Financial institutions continue to try to find a way to increase their bottom line, whether it is with new clients, new dollars, or increasing profitability.
Traditional sources utilize the institution’s individual loan account interest rates compared to an overall cost of funds; while the institution’s individual deposit account interest rates compared to the overall yield. In this methodology, deposits are evaluated as a single source of funds and loans/leases are evaluated as a single use of funds. Each pool is assessed relative to one another on an account-by-account basis, where the specific rate on a given deposit account is assessed relative to the overall yield of the institution, and the specific rate on a given loan/lease account is assessed relative to the overall cost of funds of the institution.
Lenders already have practices and policies in place to govern ALLL, so all that really has to change are the inputs—and the way organizations think about estimating losses. The fundamental concept, however, is the same: take all reasonable steps to predict the future state of the portfolio.