NCUA Webinar: Internal Controls and Accounting Tips for Small Credit Unions (6/22/2016)


Kathryn Baxter: Good afternoon, everyone. Welcome to our June webinar-a very exciting webinar we have for you today. It’s on accounting issues,
and this is part two. We had part one last year, so we hope you’re returning visitors to this particular webinar. My name is Kathryn Baxter. I am going to be your moderator for today’s event. You know how we go, folks. This is the drill. We have some administrative announcements for you. First of all, please
adjust the volume on your computer, because we want you to hear everything. Drag the right bottom corner of this slide, so that you can see it very clearly, if you need to enlarge it. Also, from this website, you will need to allow pop-ups. At any time during the webinar, you may feel free to ask us a question. In fact, we would like
you to do that. If you know the name of the speaker that you’d like to address your question to, please include them in your question. Before we end our webinar, we’re going to push out a survey to you because we’d like to know what you think about what we do here in the Office of Small Credit Unions. We value
your opinion. As always, in approximately three weeks we will close caption this webinar for on-demand viewing. As I mentioned, we have a very exciting webinar for you today, and this is part two of internal controls and accounting tips for small credit unions. We do have quite a number of credit unions on the
line today-small and large-and we know you’ll enjoy it. I’m joined today by my host, Dominic Carullo. I know we’ve missed Dom for the past couple of webinars, and he has something very important that he wants to tell credit unions. Dom, what do you think about the credit union community? Dominic Carullo: Come on, Kathryn, you know what I
think. I love credit unions. Credit unions are the best. Kathryn Baxter: They are, absolutely. Dominic Carullo: Okay, folks, we have a wonderful webinar for you today, and today we will discuss internal controls and accounting tips for small credit unions. Of
course, we have to start off with our disclaimer. This webinar is offered for informational and educational purposes only. NCUA does not endorse any particular credit union or vendor, or their
employees, products, or services. Once again, we are offering a certificate of completion for those who qualify. In order to get the certificate of completion at the end of the webinar, you have to answer three of the four poll questions. We will be going
through four poll questions throughout the webinar. You need to stay on the call for at least 45 minutes, and then you need to answer 8 of the 12 quiz questions correctly when you take the test. You can find the quiz at one of the little tabs at the
bottom of your screen. Now, let’s introduce our webinar team. First, we have analyst Carolyn Penaluna. Welcome, Carolyn. Carolyn Penaluna: Hello, everyone. Dominic Carullo: Next, we have Kerri Piekarski. Kerri, welcome. Kerri Piekarski: Thank you, Dominic. Dominic Carullo: Last
but not least, we have Scott Neat who is the Director of Supervision in E&I. Welcome, Scott. Scott Neat: Good afternoon to everyone. Dominic Carullo: Glad to have you. We have some wonderful speakers here today. Now, after our introductions, Carolyn will provide a wonderful perspective on internal controls, which apply not only
to the small credit unions but to larger ones as well. Later on, she’ll return and discuss grant accounting. Now, Kerri will then provide us with good advice on accounting for repoed assets. Later on she’ll come back and she’ll provide some call report and credit union profile advice. Next,
Director Scott Neat will discuss some upcoming current expected credit losses. It’s the evaluation of the allowance for loan loss accounts. Then, finally, our beloved Kathryn Baxter-I see her smiling over there-she will host our Q&A in the last 30 minutes of
this presentation today. Okay, folks. It’s now time to get you involved with our webinar. Here is our first poll question. What is your asset size? Now, if you’re less than a million, click on the first circle, $1 million to $10 million-the second, and so on and so forth.
If you’re in audience and you’re not with a credit union, just kindly click on N/A on the last slide. While we are waiting for everyone to answer, I just want to remind everybody to get your questions in. Are we getting very many? Kathryn Baxter: We are. We have a few. I also wanted to remind our audience, if you want to download
the slides, there is a green folder widget at the bottom of your console. That is where you download the slides. Also, to the right there are two magenta colored icons. One will show you your progress as to whether you’ve been on the call for 45 minutes, whether you’ve answered three out of the four poll questions, and whether you’ve answered
9 out of the 12 quiz questions. Right, Dom? Dominic Carullo: Very good. Very good, Kathryn. Oh, we have our poll results. It looks like the majority of the credit unions in the audience are still considered small by NCUA standards now-are in the $10 million to $100 million range. We have about 11.9% in
the $1 million to $10 million range, about 19.3% in the $100 million to 500 million, so we have some big guys out there, and 11.6% over $500 million. We have some very large credit unions out there interested in what we have to say today. Welcome, everyone.
We are glad to have all of you. It is now my pleasure to bring on supervision analyst, Carolyn Penaluna. She will provide her perspective on internal controls for small credit unions. A little later in our webinar, Carolyn will discuss grant accounting. Carolyn, before you begin,
can you please spend a moment and tell us a little something about yourself? Carolyn Penaluna: Yes. Thank you, Dominic. I am a CPA and a CFE. I’ve been in the credit union industry for 25 years. I’ve had 8 years with a credit union and 17 years with NCUA. I’m a native Texan, which you’ll probably be able to
tell by my accent. Let’s talk about internal controls. The Federal Credit Union Act and regulations requires the board of directors ensure their credit union has internal controls in order to safeguard their assets and to provide for the reliable financial reporting, such as the call report. This is part of
their fiduciary responsibility. Internal controls do not guarantee that fraud will not occur, but they will make it more difficult for someone to commit fraud and remain undetected. Now, the following are the main factors allowing fraud to occur: Lack of internal controls, Lack of management review-in
a small credit union where the manager may be involved in the daily transactions, this would be more a lack of the board’s supervisory oversight— Override of internal controls, and poor tone at the top. Increasing the probability that fraud schemes will be detected
is one of the core principles of fraud prevention. The presence of internal controls should result in quicker detection and lower fraud losses. These factors help deter fraud: Internal controls, which vary based on the products and services the
credit union offers The ability to segregate duties, which is generally dependent on the number of employees, Competent personnel in oversight roles, Independent audits, which includes the annual audit and any interim and surprise audits that
occur during the year. Segregation of duties means one person does not control a transaction from start to finish. This is so important; I am going to say it again. Segregation of duties mean one person does not control a transaction from start to finish. It’s important to note
that when there are not enough staff to allow for the full segregation of duties, management oversight, board oversight, and periodic supervisory committee audits are all essential. When you only have one employee, interim audits performed by the supervisory committee, or performed by third parties if the supervisory
committee has hired one, are absolutely crucial. An example of dual controls is it takes two people to open the vault. One person has the combination and the other person has the key. One person should not have the combination and the key. If you have a credit union with only one employee, then there is only one person and they are
going to have both the combination and the key. They are also probably performing the reconciliations of vault cash and the bank statements, so there are no dual controls and there is no segregation of duties. But a compensating control would be if a third party performed the bank reconciliations. Another compensating
control is supervisory committee performing surprise vault and teller cash counts. Whenever it is not possible to have segregation of duties, the credit union should have compensating controls in place. Now, a word of caution,-segregation of duties and dual controls do not
guarantee a fraud will not occur, because the employees could collude and undermine this control. Employees should have a unique password for each program and they should never share their passwords. That is because if a fraudulent transaction occurs, you will not be able to determine who actually performed
the transaction. Now, obviously this is not an issue when you have only one employee. But if you have more than one, no one should be sharing passwords at all. Computer access levels are usually based the job function, and this provides for the segregation of duties because it limits the user to only those functions pertinent
to their job. For example, a teller could only do teller duties. They could not anything in the lending area or in the general ledger area on the computer system. System controls should also allow for blocking the employee’s ability to perform transactions on their own account and on those accounts of their family members.
