In January, the NCUA issued a letter to credit unions that outlined its primary areas of supervisory focus for 2019, which is intended to assist credit unions in preparing for their next NCUA examination.
One of the areas addressed was the new accounting rules for the Allowance for Loan and Lease Losses (ALLL), also known as Current Expected Credit Loss Model, or CECL. Credit unions do not have to adopt the CECL requirements until 2022, and many credit unions have just started the process of organizing a task force, looking at modeling options, and determining if third-party consultants or IT solutions are necessary.
This letter changes the dynamics for the CECL implementation process by requiring that credit unions “performed analysis for how CECL would alter the Allowance for Loan and Lease Losses funding needs.” This statement is subject to interpretation, but it seems to be indicating that credit unions will have to start calculating their ALLL under CECL now to determine the impact of funding requirements when CECL is adopted in 2022. This is something we believe very few financial institutions, including credit unions, have done.
In addition, on January 11th, the Financial Accounting Standards Board (FASB) issued Staff Q&A Topic 326, No.1 on the weighted-average maturity method (WARM) for determining the ALLL under CECL. The Q&A endorsed the WARM method as acceptable to calculate the ALLL under CECL. We believe that this less-complex approach is what many credit unions will opt for. Whittlesey has been a proponent of this approach for credit unions long before it was first discussed in a FASB and financial institution regulators webinar in 2018.
Whittlesey has a team of partners, managers, and supervisors in its credit union niche that are current on all the CECL requirements, and have closely followed the process since its introduction by FASB in 2016. We can assist you with understanding the new requirements, including how CECL will impact the ALLL, and also help determine the possible financial impact without the use of costly complex modeling, and/or IT solutions.
Contact your Whittlesey Advisor at 860.522.3111 for more information.