The NCUA recently held a webinar on the allowance calculation. Most of the information covered was basic, but a large part of the webinar was dedicated to the inclusion of qualitative factors in your calculation. The NCUA is expecting you to include and support these factors, but in a poll of the 2,100 attendees, about half in attendance said they are not including qualitative factors in their calculations and 25% of those are say they cannot support their factors.
The logic behind including qualitative factors is that your loan portfolio is different than it was during the period which you calculated historical charge offs, and this should be reflected in your allowance. They gave eight examples of qualitative adjustments. There doesn’t need to be an adjustment for all eight, but you should consider them. I have elaborated on the the items that seemed more significant to the NCUA They include:
(1) Lending Policies
(2) The Local Economy – Charge offs throughout the industry have been very tightly tied to the unemployment rate. Your historical charge offs should be adjusted to reflect changes in the local unemployment and other economic factors.
(3) Loan Volume
(4) Internal Staffing Changes
(5) Credit Quality / Delinquency – There should be adjustments to your historical loss percentage for changes in the quality of your portfolio. The NCUA is going to be more thorough in their analysis of credit quality than your financial statement auditor, so be prepared to support this qualitative adjustment. According to the NCUA, credit unions should be monitoring changes in FICO scores on a quarterly basis.
(6) Loan Review Systems
(7) Collateral Values – Changes in the value of collateral will affect the amount recovered from foreclosed properties and could also result in a change in strategic delinquency. This will result in a change in your net charge off rate.
The NCUA posted a chart in their slides that depicts the adjustments made by Qualitative Factor and Loan Type. Here is their example:
A Twenty Twenty Logo denotes items which are supported by a Twenty Twenty Portfolio Analysis.
In total there are 23 adjustments, 20 of which increased the allowance factor. That may be an indicator in what they expect to see in terms of qualitative adjustments. You should be prepared to support the reasoning behind all of your qualitative adjustments, but I would stress that you should be especially prepared to support any adjustments decreasing your allowance.
Dan Price, CPA
Twenty Twenty Analytics Blogger