Many times banks will provide their directors with a summary derivation of an appropriate reserve. The reserve adequacy calculation for Insights Bank and Trust (shown here) may be similar to one that you might receive at your bank.

Insights Bank and Trust Calculation of the Allowance for Loan and Lease Loss As of September 30, 1994
Loss Estimates
FAS 114 Res. Component	$235,518
FAS 5 Reserve Component	76,830
Total	$312,348
Acceptable ALLL Range (per ALLL policy)
High +10%	$343,582
Low - 10%	281,112
Current ALLL Balance	$283,000
What is the Required Addition to the ALLL?
This is where Mike McCard's recommendation for the $15,000 increase would go. Normal policy is that the current ALLL balance and the total loss estimates should both be within the acceptable range, as specified in the bank's ALLL policy. There are two questions to ask: 1.) Is the range still appropriate? 2.) If you keep the existing range, is it wise to stay toward the bottom?

The calculation shows estimates of the FAS 114 and 5 components of the reserve, giving an estimated loss in the loan portfolio of $312,347. Per the bank's ALLL policy, the ALLL balance is considered adequate if it falls within 10 percent of the estimated loss. Currently, the Bank's reserve balance stands at $283,000 which is toward the bottom end of the range considered as adequate.

Because the balance falls within the acceptable range, should you move on to the next item? Not necessarily. Click on the question mark button at the bottom of the Insights report on the left.

Here are some questions you should consider:

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