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.