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Survey — CECL will lead to increased costs, but how much is anyone's guess

This is part of a series of stories on S&P Global Market Intelligence's CECL survey. Click here for more in-depth CECL coverage. For more analysis of the survey results, see:

Ahead of CECL, the well-prepared minority

Many bankers have taken little or no action to prepare for CECL

What banks, credit unions think about CECL

Bankers fear costs will far outweigh benefits of FASB loan-loss change, survey shows

Smallcredit unions may need external help to implement the Financial Accounting StandardsBoard's current expected credit loss standard, or CECL, but the costs that willaccompany the pending accounting change are still difficult to gauge.

An S&PGlobal Market Intelligence survey of bankers and credit union officials revealedthat lenders are split on where the additional costs associated with CECL will lie.More than 44% of the 222 respondents said investments in vendor solutions wouldprove the most expensive aspect of implementing and complying with CECL, with another28% anticipating that internal resources will be the most notable cost, and some22% predicting that external consultants will be the priciest aspect. Only 4.6%said hiring would be the most expensive part of compliance with the rule.Credit union respondents also highlighted the costs that will come from trainingand the time spent gathering data.

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Estimating costs, capital impact

Askedto predict the cost of CECL in the first year of implementation, estimates ran thegamut, going as high as millions of dollars. The most common answer among respondentswas "unknown" or some variation. One CFO from a Minnesota-basedcredit union of less than $1 billion in assets said in the survey that the firstyear of CECL implementation would cost the institution $25,000. The CEO of an Oregon-basedcredit union with less than $1 billion in assets estimated the institution wouldspend $225,000 in the first year. As a result of CECL, the executive said the creditunion would likely keep dividends at the current payout level instead of increasingthem, and invest less in member benefits. A chief credit officer from a credit unionin North Carolina estimated that CECL would cost the institution $2 million in thefirst year of implementation.

"Itwill cost millions in transferred net worth, but operational expenses would [be]in the range of $10,000," wrote the CFO of a North Carolina credit union. Thatsame executive expects that CECL will result in a modest hit to the credit union'scapital ratios — less than 100 basis points. But the respondent believes othersin the industry will suffer more. "We are fortunate in that our loss expectationsare on the low end of industry norms. However, it is obvious that CECL will havea dramatic impact on capital for many credit unions," the CFO wrote.

The cost of expertise

Whiletotal expected outlays related to the change are unclear, they could mark an increasefrom current spending if companies opt to pay a third party to collect the data.

In aninterview John Trull, assistant vice president of regulatory advocacy for the NorthwestCredit Union Association, said the real challenge of CECL will be the expense thataccompanies collection of the type of data required for "good predictive modeling,"especially for small credit unions where the margins are very thin.

DavidMiles, senior vice president of advocacy and regulatory affairs for the VirginiaCredit Union League, made a similar point. "They're just not going to havethe sophistication within their data systems to collect the data and forecast overmultiple scenarios," he said. "Most smaller credit unions will not havethe processing capacity to do the analysis themselves."

Milesbelieves there are still "too many unknowns" to determine costs associatedwith CECL, but he said the consensus seems to be that if all financial institutionsare treated the same, the change from the current accounting method would lead toa 30% to 50% increase in funding for the allowance for loan and lease losses overthe life of the loan. Any increase in the allowance will reduce earnings, and smallcredit unions of less than $100 million in assets have already seen significantearnings pressure since the financial crisis, he said.

SharonLindeman, vice president of regulatory advocacy for the Californiaand Nevada Credit Union Leagues, said in an interviewthat from a human resources perspective, the smaller credit unions will need someexpertise that they likely will not currently have in house. Many of them will turnto a third party to conduct the necessary analysis or they may hire the needed talent.But Lindeman said hiring is often cost-prohibitive for smaller companies. "Evenif they have the expertise in house already, there are going to be changes thatthey need to build into their systems," Lindeman said.

CECL battle continues

The newstandard, which the Financial Accounting Standards Board expects to finalize aroundmidyear, would mark a major shift from the way banks and credit unions build upallowances for loan losses. The pros and cons of the new rule have been hotly debatedduring the past few years, and credit union advocates have urged FASB to recognizethe difference between large and small entities. Jeanne D'Arc Credit Union CFO Susan Hannigan sits on a CECLtransition resource group.At a meeting in February, she reiteratedcredit unions' concerns with the proposal and stressed the importance of understandinghow the standard will adversely affect credit unions.Specifically, Hannigan cited the increased cost to those small community lenders.

Milesbelieves the current methodology used is sufficient for smaller institutions. Hesaid a new model might make sense for large national banks but loan loss has notbeen a material problem for small credit unions. "When credit unions fail it'snot necessarily because they've underfunded their allowance for loan loss. I don'tthink there's any history to support that the current methodology is problematicfor small institutions," he said.

In February,62 lawmakers signed on to a Credit Union National Association-supported letter weighingin on the CECL proposal. The letter warned that the plan could negatively impactcredit availability and economic growth, especially for lower-income borrowers andsmall businesses.

Lindemansaid that while the exact rule has yet to be determined, the proposal in its currentform would be another regulatory hurdle for small credit unions to overcome. "Itwould be extremely onerous for the credit unions to implement," she said.