When you only have one or two employees, the employees will probably have rights to all of the computer access levels, and that is so they can serve their members. They may also perform transactions on their own accounts and family members’ accounts, even if there is a written policy saying they are not supposed to. That is usually because no
one else is available to post the transaction. In those instances, a supervisory committee needs to review the daily transactions, the file maintenance reports, and the activity in employees’ accounts and in their family members’ accounts. The teller should be the only one with the key to their cash drawer, and they should lock the cash
drawer when it will be unattended. Just like a password, employees should never share their teller cash drawer. This is true even if there are only two employees. It may be a little bit of an inconvenience for the members, but the tellers should not share the drawer and they should have to get the second drawer when someone needs to leave. The
supervisory committee and management should perform surprise cash counts on the teller drawers and on the vault. Preferably, they should do it in the morning before the credit union opens and before employees can post any transactions. Then they need to verify the vault and teller drawer balances to the general ledger as part of the surprise count.
Speaking of the general ledger, you should have account reconciliations for all of the balance sheet accounts as of the end of the month to substantiate the amounts reported on the balance sheet. In a perfect world, the person performing the account reconciliation would be someone who does not perform any teller transactions, or
approve and book loans, or is not an authorized signer on the checking account, etcetera. In other words, there would be true segregation of duties. Generally, this is not possible in the smaller credit unions with one to four employees, and then those compensating controls we discussed are necessary. We
need to have a third party perform the bank reconciliations and we need the supervisory committee to perform surprise audits and interim audits. In the loan process one person should not be able to approve, book, and disperse a loan. Again, that is segregation of duties. This is difficult in a one or
two-employee credit union. In those instances, a credit committee may be necessary to approve the loan. The supervisory committee and management should review file maintenance reports and periodically review the new loans granted and samples of other loans based on various system reports.
This is important. They should always follow up on missing loan files. Missing files may simply be misfiled, or it could be a red flag. When the missing file is found, the supervisory committee should compare the signatures on the loan documents to the account card signatures and then
trace loan proceeds and source of some of the loan payments to ensure this is a real loan. Fraud is frequently perpetrated through dormant accounts. The supervisory committee should include a sample of reactivated dormant accounts as part of their periodic interim audit of file maintenance reports. When
they are looking at the dormant account history, they should follow-up on any frequent withdraws and transfers made to other accounts or loans, especially if those are to employees’ accounts or the family members’ accounts. They should look at the source documents for this unusual activity. Then the
same procedures should be performed on the do-not-mail accounts. Your corporate credit card should have a policy that specifics who is authorized to use the card, who is required to review and approve the card usage, and it should establish usage limits and forbid personal usage. It should
require submission of the receipts from the merchant, with explanations for the purchase written on the receipt. Then an individual with higher authority should review the statement and the receipts and approve it for payment. If there is only one employee then that means the person of higher authority will be one of the board
members or a committee of the board. The supervisory committee’s job is to periodically review the statements and receipts, ensure that the approval function was performed, and then make sure the receipts are present for all of the charges and are in accordance with policy. The expense reimbursement is very similar to the corporate
credit card policy. It should specify what would be reimbursed. It should require timely submission of the expense report. It should say who is required to review and approve the expense report, and it should require the receipts and the explanations for the expenditure. In addition, just like with the corporate credit card,
an individual with higher authority should review the statement and receipts and approve it for payment. The supervisory committee should review these expense reports and receipts. They should ensure that the approval had been performed and documented. Then, this is important they should also make sure the same expense was
not charged to the corporate credit card. That is the reason for the requirement of timely submitting of the expense report. You do not want someone using the corporate credit card and getting an extra copy of the receipt, so they can submit the credit card and it gets paid. Then several months later, they put that same expense
and use that second receipt on the expense report. I think now we are ready for Dominic to give us another poll question. Dominic Carullo: All right, Carolyn. Thanks. In a moment, we are going to talk about annual audits, so we have a poll question that is very relevant to our next topic. What type of
annual audit does your credit union obtain? CPA opinion would be the first circle, agreed upon procedures, supervisory committee audit completed by the supervisory committee, supervisory committee audit completed by an outside person, or n/a if you’re not a credit union. While we are
waiting for you to respond, for those-how are we doing with the questions, by the way? Kathryn Baxter: Let’s ask Carolyn. We have a good question for her. Okay. You ready, Carolyn? Carolyn Penaluna: I guess so. Kathryn Baxter: Okay. A credit union wants to know how often cash counts should be
performed on each teller drawer per month. Carolyn Penaluna: Well, that is going to be a management decision, and it should depend mainly on the volume of activity at that location. If you have a huge amount of cash flowing through, and if you have a teller that maybe has quite a few outages,
you would want to probably count that person a little bit more frequently than the teller that does not have outage problems, but it really depends. I would say it would be great if you could do them once a month, but if you were at a large location, it would be very difficult to count all of the tellers once a month. Kathryn
Baxter: An interesting question, I might add. Dominic Carullo: All right. Thank you, Carolyn. All right. Let’s see our results here. Well, it looks like about 41% of our folks out there get a CPA opinion audit, and that doesn’t surprise me. We have a lot of large institutions out there. About 16.8% agreed
upon procedures, 4.7% supervisory committee audit completed by the supervisory committee, 29% outside folks completing the supervisory committee. We have a good spread, but it looks like we have the majority of them are CPA opinion and agreed upon procedure audits. That is quite interesting.
Carolyn, I’m going to turn it back to you. Carolyn Penaluna: Well, I have worked at a credit union, so I know how much work is involved being on the other side of the audit, and also on the other side of the exam. In a small credit union that has a limited segregation of duties, the active supervisory committee and all of these
audits are a vital part of internal control. This is not a list of all of the areas that should be reviewed. Please check out the NCUA supervisory committee guide for more information on all of the different audits to review. I do want to mention the insider account review. This includes board, supervisory committee and credit committee
members. It includes the employees. It includes the family members, which when you talk about family members, this includes their children, whether they are living at home with them or grown, grandchildren, siblings, spouse, and parents, etcetera. It is not just limited to those family members living in the same household with the employee or
volunteer. The procedures performed should consist of tracing a sample of deposits and loan payments to the source documents, as well as review any transfers between family member accounts and any other account that shows on their statement. Now, in addition to our previous discussion about file maintenance reports, you should
also look for backdating of transactions. This should be rare, and t is usually a red flag. You review the share draft exception and overdrawn reports to see if insiders or the family members appear frequently on the report, because this could be an indication of financial distress, which is a red flag. Speaking of red flags,
there are many internal fraud red flags. This is just a list of a few of them that are generally easy to spot, like living above one’s means. Generally, there could be a legitimate reason for someone to be able to live above their salary level. They may have won the lottery or had an inheritance, or they could be committing fraud.
