Dear Boards of Directors and Chief Executive Officers:
The National Credit Union Administration is providing a tool to assist small credit unions with determining their allowance for credit losses (ACL) on loans and leases as required under Accounting Standards Codification Topic 326, Financial Instruments – Credit Losses, commonly referred to as Current Expected Credit Loss (CECL). The Simplified CECL Tool (CECL Tool) is designed for credit unions with less than $100 million in assets.1 The CECL Tool and its supporting documentation are available on the CECL Resources page at NCUA.gov.
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. While credit unions may choose from a variety of credit loss models under CECL (for example, expected loss, discounted cash flow, roll-rate, probability of default), the CECL Tool uses the Weighted Average Remaining Maturity (WARM) methodology.
The Financial Accounting Standards Board supports the NCUA’s efforts to identify acceptable and scalable methods and approaches to reduce the costs and complexity related to implementing and applying the CECL guidance for smaller credit unions. The WARM method represents one acceptable approach for smaller, less complex pools of assets. Each credit union should determine which approach best fits its portfolio.
The CECL Tool calculates the ACL for a loan portfolio category by multiplying the period-end loan portfolio balance, the average annual charge-off rate, and the WARM factor (see Appendix A). Loan portfolio categories parallel those in the NCUA Call Report (see Appendix B). The CECL Tool also provides the related WARM factor derived from loan-level data of like-sized credit unions and vetted to provide a relevant factor for each loan portfolio category.
Within the CECL Tool, 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.
The CECL Tool’s data will be updated for each quarter-end, beginning September 30, 2022, to provide updated WARM factors that reflect current market conditions.
To assist credit unions and their auditors in reviewing the CECL Tool, please see the Frequently Asked Questions and the Model Development documents (opens new window). These documents provide the rationale, assumptions, and other analyses that support the tool’s use for calculating the allowance for credit losses on loans and leases.
This letter and the CECL Tool do not constitute legal or accounting advice. Your credit union should consult its accounting advisor on whether the tool is appropriate for use to determine the allowance for credit losses on loans and leases, given the unique facts and circumstances of your institution.
The NCUA is providing the CECL Tool “as is” and it expressly disclaims all warranties, expressed or implied, including any implied warranties of merchantability and fitness for a particular purpose. The NCUA is not liable to your credit union or any third party for any direct, indirect, incidental, consequential, special, or exemplary damages or lost profit related to using the CECL Tool.
If you have any questions, please contact the Office of Examination and Insurance at firstname.lastname@example.org or 703.518.6360.
Todd M. Harper
1 The CECL Tool can be used by larger credit unions based on the discretion of their management and auditors. The CECL Tool includes functionality for a credit union to calibrate assumptions to its circumstances.