Current expected credit loss (CECL) rules are more than just a change in accounting standards, they have the potential to alter the credit union business model, according to Sally Myers, principal, and Rob Johnson, executive vice president/principal, for C. Myers Corp.

They addressed the 2019 CUNA Finance Council Conference Monday in New York City.

CECL is a new accounting standard that changes the accounting for credit losses, recognizing lifetime expected credit losses instead of the current “incurred-loss” approach. NCUA has made preparing for CECL a supervisory priority in 2019.

“CECL requires a mindset shift,” Myers says. “Initially, it’s counterintuitive to many C-suite members and board members because there will be a disconnect between actual financial performance and what your financials show. That disconnect needs to be connected.”

She says some financial institutions will be tempted to restrict loan growth in the pursuit of better short-term financial performance. That would be a mistake.

“As you’re growing loans, you need to feed that CECL beast by accounting for losses over the life of the loan up front,” Myers says. “You have to explain this to other people making strategic decisions.”

Johnson cites several strategic considerations for credit unions:

• There may be a disconnect between financial statements and ultimate financial performance.
• Financial results will be affected initially due to CECL requirements.
• Policies may need to be adjusted due to CECL-induced volatility.
• Financial modeling will need to be longer-term to gauge the impact on your portfolio. “If you stop too soon, you won’t make good financial decisions."

The silver lining: Focusing more on forecasting may result in improvements, such as better pricing decisions or improved efficiencies.

“Look now at policy triggers and limitations,” Johnson advises. “Experiment today with different policy limitations by asking, ‘if CECL were in place today, what would happen?’ You don’t want your policies to box you in due to CECL.”

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Most importantly: Communicate these changes now to board members and executives in all areas of the credit union.

“You’re working with people who don’t do financials [full-time],” Myers says. “Your boards aren’t living in the CECL world. You need to fast forward to the end of the loan term to see all of the yield. Start talking about net yield over the life of the loan.

“Build a story you can replicate for your team to explain what’s happening and why,” she continues. “Start educating now and continue. This will take repetition because you’re trying to undo how things were for decades.”

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