By Mark DeBree, Catalyst Strategic Solutions Managing Principal
Now a month into the new year, the sudden shock of 2020 is slowly fading, and we can finally catch our breath…right? Well, the fresh start also inches us closer to the impending CECL transition. Despite hope that the implementation date might get pushed out amidst the COVID-19 pandemic, it appears January 1, 2023 is standing firm. However, the NCUA did provide a little relief, allowing credit unions to spread out the impact on net worth over a few years.
So, what should credit unions be doing now to prepare?
At this point, most credit unions should be evaluating solutions and determining the most appropriate models for their needs. The world of CECL is quite vast and the Financial Accounting Standards Board (FASB) has provided several methods for estimating future credit losses. This flexibility is valuable, but it can also cause some confusion as credit unions try to determine the “best” approach.
Where to start?
There are numerous vendors, articles and publications espousing the value of various models. Generally, determining the overall level of complexity and heterogeneity within a loan portfolio is often the first fork in a road a credit union must cross. This is extremely important, especially for small to mid-sized credit unions that have straightforward loan portfolios, because it will help determine if they can consider a less complex (and less expensive) methodology, like the weighted average remaining maturity (WARM) method.
While the FASB, or any regulatory body, will avoid advocating for any particular method or solution, they did provide some general guidance. The FASB stated, “...the WARM method is one of many methods that could be used to estimate the allowance for credit losses for less complex financial asset pools.” This is not a blanket endorsement, but it does offer small to mid-sized credit unions a potential solution that bypasses the needs and data requirements of more complex methods.
Next steps
In addition to identifying a CECL solution and methodology for adoption, credit unions should consider obtaining estimates on the impact the CECL transition will have on their earnings and net worth levels. To accomplish this, credit unions can reach out to their CECL providers, or if they’re still shopping, potential vendors. Preparation and awareness surrounding CECL’s impact may help ease management and board concerns. Our models show that credit unions can expect an increase in the allowance account, but the total level of that increase varies from credit union to credit union.
I was raised with a few adages growing up, such as: To be forewarned is to be forearmed. That may be only a Texas thing. Another, potentially more appropriate, saying is: An ounce of prevention is worth a pound of cure. Either way, my point is that credit unions should peek behind the curtain to get an idea of what the future may hold. No one will be served well by waiting until the eleventh hour to find a means of compliance.
Catalyst Strategic Solutions can assist credit unions with their CECL compliance efforts, regardless of asset size or complexity. If you are ready to start that journey, or would like to speak with a member of our team, contact us today.