In the midst of the coronavirus (COVID-19) pandemic, credit union teams continue to prepare for the January 2023 deadline for compliance with the Current Expected Credit Losses (CECL) accounting standard.
While NCUA has formally requested an exemption from the standard for credit unions, those preparing their organizations amid the chaos say it’s important to move forward with implementation.
Whether identifying a third-party solution to help navigate the new standard or addressing the issue internally, experts say there is no time like the present to be sure your credit union is on track.
Moody’s Analytics suggests organizations follow a four-step process—perform due diligence, establish a working group, identify gaps, and make a plan—to prepare for implementation. Industry leaders say the first few steps should be well underway by now.
A typical internal work group should include board members as well as individuals from finance, lending, , and information technology (IT) departments, according to Moody’s Analytics.
‘In the end, you’re still coming up with an estimate.’
At this point, credit unions should have determined how to approach CECL and begun gathering data, says Ashley Vandermause, chief financial officer (CFO) at $223 million asset UnitedOne Credit Union in Manitowoc, Wis.
“They should have decided first if they’re going ‘in-house’ or with an external vendor,” Vandermause explains. “And if they’re going with a vendor, they should have chosen that vendor.”
Many factors influence that decision, Vandermause says, including the complexity of the credit union’s balance sheet and available internal resources.
“Our balance sheet is heavy in real estate, and we also have a business portfolio,” she notes. “Due to those two factors, we felt using a third party was better for us.”
UnitedOne ultimately chose ProfitStars, with whom it already had a strong connection. Vandermause says her team has realized significant efficiencies by partnering with a vendor that is familiar with its workflows, including fewer monthly downloads and higher confidence in the data since it’s not being recreated across platforms.
Paul Meissner, CFO at $985 million asset Credit Union of America in Wichita, Kan, says his organization began the CECL implementation process with a high level of confidence due to its longtime practice of tracking losses in a manner similar to what will be required by the CECL standard.
“I’m not convinced that you have to use one of these super-complicated models,” Meissner explains. “In the end, you’re still coming up with an estimate.”
Brett Fisher, vice president of asset/liability management at $2.7 billion asset Founders Federal Credit Union in Lancaster, S.C., says his team shared that skepticism and selected an outside vendor on a limited basis. Spotlight Financial uses NCUA Call Report data to quickly generate estimates, which Founders Federal uses strictly for validation purposes.
Fisher says credit unions need to know their core system inside and out and have clarity on all associated capabilities early in the process.
“You need an understanding of what’s manual and what’s automated so you can know how you’re going to get your data,” he advises.
The economic impact of the COVID-19 pandemic has generated some anxiety in the context of CECL implementation.
Fisher says his team has been planning a system conversion and is considering fast-tracking that process—and the credit union’s CECL implementation—to get ahead of the fallout that’s expected.
“In the case of a credit event, it would be much more difficult to absorb a rising credit expense,” Fisher says. “If we adopt CECL early, we do so under the premise that we’re adopting a bleak economic forecast. With that, we’re able to absorb the hit through capital as opposed to earnings under the incurred model.
“Three months ago, we had built an adjusted historical base model that ran automatically each month,” he continues. “We expected to monitor it over time and run certain simulations. But now that we’re on the front of an economic crisis that could affect our members, credit risks, and charge-offs, we’re having to fast-forward our potential implementation and consider adoption sooner rather than later.”
‘We have to prepare as if CECL will be implemented.’
In parallel with nationwide efforts to prepare and comply with the new standards, NCUA Chairman Rodney Hood has urged the Financial Accounting Standards Board (FASB) to exempt credit unions from the pending requirements, citing complications brought about by COVID-19 and a lack of a compelling case for the application of standards uniquely to credit unions.
Hood’s letter states that, for most credit unions, implementing CECL will have an immediate impact on net worth. And while CECL extended implementation for credit unions by one year, credit unions are currently devoting maximum time and resources seeing members and businesses through the COVID-19 pandemic.
CUNA and the leagues also have advocated for an exemption for credit unions.
Regardless of whether FASB heeds Hood’s request, it’s best to be prepared.
“Some in the industry have held back, hoping [the deadline] either gets delayed or the standards ultimately aren’t implemented at all,” Vandermause says. “But we have to prepare as if it will and try not to wait too long. If anything changes, at least we will be prepared.”