Bank Analysis School - Case Study & Resources

ALLOWANCE FOR CREDIT LOSSES

Sunny State Bank

ACL to Total Loans (Level)

ACL to Total Loans (Trend)

1.60%

Quarter

20 X5 Q4

1.19%

1.20%

1.40%

0.99%

1.00%

0.84%

1.20%

0.80%

1.05%

0.60%

0.97%

1.00%

0.84%

0.40%

0.76%

0.80%

0.84%

0.20%

0.71%

0.70%

Bank

State

All Banks

20 X9 Q4 20 X0 Q4 20 X1 Q4 20 X2Q4

20 X3 Q4 20 X4 Q4 20 X5Q4

ACL Activity (End of Prior Year)

ACL Activity (Year-to-Date)

Quarter

20 X4 Q4

Quarter

20 X 5 Q4

Beg ALLL

Provisions Other Adj.

350,000

Provisions Other Adj.

50,000 100,000 150,000 200,000 250,000 300,000 350,000

Beg ALLL

300,000

250,000

200,000

Recoveries

150,000

Recoveries

Losses

100,000

Losses

50,000

Total

Total

End of Prior Year Qtr

Current Qtr

20 X4 Q4

20 X5 Q4

The Allowance for Credit Losses (ACL) is a reserve set aside to cover potential credit losses from defaulted assets, primarily loans. Banks with asset quality issues and higher expected credit losses should maintain a higher ACL. The ACL should be directionally consistent, meaning that deteriorating credit conditions result in a higher ACL. Provisions and recoveries on charged off assets increase the ACL, while credit losses deplete it.