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The benefits of segmentation within the allowance for loan and lease loss calculation are many. Institutions can gain more insight into sub-segmented performance, conduct more sophisticated loss methodologies such as migration analysis and can make better-informed lending decisions over time. However, institutions must not risk over-segmenting to the point of losing statistical relevance. Thus, institutions must be cognizant of how much segmentation they should apply to their portfolios and arrive at a point that both they and their examiners are comfortable with.

It’s time for a foundational shift in the resources bankers use to calculate the ALLL. Years ago, using spreadsheets was by far and away the preferred option – primarily because it was the only option. To those in the early 20th century, the typewriter was the most efficient way to write letters, and the Model T was the latest and greatest in transportation.

Final guidance on the Current Expected Credit Loss (CECL) model has been an anticipated event in the eyes of bankers and other financial professionals. Its release marks the end of the incurred loss model in accounting for expected losses and brings with it a slew of process changes in the way financial institutions collect data and perform their ALLL calculations.

It’s time for a foundational shift in the resources bankers use to calculate the ALLL. Years ago, using spreadsheets was by far and away the preferred option – primarily because it was the only option. To those in the early 20th century, the typewriter was the most efficient way to write letters, and the Model T was the latest and greatest in transportation.

In light of record-high at-risk bank figures, increasing regulatory pressures, a low-interest rate environment and the continued struggle for capital, many banks have, and are continuing to seek increased growth via mergers and acquisitions.

Guidance states that it is the responsibility of a bank’s management team and Board to ensure an adequate ALLL level as part of the institution’s safety and soundness. That responsibility includes several specific components as outlined in the Federal Reserve’s Commercial Bank Examination Manual.

The unallocated reserve can play an important role in maintaining a financial institution’s overall reserve; however, it is, by nature, a rather subjective process. Unallocated reserves are the result of an adjustment to account for estimated credit losses which fall outside of the predefined qualitative factors and historic loss calculations.

Despite much deliberation and an initial desire to converge ideologies, the International Accounting Standards Board (IASB) and its American counterpart, the Financial Accounting Standards Board (FASB) were unable to draft uniform revisions to the current incurred loss model for the ALLL.

In the most recent issue of Supervisory Insights, the FDIC included an article highlighting evolving risks in banking. The findings from this report are derived from of a culmination of FDIC exams, in which repeated Matters Requiring Board Attention (MRBAs) have surfaced.

Though the last half decade has been rather tumultuous, recent bank metrics released by the Federal Reserve indicate improving credit quality. One of the most notable metrics is the average Loan Loss Reserve ratio.

The 3rd annual Risk Management Summit is less than two months away, and many bank and credit union executives have already registered to join their peers, industry experts and Abrigo in Nashville this September.

A common concern among banks recently is how to correctly implement loss methodologiesin a period of low historical losses. While it’s a relatively good problem to have, it nonetheless imposes challenges in the calculation of the ALLL.