The National Credit Union Administration (NCUA) recently
announced the latest update to its tool to assist organizations in utilizing
the current expected credit loss (CECL) methodology for estimating
allowances for credit losses. The agency’s Simplified CECL Tool is a resource
for companies concerned with adherence to the Financial Accounting Standards
Board’s (FASB) accounting standard introduced in 2016.
The newly released version includes the latest life-of-loan
factors and a reformatted “Tab 2 – Individual Basis” to facilitate entering
data on individually evaluated loans, as well as other enhancements.
CECL became effective for most credit unions on Jan. 1.
Credit unions currently using the Simplified CECL Tool should note the latest
update is designed to determine an institution’s credit loss expense, or
provision for credit losses, for the quarter ending Sept. 30.
For credit unions that adopted CECL in the third quarter of
2023, the September 2023 Call Report will include the day-one adjustment to
undivided earnings and the credit loss expense since the date of CECL adoption.
The Simplified CECL Tool was designed primarily for
institutions with less than $100 million in total assets. The methodology,
known as the Weighted Average Remaining Maturity (WARM) or “life-of-loan”
methodology, enables institutions to determine allowance for credit losses
(ACL) on loans and leases for their loan portfolio.
Quarterly updates to the CECL tool are intended to enable
credit unions to utilize it prior to submission of their quarterly NCUA call reports.
The tool relies on portfolio-level WARM proxy data to
estimate current expected credit losses. For the WARM assumptions to remain
applicable in an ever-changing environment, the Simplified CECL Tool will be
updated quarterly.
It is important to note that the Simplified CECL Tool and
the underlying methodology may or may not be appropriate for all credit unions,
and it is up to leadership at each institution to determine whether the
approach is appropriate based on their unique facts and circumstances.
Credit unions are not prohibited from choosing a different
methodology to estimate an institution’s ACL, provided it is appropriate for
the financial assets being evaluated, consistent with the credit union’s size
and complexity and well-documented, with clear supporting analyses and
rationale.