Credit unions can also prepare by strengthening their processes for collecting, managing and storing data, given expectations that institutions will need more data for their forward-looking calculations under CECL. 

Now that the final guidance has been released, credit union management can also focus on learning what practices regulators might require, such as those related to disclosures about credit quality of assets by year of origination, or vintage, according to McPeak and other industry experts.

This back-end calculation adjustment isn't one that members will see reflected on their monthly statements, but it will likely impact credit unions going forward.

While it is common for credit unions to adapt to many regulatory changes, it is rare for those changes to impact the ALLL. In fact, institutions calculate their ALLL now based on well-established accounting and regulatory standards that have had only minor changes and updates over the past several years.

Simply put, the allowance is an element of risk management that financial institutions have to get right, and it may change the loan loss reserve calculation and could have implications across many aspects of day-to-day operations.

A chief criticism of the past ALLL model is that it relies too heavily on outdated information; institutions recognize credit losses only once they are considered "probable" instead of when they are first identified. The dangers with this delay were exposed during the financial crisis, when reserves at some institutions were insufficient to cover their losses. The CECL model implements forward-looking analysis and looks at the life of the loan, rather than just one year. The objective is for institutions to account for and therefore reserve for losses based on "possible" estimates.

CECL leaves many credit unions speculating how life-of-loan losses can be defensibly predicted using historical and qualitative factors. For many credit unions, particularly smaller institutions, it also raises some concerns about historical data that may not have been recorded or will be inaccessible when it's needed for a CECL calculation.

All of this information and impending changes to the ALLL begs the question – what can a credit union do now to prepare? Now that the FASB's standard is final, and we know that the standard is not prescriptive, the most effective way to prepare for CECL now is to proactively aggregate loan-level data for the portfolio. This includes collecting and storing data such as a loan balance, segmentation for the loan, risk rating, charge-offs and recoveries associated with the loan (partial and full), loan duration and a variety of other important data fields. This data may not be needed immediately, but building up a strong history of detailed data will give credit unions the flexibility and resources to adjust their models as needed.

Patrick Weightman is marketing manager, bank market for Sageworks. He can be reached at 984-242-2542 or [email protected].