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:

  1. 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.
  2. 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.
  3. 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.
  4. 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.
Last modified on
09/14/22