting

Standards No. 5, Accounting for

Contingencies

Financial Accounting Standards Board

Statement of Financial Accounting

Standards No

0 and attachments), discussed on May 19–

20, 1999

Financial Accounting Standards Board

Interpretation No. 14, Reasonable

Estimation of the Amount of a Loss (An

Interpretation of FASB Statement No. 5)

Financial Accounting Standards Board

Statement of Financial Accounting

Standards No. 5, Accounting for

Contingencies

Financial Accounting Standards Board

Statement of Financial Accounting

Standards No. 114, Accounting by

Creditors for Impairment of A Loan (An

Amendment of FASB Statements No. 5 and

15)

Financial Accounting Standards Board

Statement of Financial Accounting

Standards No. 118, Accounting by

Creditors for Impairment of a Loan—

Income Recognition and Disclosures (An

Amendment of FASB Statement No. 114)

Financial Accounting Standards Board

Statement of Financial Accounting

Standards No. 125, Accounting for

Transfers and Servicing of Financial Assets

and Extinguishments of Liabilities

Regulatory Guidance

Federal Deposit Insurance Act, Section 39,

Standards for Safety and Soundness (12

U.S.C. 1831p–1)

Federal Financial Institutions Examination

Council’s Instructions for Preparation of

Consolidated Reports of Condition and

Income

Interagency Guidelines Establishing

Standards for Safety and Soundness,

established in 1995 and 1996, as amended

on October 15, 1998

Interagency Policy Statement on the

Allowance for Loan and Lease Losses

(ALLL), December 21, 1993

Joint Interagency Statement (regarding the

ALLL), November 24, 1998

Joint Interagency Letter to Financial

Institutions (regarding the ALLL), March

10, 1999

Joint Interagency Letter to Financial

Institutions (regarding the ALLL), July 12,

1999

Securities and Exchange Commission

Financial Reporting Release No. 28,

Accounting for Loan Losses by Registrants

Engaged in Lending Activities, December

1, 1986

Securities and Exchange Commission

Securities Act Industry Guide 3, Statistical

Disclosure by Bank Holding Companies

Securities and Exchange Commission Staff

Accounting Bulletin No

Financial

Institutions (regarding the ALLL), July 12,

1999

Securities and Exchange Commission

Financial Reporting Release No. 28,

Accounting for Loan Losses by Registrants

Engaged in Lending Activities, December

1, 1986

Securities and Exchange Commission

Securities Act Industry Guide 3, Statistical

Disclosure by Bank Holding Companies

Securities and Exchange Commission Staff

Accounting Bulletin No. 99, Materiality,

August 1999

Securities Exchange Act of 1934, Section

13(b)(2)–(7) (15 U.S.C. 78m(b)(2)–(7))

United States General Accounting Office

Report to Congressional Committees,

Depository Institutions: Divergent Loan

Loss Methods Undermine Usefulness of

Financial Reports, (GAO/AIMD–95–8),

October 1994

Dated: August 30, 2000.

Joanne M. Giese,

Assistant Executive Secretary, Federal

Financial Institutions Examination Council.

[FR Doc. 00–22719 Filed 9–6–00; 8:45 am]

BILLING CODE 6210–01–P (25%), 6714–01–P (25%)

6720–01–P (25%), 4810–33–P (25%)

FEDERAL MARITIME COMMISSION

Notice of Agreement(s) Filed

The Commission hereby gives notice

of the filing of the following

agreement(s) under the Shipping Act of

1984. Interested parties can review or

obtain copies of agreements at the

Washington, DC offices of the

Commission, 800 North Capitol Street,

NW., Room 940. Interested parties may

submit comments on an agreement to

the Secretary, Federal Maritime

Commission, Washington, DC 20573,

within 10 days of the date this notice

appears in the Federal Register.

Agreement No.: 011421–024.

Title: The East Coast South America

Discussion Agreement.

Parties:

Crowley American Transport

Alianca Transportes Maritimos S.A.

Columbus Line

Lykes Lines Ltd., LLC

APL Co. PTE. Ltd.

P&O Nedlloyd B.V. and P&O

Nedlloyd Limited

Pan American Independent Line

Zim Israel Navigation Co., Ltd.

Mediterranean Shipping Co. S.A.

Euroatlantic Container Line S.A.

Senator Lines GmbH

A.P. Moller-Maersk Sealand

Compania Sud Americana de

Vapores, S.A

iscussion Agreement.

Parties:

Crowley American Transport

Alianca Transportes Maritimos S.A.

Columbus Line

Lykes Lines Ltd., LLC

APL Co. PTE. Ltd.

P&O Nedlloyd B.V. and P&O

Nedlloyd Limited

Pan American Independent Line

Zim Israel Navigation Co., Ltd.

Mediterranean Shipping Co. S.A.

Euroatlantic Container Line S.A.

Senator Lines GmbH

A.P. Moller-Maersk Sealand

Compania Sud Americana de

Vapores, S.A.

Evergreen Marine Corporation

(Taiwan) Limited

Braztrans Transportes Maritimos

Limitada

Compania Libra de Navegacao

Synopsis: The proposed amendment

sets out the obligations of the members

with respect to the payment of

Agreement expenses and would permit

the expulsion of members who fail to

meet those obligations.

Agreement No.: 011426–030.

Title: The West Coast South America

Discussion Agreement.

Parties:

Crowley American Transport

Seaboard Marine Ltd.

Columbus Line

Compania Chilena de Navegacion

Interoceania, S.A.

APL Co. PTE. Ltd.

P&O Nedlloyd B.V.

South America Independent

Association and its members:

Trinity Shipping Line, SA

Interocean Lines Inc.

Mediterranean Shipping Co. S.A.

South Pacific Shipping Company, Ltd.

d/b/a

Ecuadorian Line

NYK/NOS Joint Service

A.P. Moller-Maersk Sealand

Compania Sud Americana de

Vapores, S.A.

Synopsis: The proposed amendment

sets out the obligations of the members

with respect to the payment of

Agreement expenses and would permit

the expulsion of members who fail to

meet those obligations.

Agreement No.: 011722.

Title: New World Alliance/A.P.

Moller Maersk-Sealand Slot Exchange

Agreement.

Parties:

A.P. Moller-Maersk Sealand

American President Lines, Ltd

APL Co. PTE Ltd.

Hyundai Merchant Marine Co., Ltd

Mitsui O.S.K. Lines, Ltd.

Synopsis: The agreement authorizes

the parties to exchange slot spaces on

each others vessels in the trade between

U.S. Atlantic and Gulf Coast ports and

ports in Northern Europe.

Agreement No.: 011723.

Title: New World Alliance Facilitation

Agreement

ement.

Parties:

A.P. Moller-Maersk Sealand

American President Lines, Ltd

APL Co. PTE Ltd.

Hyundai Merchant Marine Co., Ltd

Mitsui O.S.K. Lines, Ltd.

Synopsis: The agreement authorizes

the parties to exchange slot spaces on

each others vessels in the trade between

U.S. Atlantic and Gulf Coast ports and

ports in Northern Europe.

Agreement No.: 011723.

Title: New World Alliance Facilitation

Agreement.

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