The impact of Current Expected Credit Losses (CECL) implementation won’t be felt for more than three years, but credit union chief financial officers (CFOs) are preparing ardently for what promises to be a “fundamental shift” in their balance sheet strategies.
A trio of finance professionals with intricate knowledge of the new accounting standard offered their insights during a panel discussion at the CUNA CFO Council Conference Tuesday in Orlando.
“There’s not an easy way to say today what CECL will do to your credit union because it all depends on the economic cycle when this goes live,” says Ashlee Micale, executive vice president/CFO at San Diego County Credit Union.
“Using different methodologies on the same data yields huge variances,” she adds. “You need to plan ahead for financial resources and operational resources you’ll need to allocate toward compliance.”
Generally speaking, credit unions cast a wary eye on CECL, which goes into effect in the fiscal year beginning after Dec. 15, 2020. But a positive side effect of the change is credit unions’ increased interest in better using data analytics to manage their balance sheets proactively.
“With data analytics, you can look for trends and manage credit unions better,” says Julie Renderos, executive vice president/CFO at Suncoast Credit Union in Tampa, Fla. “You’re making sure there’s a canary in the coal mine. When you’re looking into trends, you’ll spot things right away. During the last recession, we didn't have the caliber of analytics in place to recognize early on what was happening.”
Another encouraging development is that NCUA has indicated it will allow credit unions latitude to design a CECL program suitable for the organization’s circumstances.
“This is a blank canvas,” says Susan Gruber, senior vice president/CFO at Patelco Credit Union in Pleasanton, Calif. “You can create the methodology that works best for your balance sheet.”
While CECL remains somewhat mysterious, the three CFOs outlined 10 points for consideration:
1. Start preparing now. 2020 sounds like the distant future now, but soon it will be a matter of hindsight.
2. Create a road map. Mile markers for progress have proved especially beneficial at San Diego County Credit Union. Determine which steps the credit union must take toward by compliance by a specific date, and stick to them.
3. Plug into available resources. Consult with vendors, peers, forums such as the CUNA CFO Community, and the abundance of white papers that vendors, consultants, and regulatory bodies issue on the topic.
4. Create a task group. Micale formed an internal, cross-functional CECL group in 2014 that continues to meet monthly, exchanging information and enlisting support for challenges that arise.
5. Expect a varied impact. Credit unions will experience CECL differently based on asset size and complexity, among other factors. Micale serves on an NCUA advisory council with Renderos that assesses regulators’ application of the rule.
“We don’t expect overly complex solutions for small credit unions. Don’t expect solutions that are overkill,” Micale says. “But for larger credit unions and more complex balance sheets, there certainly is a need for a more complex solution.”
6. Educate stakeholders. Brace your senior management and board for the changes CECL will usher in. “You don’t want any surprises,” Micale says.
7. Refine existing data. Patelco has access to nearly 15 years of data thanks to preservation from its previous core processor. Still, the credit union battles inconsistent formatting and the degree of variables captured at the time.
8. Revise data collection. Learn from the strengths and weaknesses of the data you evaluate now. Correct data gaps and establish protocol for seemingly mundane categories, such as using either “Ave.” or “Avenue” in addresses, and five- or nine-digit ZIP codes.
Evaluate whether you can establish a data analytics division or emphasis.
9. Evaluate varying methodologies. Determine which assessment and forecasting tools best match your credit union’s beliefs and needs.
10. Weigh third-party vendors’ solutions carefully. Because many products are still in their infancy, ensure they have fully developed the promised methodologies.
“A lot of people are trying to sell you something that you don’t know if you’ll need or not,” Renderos says. “Don’t jump--they’re selling something that might or might not be the best for you.”
►Click here for more conference coverage from CUNA News, and get live updates on Twitter via @AdamMertzCUNA, @cumagazine, and @CUNACouncils, and by using the #CFOCouncil hashtag. Learn more about the CUNA CFO Council, a member-led professional society for credit union executives, at cunacouncils.org.