I am interested in seeing some different ways to calculate "Allowance for Loan Losses"....We are currently using a formula that we have used for the past ten years...The last time Regulators were at our bank, they briefly looked at it and I got the impression ours was a little out dated. They will be visiting us again around the 1st of the year and I would like to have a "New and Improved" version...for them to look at. If anyone would like to share their formulas for calculating the allowance for loan losses or could tell me where I could get some samples....(You can e-mail me at phoskins@sun-spot.com) Thanks for any help!!!

I would never post our formula. It would be considered a trade secret. If the formula was given anyone could backward-engineer the published numbers to determine level of problem loans, etc.

In broad terms, you might want to take a look at migration analysis. In real general, this follows loans based on your internal ratings to their ultimate conclusion. For example, how many of your "A" rated loans become chargeoffs within 5 years? How many of your "D" rated loans become chargeoffs within 5 years? etc. Traditional analysis looks at the portfolio as it sits at this moment and assigns a factor to the real dogs to determine if the allowance is adequate. That method ignores the fact some of those highly rated loans at this point in time will become dogs.

So you might end up with a formula such as:

0.5%A + 1.0%B + 2.3%C + 75%D + 98%E = Allowance

ALLL is a big deal, to your bank, your regulator and possibly the IRS. You don't want to experiment with this. Do some searches and look for any guidance your regulator has published on ALLL and for any comments they have made in exit reviews or exam discussions.

Then call your regulator and talk about it. Do YOU feel it is adequate based on your portfolio? Ask them what methodologies seem to work best in your peer banks and see how that may apply to you.

While you are commended for getting out of the "this is the way we've always done it" mode, ALLL formulas are not a one size fits all proposition. You need to factor in your portfolio, management, collections, etc.

Based on our regulator's insistence that our ALLL should be increased way out of proportion to our miniscule historical losses, I would say that a good formula would be
"M + O + R + E".

You might take a look at:

http://www.triacnet.com/catalog.htm

I have not reviewed the product, but the price seems reasonable.

Thanks AL for your help. I went to the WEBSITE and it was just what I was looking for...

Last year - June/July, the FFIEC issued new interagency guidance on ALLL. This would be the place to start. I have attached the link to the OTS website and the policy statement. Since it is interagency the actual policy statement is the same for all regulators - the cover letter probably differs between agencies. This is what they are examining agaist now - rather than the old rules.

Good Luck

[url=http://www.ots.treas.gov/docs/25142.pdf]

For OCC banks, the ALLL guidance was issued in Bulletin 2001-37.