Regulators Confirm WARM as Acceptable Method Under CECL
As we creep closer to the implementation date of CECL for public filers, there has been a significant amount of commentary related to the Weighted Average Remaining Maturity (WARM) methodology throughout the Banking and Credit Union industries.
On April 11th, 2019 an interagency webinar was held by representatives from the FRB, FDIC, OCC, SEC, CSBS, FASB, and the NCUA. The objective of the session was stated as:
“Our goal today is to confirm that the WARM methodology is one of many acceptable methods to estimate the allowance for credit losses under CECL.”
As a reminder, CECL is intended to be scalable for institutions of all shapes and sizes. As stated in the webinar, complex modeling techniques are not expected of most community banks and credit unions. Simplified solutions, such as WARM are deemed to be one of the many acceptable methods to comply with CECL.
This webinar affirmed the comments made in the January, 2019 Q&A by FASB staff, providing a similar context to the use and applicability of WARM. If you have not yet read the Q&A, we strongly encourage you to do so, which can be found here: https://www.fasb.org/cs/ContentServer?c=Document_C&cid=1176171932989&d=&pagename=FASB/Document_C/DocumentPage
The presenters, representing a wide-array of the regulatory agencies impacting the financial services industry, did a great job of providing examples of scenarios where this is applicable, how to apply the WARM methodology, and also addressed many of the questions that have been raised throughout the industry. If you have not had the opportunity to listen to this presentation yet and are considering WARM as a solution for CECL, I would definitely try to carve out 90 minutes of your day and listen to this presentation, which can be found here: https://www.webcaster4.com/Webcast/ListenPage?companyId=583&webcastId=29509
As we have previously discussed in this blog, there are a large number of tools and options available to assist you in the calculation of CECL using the WARM methodology. As various implementation dates approach, we are seeing a significant increase in the number of questions from our contacts in the financial institutions industry, as Banks and Credit Unions are deciding on methodologies.
If you are interested in using the WARM methodology, take a look at the CECL Calculator from BankTrends. This tool does a great job of simplifying the process for the reserve calculation for both banks and credit unions by utilizing call report information to determine loan balances and calculate average annual loss rates. It allows the user the ability to customize inputs by call report codes such as the weighted average remaining maturity, qualitative factors, prepayment assumptions and the portion of the loan portfolios which are interest only. More information on this tool can be found here: https://www.bank-trends.com/CECL/
If you are looking to get more granular, assessing the portfolio at loan level detail, there are other solutions that can be built within Microsoft Excel, where CLA can come along side your institution and provide consultation on the development of these methodologies.
For many community banks and credit unions, CECL compliance doesn’t need to be as complex as it was once feared to be. Our goal at CLA is to assist our clients with the implementation of CECL, making this standard as simple as possible. Should you have questions, please reach out to your contact at CLA, or comment on this post below and we will follow up with you and discuss how CLA may be of assistance.
Joshua Juergensen is a principal with CLA. He works with banks and credit unions nationwide, managing audit engagements, directors’ exams, external loan file reviews, internal audits, and other consulting services.
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