The calculation of the Allowance for Loan & Lease Losses (ALLL) is a critical component of a community bank balance sheet and income statement. ALLL accounting and regulatory guidance stipulates that banks must accurately estimate the amount of credit loss contained within its loan and lease portfolio that must be held in reserve
Credit risk may be quantified as an amount of credit loss due to loan defaults that a bank could suffer. The ALLL reserve is a contra account which represents the estimated value of a bank’s portfolio of loans and leases that the organization will not receive full repayment. ALLL reserve requirements may also be viewed as a direct allocation of bank capital.
Decades Of Banking Leadership Experience
The partners and consultants at Artisan Advisors have many years of experience as top level banking executives, who have had extensive involvement with ALLL calculations, GAAP guidance and regulatory requirements. We have helped the leadership of many community banks accurately determine the proper amount of reserves, based on the specific risk factors of their institutions.
We are uniquely qualified as former C-level executives to not only guide our clients into GAAP and regulatory compliance, but also to provide strategies to minimize the impact to critical capital that can be used for business growth and the greater good of the communities in which our clients serve.
The ALLL Calculation
A Process Unique To Every Institution
The highly experienced team at Artisan Advisors have been called upon by many community banks to either calculate the ALLL reserves or to conduct a review of the bank’s calculations.
The foundation of our ALLL reserve approach starts with data – your bank’s unique loan and lease data. The dedicated professionals at Artisan Advisors will analyze the data used in your ALLL calculation and evaluate it for accuracy, completeness and relevancy.
Artisan experts will review detailed loan data and management reports to determine the amount of loans which must be deemed impaired. Banks are required to perform specific analysis for possible credit loss for each loan that meets the criteria of being impaired. These specific impairments will be included in the ALLL.
For those loans not considered impaired, the Bank is required to calculate an estimate of possible loss based on detailed historical performance. Every community banking institution has its own credit risk profile, based on the unique characteristics of each bank’s loan and lease portfolio. Artisan’s approach toward calculating possible losses within its portfolio is based on proper segmentation. Proper segmentation of the bank’s portfolio focuses on methods which minimize the impact of historical losses resulting from certain loan segments to the rest of the portfolio which is considered performing. At the same time, qualitative factors are evaluated for appropriateness and directional consistency for each loan segment. Factors being evaluated and then quantified include the economy, industry trends, management experience, policy changes, trends in delinquency, losses, etc.
Once this process is complete, the ALLL is then determined as sum of specific reserves on impaired loans, plus estimated losses based on historical losses and an evaluation of qualitative factors for remaining performing (and unimpaired) loans.
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