In this case, Insights Bank and Trust uses the
broad loan categories found on the Call Report to form homogeneous groups of loans that
it does not review individually. In the analysis, the Bank has netted out or subtracted the impaired loans reviewed
as part of its FAS 114 calculation. It then applies a loss rate to the net loan amount to determine
the FAS 5 reserve component.
One question to ask is "are the loan categories the Bank uses too broad on which to
estimate loss?" For example, should operating loans be separated from equipment loans in the
agricultural loan category?
Another set of questions to ask is "where did the loss rates come from and what do they
represent?" Are they based on historical experience? Has something changed at the bank or its
environment that makes historical experience irrelevant? Does what you see make sense to you from
your own knowledge and experience?
In the final analysis, the answers you receive to your questions will help you understand the
reports you see, what information included in the report means and help you develop a comfort
level with adequacy of the analysis presented.
Insight Bank and Trust FAS 5 Analysis