Opinion ID: 612337
Heading Depth: 2
Heading Rank: 2

Heading: Loan Losses Reserves

Text: Rensin alleges that GAAP required Regions to maintain adequate reserves for: (1) estimated credit losses for loans specifically identified as being impaired; (2) estimated credit losses for loans or groups of loans with specific characteristics that indicate probable losses; and (3) estimated credit losses inherent in the remainder of the portfolio based on current economic events and circumstances. According to SFAS No. 114, [a] loan is impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. J.A. 1089 (Am.Compl.¶ 169 (quoting Accounting by Creditors for Impairment of a Loan, SFAS No. 114 ¶ 8 (Fin. Accounting Standards Bd. 1993))). The complaint acknowledges that Regions increased its allowance for credit losses during the relevant period and reported that these increases were attributable in part to adverse trends in the mortgage and housing markets. Nonetheless, plaintiff contends that Regions' loan loss reserves from the first quarter of 2007 through the first three quarters of 2008 were materially inadequate and did not reflect the high risk of loss inherent in its mortgage loan portfolio. J.A. 1088 (Am. Compl.¶ 168). These allegations suffer from the same deficiencies as those regarding goodwill. As Judge Kaplan recognized, determining the adequacy of loan loss reserves is not a matter of objective fact. Instead, loan loss reserves reflect management's opinion or judgment about what, if any, portion of amounts due on the loans ultimately might not be collectible. See J.A. 1025-26 (Am. Compl.¶ 10 (The provision for loan losses is used to maintain the allowance for loan losses at a level that, in management's judgment, is adequate to cover losses inherent in the loan portfolio as of the balance sheet date. (emphasis added) (quoting Regions 2007 Form 10-K))). Such a determination is inherently subjective, and like goodwill, estimates will vary depending on a variety of predictable and unpredictable circumstances. See United States v. Morris, 80 F.3d 1151, 1164 (7th Cir. 1996) ([T]he estimation of probable losses in a large loan portfolio ... is more an art than a science, and ... any two analyses of probable losses in the same portfolio are unlikely to exactly correspond....); Shapiro v. UJB Fin. Corp., 964 F.2d 272, 281 (3d Cir.1992) (There appears to be no single method of evaluating and setting loan loss reserves, perhaps because no method has proven foolproof. Some banks set their loan loss reserves by comparing the size of the reserves to that of the loan portfolio. Others also analyze the quality of their loans in varying degrees of detail and according to a range of different criteria and classifications. (citations omitted)). Plaintiff does not point to an objective standard for setting loan loss reserves. [6] Thus, in order for the alleged statements regarding the adequacy of loan loss reserves to give rise to liability under sections 11 and 12, plaintiff must allege that defendant's opinions were both false and not honestly believed when they were made. Virginia Bankshares, 501 U.S. at 1095, 111 S.Ct. 2749. Because the complaint does not plausibly allege subjective falsity, it fails to state a claim.