This case describes how a smaller retail bank provisioned for loan losses in the period leading up to the recent financial crisis. The bank made a single loan based on an unsubstantiated appraisal that was so large that the quarterly financial statements clearly show how the loan moves to nonperforming status in one quarter, then is partially written off in the subsequent quarter. Despite the large increase in nonperforming loans, the bank does not materially increase the allowance for loan losses. As such, it provides an opportunity to analyze the riskiness of loan portfolios and the adequacy of the allowance for loan losses, and to discuss the potential effects (and controversy) of the new accounting update, which governs how retail banks account for loan loss allowance.
