What is the allowance for credit losses?
It is the part of its loans a bank does not expect to collect. The allowance is deducted from loans, so the balance sheet shows the net amount the bank expects to collect.[S2] The estimate covers each loan's full contractual term.[S2]
How is the allowance ratio worked out?
It is the allowance at period end divided by total loans at period end, times 100. SEC rules ask banks to give the ratio with both of its parts.[S1]
What makes the allowance go up or down?
The provision for credit losses, an expense in the income statement, adjusts the allowance to the bank's latest estimate.[S2] Loans written off as uncollectible are taken out of it.[S2] The estimate draws on past losses, current conditions and forecasts the bank judges reasonable.[S2]
Where do you find it in a 10-K or 10-Q?
- Balance sheet: loans, with the allowance shown separately.[S4]
- Income statement: the provision line.[S5]
- Notes: a table from the opening to the closing allowance, with the provision, write-offs and recoveries.[S2]
- The ratio, and the allowance split by loan category, with the reasons for big changes.[S1] The rule sets no location; commenters told the SEC in 2019 that banks typically put them in MD&A, the Business section or the notes.[S6]
What does the allowance ratio leave out?
- Loans already written off. Those appear as net charge-offs.[S2][S1]
- Expected losses on unused credit lines it cannot cancel at will, which sit in a separate liability.[S3]
- How the estimate was made. Each bank picks its own methods and forecasts, using judgment.[S2]