One thing about the fraudster, they usually do not want to miss work, even for vacations, and they do not want to cross train anyone to perform their duties for fear they will be caught. In a one person credit union, your fraudster may tell the person, usually the volunteer who is filling in when they are going on vacation, “Just put the bank statement to the side, and I’ll reconcile it when I get back. ” Well, that is wrong. The person that is covering should be cross
– trained to perform all of the duties. That is how you would detect some of the fraud. Now, this is important. When you see several of these red flags or other red flags, you should review the employee’s account and their family members’
accounts, and then also look at their work transaction history to see if there is anything unusual going on. Hopefully, this part of the presentation assists you with reviewing internal controls at your credit union. Now, back to Dominic. Dominic Carullo: Hey, terrific job, Carolyn. Now we are going to bring on Kerri
Piekarski. Kerri will be providing some tips on accounting for repossessed assets. A little later, she will be providing some call report tips, which are going to be very, very useful for all of us. Now, Kerri, before you begin, can you just tell us a little something about yourself? Kerri Piekarski:
Sure. I live in Ft. Wayne, Indiana. I’ve been with NCUA for 15 years. Prior to working for NCUA, I was an internal auditor at a local insurance company in Ft. Wayne. Okay, repossessed assets-credit unions need to follow GAAP in accounting for repossessed collateral. The NCUA accounting
manual and the 5300 call report instructions provides guidance for recording and reporting of repossessed assets. This general ledger account is referred to as assets acquired in liquidation of loans. Initially, you will record the asset at fair value
at the date of repossession. This fair value becomes the cost of the repossessed asset. If the loan amount is greater than the value of the collateral, then the loss would be charged off to the allowance for loan loss accounts. After
repossession, we value the asset periodically to the lower of the carrying amount or the fair value. If you have more than one vehicle, this needs to be transferred to the account and supported by a
subsidiary ledger. Then you would reconcile the subsidiary ledger to the general ledger account monthly. Here are some examples of the accounting entries. We will assume that we have a vehicle that has been
repossessed and the fair value is $7,500. The loan has an outstanding balance of $10,000. We have a $2,500 loss. You would debit assets acquired in liquidation of loans for $7,500, debit the allowance for loan
loss account for $2,500, and credit loans for $10,000. Now, let’s assume that we sold the vehicle for $5,000. We would debit cash for $5,000, debit the loss due to disposition of assets for $2,500, and we’re using this account now because
it’s been transferred out of loan. We’re not going to use the allowance from loan loss account on this entry. Then we will credit assets acquired in liquidation of loans for $7,500. On the call report, sometimes there’s confusion on
where to report these repossessed assets. They should be reported under other assets. That’s page 2 line 27-report the number of vehicles for each category in the left column and the total amount for each
category in the right column. Then finally, you would report the gain or loss on the sale of the repo’d asset on page 5 line 16, as a gain/loss on deposition of assets. Now, back to Dom for another poll question. Dominic Carullo:
Nice job, Kerri. I am going to bring back Carolyn in a moment, but before I do I am going to have a poll question for you, which is very, very relevant to what Carolyn is going to discuss. She is going to be discussing accounting for grants. Has your credit union applied or received
a grant in the past? I am going to give everyone some time to answer that. Kathryn, do you have anything else? Kathryn Baxter: I have a question for Kerri. Kerri, are you ready? Kerri Piekarski: Yes. Kathryn Baxter: All right. The credit union wants to know how frequently should the evaluation of a repossessed asset occur? How
frequent? Kerri Piekarski: How frequent-well, that’s a judgment call. We’re talking about assets that are depreciating in value as time goes on. I would say at least every 60 or 90 days. Kathryn Baxter: Sounds good. Dominic Carullo: All right, Kerri. Thank you for that. Here is the answer to our poll. Has
your credit union applied or received a grant in the past? It looks like a good percentage-about 33.6%- of our audience has done some grant accounting in the past, so what we’re going to talk about right now is very relevant. Carolyn, tell us about it. Carolyn Penaluna:
Thank you, Dominic. Accounting bulletin 07-2 was issued in May 2007. This bulletin provides the regulatory accounting policies for grants by credit unions with assets less than $10 million. We are going to discuss the contents of this bulletin. For credit unions greater than $10
million, you follow GAAP. The accounting procedures are dependent upon the nature of the grant. Therefore, you should review the terms of the grant before recording it in the general ledger. A grant must include a promise to give. Generally, a promise to give is a written agreement to
contribute cash or other assets. There are two types of promise to give, and they have different accounting treatments. An unconditional promise is a voluntary promise to give without having to meet any other conditions. It can include restrictions on the use of the funds, but it will not
have conditions for the funds. An unconditional promise to give as recognized at income at the time the promise is received. A conditional promise means conditions must be met before the credit union has the right to receive the cash. In other words, the grant is not earned until conditions have been met, so income
cannot be recognized until the conditions are met. Some examples of a conditional promise to give are: Cash will be contributed based upon the credit union raising matching funds. Another example would be the credit union must incur qualifying expenses before the grant is paid. We are going to go through an example
of an unconditional promise, and then we will go through an example of a conditional promise. In this example, a credit union is awarded a grant of $50,000. The grant has restrictions on the use of the funds, requiring it to be used to purchase a cash recycler for $30,000 and a hands-on financial literacy program
for $20,000. These are restrictions on the use of the funds, but they are not conditions. The grant is awarded to the credit union, and the credit union receives $50,000. This is recorded as a debit to cash for $50,000 and a credit to income from grants for $50,000. The income from grants is
recorded as other non-operating income on your call report. The credit union has received the grant funds and they go and purchase the recycler for $30,000. The journal entries are a debit to fixed assets for $30,000 and a credit to cash for $30,000. They pay a
vendor for helping them develop the hands-on financial literacy program for youth, and they will debit education promotion expense, or it could be a pre-paid expense, for $20,000 and credit cash for $20,000. That is pretty straightforward accounting on the unconditional
promise. Now, we have an example of a credit union being awarded a $15,000 grant for a digital growth initiative to implement mobile banking. There is a conditional promise on this one. The credit union is going to have to expend the funds first before they will be paid. The credit union hires a consultant to help them with the
mobile banking initiative. They are going to have to submit the proof of payment as their proof to show that they have spent the funds, one of the conditions. They will probably submit some other documents from the consultant, which would be a second condition in order to receive the grant funds. In this example, qualifying
expenses are incurred, but no general ledger entry is recorded for income. Instead, you are going to have the qualifying expenses, which you could debit relevant expenses, or fixed assets, for $15,000 and credit cash for $15,000. The
credit union may record the following entry, debiting grant contribution receivable $15,000 and crediting income from grants for $15,000. This is after they have already expended the funds, but this entry requires the following assumptions. 1 The
qualifying expenses were incurred, which we just said that they had already paid for those expenses, 2 Timeframes were properly adhered to, and then 3 The possibility of not submitting the claim and the related documentation within the required timeframe is remote. They have to be able to submit
the proof of payments later for the conditions of this conditional promise in order to be able to record that entry. In this slide, the credit union has submitted all of their required documentation, and OSCUl reimburses the credit union. The credit union now records the following general
ledger entry. They debit cash for $15,000, and they credit grant contribution receivable for $15,000. There is my contact information, and now back to Dominic. Dominic Carullo: Okay, Carolyn. Right now I’m going to bring Kerri back, and Kerri is going to provide some useful call
report tips. Kerri? Kerri Piekarski: Thank you, Dominic. This part of the presentation will focus on frequently asked questions or challenges on a call report for small credit unions. Fair market value of hold to maturity investments-this is something that credit
unions tend to miss report. Either they report a very high number or a very low number, and it impacts the fair value of investment ratio. What you need to report-first of all, on page 1 line 6-the hold to maturity investments should be reported
on the balance sheet at amortized cost. Amortized cost means the cost of the investment after adjusting for the amortization of the premium, or the accretion of the discount. Then you would report the fair market value on page 18, line
15. This is Schedule B, and that’s where you would put your fair market value for the hold to maturity investments. Overdrawn share accounts-a challenge here is to remember that they need to be reported as loans rather than as shares.
