The Hilltop Companies’ core strength is assessing, calculating, minimizing and accounting for credit risk. The Allowance for Loan and Lease Losses (ALLL) is the summation of all these activities and is where the estimate future credit loss exposure is recorded in the financial statements. While calculating and recording the ALLL is the important step to accounting for the ALLL, there are several key steps that we consider when arriving at the proper ALLL amount.
Our credit risk service includes three primary components which are as follows:
- Risk Management Policy, Structure, and Controls Risk Assessments:
- Establishing your Credit policy
- Setting up credit processes
- Establishing ALLL policy
- Testing policy and process compliance
- Loan portfolio analysis and Loan Reviews:
- Loan portfolio characteristic analysis
- Loan portfolio performance analysis (delinquency trends, loss trends, prepayment trends, etc.)
- Loan document quality reviews
- Loan credit quality – underwriting reviews
- Recalculation of ALLL – as described below.
The Hilltop Companies performs the following specific ALLL services. which relate to the credit risk assessment of a loan or lease portfolio,
- Loan portfolio completeness and accuracy assessment – understanding the population of risk, the data accuracy and the validity of delinquency reporting are some of the steps undertaken with this service
- Credit risks identified – identifying what credit risks are arising, which loans or leases are affected, timing of such credit risks, any specific loan/lease characteristics, etc.
- Identifying loans with the credit risk issues identified – our process to specifically identify which loans (whether current or delinquent) subject to the above credit risks
- Frequency of loss assessed/recalculated – we assess the probability of a loan becoming delinquent based on past credit trends,
- Severity of loss assessed/recalculated – we assess the amount of loss incurred and the characteristics of loans/leases that have resulted in a loss
- Recalculation of expected losses on loans that are delinquent or impaired – using all of the data gathered about the loan or lease portfolio, we recalculate the expected losses on delinquent loans
- Identification of the credit risk exposure on current loans – using all of the data gathered about the performing loan or lease portfolio, we recalculate the expected losses on such loans
- Calculation of ALLL using our independently determined data, assumptions and credit ratings
- Recalculations and testing of ALLL as provided by client – we recalculate the ALLL using your data, assumptions and credit ratings. This effort is completed to ensure that all factors have been considered and that data utilized is accurate/complete. We typically compare the results from the last two steps and determine whether there are any significant differences.
- Discussions with Regulators and Auditors where issues have been identified by such – our team members have often been “in the shoes” of either or both the Regulator or External/internal auditor. Having this experience, we understand what concerns they may have, we are able to “speak the audit language” and often resolve disputes/differences related to the ALLL that your company has recorded.
We recommend integrating the policy and compliance efforts, the loan review work and the ALLL analysis and calculation. The regulators and external auditors are often supportive of this approach because we assess credit risk from a “cradle to grave” perspective i.e. a comprehensive view of the entire credit management efforts performed by your company.