Bankers’ top exam advice on the ALLL
Banks and credit unions spend months preparing for safety and soundness examinations, and one area that has received regulatory scrutiny in these regulatory reviews is the allowance for loan and lease losses. Even if the bank or credit union hasn’t recently made a significant change in the ALLL, this area is a common one for examiners to review closely.
So what have other banks and credit unions experienced when it comes to examiners’ reviews of the ALLL? What tips do they have for peers? Sageworks earlier this year surveyed banks and credit unions on their recent exam experiences, and financial institutions offered several pieces of advice on the ALLL:
1. Document everything
2. Justify qualitative factors
3. Methodology matters.
Documentation – Many of the FDIC- and OCC-examined institutions in the survey offered advice related to documentation – of a variety of factors related to the ALLL. These included documenting the overall methodology, the formulas, having loan reviewers document well any risk-rating change recommendations and ensuring there are appraisals that can support calculations.
“Can’t have enough documentation,” wrote one staffer at an FDIC-examined institution that has between $75 million and $200 million in assets. “Explaining all decisions will help with the process.”
A respondent with an OCC-examined institution that has between $2 billion and $10 billion in assets said, “Document everything! Every assumption you make, every calculation process, every reason for why you do it the way you do.”
Qualitative factors – Institutions also recommended making sure you can justify qualitative factors used to make adjustments to reserve amounts for FAS 5 loan pools. Several institutions reported that justification for the qualitative factor analysis has continued to be an area of examiners’ focus.
Methodology – Financial institutions’ actual methodology for the ALLL also apparently drew attention from examiners, because several banks and credit unions had advice on the processes that are established for calculating the ALLL.
“Create a methodology that makes sense and follow it,” said one respondent from a credit union that has between $75 million and $500 million in assets. Many respondents reiterated the importance of keeping up with and following regulatory guidance as closely as possible.