This is regardless of whether you have a an overdraft protection program in place. The report it on page 2, line 16. Again, you do not report them with shares. They need to be removed from shares and reported
as loans. In order to keep your balance sheet in balance, you would need to add in the shares and then add again into loans. The frequent mistake is to try to subtract them out of shares. Then
we have another place to report on the call report. It’s on page 3 in the additional share section of the call report-the supplemental information. This does not affect the balance
sheet. Secondary capital is my next topic. Secondary capital applies to low income credit unions, and there are some challenges on trying to report that correctly on the call report. First of all, they
need to be reported on page 3, lines 4 and 5 of the liability section of the call report. That would be either subordinated debt or subordinated debt included in net worth. How you determine the percentage to report is on the next slide. The
maturity date of the secondary capital dictates the amount that you report on each line. For example, if you have secondary capital greater than five years, then 0% would be reported at as subordinated debt on line 4, and you would be
able to count the full value of the secondary capital and net worth, so 100% would be reported on line 5, and you would follow that table as the years progress. The second place that you report secondary capital is on page
6, line 9. That is again following the same sliding scale based on the remaining maturity. Membership numbers is another area that gets misreported. On page 6, line 2 you report the number
of credit union members, and this is the actual number of members-not the number of accounts. You would only count each member once, regardless of the number of accounts that a particular member would
hold. Then on line 3 you report the number of potential credit union members. Loans granted year-to-date— sometimes this gets overlooked and there are no numbers reported, or other times they report just the ones that were granted that
month or that quarter. This is a cumulative figure, and you should report the year-to-date number and in the year-to-date amount. Statement of income and expense-this is on page 5 of the call report. The most
frequent errors that we see on this page of the call report is credit unions may tend to report the month or the quarter rather than the year-to-date figures. This is also the page where we have more
likelihood of input errors. Sometimes it’s caused by entering cents, so we get an incredibly large number. One that you have to keep in mind that the call report does not take cents, and then just double checking to make sure your net
income for year on this page agrees with your own financial statement. Non-interest income presents some challenges for some credit unions. We have two lines to report this on-the fee income and other operating income. With fee
income you just report the fees that were charged for services like overdraft fees, ATM fees. You shouldn’t be netting expenses like ATM expenses with this fee income. That would be reported on your operating expenses.
Now, we’re to the profile, which this is the section on CU online where you report specific operating information. It’s important to remember to update this information. It does change. You’ll be prompted to certify this before
you file your call report. Sometimes the data in there also needs to be changed, so it needs to be reviewed. Some of the areas that will change will be volunteers and officials, the annual meeting date, the financial statement audit date, and the
verification of members account. The BSA independent test needs to be entered. We still run into credit unions where there hasn’t been a date entered in this field, so that needs to be updated annually and make sure you have a date in there. You will also update your
disaster recovery test, your disaster recovery location, if needed, and your vital record center. What I want to point out on the vital record center is you need to make sure that you have a separate address from the credit union’s address to retain in your records. This is a requirement in
our regulations. On some profiles we see where the credit unions main office address is listed, and then they slightly alter it to get past the warnings for the vital records site. Occasionally, I get questions about how to print a blank call
report. In the old days we used to mail hard copy call report form and instructions. That information is still available. You can go to our NCUA webpage, and we have the website address on this slide. Another place
that you can go to locate the call report instructions is from our NCUA home page, and click on I am a credit union, and then on the second drop-down box you have the option to “ffile my call report”.. If you click on that, that will
take you right to the NCUA online page. In the upper right hand corner you can access the call report form and instructions. Many late filers are small credit unions who think they have submitted their call report but in
actuality, it has not been submitted. When you do submit your call report, you’ll get an email from the NCUA online system confirming the date and time of the submission. You’ll get a second email with the FPR attached.
We also recommend that you have a backup person to complete the call report and maintaining the profile information. Now, back to Dominic with another poll question. Dominic Carullo: All right, Kerri. Hey, that is some terrific advice. I have not helped a credit union
with a call report in a while, and I know that is going to help many folks out there. Here is our poll question. Whom do you generally call with your call report questions? Now, fill in the proper circle there. Now, if you have any questions with your call report, contact your
respective examiner, your NCUA regional office, or your state supervisory authority, as appropriate. Now, if you have any technical questions concerning the IT aspects of the report, contact NCUA’s customer technical
support by email at [email protected] or by telephoning them at 1-800-827-3255. Let us look at our answers. It looks like most folks out there contact their examiner with their questions. We also have some that contact
a regional office, contact the state supervisory authority. It looks like we have quite a few state charters out there. Those with technical questions, they are calling our NCUA technical support desk. Do you have something, Kathryn? Kathryn Baxter: I do. Kerri, you’re getting a ton of questions. You’re pretty popular.
Here’s a question for you. The credit union wants to know, when you were talking about the 5300, do they need to include associate board members that are non-voting in that? Kerri Piekarski: I think you should add everyone who is associated with the credit union on that page. Dominic Carullo: Awesome.
Okay, short and sweet. Okay. Now, I would like to bring on Supervision Director Scott Neat. Scott will briefly discuss the upcoming new method of evaluating the adequacy of the allowance for loan loss account. Scott, before you begin, could you please tell us a little something about yourself? Scott Neat:
Sure Dom, and good afternoon again, everyone. As Dom said, I am the director of supervision in NCUA’s Office of Examination and Insurance. My division is where NCUA’s chief accountant resides. I have been with NCUA for just under 30 years, where I have spent a good part of my career as a problem case officer and a supervisor examiner based
out of NCUA’s regional office in Atlanta. My office will be responsible for drafting policies and guidance related to the implementation of this new accounting standard. My goal today is to provide you an overview of what the new accounting standard that was issued by the
financial accounting standards board is about. Formally, FASB is calling the new standard accounting standards update number 2016-13, accounting for financial instruments credit losses topic 326. That is a mouthful. Informally, the
new accounting standard is commonly called CECL. CECL is an acronym that stands for current expected credit losses. After a draft was initially issued by FASB in 2012, they released the final standard just last week on June the 16th. This new standard
will replace today’s existing credit losses impairment methodologies. It will be the new generally accepted principle or GAAP for funding the allowance for loan and lease loss account required by credit unions, banks, and other entities. FASB’s stated mission with
the new standard is to establish and improve financial accounting and reporting standards in order to provide useful information to investors and other users of financial statements. With the new standard, FASB wants to require organizations to use more forward-looking information.
