ALLOWANCE FOR LOAN AND LEASE
LOSSES CURRENT ISSUES AND
FREQUENTLY ASKED QUESTIONS
Carol Gross
Federal Reserve Bank of Kansas City
Denver Branch
Supervision and Risk Management
Allowance for Loan and Lease Losses:
Current Issues
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Allowance for Loan and Lease Losses (ALLL) releases
Appropriate look-back period for calculating loss rates
Qualitative factors
The ALLL on junior lien portfolios
Appropriate definition of impaired loans
Purchased credit-impaired loans
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Credit Quality
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Credit quality indicators improving
Commercial real estate picking up in certain locales
Past due and OREO levels generally decreasing
Change in portfolio mix:
‒ C&I
‒ Oil and gas
• Yield and earnings pressure to make up for bad years:
‒ Intense competition for limited loans
• Upcoming home equity payment shock
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Credit & Market Risk
Examiner Focus
• ALLL must be in accordance with supervisory guidance
• Management’s reassessment of the ALLL methodology
• Significant decreases or no increase in the allowance will
be viewed with caution
• Looking for solid improved trends
• Accurate identification of impaired loans
• Proper impairment measurement
• Documentation and support:
‒ Are the qualitative adjustments sufficient?
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Accounting Standards Codification
(ASC) 450
Loss Histories
• What is the appropriate time horizon for calculating historical
loss rates?
• There is no fixed period of time that banks should use to
determine the historical loss experience
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ASC 450 (Cont’d)
Loss Histories (cont’d)
• A bank’s supporting documentation should include an
analysis of how the current conditions compare with those
conditions during the period used in the historical loss rates
for each group of loans assessed under ASC 450-20
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ASC 450 (Cont’d)
Loss Histories (cont’d)
• A bank should review the range of historical losses over the
period used, rather than relying solely on the average
historical loss rate, and should identify the appropriate
historical loss rate from within that range to use in estimating
credit losses for the groups of loans
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ASC 450 (Cont’d)
Qualitative Factors
• Require judgments
• Are not strictly mathematical calculations
• Reflect management’s estimate of the extent to which current
losses on a pool of loans differ from historical loss experience
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ASC 450 (Cont’d)
Qualitative Factors (cont’d)
• Document the qualitative factors considered and the
conclusions reached. Support and documentation include:
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Description of each factor
Management’s analysis of how each factor has changed over time
Amount of adjustments to loss estimates for changes in conditions
Which loan groups’ loss rates have been adjusted
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ASC 450 (Cont’d)
Qualitative Factors (cont’d)
• Examiners will look for:
• Documentation and its reasonableness
• Whether management adequately identifies the qualitative factors
that are determined to cause estimated losses to differ from
historical loss experience
• Directional consistency of adjustments with changes in the
underlying factors
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Other Current Issues: Junior Liens
Junior Lien Guidance
• SR Letter 12-3: Interagency Guidance on Allowance Estimation
Practices for Junior Lien Loans and Lines of Credit
• Intended to remind institutions of existing GAAP and regulatory
guidance related to estimating the allowance for junior lien
loans and HELOCs
SR Letter 12-3: http://fedweb.frb.gov/fedweb/bsr/srltrs/sr1203.pdf
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ASC 310
• Current U.S. GAAP:
‒ Incurred credit loss model
‒ Impairment of receivables shall be recognized when, based on all available
information, it is probable that a loss has been incurred based on past events
and conditions existing at the balance sheet date (ASC 310-10-35-4)
‒ A loan is impaired when, based on all current information and events, it is
probable that a creditor will be unable to collect all amounts due according to
the contractual terms of the loan agreement. All amounts due according to the
contractual terms means that both the contractual interest payments and the
contractual principal payments of a loan will be collected as scheduled in the
loan agreement. (ASC 310-10-35-16)
 This does not consider possible or expected future trends that may lead to
additional losses
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Impairment Measurement
ASC 310-10-35-20 through 32 – For impaired loans, which includes TDRs
Option 1
• PV of expected future
CFs discounted at the
loan's effective interest
rate
Must consider
defaults and
prepayments
Option 2
Option 3
• Loan's observable market
price
• FV of the collateral (less
cost to sell)
• Provided it is a
collateral dependent
loan
Method not
considered
available because
no market for
impaired loans
*Options 2 and 3 are used as practical expedients to Option 1, ASC 310-10-35-22
Judgment required
in determining
what is collateral
dependent
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Purchased Credit Impaired Loans
Day 1
Day 2
• Purchased impaired loan is initially recorded at FV
with no ALLL recorded at acquisition
• Post acquisition, purchaser must regularly estimate CF
expected to be collected to assess for impairment
• Probable decrease in expected CF should be
recognized as impairment through the ALLL
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Loan Impairment Resources
Evaluate for
Impairment
ASC 310-10-35-16
through 17
Measure
Impairment
ASC 310-10-35-20
through 32
Account for
Impairment
Record ALLL
Call Report
Instructions
Glossary
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Questions
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