When adjustments to an institution's ALLL are warranted by Q factors, the presentation of those adjustments to an examiner and/or auditor is critical, and institutions must determine what key drivers will be used to quantify the factors. It is important to demonstrate consistency and transparency, making documentation key. There are two ways that credit union pros can reduce the scrutiny associated with an adjustment:

Consistent sourcing: Whether you're justifying an adjustment in one of the nine Q factors, or another factor specific and relevant to the institution, it's paramount to ensure your source material is consistent. If during the first quarter of the year, a banker utilized the national unemployment rate from the Federal Reserve Economic Data to assess national economic conditions, then that same source should be used in calculating the adjustment for the third quarter's ALLL as well.
Qualitative scoring matrix: Use a qualitative scoring matrix – where the factors are outlined and graded using a systematic score – to strengthen the framework around the ALLL calculation and ensure directional consistency. Once adjustments are made, make sure to add relevant comments and cite the data or drivers used to support the adjustments. The comments can be concise, but keep in mind that the goal is to describe the trends observed within the supporting data and thus the reasoning behind the adjustments.

Credit union professionals responsible for the ALLL calculation know that it can be a challenge to serve three masters – those of their key executives and members, auditors and examiners. Ensuring that the subjective material of the Q factors is presented in a clear and consistent way quarter over quarter will serve the important purpose of making the calculation and any adjustments more easily defensible.

Instant Insights /

Consistency, Transparency Keys to Q Factors in ALLL

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