Community Bank Allowance Methodology Survey Results (Download)

Given the turmoil in the industry, many stakeholders are focusing their attention on the allowance methodology in use at financial institutions. Institutions of all sizes struggle with setting an allowance that covers losses that are probable and estimable on the date of the evaluation. Furthermore, the allowance is not a cushion against possible future losses; that protection is provided by capital.

Two hundred and five individuals completed this Web-based survey, which was conducted in May 2009.

Topics covered included:

• Allowance practices
• The technical aspects of reserve setting including FAS 115 and troubled debt restructuring, as well as disclosure and governance. The survey focuses on the allowance methodology for both the retail and commercial portfolios.

Some Key Findings of the Survey Include:

• More than 25% of participants allocate a management adjustment of more than 25% to the allowance.
• In addition, 62% of participants hold unallocated reserves with more than half of the participants holding 1-10% of unallocated reserves.
• A finite number of trailing months is the criteria used to estimate the relevant historical loss rates. The majority of participants report shortening the loss period to apply more weight to recent losses.

Many other best practices came out of this important survey. To purchase the detailed results, please click the "Add to Cart" button listed at the bottom of this page.