How Do You Recommend Justifying an Unallocated Reserve
Jan 21, 2015
Todd Sprang, Principal of CliftonLarsonAllen, mentions that many institutions mistakenly use an unallocated reserve to make adjustments that may well be within the scope of the nine recommended qualitative factors. Sprang recommends that institutions use an unallocated reserve that is no more than 10% of their total reserve, and to use qualitative and environmental factors where necessary to ensure their unallocated reserve is not artificially high.
For unallocated reserves, I think institutions that have unallocated reserves are over 10% of their total reserves.
When we ask them why they maintain such reserves, the explanations usually involve qualitative factors. So they start talking about things that represent their qualitative factors, those that recommend that they reclassify the unallocated out of that portion of the loans and into their qualitative reserves to better document why they need to reserve levels, and keeping their unallocated at a stable, core percentage.