Survey Reveals Widely Divergent Approaches to ALLL
Each year we survey financial institutions across the country to learn how they are approaching their allowance for loan and lease losses (ALLL) and about their pain points. It’s one more way we stay current in developing solutions that address bankers’ needs and concerns. This year we conducted two surveys, one on how institutions approach their allowances today and another on how they are preparing for CECL. While we are still gathering responses to our CECL survey, a few notes of interest from the first of the two, which netted responses from across the U.S., 40 states in all, and from all sizes of community banks, and drew equal participation from public and private institutions.
The results show banks using a blend of methodologies. 78.75% currently use historical loss rate to compile ALLL, with 31.25% incorporating historical loss migration into their calculations and 17.5% using PD/LGD loss migration. 3.75% use other methodologies.
- Most institutions use more than one approach in segmenting their loans for estimating their ALLLs. Four of five respondents segment by loan or product type. Another 38% segment by type of collateral. More than 50% said they segment by risk rating. As well, 12.35% said they segment by geography and 6.17% by origination vintage.
- 30.86% of respondents use a loss emergence period (LEP) in calculating their ALLL. Of those, the LEP range is wide, from as little as three quarters to as many as 23, though one year is still popular (21%) as is two years (26%). 47% use different LEPs for different categories of loans (Commercial, CRE, multi-family, commercial leases and A&D).
- Look-back periods also vary greatly, from one year to 22.5 years. Only one respondent said they do different look-back periods for different loan categories.
- There was almonst an even split between those who consider the Q-factor process highly manual or subjective and those who combine subjective with objective measures like data feeds and matrices, though even those are weighted toward manual or subjective determination.
- 54% of respondents maintain an unallocated reserve.
Overall, responses reveal a wide range of approaches to the ALLL among the financial institutions that responded to the survey. Such diversity is indication of both the complexity surrounding the allowance and the need for each bank to address its allowance uniquely with methods and practices that best suit its portfolio and the community it serves.
Currently, we are conducting a survey on CECL preparedness which will be released later this month.