The NCUA developed the Simplified CECL Tool (CECL Tool) to assist smaller credit unions with developing their allowance for credit losses (ACL) on loans and leases as required under the accounting standard for the current expected credit loss (CECL), Accounting Standards Codification (ASC) Topic 326, Financial Instruments – Credit Losses.
The CECL Tool is intended for use by credit unions with under $100 million in assets, although it could be used by larger credit unions based on the discretion of their management and auditors.1 Because not all credit unions are the same, the CECL Tool includes functionality for a credit union to calibrate assumptions to its circumstances.
While a variety of credit loss methodologies are permissible under CECL, the NCUA chose the Weighted Average Remaining Maturity (WARM) method under the expected loss rate approach as the model methodology for the CECL Tool. The Financial Accounting Standards Board (FASB) indicates the WARM method is intended for use in estimating the ACL for less complex entities or those with less complex financial asset pools. As stated in a FASB Q&A on the applicability of the WARM method, “There is no expectation that a less complex entity should have to implement a sophisticated model to satisfy the requirements of [Accounting Standard] Update 2016‑13. If an entity is using a loss rate-based method today, that entity may continue with a comparable method, including the WARM method.”2
Accordingly, the WARM method within the CECL Tool uses current loan balances, historical annualized charge-off rates over a specified lookback period, and the estimated remaining life for each segment to estimate the ACL for pooled loans, subject to any qualitative adjustments to the latter two inputs. The ACL for individually evaluated loans is a separate calculation within the Tool.
Appendix
Figures 8 and 9 contain summary statistics on the loan data used to estimate each portfolio segment’s WARM factor. Figure 8 displays relevant metrics for the WARM factor estimation at the portfolio segment level. Figure 9 presents the same information as Figure 8, but it breaks down portfolio segments into their product level components.
The fields in the tables are described below:
- Category: The type of loans grouped together to calculate the WARM factor. Figure 8 contains the portfolio segments used in the CECL Tool. Figure 9 breaks the portfolio segments into their financial product components (where possible).
- Call Field: The type of loan’s associated call field on the Call Report.
- Loan Count: The number of loans in the category.
- Avg Loan Rate: The average interest rate on the loans in the category.
- Wtd Avg Maturity: The average remaining term, weighted by loan balance.
- WARM: The average WARM factor in the pool of loans.
- Prepay Speed: The average annual prepayment assumption applied in the loan pool.
By comparing credit union-specific metrics to the industry-level metrics in the WARM factor tables below, a credit union can gain insight into the differences between its loans in its portfolio segments and those loans used to estimate the WARM factors. Differences in interest rate, remaining maturity, and prepayment expectations can all provide justification for credit union-specific adjustments to the WARM factors.
Figure 8: June 30, 2022, CECL Factors
Item | Category | Call Field | Current Balance | Loan Count | Avg Loan Rate | Wtd Avg Maturity | WARM | Prepay Speed |
---|---|---|---|---|---|---|---|---|
Item 3 |
Category Non-Federally Guaranteed Student Loans |
Call Field 698A |
Current Balance 8,606,553 |
Loan Count 2,400 |
Avg Loan Rate 4.98 |
Wtd Avg Maturity 98.71 |
WARM 41.39 |
Prepay Speed 11.8% |
Item 4 |
Category All Other Unsecured Loans/Lines of Credit |
Call Field 397 |
Current Balance 147,670,273 |
Loan Count 62,213 |
Avg Loan Rate 10.30 |
Wtd Avg Maturity 40.90 |
WARM 18.38 |
