Problem Loan Management and Allowance for Loan and Lease Losses (ALLL) Model
Do you want your Bank's Allowance for Loan and Lease Losses methodology to withstand the scrutiny of your outside auditor and your regulators? Would you like to be confident that your ALLL is adequate given current industry and economic conditions?
Does that sound impossible or at least improbable? It is possible (and critical) to create a consistent, accurate, flexible and responsive method for loan loss reserve calculations that is acceptable to auditors and regulators, and is adequate to absorb inherent losses. Credit Risk Management, L.L.C. can help your Bank in this endeavor.
The CRM ALLL Model provides a platform from which community banks can build their own unique ALLL estimating model based on their processes and procedures. It incorporates your actual loss history, present portfolio composition, observed trends and management judgment. This process can be substantially streamlined by the advanced data management features of our CRM³ Loan Portfolio Analysis software, if that is also used.
Benefits of Our ALLL Model
Key FAS 5 and FAS 114 Features
- The Credit Risk Management ALLL Model meets present regulatory rules and addresses related accounting considerations. It allows for detailed analysis, but condenses results into summary reports. Once developed, it is simple to update and modify. The ALLL Model has been developed and installed at multiple client banks to date and has been favorably received by those clients' outside auditors and respective regulatory agencies.
- The CRM ALLL Model is not simply a mathematical model. The underlying logic was developed by credit professionals with decades of experience in problem loan management. The Model addresses accounting rules, but it is built on experienced credit judgment.
- The CRM ALLL Model is customizable and is adjusted to fit your data gathering capacity and credit philosophy.
- The CRM ALLL Model is supported by professionals who are available to provide advice on overall management inputs and specific problem loan evaluation, as well as to make requested technical adjustments to your Model. We will also address the questions of Board members, outside auditors, state or federal regulators, etc.
What Do Our Clients Have to Say About the CRM ALLL Model?
- Establishes FAS 5 Formula Reserves by whatever functional segmentation best allows the Bank to accurately group "similar" loans. These loan groupings will most likely be by product code, collateral code, Call Report code, or some combination thereof. Banks must have the ability to segment data and track losses according to these FAS 5 categories.
- Uses Risk Grade (for Commercial loans) and Performance Category (for Consumer loans) as subcategories within any FAS 5 Formula Reserve to track increases in volume migrating through weaker credit tiers. This should reflect the process by which problem loans transition from:
- Expected but not identified (FAS 5), to
- Expected and identified (moved to FAS 114).
- Allows the user to adjust key variables within any FAS 5 Formula Reserve category that should be expected to change from loan group to loan group. Most of these are initially based on management judgment, but can generally be tied to observable results (internal or external) and adjusted through time with appropriate data capture.
- Quantifies a user self-assessment of subjective factors reflective of overall Loan Review systems and Credit Administration processes. This step yields an internal portion of Unallocated Reserve that adjusts with periodic changes in policy, procedure and organizational structure.
- Quantifies the correlation between external qualitative factors and their impact on the overall portfolio. This step yields an external portion of Unallocated Reserve that adjusts with observable movements in specific external markers.
- Provides summary estimating tools to calculate Individual Reserve for impaired loans.
- Creates high level summary reports to reflect overall ALLL composition.
We have been offering the CRM ALLL Model to our clients since 2007. Here's a sample of what our clients have to say about the CRM ALLL Model:
Contact us to find out more.
- "For the trouble this has saved me, we would have happily paid a lot more." - from the Chief Credit Officer at a $450 Million community bank.
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