Building Picture EPB Employees Credit Union
Allowance for Loan and Lease Losses Policy
Phone: (423) 648-3413, Fax: (423) 698-2912, email: epbecu@epbecu.org
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The information contained herein is for the Directors, Officers, Employees and Members of EPB Employees Credit Union, 1500 McCallie Avenue, Chattanooga, Tennessee, USA. It is provided as both a convenience and as an off-site backup in case of an emergency. No authorization is given to any other person or entity to use this information in part or in whole.
ALLOWANCE FOR LOAN & LEASE LOSSES (ALLL) POLICY
EPB Employees Credit Union

  1. PURPOSE

    1. This policy addresses the method and documentation this Credit Union will use to determine the adequacy and appropriate level of the Loan and Lease Loss Allowance Account.

    2. This policy addresses the method and documentation this Credit Union will use to evaluate the loan portfolio for purposes of establishing estimates of probable loan losses.

    3. The intent of this policy is to comply with all:
      1. Tennessee Department of Financial Institutions rules and guidelines,
      2. National Credit Union Administration rulings and guidelines,
      3. Generally Accepted Accounting Principals.

 

  1. RESPONSIBILITY AND REPORTING

    1. Management is responsible for establishing and maintaining an appropriate Loan Loss Allowance Account balance.

    2. The Supervisory Committee is responsible for the periodic selection (at least annually) of loans on a random basis for the purposes of:
      1. Verifying loan documentation
      2. Verifying compliance with Credit Union lending and charge-off policies,
      3. Verifying that proper reporting is being made to the Board.

    1. A written Loan Loss Reserve Analysis report will be submitted by Management to the Board of Directors at its regularly scheduled meeting.

 

  1. METHODOLOGY

    1. The following calculation will be used to compute the ALLL each month.

      1. Delinquent loans will be classified and specific losses estimated on an individual loan basis.
      2. The Credit Union will then apply a loss ratio calculation per loan segment to the loan balances outstanding.
      3. The estimates in number one will be added to the amounts computed by historical loss ratios in number two. This new calculated amount will be subtracted from the ALLL balance to determine whether the balance is over-funded or under-funded.

    1. Once the funding status of the ALLL is determined, Credit Union Management will adjust the allowance account contribution expense during month-end processing. The adjustment, usually a contribution, will be limited by what the Credit Union can afford for that month. A general guide will be to contribute no more than 40% of the net monthly income during any one month.

    1. If the ALLL balance exceeds the calculated funding status, Management will not need to make a contribution for that month. However, due to environmental factors or other known circumstances, Management may exceed the calculated funding status. Reasons for such excess shall be provided to the Board by Management.

 

  1. DELINQUENT LOAN CLASSIFICATIONS AND SPECIFIC LOAN LOSS ESTIMATES

    1. Management will use computer generated reports to determine the severity of loan delinquency. Management will prepare and submit monthly to the Board a Loan Delinquency Report. Report totals will include the number of loans and the totals of balances as of the last day of the month for the following divisions:

      1. 0 to less than 2 months delinquent.

      2. 2 months to less than 6 months delinquent.

      3. 6 months to less than 12 months delinquent.

      4. 12 months and more delinquent.

    1. Management will also prepare and submit monthly to the Board a Loan Loss Reserve Analysis Report. Loans, 2 months or more delinquent, will be identified by name, account number, balance, etc. Management will specify an “estimate of probable loss amount” per each loan. These amounts will be totaled based on segment (secured, unsecured and mortgage).

 

  1. * WEIGHTED AVERAGE YIELD AND LOAN LOSS RATIOS
    1. The Loan Loss Reserve Analysis Report will also show the weighted average yields and loan loss ratios calculation based on internal Management reports. These figures are derived by tracking, per each segment, the month-end loan balance totals, total recoveries and total charge-offs. ** A 12-month running weighted average and loan loss ratio per each segment will be calculated and disclosed on the report.

    2. The report will show the totals in the ALLL account and the net effect of the estimate of probable loss added to the loss ratio calculations. The excess or deficit in the ALLL account will be disclosed.

 

  1. REVIEW

    1. Periodic reviews will be conducted by the Supervisory Committee, the external auditor, and state and federal regulatory agencies to provide for a continued validation of this policy.

    2. Recommendations for changes must be approved by the Board.
Approved: 2/20/2003
Revised: * 5/18/2005
Revised: ** 12/14/2005