Prepay Speed 12.0% |
Item 5 |
Category New Vehicle Loans |
Call Field 385 |
Current Balance 379,725,875 |
Loan Count 27,298 |
Avg Loan Rate 3.89 |
Wtd Avg Maturity 54.99 |
WARM 20.97 |
Prepay Speed 18.9% |
Item 6 |
Category Used Vehicle Loans |
Call Field 370 |
Current Balance 1,000,050,914 |
Loan Count 94,421 |
Avg Loan Rate 4.83 |
Wtd Avg Maturity 52.72 |
WARM 18.93 |
Prepay Speed 23.9% |
Item 8 |
Category All Other Secured Non-Real-estate Loans /Lines of Credit |
Call Field 698C |
Current Balance 49,830,850 |
Loan Count 3,223 |
Avg Loan Rate 6.06 |
Wtd Avg Maturity 85.02 |
WARM 29.08 |
Prepay Speed 17.4% |
Item 9 |
Category Loans/Lines of Credit Secured by a First Lien on a single 1-4 Family Res. |
Call Field 703A |
Current Balance 1,283,145,405 |
Loan Count 11,338 |
Avg Loan Rate 3.71 |
Wtd Avg Maturity 217.28 |
WARM 65.61 |
Prepay Speed 11.1% |
Item 10 |
Category Loans/Lines of Credit Secured by a Junior Lien on a single 1-4 Family Res. |
Call Field 386A |
Current Balance 155,578,396 |
Loan Count 9,125 |
Avg Loan Rate 5.37 |
Wtd Avg Maturity 155.12 |
WARM 52.90 |
Prepay Speed 11.7% |
Item 11 |
Category All Other Real Estate Loans/Lines of Credit |
Call Field 386B |
Current Balance 15,083,004 |
Loan Count 579 |
Avg Loan Rate 3.97 |
Wtd Avg Maturity 110.80 |
WARM 75.06 |
Prepay Speed 8.0% |
Item 12 |
Category Commercial Loans/Lines of Credit Real Estate Secured |
Call Field 718A5 |
Current Balance 64,231,821 |
Loan Count 412 |
Avg Loan Rate 4.38 |
Wtd Avg Maturity 94.47 |
WARM 34.80 |
Prepay Speed 9.4% |
Item 13 |
Category Commercial Loans/Lines of Credit Not Real-estate Secured |
Call Field 400P |
Current Balance 45,577,345 |
Loan Count 584 |
Avg Loan Rate 4.11 |
Wtd Avg Maturity 108.38 |
WARM 39.21 |
Prepay Speed 10.6% |
Figure 9: June 30, 2022, CECL Factors, Product Level
Item | Category | Call Field | Current Balance | Loan Count | Avg Loan Rate | Wtd Avg Maturity | WARM | Prepay Speed |
---|---|---|---|---|---|---|---|---|
Item 3 |
Category Non-Federally Guaranteed Student Loans |
Call Field 698A |
Current Balance 8,606,553 |
Loan Count 2,400 |
Avg Loan Rate 4.98 |
Wtd Avg Maturity 98.71 |
WARM 41.39 |
Prepay Speed 11.8% |
Item |
Category Unsecured Loans |
Call Field 397 |
Current Balance 128,924,034 |
Loan Count 54,116 |
Avg Loan Rate 10.02 |
Wtd Avg Maturity 41.92 |
WARM 18.63 |
Prepay Speed 12.6% |
Item |
Category Line of Credit |
Call Field 397 |
Current Balance 18,746,239 |
Loan Count 8,097 |
Avg Loan Rate 12.25 |
Wtd Avg Maturity 33.88 |
WARM 16.62 |
Prepay Speed 7.8% |
Item 4 |
Category All Other Unsecured Loans/Lines of Credit |
Call Field 397 |
Current Balance 147,670,273 |
Loan Count 62,213 |
Avg Loan Rate 10.30 |
Wtd Avg Maturity 40.90 |
WARM 18.38 |
Prepay Speed 12.0% |
Item |
Category New Auto |
Call Field 385 |
Current Balance 227,477,733 |
Loan Count 17,413 |
Avg Loan Rate 3.84 |
Wtd Avg Maturity 55.48 |
WARM 20.81 |
Prepay Speed 19.8% |
Item |
Category Indirect New Auto |
Call Field 385 |
Current Balance 152,248,142 |
Loan Count 9,885 |
Avg Loan Rate 3.97 |
Wtd Avg Maturity 54.27 |
WARM 21.20 |
Prepay Speed 17.5% |
Item 5 |
Category New Vehicle Loans |
Call Field 385 |
Current Balance 379,725,875 |
Loan Count 27,298 |
Avg Loan Rate 3.89 |
Wtd Avg Maturity 54.99 |
WARM 20.97 |
Prepay Speed 18.9% |
Item |
Category Used Auto |
Call Field 370 |
Current Balance 671,881,795 |
Loan Count 67,209 |
Avg Loan Rate 4.91 |
Wtd Avg Maturity 51.08 |
WARM 18.18 |
Prepay Speed 25.2% |
Item |
Category Indirect Used Auto |
Call Field 370 |
Current Balance 328,169,120 |
Loan Count 27,212 |
Avg Loan Rate 4.67 |
Wtd Avg Maturity 56.08 |
WARM 20.46 |
Prepay Speed 21.3% |
Item 6 |
Category Used Vehicle Loans |
Call Field 370 |
Current Balance 1,000,050,914 |
Loan Count 94,421 |
Avg Loan Rate 4.83 |
Wtd Avg Maturity 52.72 |
WARM 18.93 |
Prepay Speed 23.9% |
Item 8 |
Category All Other Secured Non-Real-estate Loans /Lines of Credit |