This is because the present incurred loss methodology delays recognition of credit losses until a loss probable or has been incurred. The new standard will help simplify the accounting standards by replacing several existing credit impairment standards. An added benefit may be that the new methodologies
may provide a valuable source of information when management teams are pricing loan products. NCUA will continue to expect all federally insured credit unions to follow GAAP when funding their allowance for loan lease loss account. Credit unions will also be expected to maintain a written policy and methodology to
support the allowance account under CECL just as they do today. The new accounting standard does not specify a single method of measuring expected credit losses. With CECL credit unions will continue to use judgment to develop estimation methods. Like before, the new methodology must be well documented,
applied consistently over time, and faithfully estimate the collectability of financial assets by applying the principles in the new accounting standard. This new accounting standard provides many different examples of acceptable methodology approaches. The new standard also allows credit unions to use approaches
that build on existing processes today. Credit unions can continue using existing methods for estimating credit losses when implementing the new standard. However, certain inputs into these models must change to achieve an estimate of lifetime credit losses, rather than the annual loss rates commonly used today. When appropriate,
credit unions will need to adjust their historical loss experience not only for current conditions, but also for a reasonable and supportable forecast to affect the expected collectability of loans and other financial assets. For example, if your credit union has a field of membership that has a large group of
employees that are about to go on strike and one of their major sponsors. The new standard will require that the anticipated or expected impact of this strike on credit losses be factored into your methodology. This would be true even if additional loan losses have not yet been incurred. Again,
CECL will be based more on expected losses rather than emphasizing your current or past losses. It’s intended to result in the earlier recognition of losses. However, even with earlier recognition of losses, it is important to note that the timing of loan charge offs will
not change. The new standard will not change your charge off policies. While some larger more complex credit unions may find it beneficial to do so, neither FASB nor NCUA will require credit unions to purchase modeling software to implement the new standard. It’s expected that the majority of
credit unions, especially our smaller credit unions, will continue to use self-designed spreadsheets to do the math required. Also, contrary to the rumor mill, is the fact that there is no need or requirement for a credit union to hire a consultant to implement the new standard. While implementing CECL will likely result in a higher allowance
for loan and lease loss account for many credit unions, initial adjustments to implement CECL will be allowed through undivided earnings. The long term impact on the income statement is expected to be neutral. It’s also important to note that this accounting change will have no impact on risk-based capital requirements.
CECL is effective for call report purposes beginning December 31, 2021. Credit unions will continue to use existing standards and methodologies until then. The standard does provide an option for credit unions to implement the new standard
beginning in 2019, but NCUA will not require credit unions to implement it prior to 2021. While the implementation date is several years from now, all credit unions should begin thinking about what impact CECL may have on their credit union. What impact the new standard will have on their
net worth ratio should also be a topic of discussion during budgeting and business planning sessions. Credit unions should not wait until 2020 or 2021 to begin planning for this change. Many credit unions will want to begin gathering the information they will need to implement the new methodology. This may include charge off data by vintage year
and/or by loan type. Additionally, credit unions may want to identify other sources of data to consider to include in their new methodology. For example, this could include statistical reports that can be obtained from credit bureaus or economic data readily available from publications such as the Wall Street Journal. NCUA
will be updating guidance for examiners and credit unions. To ensure consistency during examinations, NCUA will be providing extensive training to examiners so they are familiar with the new standards. We are also working with our sister banking agencies to develop a consistent and timely communication pertaining to the new
accounting standard. This past Friday NCUA issued a joint statement on CECL that provides a very good summary of the new standard. If you’ve not seen it yet, I encourage you to find it on NCUA’s website at NCUA.gov under the newsroom tab. Going forward, NCUA will continue to be mindful of
unintended consequences and the impact the new standard will have on net worth. We also consider the needs of small credit unions and less complex credit unions in developing supervisory guidance. With that, I will turn it back over
to Dom. Dominic Carullo: All right and here’s Scott’s contact page, if you want to contact him directly. I am waiting for a slide to come up here. I would like you to be aware of a terrific new search engine
we have here at OSCUl. FAQ+ is on our website, and it is designed to serve the credit union community by directing users towards resources or subjects of their choosing. Now, the links and other resources on this site may direct the
user to sources not found on NCUA’s site or may direct you outside of NCUA, which is not controlled by the NCUA. If you have a question relating to a credit union and you cannot seem to find an answer for that, if you get on our OSCUl site and in the upper right-hand corner, you can
type in your question up there. We have many answers already archived in there. However, if you ask a question that we do not have an answer archived for you, one of our analysts-one of our OSCUl economic development specialists-will research your question and provide you an
answer. We usually try to do that within about 24 hours. That is a really good research for those of you out there in credit union land. Also, if you need to contact OSCUl, our office, here is our contact information at the bottom
of the screen. Okay. Now, I talked about the certification of completion at the beginning of this webinar, and now would be a good time for you to go ahead and take the quiz. It is located in one of the little tabs at the lower right-hand
corner of your screen. Now, to qualify for the certificate of completion there are three things you need to do. The first thing is you need to answer at least 8 of the 12 quiz questions correctly. You must have already answered three of the four poll questions, and you must
have been on our webinar for at least 45 minutes. If you are still here with us right now, you’re probably already there. By the way, if you don’t get 8 of the 12 correct right away, you could go back and re-answer the questions and resubmit your answers. If you
don’t get it first time around, you will have a second chance and a third chance to correctly answer the test and to pass the test. Now, before we get to our questions and the webinar survey, here is a listing of our upcoming webinars. Now, tomorrow
we have another webinar. What I wanted to do-tomorrow is our CDFI certification webinar. Now, this is a terrific opportunity for low-income designated credit unions to learn about our partnership with the CDFI. Now, in this webinar we
will discuss the greatly simplified process for becoming CDFI certified. Now, once certified, there are wonderful grant opportunities through the CDFI, which may enable your credit union to provide enhanced services to underserved and unserved
members. The grants that are available through CDFI dwarf the grants that we are able to provide through OSCUl, so if you are a low-income designated credit union and you have any interest in becoming CDFI certified, you should really tune in tomorrow. With
that, I am going to turn it over to Kathryn. Kathryn Baxter: Well, well, well, here is my survey, so please while we’re going through our Q&A, take our survey. Remember we want to know what you think about this webinar and give us your suggestions for any upcoming ones. Since we have so many
questions today-we have some good questions too, Dom, by the way. Dominic Carullo: Oh, good. Kathryn Baxter: But you know who I’m going to start with? Take a guess. Dominic Carullo: The person that loves credit unions? Kathryn Baxter: You. Yeah. Dominic Carullo: All right. Hit me. Kathryn Baxter: Okay. We had a person that wants to know what in the
world does OSCUl stand for? Dominic Carullo: That’s a pretty interesting question. Kathryn Baxter: It really is. Dominic Carullo: Okay, and it’s pretty easy. We are the Office of Small Credit Union Initiatives. I know that is a mouthful. That is why we call ourselves OSCUl. Kathryn Baxter: That’s right. Thank you, so I’ll ask you another
question too, Dom. The credit union wants to know is there a list of available grants to credit unions? Dominic Carullo: Oh, there absolutely is. If you go on NCUA.gov and click down to the Office of Small Credit Union Initiatives, which is in the center of your screen, if you scroll down from
NCUA.gov, and you click into ours, and then click on grants and loans, everything you need to know about our grants and loans are right there on our website. In fact, we have an ongoing grant program going on right now which ends June 30th, so there’s still time
to get your grant applications in. Kathryn Baxter: Awesome. Now, we are going to jump to Carolyn. Carolyn, you out there? Carolyn Penaluna: I certainly am. I hope I am ready. Kathryn Baxter: I think you are. You have quite a few questions too. You and Kerri were quite popular.
