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How to Estimate the Impact of CECL on ALLL

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Over the past several years, I’ve spoken to a number of credit union leaders who have a basic question.   What will the impact of CECL be on my credit union’s ALLL?   Before implementing a credit union on CUBI.Pro’s Analytics CECL calculator, I will ask the client what they expect their CECL forecast will be.   The responses range from accurate to highly inaccurate.   I suspect those that are inaccurate are the result of a hopeful outlook and a lack of awareness of what FASB’s new rules are meant to accomplish.   The challenge will be, as more credit unions begin to implement CECL methodologies, gaining acceptance of the resulting forecast if the expected forecast is skewed.   This article is meant to demonstrate how a credit union can arrive at a reasonable estimation of what its forecast should be so that they are better able to evaluate the effectiveness and accuracy of forecast calculators, whether developed internally or externally. The first thing to understand about f
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Odds Are, You Have Never Seen One of These

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By Michael Cochrum We like to know our odds.   What are the odds that you will be struck by lightning?   In the span of one year, that could be one in 700,000, but in your lifetime, one in 3,000 [i] .   Yikes! That is a little too close for comfort.   How about the odds of dying from cancer?   There are a lot of factors here, but roughly your odds are about 0.5%, or 5 in 1,000 [ii] ,   about the same as your chances of dying in a car accident.   Living in America, your odds of being a victim of murder is about 1 in 6,000.   According to a 2002 Department of Justice study, the chances of you being murdered by someone close to you as opposed to a stranger is 74% [iii] .   So, based on the odds of getting struck by lightning and the odds of being killed by someone close to you, why on earth would one ever plan a family reunion at an outdoor venue.   Would you agree, knowing our odds helps us to make better decisions? I find it interesting, however, that when I conduct traini
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Measurements Matter

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By Michael Cochrum Suppose you or your significant other go to the local haberdashery looking for a new suit.  Instead of the assistant taking waist, hip, neck and chest measurements, they simply ask for weight.  How likely do you think it is that the correct fit would be selected based only on that information?  It’s not very likely.  While weight is a measurement of size, it is not very helpful in measuring fit.  Among financial institutions, we may be guilty of the same misconceptions, and susceptible to the same error, related to our Key Performance Indicators (KPI’s).  Using the wrong measurement can be all the difference between making sound business decisions and making mistakes that are only discovered after it is much too late. One key measure that is used in financial institutions is delinquency rate, or the percentage of account balances that have payments that are sixty days or more past due.  Because delinquency can be a precursor to default, loan portfolios wi
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Small Market Credit Unions May Have Greater Impact on Field of Membership

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By Michael Cochrum In the world of credit unions, as with banks, the larger shops tend to garner more attention from industry insiders.   However, it may be that smaller, small-market credit unions are garnering more attention from the members they serve.   CUBI.Pro recently used its national CU Peer Data Application   to research how credit union assets were distributed by state and   by individuals in each state.   The research demonstrates that credit unions in the most populous states garner the largest concentrations of assets but do not necessarily impact individuals in those states as much as credit unions in states where the population is less dense. Obviously, large credit unions are often able to offer more services and access points to their members than smaller credit unions, due to scale, but the question that arises is whether these services are what members and potential members are seeking in every area the credit union serves?   Another question is whe
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How Medallion Loans Present an Existential Threat to Your Credit Union, Even If You Have Never Funded One.

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by Michael Cochrum When I was five years old, I was out playing in the yard with my brother and cousins after an afternoon thunderstorm in Western Kentucky.  We were playing near the creek that flowed behind our house that had swollen, from the spring rains, to twice its normal size.  What happened next is unclear based on individual testimony, but the consensus is that I ‘fell’ into the muddy creek and had to be ‘rescued’.  I swear that I felt a nudge before falling in and swallowing a mouth full of water, but no one else seems to remember that as clearly as I.  After being rescued, I rushed into the house, probably crying, to dry off and get fresh clothes.  The only problem is, my mom was inside and once she got wind of what happened, she made us all come in for the rest of the afternoon.  Not only had I ‘almost died’ but now I was the ‘reason’ why everyone else had to spend the afternoon inside.  I was the one who spoiled it for everyone else.  I’m sure you have been the v
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Are You a Coach or a Referee?

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By Michael Cochrum, CUBI.Pro Recently, I was speaking with a good friend of mine who is a leader in his business.   He was telling me about a decision he was about to make to hire a new employee.   “This hire is critical”, he said, because the organization has had a series of bad separations which has left his team reeling by the disruption.   My advice to him was that he didn’t need to hire a ‘project’, because it was obvious, from recent history, that his organization didn’t do a real good job coaching its team members.   My friend bristled a bit at my comment and, in defense, responded, “I think I’ve been doing a good job helping my team get along with one another and settle disputes.” “But, are you a coach or a referee?”, I challenged.   Both are essential to the game but allow me to explain the difference. A referee’s role in a game is to, first and foremost, know the rules.   They also assume that everyone else knows the rules and, therefore, focuses on rule enforce
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Three Behind-the-Scenes Lending Observations

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By Michael Cochrum, CUBI.Pro When I was a junior in high school, my school’s marching banding, The O’Fallon Township Marching Panthers, was invited to march in the Orange Bowl Parade.   Band geeks around the world, like me, understand what a prestigious honor an invitation like this is.   It is equivalent, or more, to a state championship for an athletic team.   It’s a really big deal.   I have no real memory of most of the parade, however there are two things that do stand out in my recollection of this trip.   First, I remember being behind the Budweiser Clydesdale horses in the parade, which adds a level of complexity to making it through the parade with clean shoes.   Second, I remember our backstage tour of Walt Disney World on our trip back home to Illinois. Few visitors to Walt Disney World ever have the opportunity to go ‘behind the wall’ and learn how Disney manages to make a family’s trip to their park so seemingly miraculous.   While this was an interesting tour,
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