It's one of the biggest issues on CFOs' minds right now, though it likely won't impact the bottom line for a while.
The Federal Accounting Standards Board (FASB) has indicated it plans to make changes to how financial institutions calculate allowances for loan loss reserves, moving from an incurred loss model to an expected loss model.
"It will increase the costs for most credit unions making those calculations," explained Jason Peach, CFO at West Community CU in O'Fallon, Mo., and second vice chair of the CUNA CFO Council. "It will probably also increase reserves for most institutions. I've heard there could be anywhere from a 10 to 30 basis-point hit in terms of net worth when that goes into place. Reserves could go to 1.5 to two times what they are today based on how we understand the way the rule is taking shape."
CUNA and other trade groups have written to FASB to ensure it understands the impact this would have on credit unions. In its comment letter to FASB, CUNA said requiring credit unions to restructure their balance sheets, doubling or tripling current allowances for loan losses could result in reduction of retained earnings at many institutions, leading to lower net worth ratios and creating prompt corrective action implications for institutions where no such concern currently exists.
The FASB proposal is "the thing that's most out of our control that could be a pretty big financial impact coming down in the next two years," said Peach. While CUNA has urged FASB to withdraw the proposal or exempt credit unions, Peach said West Community is already trying to structure its capital plans for the possibility that CUs might be impacted by the rule.
"We already talk about the earnings we need and what we're going to do and what revenue we need to drive, and we say this is a pot of money that may come out of our capital, so let's make sure we understand what that could look like," he told Credit Union Journal.
Sonya Jaynes, CFO at Red River CU in Texarkana, Texas, and another member of the CFO Council's executive committee, said while her CU "already [has] a nice little allowance ready, our concern is that we're going to have to double that. And that comes right off the bottom line."
And it's not as though the credit union can just add to that allowance, she said, since examiners will penalize a credit union if they believe the institution is overfunding those reserves.
So Red River CU and others are waiting until the final rule is released and an implementation date is in place, but Jaynes said she has also been working with staff to determine what kind of data can be gathered now to better prepare.
"If we make a four-year auto loan today, what's the likelihood that that's going to default?" she said. "Because that's basically what the rule is going to make us do — from the moment we make the loan, we have to start reserving like it's going to go bad."
Not all CFOs shared the same level of unease as Peach and Jaynes. Bill Kennedy, CFO at Department of the Interior FCU, noted that while it's on his credit union's radar, "I don't see it being a huge impact financially other than maybe the initial costs of doing the data collection and maintaining it."
Kennedy said he believes that as long as credit unions can up their game with data collection, it shouldn't be an overwhelming issue. "I think most of your credit unions of any size are involved in [digging deeper into data and data management], because data is where it's all at," he said.