Bank Analysis School Case Study eBook

Sunny State Bank

ALLOWANCE FOR CREDIT LOSSES

ACL to Total Loans (Level)

ACL to Total Loans (Trend)

20X5Q4

1.80%

Quarter

1.20%

1.60%

1.20%

1.40%

0.99%

1.00%

0.84%

1.12%

1.20%

1.04%

1.01%

0.80%

0.97%

1.00%

1.05%

0.87% 0.84%

0.83%

0.80% 0.83%

0.60%

0.91%

0.80%

0.70% 0.71%

0.70%

0.86% 0.78%

0.74%

0.73%

0.73% 0.72%

0.40%

0.60%

0.54% 0.58%

0.20%

Bank

State

All Banks

20X9Q2

20X9Q3

20X9Q4

20X0Q1

20X0Q2

20X0Q3

20X0Q4

20X1Q1

20X1Q2

20X1Q3

20X1Q4

20X2Q1

20X2Q2

20X2Q3

20X2Q4

20X3Q1

20X3Q2

20X3Q3

20X3Q4

20X4Q1

20X4Q2

20X4Q3

20X4Q4

20X5Q1

20X5Q2

20X5Q3

20X5Q4

ACL Activity (Year-to-Date)

ACL Activity (End of Prior Year)

Quarter

Quarter

20X5Q4

20X4Q4

Beg ALLL

Provisions Other Adj.

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

Provisions Other Adj.

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

Beg ALLL

Recoveries

Recoveries

Losses

Losses

Total

Total

Current Qtr

End of Prior Year Qtr

20X5Q4

20X4Q4

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.