PHOENIX — Estimating an appropriate allowance for loan and lease losses an NCUA examiner will accept is a “never-ending cat and mouse game where you’re always trying to chase the right answer,” CPA Bart Ferrin said during a breakout session Monday at the CUNA CFO Council conference.
Ferrin is the principal at Ferrin & Company, a Salt Lake City-based CPA firm that serves credit union
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To prepare for an exam, Ferrin said, CFOs should refer to FASB guidance and an NCUA accounting bulletin from 2006 titled “Interagency Policy Statement on Allowance for Loan and Lease Losses”.
That document, Ferrin said, states that an ALLL estimate should be based on comprehensive, well-documented and consistently applied analysis of the loan portfolio, and should take into account all available information existing as of the financial statement date, including environmental factors like economic, industry, geographical and political factors.
“Examiners have their own personal attitudes and something that can play into what they want you to do,” he said. “As a credit union, you can turn that back around and say, ‘Here are the rules we’re playing by, and the rules you’re supposed to be playing by’.”
Credit unions should complete four key steps in the ALLL process when preparing for an exam, Ferrin said.
They include establishing an appropriate pooling process, an appropriate individual loan identification process, an appropriate qualitative and environmental analysis process and the preparation of a final management and discussion analysis.
“Think of your exam as a playing field,” the Utah accountant said. “You want to narrow it, so by doing these four steps, your examiner knows where the out-of-bounds lines are.”
A quick show of hands revealed that most CFOs in the room felt they were being asked to allocate too much to loan losses. Many agreed that examiners were not allowing them to decrease ALLL to pre-recession levels, even if loan losses have fallen accordingly.
While Ferrin agreed funding ALLL is difficult, particularly in today’s low margin environment, pending changes to FASB standards will require allocations to double or even triple.
Although FASB has not yet finalized a standard, despite missing an initial April 30 deadline, Ferrin said, the changes, which will replace funding for incurred losses with expected losses, would be even more difficult to absorb if the ALLL was decreased.
“The current one-year funding requirement we’re currently operating under is really underfunding, if you really think about it,” he said. “It really should be two years. So from that point of view, it makes sense to have more in there. But, that doesn’t make it hurt any less.”