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#71410 - 04/02/03 06:38 PM Unfunded commitments on Allowance for Ln Loss rprt
RebekahL CRCM Online
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RebekahL CRCM
Joined: Feb 2003
Posts: 782
Big Sky Country
I am at a total loss...

Under the "unfunded commitments" heading on our ALL, we have always included the loan commitments we have made in response to loan requests. These commitments are written commitments for financing that expire, but have not yet been consummated by the customer or booked on our system.

Is this correct - should these commitments be included on the ALL? My auditor questions it, since we have not signed any contracts with the customer or booked the funds on our system - why do we have to set aside 1% of the total for a loss reserve?

In the same vein, what about the unused portions of credit lines - where do they get reported? (i.e. a business LOC for $500,000 that only has $100,000 outstanding. What do we do about the remaining $400,000? Also, would consumer overdraft protection lines with funds available be included?) I assume they are included in "unfunded commitments".

I have looked everywhere but simply cannot find this issue spelled out, in black and white. Any help you can provide would be greatly appreciated!
Me, Type A? Maybe - I'm not done analyzing it yet.

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#71411 - 04/02/03 08:20 PM Re: Unfunded commitments on Allowance for Ln Loss rprt
1111 Offline
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Joined: Jan 2003
Posts: 580
Look at Call Report Schedule RC-G - Other Liabilities, line 3 (Allowance for credit losses on off-balance credit exposure). Basically, you report the amount of any allowance for credit losses on off-balance sheet exposures established in accordance with generally accepted accounting principles.

"Since 1996, the Audit and Accounting Guide - Banks and Savings Institutions, published by the American Institute of Certified Public Accountants, has stated that credit losses related to off-balance sheet financial instruments should be accrued and reported separately as liabilities "if the conditions of FASB Statement No. 5 are met." Consistent with this accounting guidance, the Call Report instructions state (on Glossary page A-3) that "each bank should also maintain, as a separate liability account, an allowance sufficient to absorb estimated credit losses associated with off-balance sheet credit instruments." Off-balance sheet credit instruments include off-balance sheet loan commitments, standby letters of credit, and guarantees

On the Call Report, a bank must report its "Allowance for credit losses on off-balance sheet credit exposures" in item 3 of Schedule RC-G, Other Liabilities, not as part of its "Allowance for loan and lease losses" in Schedule RC, item 4.c. However, for risk-based capital purposes, the "Allowance for credit losses on off-balance sheet credit exposures" is combined with the "Allowance for loan and lease losses" and the total of these two allowances is included in Tier 2 capital up to a limit of 1.25 percent of a bank's gross risk-weighted assets. For further information on the inclusion of these allowances in Tier 2 capital, please refer to the instructions for Call Report Schedule RC-R, item 14."

With that said, it is not necessary or required to match the percentage that is reserved on loan assets, especially since off-balance sheet assets may or may not turn into booked loan assets. Therefore, an allowance of 25 to 50 percent of the allowance allocated to actually loan assets is reasonable.

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#71412 - 04/03/03 05:20 PM Re: Unfunded commitments on Allowance for Ln Loss rprt
Dollar Bill Offline
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Dollar Bill
Joined: Nov 2002
Posts: 107
I can see where the auditor is coming from. In the past, financial institutions have usually had a budget for the provision for loan loss and made an entry each month to the allowance account.

Now with the FFIEC Policy on Allowance for Loan Loss, that cushion is no longer allowed, which can be somewhat confusing. All allowance percentages allocated to the loan segments must be justified based on prior losses and economic trends in the portfolio.

To answer the question, I think that you would have to justify the percentage allocated to the unfunded committments. However, I have never heard of an examiner criticize that the allowance account is over-reserved, unless it is obvious of course.

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#71413 - 05/02/03 10:45 PM Re: Unfunded commitments on Allowance for Ln Loss rprt

We were told by our external auditors that we need to rethink the current formulas for our ALLL Analysis. Can someone share their BC-201 Qualitative Factors for the different loan pools (HELOC, Residential Mortgages, Commercial/Investment Mortgages). Our current analysis just pools the portfolio into all Mortgage loans, Consumer lines of credit and Installment Loans.

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