Scott, you don’t get away either, but I’m going to start with Carolyn. Carolyn, here’s what the credit union asked. They said, “Can you record the grant receivable as the expenses are incurred?” Carolyn Penaluna: Well, it sounds like if you have a grant receivable, it sounds like you have a conditional promise
to give. In that case, you would have to meet those requirements that I stated where you have already paid the expense that you have incurred. Then you would have to make sure that you can state that the timeframes were properly adhered to, and that the possibility of not
submitting the claim and related documentation within the required timeframe is remote. If you can meet all three of those conditions, then you would be able to record the grant receivable. Kathryn Baxter: Okay. Fantastic. Carolyn, here’s another question about grant funds.
It’s sort of a two-parter, so I’m going to ask you to listen real carefully. Here’s what the credit union says. “If unconditional grant funds were received in year one but not used until year two, won’t this screw up the income statement?” Carolyn Penaluna: Okay. Kathryn Baxter: That’s the first part. Answer
that first. Carolyn Penaluna: Okay. Well, the first part is we have to remember that we are talking about, that this accounting bulletin is for credit unions less than $10 million. Those credit unions do not have to follow GAAP. If you’ have more than $10 million, you are going to follow GAAP, and you would not have that condition because you
would have to have the income and expenses matching in the same period. If you are not following GAAP, it would then depend on if you use cash basis or a modified cash basis. If you use cash basis and you receive the grant, yes, you would record the income. Until those funds are expensed, until you pay and use the funds,
you are not going to record the expense because you are cash basis. Yes, your income statement would show income in year one and expenses in year two. If you are modified cash, you could potentially instead record the income as deferred income in year one and then take it out of the deferred income
in year two as you are paying the expenses. Kathryn Baxter: Okay. I think you answered the second part of that too. Carolyn Penaluna: Oh, good. Kathryn Baxter: Stand by. We’re going to jump right over to Kerri. Kerri, are you ready? Kerri Piekarski: Yes. Kathryn Baxter: You said that too quick-yes
I am. Okay. Here’s a question for you. It’s about a repossessed vehicle. The credit union says, “If a repossessed vehicle is sold for less than fair value and it was recorded at possession, should the deficiency balance be written off through the ALLL-the A-L-L-L-or as a loss on
depositions?” Kerri Piekarski: Yes. If the vehicle has been moved into the assets and liquidation account, then the balance that’s remaining after sale would be written off as a loss on the sale of the asset. Kathryn Baxter: Okay. Here’s a question on
the call reports. You ready? Okay, Kerri. The credit union says, “On page 6 of the call report, what is the difference between grant received and grant awarded?” Actually, that may be-is that you or Carolyn? Kerri Piekarski: I think that what we’re asking on the call
report here you’re awarded a grant and sometimes something needs to happen before you actually receive the grant. When you know that you’ve been awarded the grant, you would report that then. Then when you actually receive the grant money, that’s when you would fill out that portion. Kathryn Baxter: Okay. Fantastic. Scott, it’s your turn.
Scott Neat: Okay. I’m ready. Kathryn Baxter: Are you ready? All right. He’s anxious. I’m going to give it to you next. Scott Neat: Okay. Kathryn Baxter: Here’s the question that the credit union had. It’s about the CECL standard. They said, “If a credit union chooses to adopt the new CECL standard early, can they use CECL for call reports prior
to the fourth quarter of 2021, or would they be required to continue to use the old methodology for the call report until the fourth quarter of 2021?” Scott Neat: The new standard allows credit unions to implement this new standard early in 2019. Beyond that, the requirement
is that credit unions will be required to start reporting their allowance account under CECL beginning with the call report for the year ending 2021 for the December 31 call report. Kathryn Baxter: Okey-dokey. Here’s another CECL question for
you. The credit union said, “For CECL how far are you expected to look-the life of a loan, current economic conditions?” Scott Neat: The standard emphasizes the need to look and determine the expected losses over the lifetime of the loan. If
you have a loan portfolio that has a weighted average life of 36 months, for example, you would need to estimate the losses for that 36 month period. Kathryn Baxter: Awesome. Dom, are you ready for a question? Dominic Carullo: Absolutely.
Kathryn Baxter: Okay. You are ready. Okay. The credit union wants to know-this is a very good question-what asset size is considered small for credit unions?” Dominic Carullo: That’s funny. We were just talking about that earlier. Kathryn Baxter: We were. Dominic Carullo: We believe it’s $100 million. Kathryn Baxter: It is. Here’s one more for you.
Dominic Carullo: All right. Kathryn Baxter: Are you ready? Okay. The credit union wants a suggestion from us. “Can you make any suggestions to gaining supervisory committee members?” This has nothing to do with what we’re talking about, but they just want a suggestion. Do you have any? Dominic Carullo: Wow. That is a terrific question. We get this question all of the time. That’s
sort of like predicting interest rates. Honestly, we do not have anything to offer, but one thing that we’ve been really recommending recently is that credit unions bring in student interns. It could be that you have some college students out there or you might be able to bring in some student
interns to give you a hand with the audit. That is one suggestion, if you can maybe bring in some interns to serve on your supervisory committee or to assist your supervisory committee. That may be helpful. Kathryn Baxter: Okay. Great. I want to jump back to Scott. Scott, you have a fan here. You have a fan here, Scott, so I want to jump back to you.
Are you ready? Scott Neat: Yeah. Kathryn Baxter: Here’s what your fan said. I’m going to put you on the spot to answer this question. They said, “Is it true that Mr. Neat gave up his allegiance to the University of Kentucky and is now a Duke fan?” Scott Neat: Never,
never. Kathryn Baxter: Okay. Let’s give Scott another question here. CECL— so the question that the credit union has is, “Since CECL will deal with speculation, why couldn’t a credit union use a historical loss ratio
and pre-book the loss when booking the loans?” Scott Neat: Well, again, the standard that they published last week provides many different examples for how credit unions can implement the new standard. One method would be to continue to use the historical loss averages as a foundation
or a starting point, but then you would need to be more forward-looking and predictive of what the losses are anticipated over the lifetime of those loans. That’s going to be the challenge. Kathryn Baxter: Okay. All right. Great. I’m going to step back to Carolyn and also Kerri, because I think both of you
may have some input on this question. Here’s what the credit union said. They say, “We have members that ask to set up a loan workout to pay a deficiency on a charge off due to repossession, and the credit union does not incur a loss, but how should this be recorded?” Kerri Piekarski:
Okay. I’m reading the question right now. Would you mind reading it again? Kathryn Baxter: Sure. Here’s the question. We have had members that ask to set up a workout loan to pay for a deficiency balance on a charge off due to repossession so the credit union does not incur a loss. They want
to know how to record it. How should it be recorded? Kerri Piekarski: Okay. Well, this sounds like to me like it would be a troubled debt restructure. Kathryn Baxter: It does. Yeah. Kerri Piekarski: That would need to be-you would record it as a loan, but there are additional accounting requirements for TDRs or troubled debt restructures
that you need to evaluate what the impairment will be. That’s based on the net present value of future cash flows for a loan like this, because there wouldn’t be any collateral anymore. Kathryn Baxter: Okay. Did you have anything to add, Carolyn? Carolyn Penaluna: No. I think Kerri got it all. Kathryn Baxter: All righty. Thank you,
Kerri. Now, let’s ask a question. Carolyn, I’m going to give you another grant question. Carolyn Penaluna: Okay. Kathryn Baxter: The credit union says-this is a good question too- “Are all grants, whether from NCUA or any other organization-accounted for in the manner that you discussed always?” Carolyn
Penaluna: If you are under $10 million and do not have to follow GAAP, then yes, all grants should follow the accounting bulletin, which is what I discussed. If you are more than $10 million, all grants should fall under GAAP. Kathryn Baxter: Okay. All
right. Here’s another question for you, Carolyn. This is directed to you, so here’s what the credit union says. “If someone surrenders an asset in lieu of foreclosure repossession, would we include it in a call report?” Carolyn Penaluna: I think that question is actually for Kerri.
