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ALLL: Under scrutiny from regulators and accountants

November 12, 2012
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With the high level of attention and scrutiny around the allowance for loan and lease losses (ALLL) during the past few years, it’s no wonder that there may be some confusion between the different parties involved: bank management, examiners, and the accounting firms that sign off on the reserve and its methodology.

In response to examiner scrutiny, many banks have been modifying their methodology slightly. So whether their changes make the reserve more or less conservative, financial institutions are giving the calculation of the ALLL renewed attention in an effort to forego problems during the next exam.

The confusion between parties stems from changing the reserve too much or too often, though. The accounting firms that serve financial institutions grow cautious when the reserve, and therefore the banks’ earnings, changes too frequently or too drastically. As a result, accounting firms may question the methodology modifications that the banks are making. The chief concern is that financial institutions are too eager to reduce reserves given the slightly-improved credit conditions.

In a recent American Banker article, they noted that the accountants signing off on bank earnings will be hesitant to do so if they believe those earnings don’t accurately reflect bank performance. David Seleski, the president and chief executive at Stonegate Bank in Fort Lauderdale, FL, told American Banker, “At some point, the banks will be in the middle, with the regulators on one side and the CPAs on the other side.”

How to Support Changes in the ALLL Reserve

Any institution that is considering a change to its ALLL methodology should use the 2006 Interagency Policy Statement as a guide for making those changes. In order to estimate a proper ALLL provision, the analysis of a financial institution’s loan portfolio should be (1) comprehensive, (2) well documented, (3) consistently applied, and (4) inclusive of environmental and qualitative risk factors. For more information on how to support an ALLL change, download our whitepaper: How to support changes in the ALLL reserve.

About the Author


Raleigh, N.C.-based Sageworks, a leading provider of lending, credit risk, and portfolio risk software that enables banks and credit unions to efficiently grow and improve the borrower experience, was founded in 1998. Using its platform, Sageworks analyzed over 11.5 million loans, aggregated the corresponding loan data, and created the largest

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