The ALLL account is a valuation account used to recognize impairment of a credit union’s recorded investment in loans on its balance sheet before losses have been confirmed later through a charge-off or write-down. This evaluation must be performed at least quarterly with review and approval by the credit union’s Board of Directors.
It is essential that you adequately and appropriately value the assets of the credit union, including loans and doubtful loans, and report those amounts accurately on our call report to meet the regulatory requirement of “Full and Fair Disclosure”.
A credit union should expense an amount to the ALLL for loans when:
1. It is probable a loss has been incurred and;
2. The loss can be reasonably estimated.
The determination of the amounts of the ALLL and the provision for loan and lease losses should be based on management’s current judgments about the credit quality of the loan portfolio, and should consider all known relevant internal and external factors that affect loan collectibility as of the reporting date. Estimating the amount of an ALLL involves a high degree of management judgment and is inevitably imprecise.
Loans should be pooled by like credit risk characteristics and a loss factor applied (based on historical charge-off to average loan balances) which then may be adjusted upward or downward for relevant (and documented) internal or external data.
NCUA guidance on the proper methodology to be used to calculate the adequacy of the ALLL account is contained in Letter to Credit Unions 02-CU-09 and the related Interpretive Ruling and Policy Statement (IRPS) 02-3.