Concerns and challenges
Even with a rock-solid game plan, credit union leaders anticipate challenges down the road.
“The impact of CECL will depend on the complexity of your balance sheet, as well as the size of the credit union,” Gruber says.
“I think it’s going to hit midsize credit unions the hardest,” she adds. “These credit unions originate mortgages, auto loans, and business loans, but they may not be able to afford the analytical power and the talent you need to run CECL.”
Management at ServU Federal Credit Union in Painted Post, N.Y., is tackling CECL with gusto. Christa Nellis, CFO of the $280 million asset credit union, is analyzing every loan on the credit union’s books.
She’s segregating each by loan category, year of origination, and macroeconomic trends such as unemployment rate, consumer price index, and fuel prices.
Nellis has mined the data for individual borrower factors, such as divorce and bankruptcy, which correlate highly with charge-offs.
“I’m going to look at various factors to correlate my charge-offs to what’s happening in the economy,” she says. “So if something changes in the economy, I can look at the correlation to my historical data and predict what may happen in the future.”
ServU Federal CEO Nancy Williamson encourages leaders at smaller credit unions to reach out to colleagues at larger credit unions for help, and to use industry resources, including NCUA’s Office of Small Credit Unions.
“We’ve read everything we can on CECL,” Williamson says. “We’ve gone to classes and we’re trying to learn as much as we can. What I find is when people try to tell you about CECL, no one tells you specifically what you need to do. So we had to figure it out for ourselves.”
Some industry experts are concerned with the timing of the CECL rollout. For one thing, no one is sure what the economy will hold in 2020.
“The economy is likely to slow right around the time credit unions are implementing CECL,” says Mike Schenk, CUNA’s vice president of research and policy analysis. “If we’re not muddling through a recession while we’re implementing, it might certainly be a recessionary environment soon thereafter. This will make CECL implementation more challenging.”
Coupled with the near-simultaneous implementation of NCUA’s new risk-based capital regulation, a downturn in the economy might cause compliance headaches for many credit unions.
The implementation date for NCUA’s risk-based capital rule is Jan. 1, 2019, just prior to CECL, Micale says. “It will be important for credit unions with lower levels of capital to analyze the potential impact of these new requirements and make necessary strategic adjustments to maintain well-capitalized levels.”
Renderos shares Schenk’s concern about CECL’s timing and the possibility of its effective date coinciding with a recession. “During the Great Recession, credit unions experienced significant losses. Under the existing incurred loss model we could increase our provision expense at a measured and controlled pace, allowing us to continue lending to help our local economy.
“Under CECL—with no recovery in sight—we would have booked significant losses at the time new loans were being made, causing a net loss on the new book of business,” Renderos continues.
“Lending through a recession is an important practice credit unions use when working toward an economic recovery,” she says. “The new CECL guidance threatens to discourage this powerful economic simulator.”