Written By: Lugie Brown
At First American National Bank, the data used to compute an ALLL reserve analysis consists of the following reports:
- Past due loans by days and history past due
- Non-Accrual loans
- Criticized loans
- Classified loans
- Impaired loans
- TDR loans
- Loans to deceased customers
- Government insured loans
- Loans by Call report codes (could be other codes such as product, loan type, collateral)
- Report of checking account losses
- Report of credit card losses
- Loans to bankrupt customers
- Media & other reports or studies that impact qualitative factors
- Risk Ratings
- Archived loan balances
- Charge-offs & recoveries net loss
Fair market value of collateral
- Collateral appraisal values
- Selling costs
Present value of future cash flows/TDRs
- Expected monthly payments
- Effective interest rates
- Remaining term
- Amortization days
A past due loan report is used to review loans needing a downgrade due to days past due or days past due in combination with history. Commercial loans over 90 days past due are placed on non-accrual. Consumer loans, including home loans, are typically assigned non-accrual at 90 days but in some cases where a workout is in process or collateral value exceeded the fair market value less cost to sell & the loan is in collection, non-accrual is not assigned until 120 days past due.
Loans previously assigned non-accrual are reviewed to determine if collateral values have been updated and if impairment or a partial or complete charge-off is appropriate. The same review takes into consideration evidence of improvement in the customer’s financial position warranted reassigning the loan to active status.
Criticized and Classified loans are reviewed for further deterioration or financial improvement, with the latter leading to upgrading the loan. The former is more typical.
Loans previously impaired are reviewed for reduction of principal below the potential loss threshold. When loan collateral has been recently appraised (should be on an annual basis), a new impairment analysis is conducted to determine amount of specific allocation to reserve.
TDR loans are reviewed with two purposes in mind. The first reason is to see if payments have been made timely sufficient to change reporting to the call report. Another purpose is to see if financial reporting has been updated and what impact that might have on the risk classification.
Loans to deceased or bankrupt customers are reviewed for elapsed time since occurrence of the event to determine if a risk downgrade is to be made.
FANB has few government insured loans, but for those that are, rules that would otherwise require criticism of the loan are relaxed, thus lessening the ALLL reserve requirement.
All loans are segmented by call report codes to summarize balances for each risk level. Loans secured by certificate of deposits or savings accounts are identified and omitted from loss calculations.
Credit card losses and charged-off checking accounts are recorded and factored into the analysis.
Adjustments to qualitative factors are supported by reports from banking associations, economists, media publications, & other news articles at the national, regional, and local levels. This support strengthens any adjustment made, both improvement and deterioration.
Over a period of 3 to 5 years annual loss percentages are computed and saved to factor into the ALLL analysis. When the volume of loans in a particular call report category is too small to be statistically reliable, several like categories are grouped together. Loss history is subdivided into pass, criticized, and substandard categories for q factor analysis as well as migration analysis.
Once all the reports mentioned have been reviewed and adjustments made, data is input into an Excel workbook where formulas analyze and combine output to arrive at a computed number. That computed number is then compared to the funded ALLL balance to determine adequacy. When the computed number is greater than the funded balance, a deposit is made promptly to raise the funded level to the computed one.