Compliance Blog

Sep 26, 2022

All the Acronyms, and a Simplified CECL Tool from NCUA

We’ve all heard of the “alphabet soup” of government agencies, who then serve up even more helpings of acronyms whenever they start a new project, and who can keep them all straight?  From FBI and CIA to NCUA and CFPB, what do all the letters mean?  I know those are easy, but here are a few more: FASB, ACL, CECL, and WARM.  Did you get them all?  If not, keep reading, and I’ll explain.

Dwight from "The Office" looking confused with text that says, "Me trying to figure out the acronym."

Earlier this month, the National Credit Union Administration (NCUA) published Letter to Credit Unions 22-CU-10, regarding a simplified CECL Tool for credit unions with less than $100M (one hundred million dollars) in assets.  For those unfamiliar with CECL (I personally pronounce it as “Cecil,” like the name), it stands for Current Expected Credit Loss.  CECL is the common name for allowance for credit losses (ACL – another one; and  it’s not something you can tear in your leg) “on loans and leases as required under Accounting Standards Codification Topic 326, Financial Instruments – Credit Losses” issued by the Financial Accounting Standards Board (FASB).  NCUA has noted that federally-insured credit unions are required to implement the CECL standard for fiscal years after December 15, 2022, though they can voluntarily implement it earlier if they wish to do so.

NCUA explains in its letter that “the CECL Tool is one of many options available to calculate the ACL for loans and leases under the requirements of the CECL accounting standard.”  The Simplified CECL Tool utilizes the Weighted Average Remaining Maturity (WARM – like a nice cup of tea on a crisp fall day) methodology.  The WARM method is an acceptable approach for smaller and less complex pools of assets, making it most helpful to small credit unions with under $100M in assets.  However, each credit union may decide the best approach that fits its own portfolio.

How the Simplified CECL Tool works, in a nutshell, is that it “calculates the ACL for a loan portfolio category by multiplying the period-end loan balance, the average annual charge-off rate, and the WARM factor.”  Appendix A outlines the ACL calculation for each portfolio segment, and Appendix B provides a list of loan portfolio segments, which mirrors those in the NCUA Call Report.  The letter includes seven enclosures: three appendices, a link to the CECL Tool, a FAQ (Frequently Asked Questions), a User Guide, and a Model Development Document. 

The Tool itself is a downloadable excel file, into which the credit union enters its inputs into the green-colored fields within the worksheets (tabs), and the Tool calculates the outputs in the output sections of the worksheets (tabs), all within the same workbook.  The User Guide walks through the process of inputting data into the input tabs, then provides explanations of the output tabs.

Per NCUA’s letter, “individual credit unions should adjust the charge-off rate and the WARM factor using qualitative factors (see Appendix C).  This allows each credit union to refine the values to its specific circumstances, including current conditions and reasonable and supportable forecasts.”  Appendix C provides a list of qualitative adjustments that may be made, and examples of each.

The FAQ covers various questions within the topics of Model Methodology, Data, Assumptions, Qualitative Adjustments, and Documentation.  Of note, Question 2 under Model Methodology asks, “[w]hat type of credit unions should consider the Simplified CECL Tool?”  NCUA responds:

The intended users of the CECL Tool are credit unions with under $100 million in assets, or those with similar characteristics as smaller credit unions. While there is no specific threshold for its use, the appropriateness of the tool’s usage by each credit union should be evaluated on a case-by-case basis, approved by management, and consulted on with the credit union’s auditor. Figures 8 and 9, in the Appendix, contain summary statistics on the loan data used to estimate each portfolio segment’s WARM factor. Credit unions should compare these values to their own loan portfolios to determine the applicability of the WARM factors. The CECL Tool allows qualitative adjustments to the WARM factors for credit unions to calibrate it to their loan portfolio segments.

(Emphasis added.)

Based on this response, it appears that somewhat larger credit unions may utilize the tool, subject to a thorough round of approvals by management and review by the credit union’s auditor.  The Tool does allow adjustments to the WARM factors, in order for credit unions to specifically calibrate it to their own loan portfolio segments, which may provide some flexibility.  However, the Tool may not work appropriately for credit unions with larger and more complex pools of assets. NAFCU has sent a letter to NCUA asking that the agency clarify that the tool could be appropriate for credit unions with assets of up to $1 billion.

NCUA plans to update the CECL Tool for each quarter-end, starting at the end of this month (September 2022), “to provide updated WARM” (did you forget what it means, already?) “factors that reflect current market conditions.”

To learn more, credit unions should take a look at the Letter to Credit Unions and its enclosures, and consider consulting with an accountant or the credit union’s accounting advisor on whether the Simplified CECL Tool could be useful for the credit union to utilize. To learn more about CECL, credit unions may want to review NAFCU’s CECL Resources page.

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