Call Field 698C |
Current Balance 49,830,850 |
Loan Count 3,223 |
Avg Loan Rate 6.06 |
Wtd Avg Maturity 85.02 |
WARM 29.08 |
Prepay Speed 17.4% |
Item |
Category Mortgage up to 15 Years. |
Call Field 703A |
Current Balance 498,509,302 |
Loan Count 5,639 |
Avg Loan Rate 3.47 |
Wtd Avg Maturity 130.17 |
WARM 45.31 |
Prepay Speed 11.8% |
Item |
Category Mortgage Over 15 Years |
Call Field 703A |
Current Balance 625,568,721 |
Loan Count 4,360 |
Avg Loan Rate 3.80 |
Wtd Avg Maturity 289.84 |
WARM 83.49 |
Prepay Speed 9.9% |
Item |
Category Mortgage Balloon |
Call Field 703A |
Current Balance 65,066,733 |
Loan Count 635 |
Avg Loan Rate 4.54 |
Wtd Avg Maturity 100.64 |
WARM 28.29 |
Prepay Speed 19.6% |
Item |
Category Mortgage ARM |
Call Field 703A |
Current Balance 94,000,650 |
Loan Count 704 |
Avg Loan Rate 3.88 |
Wtd Avg Maturity 277.14 |
WARM 80.13 |
Prepay Speed 9.1% |
Item 9 |
Category Loans/Lines of Credit Secured by a First Lien on a single 1-4 Family Res. |
Call Field 703A |
Current Balance 1,283,145,405 |
Loan Count 11,338 |
Avg Loan Rate 3.71 |
Wtd Avg Maturity 217.28 |
WARM 65.61 |
Prepay Speed 11.1% |
Item 10 |
Category Loans/Lines of Credit Secured by a Junior Lien on a single 1-4 Family Res. |
Call Field 386A |
Current Balance 155,578,396 |
Loan Count 9,125 |
Avg Loan Rate 5.37 |
Wtd Avg Maturity 155.12 |
WARM 52.90 |
Prepay Speed 11.7% |
Item 11 |
Category All Other Real Estate Loans/Lines of Credit |
Call Field 386B |
Current Balance 15,083,004 |
Loan Count 579 |
Avg Loan Rate 3.97 |
Wtd Avg Maturity 110.80 |
WARM 75.06 |
Prepay Speed 8.0% |
Item 12 |
Category Commercial Loans/Lines of Credit Real Estate Secured |
Call Field 718A5 |
Current Balance 64,231,821 |
Loan Count 412 |
Avg Loan Rate 4.38 |
Wtd Avg Maturity 94.47 |
WARM 34.80 |
Prepay Speed 9.4% |
Item 13 |
Category Commercial Loans/Lines of Credit Not Real-estate Secured |
Call Field 400P |
Current Balance 45,577,345 |
Loan Count 584 |
Avg Loan Rate 4.11 |
Wtd Avg Maturity 108.38 |
WARM 39.21 |
Prepay Speed 10.6% |
Disclaimer
Utilizing the CECL Tool approach does not by itself ensure compliance with U.S. Generally Accepted Accounting Principles (GAAP) or any other requirement. While ASC 326 (Financial Instruments—Credit Losses) allows entities to use judgment in determining appropriate and relevant information and estimation methods, a credit union’s management is responsible for ensuring the ACL conforms with GAAP and adequately covers credit risk.
The CECL Tool is provided for information and convenience only. This document and the Simplified Tool do not constitute legal or accounting advice. Credit unions should consult their accounting advisors on whether the CECL Tool is appropriate for use (including qualitative adjustments made within) to determine the ACL on loans and leases for compliance with CECL, given facts and circumstances unique to them. The NCUA is providing the CECL Tool “as is” and the agency expressly disclaims all warranties, express or implied, including any implied warranties of merchantability and fitness for a particular purpose. The NCUA is not liable to credit unions or any third party for any direct, indirect, incidental, consequential, special, or exemplary damages or lost profit related to the use of the CECL Tool.
Footnotes
1 The peer data used for calculating Weighted Average Remaining Maturity factors is from credit unions under $100 million in assets; this peer data may not be relevant for credit unions with a larger asset size.
2 This is an external link to a website belonging to another federal agency, private organization, or commercial entity. FASB Staff Q&A: TOPIC 326, NO. 1: Whether the Weighted-Average Remaining Maturity Method is an Acceptable Method to Estimate Expected Credit Losses (Opens new window)
3 Credit unions provide NCO data via the Call Report process, which is used to calculate the balance-weighted average NCO rates.