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Bank Teller

FOS Blog

10 Dec

Allowance for Loan Lease Loss Common Mistakes

Allowance for Loan Lease Loss Common Mistakes

The Allowance for Loan and Lease Loss (ALLL) continues to be a major focus for the Banking regulators. The allowance is the most significant estimate within an institution and an area where bankers continue to make common mistakes.   Has your institution made common mistakes related to the allowance in areas such as policy, valuations, and documentation to support impairment calculations?

Policy – Regulators continue to site issues with policy not outlining the responsibilities of the participants within the ALLL process, not comprehensively describing your methodology, and policies that are not updated for current methodology practices.

Valuation – Common issues include the institutions using outdated appraisals or websites in establishing values of the properties when calculating specific reserves on their loans for ASC 310, formerly FAS 114. While it may not be financially feasible for the bank to obtain frequent appraisals on all of their loans, they need to assess each loan separately based on the size and risk of loss. This will determine whether a current appraisal is prudent to the ongoing determination of the loan and the specific reserve calculation. Over time, new appraisals should be obtained in order to properly value the property and ensure the valuation is adequate in relation to ASC 310. Generally, 12-24 months is the duration to use an appraisal depending on economic conditions, the severity of change in economic conditions, and the materiality of the loan to the overall allowance.

Documentation – As it relates to ASC 450 (formerly FAS 5), institutions tend to lack documentation used to support the qualitative factors used in the calculation. The institutions should outline trends as it relates to delinquency and loan volumes, local and national economy changes, and changes within their own policy in determining the factors. An overall memorandum outlining the bank’s thought process in determining the values is recommended. Simply assigning a number to the value of the reserve is no longer acceptable and the institution must demonstrate how they arrived at the factors when determining the reserve for the loans that will not be specifically reserved.

Overall, institutions are updating their ALLL calculations, but the above common areas continue to warrant additional scrutiny and care.

For additional information contact the author Lyle Loeb at