Justifying a Change In Your ALLL
An understated ALLL expense will overstate an institution’s earnings. Conversely, an overstated ALLL expense can understate and limit an institution’s earnings. As such, it is imperative to ensure that the level of the ALLL is an accurate reflection of expected credit losses for the institution’s portfolio.
As economic and portfolio conditions change, so, too should the overall ALLL. The 2006 Interagency Policy Statement makes it clear that in order to estimate a proper ALLL provision, the analysis of a financial institution’s loan portfolio should be:
- Comprehensive
- Well-documented
- Consistently applied
- Inclusive of environmental and qualitative risk factors
If an institution’s ALLL reflects all of the above characteristics and the end number necessitates a change from current levels, the institution should be able to defend any necessary provision to examiners.