Challenges in the estimation of the ALLL Process
The Allowance for Loan and Lease Losses has been a challenging process for financial institutions over the last several years with the changing regulatory requirements. Mike Lubansky, director of consulting services at Sageworks, discusses some of the most common challenges in the ALLL process in the video below.
From the video:
1. Manual, time-intensive nature of the process – Pulling together data from multiple loan systems and spreadsheets each quarter can increase manual work.
2. Overly complex, error-prone Excel worksheets – Sageworks recently polled over 130 financial institutions and found that 84% are using Excel as opposed to third-party software for their ALLL calculations. Going through several spreadsheets and multiple tabs in Excel can pose many challenges, such as errors in calculations, version control issues, and an overly complicated process that is not centralized, flexible, or transferable if changes occur with bank personnel or with accounting standards and regulations. It is important to have a well defined process with the increasing regulations and documentation.
3. Keeping up with new accounting standards and shifting regulatory demands – The Allowance is a very important number in the financial statements and it largely affects net income depending on the institution’s provision. It has been speculated that the recent FASB proposal, if implemented, may increase the reserve by 10 to 50 percent for many financial institutions.
4. Balancing pressures from different constituencies – Financial institutions have to keep the different viewpoints in mind while presenting and calculating the allowance. For instance, examiners want to make sure you have adequate reserves, external auditors are primarily concerned about following the GAAP and the members of the board may be concerned about the effects the allowance may have on profitability.
5. Reporting and Disclosure requirements – Since the ASU 2010-20 update in Dec 2011, all financial institutions, including privately held institutions, have to prepare disclosure reports that are based primarily on information related to the allowance.