Why You Should Consider Using a Qualitative Scoring Matrix

A scoring matrix can be used within the qualitative and environmental portion of the allowance calculation to add objectivity. This consists of assigning a specific scoring based upon trends in qualitative and environmental factors. For instance, if there is a "slight improvement" in the economy, institutions using a qualitative scoring matrix would then assign an adjustment in basis points equivalent to a "slight improvement." If in the next quarter there is a "decline," they would then adjust accordingly. This qualitative scoring matrix is a way to add objectivity and ensure directional consistency in the justification of qualitative and environmental factors.

Justify & Support Your Qualitative Factors

This video provides some insight into the data used in the justification of qualitative and environmental factors. Many institutions use Federal Reserve Economic Data, specifically the unemployment rate to denote improvements or declines in the economy. For changes in the value of underlying collateral for collateral specific loans, many institutions use market data such as Case Shiller. The most important item to note is that the use of this data must be done in a consistent manner. Examiners will not only want to see the supporting documentation behind your assumptions, but also evidence that you have been consistent with your assumptions from period to period.

Assembling Appropriate ASC 450-20 (FAS 5) Pools

This brief video touches on the topic of segmentation within the ASC 450-20 (FAS 5) portion of the ALLL calculation. While generally the more granular an institution gets, the more defensible the calculation is in the eyes of examiners, there certainly is a tipping point. Institutions must maintain statistical relevancy and ensure that they do not over-segment their pools. Finding a good balance can help institutions to gain more insight into their portfolio, have a more concise calculation and be better equipped to defend their methodology to auditors and examiners.