Qualitative And Environmental Factors In The ALLL

How a solid allowance methodology and consistent application provides peace of mind for a Colorado credit union.

Westerra Credit Union ($1.3B, Denver, CO) revised its process for taking qualitative and environmental (QE) factors into consideration for its Allowance for Loan and Lease Losses (ALLL) approximately one year ago. Today, the credit union breaks down its analysis according to each of the eight risk areas identified in NCUA’s Notice of Final Interpretive Ruling and Policy Statement (IRPS) 02-3.

We have found that breaking down ALLL by risk area according to the guidance NCUA has provided is helpful, says Jennifer Meyers, Westerra Credit Union’s CFO. We take each of these specific areas and risk weight them based on how those items would impact the actual loss potential in our portfolio.

The eight risk areas include:

  1. Levels of and trends in delinquencies and impaired loans;
  2. Levels of and trends in charge-offs and recoveries;
  3. Trends in volume and terms of loans;
  4. Effects of any changes in risk selection and underwriting standards, and other changes in lending policies, procedures, and practices;
  5. Experience, ability, and depth of lending management and other relevant staff;
  6. National and local economic trends and conditions;
  7. Industry conditions; and
  8. Effects of changes in credit concentrations.

Qualitative Assessment And Hard-Data Decisions

Hard data is relatively easy to find because Westerra reviews both the levels and trends in delinquencies and impaired loans, charge-offs, loan volumes, and terms to help it assess whether it needs to adjust its ALLL.


Westerra Credit Union
Data as of 06.30.15

  • HQ: Denver, CO
  • ASSETS: $1.3B
  • MEMBERS: 94,292
  • BRANCHES: 11
  • 12-MO SHARE GROWTH: 4.07%
  • 12-MO LOAN GROWTH: 12.44%
  • ROA: 0.46%

We consider each of these financial metrics and conclude with a narrative in which we qualitatively assess whether we need to reserve more or less, Meyers says. There is a true qualitative assessment happening in each area, but we are using the hard data to draw our conclusions and support our decisions.

The credit union makes use of national reports on key factors such as unemployment and regional press from local economic councils to help assess national, local, and economic trends. In the Denver area, the University of Colorado publishes a local economic forecast the credit union includes in its analysis.

We look at this information for elevated trends moving in either a positive or negative direction so we can more accurately assess our allowance, Meyers says.

The credit union has policy-based limits for credit concentrations that it monitors, but it also trends this data over time to see if patterns emerge.

We look at this information for elevated trends moving in either a positive or negative direction so we can more accurately assess our allowance.

This is important because the credit union handles all of the research, analysis, and narrative conclusions internally.

As local and national economic conditions have improved, we’ve been able to decrease our ALLL and haven’t had to revisit our risk weightings, Meyers says.

Separation Of Duties

Westerra has separate finance and accounting departments and has found a consistent methodology with built-in checks and balances is simpler than if one area handled the entire process.

Our finance department prepares the qualitative and environmental analysis every quarter and presents it to our manager of accounting for input, Meyers says, Then, as the CFO, I review it. It is truly a joint effort. This is important because it provides enhanced insight and separation of duties.

Beyond separating the analysis and review process, the credit union has established a separate allowance for loan loss committee outside of ALCO. The committee meets quarterly to review the credit union’s key assumptions and make sure the ALLL is adequate. Members of the committee include representatives from lending, finance and accounting, as well as enterprise risk management and default management, which encompasses collections, recovery, and loss mitigation.

We had discussions with the committee around the initial proper weighting and have left them the same, Meyers says. We don’t revisit those every quarter, which is key. You have to be consistent. Although we are open to revisiting the weightings if a significant event occurs, such as the loss of a major employer or another major recession. Fortunately, we haven’t had to address those types of events.

In addition to the allowance for loan loss committee’s quarterly meetings, the credit union reviews its ALLL and QE component during its annual audit and during periodic internal audits.

Establishing a methodology that the credit union’s executive managers and allowance for loan loss committee stands behind and applying it consistently provides Westerra with a well-documented QE analysis that pleases both the credit union and its examiners.

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August 24, 2015

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