Kathryn Baxter: Is that you, Kerri? Carolyn Penaluna: They are talking about the call report and repossessions. Kathryn Baxter: Yeah. I’ll read it one more time. If someone surrenders an asset in lieu of foreclosure or repossession, would we include it in the call report? Kerri Piekarski: Are we talking about in he section
for charge-off or-? Kathryn Baxter: They didn’t get specific. Kerri Piekarski: Okay. Kathryn Baxter: It’s just that it seems like-so the person comes in. They can no longer afford the car. Instead of it being a formal repossession, they just turn it in. Kerri Piekarski: Yeah. I would still-yeah, we still regard these as
repossessions, even though it was a voluntary surrender of the collateral. Kathryn Baxter: Okay. All right. Then, Kerri, let me put you on the hot seat again, and then I’m going to go to Scott. Here’s one. Okay. Kerri, can you tell the credit union what the difference is between
a TDR and a loan modification? Kerri Piekarski: Yes. A TDR-there has to be two tests that are met for a modification to be considered a TDR. One would be you grant them a concession that you wouldn’t normally grant a member. For
example, you gave them a 0% or a 1% loan rate, when if they were coming in off the street, they would receive a higher rate. Then the member also must be having financial difficulties. Kathryn Baxter: Scott? Scott Neat: Okay. Kathryn Baxter: Are you ready? Here’s what
the credit union says. They’re looking for some more guidance on CECL. Are there any sample policies, sample calculations? They just want some more guidance. Do you know of any? Scott Neat: Again, the standard has several examples. I know in the past we’ve issued lawyers to credit unions and interrupted ruling
statements. I also wanted to point out that one exception to the under $2 million GAAP rule is that funding an allowance for loan and lease loss account has been NCUA’s longstanding position that all credit unions need to follow-all federally insured credit unions, I should say-need to follow the GAAP for funding the
amounts against. As we get further down the road looking at possible letters and other correspondence we’re going to have with our credit union industry, we’re going to be looking to provide additional examples. Kathryn Baxter: Okay. Here is something that’s along the same lines, Scott.
The credit union says, “Now will CECL apply to credit unions of all asset sizes?” Scott Neat: Yes. Kathryn Baxter: Okay. Very good All right. We’re going to jump back to you, Carolyn. Carolyn Penaluna: Okay. Kathryn Baxter: I’m going to see if anyone has any other questions
for Dom yet. You have some more questions. Did you know that? Dominic Carullo: I did not. Kathryn Baxter: Okay. Let’s go to Carolyn first. Okay. Just a second. Okay, so here’s the question, Carolyn. Now, it has nothing to do with grants, but I think this has something
to do with teller overages or shortages or whatever. Carolyn Penaluna: Okay. Kathryn Baxter: They said, “Should overages be considered just as serious as shortages when you were talking about fraud? Carolyn Penaluna: Yes, they should. I’m sorry if I said just shortages. I think I did when
they were asking how frequent should the surprise cash counts be. Yes. Overages can be a problem just as much as shortages. If they are trying to conceal fraud, they may have made a mistake when they were trying to hide something and gone too much the other way. Yes, it should be overages, not just shortages. It should be
outages. That should be the word; it would be overages and not shortages. Kathryn Baxter: Okay. All right. Here’s something with regard to the audit. Here’s what the credit union says, Carolyn. “We have an audit that is based upon breed upon procedures and also supervisory performed by an outside
person. ” The question that the credit has is, “Are both of these necessary?” Carolyn Penaluna: I believe, without knowing all of the details, your agreed upon procedures may be the annual audit that is required by regs. and the third party audits that you are experiencing may be the
interim audits that a supervisory committee performs. They are certainly able to hire a third party to perform those interim audits for them. Yes, I do believe, without knowing all of the details, that both of those would be necessary. Kathryn Baxter: Okay. Very good.
Now, let’s go to Dom. I’m going to jump to you, Dom, really quick. Dominic Carullo: Okay. Kathryn Baxter: The last question that I gave you with respect to supervisory committees-so I think you mentioned bringing in student interns. Did you say something like that? Dominic Carullo: I did. I did say that.
Kathryn Baxter: The credit union wants you to elaborate on that a little bit. Dominic Carullo: Okay. Credit unions, like any other business, have the ability to bring in interns. Student interns are used throughout credit union land. A lot of credit unions bring student interns in to work with them with marketing
or just to learn accounting and so on and so forth. It is good for the intern because they gain valuable experience at a live financial institution, and they get to write on the resume that they worked at a federally insured financial institution. It is very beneficial for the student
because they learn a lot. It is also terrific for the credit unions to bring in student interns because they can utilize the expertise that the student interns are perhaps studying. Perhaps you have someone-an intern-that is studying marketing or accounting or auditing or so on and so forth. Say you brought
in a student intern that was studying to be an auditor or an accountant. They would be a wonderful resource to work with the supervisory committee to complete the supervisory committee audit. I think, not standing alone, but if they work with the supervisory committee and with folks that have some experience I think that would work very, very well. Kathryn
Baxter: Yeah. That’s a good idea. I think so too. All right. Wonderful. Kerri? Kerri Piekarski: Yes. Kathryn Baxter: You’re up next. Kerri Piekarski: Okay. Kathryn Baxter: Now, let me know if this question is yours or if it’s Carolyn’s, okay? Kerri Piekarski: Okay. Kathryn Baxter: Here’s what the credit union said. They said, “Should waived member fees be
reported in the non-interest income or the expense portion of call reports?” Kerri Piekarski: I wouldn’t think you would report. If the fee has been waived, there is no income to be recorded, if I’m understanding the question correctly. Kathryn Baxter: You don’t think they have a need
to record anything? Kerri Piekarski: Correct. Kathryn Baxter: Okay. All right. Stand by. Here’s another one for you. A voluntary surrender-okay? Kerri Piekarski: Yes Kathryn Baxter: Here’s what the credit union said. “If we have a voluntary surrender that
is worth, say”- they said $7,500 and they sell it for $5,000 before it goes to the board for charge-off approval, “would we then present it as a $2,500 charge-off?” That’s what they want to know. Kerri Piekarski: Yes. I would agree with that. Kathryn Baxter: It
makes sense. Yeah. All right. Let’s see. I think I’m for you, Scott, now. Scott Neat: Okay. Kathryn Baxter: All right. I think I know the answer to this, but I’ll pass it on to you since you’re
the expert on CECL. The credit wants to know, actually, does the NCUA have an allowance for loan loss methodology model that we use? Scott Neat: No. NCUA does not have a model. Again, there are many different
ways for funding an allowance account. Some very, very large credit unions and banks may want to use a sophisticated model they might purchase, but the vast majority of credit unions-my experience has been they could just simply do the math on a spreadsheet. In my
meetings with FASB over the past year or two on this, what they kept telling me was that whatever methodology the credit union or the bank comes up just needs to be reasonable and supportable. That seemed to be the mantra throughout the conversations. Kathryn Baxter: Sounds reasonable
to me. Here’s another question on CECL. Credit union says, “Will CECL address investments, securities, or just member loans?” Scott Neat: It includes other assets such as investments and securities. Of course, the loan side of it is what applies to most credit unions. There are
provisions in CECL that will address other financial assets on the balance sheet, so you need to be aware of that. Kathryn Baxter: Okay. I think this question was to the wrong person, so I’m not going to call a name, but whoever answers it is who it belongs
to. I believe this actually has to do with the 5300 report. The credit union says, “Do credit unions need to report changes to senior management in the profile even when the personnel aren’t listed on the profile?” It gave an example. They said, “For example, senior management leaves the organization,
but they are not listed on the profile originally. ” Kerri Piekarski: Okay. I can answer that. Kathryn Baxter: Thank you, Kerri. Kerri Piekarski: The only required personnel other than the board members is the CEO. There are some optional positions that you can report. I believe the CFO and internal auditor are
the other two optional people that you would list on the call report. The other senior management positions-I don’t even think there’s an option to report them on the profile. Kathryn Baxter: Okay. Let me
stay with you, Kerri, for a minute, okay? Let me make sure I get this right before I give you the question. Kerri Piekarski: Okay. Kathryn Baxter: This is actually for Carolyn. Carolyn, are you ready? Carolyn Penaluna: Okay.
