Appendix A – Allowance for Credit Loss Calculation

For each loan portfolio segment, the Allowance for Credit Losses calculation is as follows:

Item #	Action	Value	Notes	Tool Location
1		All loans		Tab 3, column A
2	Minus	Loans assessed on an individual basis		Tab 3, column B
3	Equals	Loans to be assessed on a pooled basis		Tab 3, column C
4		Weighted average 3-year net charge-off rate using Call Report data	(a)	Tab 3, column D
5	Plus/Minus	Loss rate adjustment for qualitative factors	(b)	Tab 3, column E
6	Equals	Applicable loss rate for pooled loans		Tab 3, column F
7		Weighted Average Remaining Maturity (WARM)	(c)	Tab 3, column G
8	Plus/Minus	WARM adjustment for qualitative factors	(d)	Tab 3, column H
9	Equals	Applicable WARM rate for pooled loans		Tab 3, column I
10		(3): Loans to be assessed on a pooled basis		Tab 3, column C
11	Multiplied	(6): Applicable loss rate for pooled loans		Tab 3, column F
12	Multiplied	(9): Applicable WARM rate for pooled loans		Tab 3, column I
13	Equals	Allowance for credit losses for pooled loans		Tab 3, column L
14		Aggregate of allowance for credit losses for loans assessed on an individual basis		Tab 1, column B
15	Plus	(13): Allowance for credit losses for pooled loans		Tab 1, column C
16	Equals	Allowance for credit losses for loan portfolio segment		Tab 1, column D

Notes:

Loss rate: Obtained from each credit union’s historical Call Report submission. The spreadsheet is pre-populated with the weighted average 3-year net charge-off rate. The rate is determined by using the net charge-offs (charge-offs less recoveries) divided by the period-end balance of loans. To determine the weighted average, the rates from the previous three annual Call Reports are weighted by the balance of the loan portfolio category for the period by all aggregate balances of the category for the three years. The credit union determines whether the weighted average 3-year net charge-off rate is applicable for determining the Allowance for Credit Losses and can modify the rate by qualitative factors.
Loss rate adjustment for qualitative factors: Historical experience may not fully reflect current conditions and expectations about the future. Accordingly, adjustments should be made to reflect current conditions as well as reasonable and supportable forecasts. The credit union should consider significant factors relevant to determining expected collectability. See Appendix C for examples of qualitative adjustments.
WARM: Factors provided are for a peer group of federally insured credit unions with under $100 million in assets. Credit unions should consider whether this peer group can be a basis for estimating the Allowance for Credit Losses on their portfolio. Documenting the applicability of this peer group to your financial institution is a usual audit requirement.
WARM adjustment for qualitative factors: Historical experience may not fully reflect current conditions and expectations about the future. Accordingly, adjustments should be made to reflect current conditions and reasonable and supportable forecasts. The credit union should consider significant factors relevant to determining the expected remaining life of its loan portfolio segments. See Appendix C for examples of qualitative adjustments.