The Allowance for Loan and Lease Losses (ALLL) represents one of the most significant estimates in a bank’s financial statements. Because of the scrutiny placed on the reserve and its significance to a bank’s earnings, a comprehensive and defensible ALLL methodology is critical.
Common challenges with the ALLL methodology include:
- Recognizing and adopting new accounting standards and regulatory requirements.
- Ensuring an appropriate FAS 114 methodology using accurate impairment analysis methods and producing documentation to justify and defend the methodology.
- Ensuring an appropriate FAS 5 methodology, specifically applying the correct loss rate to each pool, evaluating qualitative factors, and producing documentation to justify the pooled loan calculations.
- Gathering data from disparate sources through sometimes labor-intensive, time-consuming processes.