CALCULATING THE ALLOWANCE FOR LOAN AND LEASE LOSSES

The Allowance for Loan and Lease Losses (“ALLL”), which was originally referred to as the “Reserve for Bad Debts,” is a valuation reserve established and maintained by charges against the bank’s operating income. As a valuation reserve, it is an estimate of uncollectible amounts that is used to reduce the book value of loans and leases to the amount that is expected to be collected. This program is designed to review the elements and thought process in establishing and maintaining an adequate ALLL level. The Allowance is watched not only by the major agencies responsible for supervision of the banking system, but also by the American Institute of Certified Public Accountants, the Internal Revenue Service and the Securities & Exchange Commission. All have similar but yet, conflicting perspectives on how much of an allocation should be contained in the ALLL.

The specific topics to be covered in this course include:

  • The Background for the Allowance for Loan and Lease Losses
  • Risks Associated with the Allowance
  • Loan Grading/Risk Rating and the ALLL
  • The Allowance and Statement of Financial Accounting Standards 5 and 114
  • An analytical framework for establishing the ALLL
  • Methodologies for Analyzing Pools of Loans
  • Management’s Responsibility for the Allowance
  • Examiners’ Objectives for the ALLL
  • Examiners’ Review of the Bank’s Allowance Process
  • Allowance Calculation and Sample Worksheets

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