Yes. Kathryn Baxter: Here’s the question, Carolyn. The credit union says, “If you are a credit union under $10 million can you follow GAAP for grants?” Carolyn Penaluna: If you are under $10 million, and you choose to follow GAAP, you will have to follow GAAP for everything. Kathryn Baxter: Okay, so it’s not just you
pick and choose. You have to- Carolyn Penaluna: Right, because it is either cash, modified cash, or is it GAAP. You pick one of those three. Kathryn Baxter: -and stick with it. Carolyn Penaluna: Yes. Kathryn Baxter: All right. Okay. Let me jump back to Kerri,
and then I’m going to go back to Carolyn. Repossessions-here’s the question the credit union said. “When should the vehicle that is repossessed be moved into a repossession status?” I believe that’s what they mean-on the
call report. Kerri Piekarski: It should be moved over to the asset and liquidation account at the time of repossession. Now, I think we’re getting some questions about getting board approval because you want to have board approve the charge-off amount. I have
no problem waiting until you have the board approve that, because that’s an important part of the internal controls to have that separation. Kathryn Baxter: Okay. I’m going to try to shorten this, Kerri-this question-a little bit.
The credit union says-and this is in regard to repossessed assets-“If the board approves the charge at the monthly board meeting,” so they want to know how in the world-what you just answered, I guess-how in the world do they reconcile immediately doing a
charge-off entry upon repossession with the board needing to approve the charge-off?” Do you want me to state that again, that might- Keri Pickarski: Sure. You can wait until you have approval from your board of directors to make that transfer to the liquidation account. Kathryn Baxter: Okay. I think this
is for you, Carolyn. Carolyn Penaluna: Okay. Kathryn Baxter: It has to do with a grant in the call report, so it may be for Kerri. Whoever answers is the one it’s for. “For the purpose of the call report, do you list the scholarships as the same as a grant?”
Carolyn Penaluna: I would say no, but that is up to Kerri. Do you agree? Kerri Piekarski: Actually, I was going to say yes. Carolyn Penaluna: Scholarships? Kathryn Baxter: Correct. Carolyn Penaluna: Are they saying that somebody is going to pay for tuition for someone to go
somewhere like to college? Kerri Piekarski: Oh, I was thinking maybe they were awarded a scholarship to attend a league function. Kathryn Baxter: Without it, it’s not very clear. Kerri Piekarski: Yeah. Kathryn Baxter: It’s kind of general. We’ll answer that again. Kerri Piekarski: It depends. Kathryn Baxter:
Yeah. It depends. That’s the answer to that one. Okay. Now, here’s a question. This is for you, Carolyn. That I do know. The credit union is looking for where they can find a general template on internal control policies, procedures, or a checklist. Is there anything that you can refer them to? Carolyn Penaluna:
Well, we do not have a checklist, per se, but they can use the supervisory committee guide and look at all of the areas that are listed for a supervisory committee to review in the ongoing audits. They can develop some internal control checklists from that if they would like to. They could also have a CPA
or their league help them develop some internal controls. It really depends on the size and complexity of the credit union and the products and services they offer. A one-size template would not fit for everybody. Kathryn Baxter: Very good. Actually, that’s very true. Okay. Here’s another good question,
and then I’m going to leave the last question for Scott. This has to do with corporate credit card activity. The credit union wants to know is this a function of the board or the supervisory committee to monitor this? Carolyn Penaluna: It is actually both. The board would be responsible for setting the policy. The board would be
responsible for reviewing the statement-a member of the board or a committee of the board would be responsible for reviewing the statement and receipts of the CEO, because that would be the next higher level authority. The supervisory committee has a responsibility to review the already approved and paid statements and
receipts to make sure that policy was followed-that somebody did review it and somebody did approve it. Then they would also be looking to see did it follow policy and is everything else okay with it. Really, they both have responsibilities. Kathryn Baxter: Okay. Great. I’m going to leave
the last question or two for Scott. The first question with regard to CECL, the credit union says, “When does it go into effect?” Scott Neat: With the call report ending December 31, 2021. Kathryn Baxter: Then he wants to know will examiners expect to see it in place
prior to the all methodology and evaluation? Scott Neat: That is a good question. The answer is no. We’re not going to require credit unions to implement this earlier than what FASB is requiring. We will be, as we get a little further down the road, as I said before, be providing training to
our examiner staff. I do think it’s important for credit unions to start thinking about and discussing what impact CECL may have on their credit unions. There are some things that we may want to share with credit unions to help them with that in the near future, in the next year or two, to help them along
that road and that path to start identifying things they need to be considering as they’re developing the new methodology. Depending on what methodology they choose, it may require they have a little bit bigger database or credit losses, for example, because they may need to accumulate. If that’s identified early, they
can start building that now or working with their vendors, if necessary, to help them capture that information. Kathryn Baxter: Awesome. This last question, Scott, with regard to CECL, the credit union said, “Did you say that the initial entries will be allowed through undivided earnings transfer?” Is that what you said?
Scott Neat: That is the expectation. Yes. We’re not going to require that you fund it through provision for loan loss expenses. It’s an accounting change that is allowed through the undivided earnings account. Kathryn Baxter: Awesome. Very good. Well, that means, Dom, we are fresh out of
time. Yeah. I just want to thank everybody, thank our speakers, Scott, Kerri, Carolyn, Dom even. We thank you. We want you to join us tomorrow for our CDFI webinar. It’s at two o’clock. Don’t forget to join us. Thanks again. The questions that we didn’t answer, you certainly will get
them when we archive this webinar for on-demand viewing. They will be in the queue. Also, for people that maybe having a problem accessing their certificate, we’ll make sure that you get your certificate. Don’t worry about it, but we will keep the console open for the next 60 minutes, so that you can still do the test and
hopefully we’ll have the problem worked out with regard to the certificates. For Dom Carullo and the rest of the NCUA team, this is Kathryn Baxter, we want you all to have a wonderful day and a great week.

Leave a Reply

Your email address will not be published. Required fields are marked *