Allowance for loan and lease losses services
Are your examiners and auditors questioning your allowance for loan and lease losses (ALLL) methodology and documentation — again? And are you asking yourself the same questions?
Perhaps your subjective adjustment factors are too subjective. Perhaps you think the ALLL is now too large, but getting acceptance of a negative provision is not going well. Or you wonder whether your compensation system should be linked more clearly to expected losses. Maybe you believe there is a connection between your underwriting policy and the size of your ALLL, but you are not sure how to make the link visible and real. Or maybe you’ve merged and have multiple systems or allowance methodologies that need to be reconciled. Or you’re planning a methodology improvement project, but you have no one to lead it.
Because the ALLL estimate is so important, with multiple components and many interested parties — both internal and external — the estimation process can be a giant headache for the C-suite, board of directors and audit committee. Grant Thornton LLP’s ALLL specialists can draw on their extensive technical and project management experience to help ease your pain.
ALLL estimation: More complex than it looks
If you do not have acquired loans whose collectability is highly doubtful —as addressed by SOP 03-3 —then your headache is most likely caused by the FAS 5 component of the ALLL. This component is normally broken down further by loan type and estimation methodology. Adding to the complexity are the multiple functions that feed data into the estimation process. In simple terms, the FAS 5 component is usually calculated like the chart to the right.
Making the calculation and incorporating all the needed inputs are complicated processes. You need an experienced team that knows how these components operate, how the regulators think, how to help you interpret GAAP, and how to assist you in determining what’s practical —all at the same time. You need some pain relief.
Contact us today to find out how we can help.
Allowance for loan and lease losses (ALLL): Loss discovery periods
Allowance for loan and lease losses (ALLL) adjustment factors