CECL: Takeaways and Considerations from Recent Workshops
August 10, 2017
CECL is much more than an accounting issue and being focused only on compliance is shortsighted. The effects of CECL will transcend every area of credit unions and the implications, if they are understood, can be anticipated and prepared for. Communication with senior management is crucial to gain buy-in to these implications.
C. myers has been working tirelessly with credit unions and credit risk simulation vendors to help the industry better prepare for changes that will happen due to CECL. The objective of this work has been to not only help individual credit unions, but also, to gather learnings that can help all credit unions. This process has included one-on-one work with credit unions over the last six months and focus group workshops of large credit unions. The two workshops included a dozen credit unions with an average asset size above $4 billion. CECL can impact all institutions, large and small, but the intent of starting with large credit unions is to get takeaways from credit unions with more resources to devote to solutions. Following, you will find ideas from the interactive workshops in Phoenix, Arizona and Tampa, Florida.
Working from their unique, institution-specific data, the workshop participants collaborated with other credit union representatives to bring the various aspects of CECL into focus and explored different methodologies and implications to the credit union business model. Discussions, walk-through exercises, and examples helped link implementation with strategic outcomes in these interactive sessions. The workshops helped participants become better equipped to consider the strategic implications, reduce pitfalls, make the most of opportunities, and to find additional decision-making opportunities through the journey of implementing CECL.
An attending CFO from a credit union with assets greater than $5 billion said, “I figured the hard work was already done as we already contracted with a vendor to do the calculations. I am realizing that this is just the beginning and there will be a lot of important decisions and work to do going forward.” That sentiment represented the overall view of the attendees as the data gathering and getting a number is just the beginning.
Attendees noted that c. myers’ independence was an added benefit. They were able to work with each credit union on understanding the implications of CECL, regardless of the vendor and methodology being used.
Gail Wean, Senior Vice President/Chief Financial Officer, Grow Financial FCU of Tampa, Florida, commented on her c. myers CECL workshop experience, “The presenters exceeded my expectations. This was one of the best presentations of complex information in my career. Exceptional knowledge base, and organization, and communication of CECL.” Much of the focus of the workshop was not only to gain knowledge, but to be positioned to use tools and examples to communicate potential strategic implications to others when attendees are back at the credit union.
Brett Fisher, Vice President of Asset & Liability Management, Founders FCU stated, “Participation in the CECL workshop has our credit union not only much better prepared to tackle CECL, but their wisdom set the foundation for utilizing CECL data analytics to improve business decisions.”
Below are 10 of the many key takeaways identified during the workshops:
- CECL should not be viewed as just an accounting issue because the potential earnings and net worth impact, especially if a credit union grows loans, can have strategic implications for which all the decision-makers at the credit union will want to be prepared.
- The potential impact of CECL can vary greatly by credit union and expected environment.
- As there is no single right answer, conquering CECL with excellence is better done together by discussing trade-offs of various paths in order to better see potential short- and long-term implications of CECL decisions.
- The point at which you address the problem is directly related to the number of viable options available to solve it. The sooner credit unions begin exploring different methods of calculating expected losses, the more agile they will be in understanding it. Credit unions need time to compare methods to feel good about their estimates.
- Within each of the various methods, there are many assumptions and settings for the credit union to consider. These settings can materially change the loss estimate.
- Focusing on improved business intelligence as a part of the work for CECL can be a material benefit to credit unions in the future.
- Return on Assets (ROA) will no longer be a clear measure of success, especially with loan growth.
- Clarity on the objectives an institution has when building a CECL implementation plan is a key to success.
- Understanding the correlations between different economic indicators and the credit risk of various account types is an important step in deciding which indicators to forecast. This process can be easy or may take several rounds of additional research based on the unique history of the institution.
- Staying focused on the net yield over the life of the loan will help avoid shortsighted decisions that could hurt relevancy.
Currently, institutions have been so focused on the data gathering that they haven’t had a chance to look beyond the data to the strategy. CECL will change the way earnings, net worth and the impact of growth, and risk in the future will be measured.
No one has managed an institution using CECL rules. The manner in which financials will become disconnected from an institution’s financial strength will differ greatly from the rules that all have applied when managing an institution. It will take time to adjust to this change. Starting now and working with others will better prepare institutions.
C. myers will be holding additional CECL workshops in 2018. For more information, please call 800.238.7475.