Posted By: TAlmond
Question:
If economic conditions are improving, loss rates and q factors both naturally fall, potentially dramatically reducing ALLL levels, which regulators don’t like to see. What have other banks done to mitigate the decrease?
2 Answers
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Is your institution experiencing Net Loan Growth? If so, it is a great place to allocate additional Q-Factor reserves. This type of allocation is quite easily supported by graphically displaying the month-to-month balance trends within the growing FAS 5 pools. Also, a slight increase to the Unallocated Reserves likely won’t rile the regulators, but the accountants tend to question it. On top of that, with a decreasing ALLL, the % of “allowable” Unallocated Reserves naturally decreases. Due to these factors, it becomes increasingly advantageous to have reporting capabilities on trends within each FAS 5 pool. For example, your institutions overall Past Dues may be insignificant, but a particular FAS 5 pool could be experiencing increased delinquencies. If that data can be extracted and displayed in some manner, it helps substantiate additional reserves for that specific FAS 5 pool. Other pool metrics to monitor might include Classified, Non-Accrual & TDR [# or %].
We use an unallocated. Makes up about 7% of total reserve. Had an exam in December and caught no grief from examiners.