SAMPLE**
ALLOWANCE FOR LOAN AND LEASE LOSSES POLICY
The Credit Union will comply with FAS 5 - Allowance for Small Balance Homogeneous Pools of Loans, when evaluating loans for potential loss.
Guidelines:
(a) Various Pools of Loans. Management will segment the credit union loan portfolio into several broad categories of loans. Each category will demonstrate similar risk characteristics. The assignment of categories will be reviewed annually to insure that they are still appropriate. At this time the loan portfolio is segmented as follows:
(1) Consumer Loans (Main Office)
(2) Consumer Loans (Branch)
(3) VISA loans
(4) Real Estate Loans (all loans secured by residential property - fixed or variable)
(b) Annual Supervisory Committee Audit. The Credit Union‘s Supervisory auditor will periodically select loans for review on a random basis. The auditor will verify loan documentation, compliance with Credit Union’s lending and charge-off policy, and proper reporting to the Board of Directors. The auditor will report findings directly to the Supervisory Committee.
SEGMENTATION DOCUMENTATION. The credit union will use a variety of documents to support the segmentation of their portfolio, including
(a) Loan trial balances by categories and types of loans;
b) Management reports about the mix of loans in the portfolio;
(c) Delinquency and non-accrual reports;
(d) A summary presentation of the results of an internal or external loan grading review.
ESTIMATING LOSS ON LOAN SEGMENTS. Management will then apply an empirically derived loss rate to each loan segment to determine an appropriate level of funding for that segment‘s Allowance for Loan Loss Account. Initially, that loss rate will be equal to the past twelve months loan loss ratio. This is known as Present Value Funding of the ALL based on last year’s losses. Management will maintain supporting documentation for the technique used to develop their loss rates including the period of time over which they incurred the losses. These loss rates will be reviewed annually for appropriateness and refined as warranted. In developing and maintaining loss measurements, management will consider the impact of current environmental factors and document which factors have been used in the analysis and how these factors affect the loss measurements. Management should also consider the following factors when developing loss measurements:
(a) Levels of and trends in delinquencies and impaired loans;
(b) Levels of and trends in charge-offs and recoveries;
(c) Trends in volume and terms of loans;
(d) Effects of any changes in risk selection and underwriting standards, and other changes in lending policies, procedures, and practices;
(e) Experience, ability, and depth of lending management and other relevant staff;
(f) National and local economic trends and conditions;
(g) Industry conditions; and
(h) Effects of changes in credit concentrations.
OVERSIGHT. Management should consider all known relevant internal and external factors that affect loan collectibility during any given period. Management’s current judgments about the credit quality of the loan portfolio should determine the amounts of the ALLL and provisions for loan and lease losses and should include the following:
(a) The board should review and approve the ALLL and provision for loan and lease losses reported each period;
(b) The board should periodically validate and, if appropriate, revise the methodology to ensure it remains appropriate for the credit union;
(c) The supervisory committee should oversee and monitor the internal controls over the ALLL determination process;
(d) The officials should adjust the ALLL through current earnings in accordance with GAAP; and
(e) The officials should understand that they must meet the full and fair disclosure requirements in NCUA Rules and Regulations before distributing dividends.
SUMMARIZATION REPORTS. Management should prepare a summary document supporting the amount of ALLL it reports on the credit union‘s financial statements. This will verify that the ALLL is fairly presented in accordance with GAAP and is auditable. The Board should review and approve this summary. Common elements in the summary will include:
(a) An estimate of the probable loss incurred for each category;
(b) The aggregate probable loss estimated using the credit union’s methodology;
(c) The amount, if any, of the necessary ALLL adjustment; and
(d) Detailed sub-schedules of loss estimates that reconcile to the summary schedule if so warranted by the level of detail supporting the ALLL analysis.
*SAMPLE*
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ALLOWANCE CALCULATION – EXAMPLE OF POOLING BY RISK CATEGORIES |
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|
CATEGORY |
LOAN BALANCE |
LAST 12 MOS LOSSES |
*CHARGE OFF % |
ADJUSTED ESTIMATE** |
REQUIRED ALLL BALANCE |
|
AUTO RISK A |
$42,500,000 |
$12,000 |
0.028% |
0.028% |
$11,900 |
|
AUTO RISK B |
$13,400,000 |
$49,000 |
0.366% |
0.400% |
$53,600 |
|
AUTO RISK C |
$7,320,000 |
$142,000 |
1.940% |
2.000% |
$146,400 |
|
AUTO RISK D |
$2,980,000 |
$93,000 |
3.121% |
4.000% |
$119,200 |
|
OTHER SECURED |
$12,000,000 |
$87,000 |
0.725% |
1.000% |
$120,000 |
|
UNSECURED LOANS |
$45,000,000 |
$450,000 |
1.000% |
1.000% |
$450,000 |
|
VISA RISK LEVEL 1 |
$9,200,000 |
$61,000 |
0.663% |
0.663% |
$60,996 |
|
VISA RISK LEVEL 2 |
$4,980,000 |
$79,000 |
1.586% |
1.586% |
$78,983 |
|
VISA RISK LEVEL 3 |
$2,600,000 |
$86,000 |
3.308% |
3.308% |
$86,008 |
|
VISA RISK LEVEL 4 |
$120,000 |
$92,000 |
76.667% |
80.000% |
$96,000 |
|
ALL OTHER VISA |
$33,000,000 |
$125,000 |
0.379% |
0.500% |
$165,000 |
|
REAL ESTATE |
$72,000,000 |
$0 |
0.000% |
0.000% |
$0 |
|
TOTAL: |
$245,100,000 |
$1,276,000 |
$1,388,087 |
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*See attached for other observable data that can be used NOT INCLUDED IN THIS EXAMPLE! |
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**Adjusted Estimated rounded until conditions change warranting re-assessment. |
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