ALLL Calculation: Loan Classification
Before beginning the ALLL calculation, an institution must first classify their loans into ASC 450-20 (FAS 5) or ASC 310-10-35 (FAS 114) categories based upon impairment status. Institutions can use a variety of measures to classify loans, including risk ratings, TDR status, nonaccrual status, payment delinquencies, and LTVs, among others.
The classification of loans has a direct impact on the overall reserve amount as well as its complexity. As such, it is important that the methodology by which institutions classify their loans is comprehensive and consistently applied.