AICPA - ALLOWANCE DISCLOSURES FOR LOAN LOSSESWorkshop Session 102

DeLeon & Stang, CPAs and Advisors

Allen P. DeLeon, CPA

allen@deleonandstang.com

USE Credit Union

Adele Sandberg

asandberg@usecu.org

Speaker biography – Allen P. DeLeon, CPA

Partner with DeLeon & Stang, CPAs and Advisors

Over 25 years credit union auditing experience

Member of the AICPA Credit Union Practitioners committee and conference planning committee

Chair of the Maryland Association of CPAs

Speaker biography – Adele Sanberg, CPA

Currently with USE Credit Union, CA state chartered

Over 20 years experience with credit unions in financial or accounting positions

Expert on allowance for loan loss issues, including TDR’s, real estate and business lending

Agenda

Introduction Overview of credit loss disclosures NCUA Regulatory & Call Reporting

Considerations Samples of new disclosure requirements Allowance for loan losses – computation

approach and discussion

BACKGROUND

ASU 2010-20, Disclosures about the Credit Quality of Financing Receivables, was issued in July 2010

The ASU is intended to provide greater transparency about credit risk disclosures and the adequacy of the allowance for credit losses

More detailed information will now be required to help users better understand the credit risk inherent in the loan portfolio

Information is required to be disclosed about hoe credit risk is analyzed and assessed in determining the adequacy of the allowance for loan losses

EFFECTIVE DATE

Effective for financial statement years ending beginning after December 15, 2010

For calendar year entities: Public entities – 2010 Non public entities - 2011

WHAT IS THE IMPACT?

CREDIT INFORMATION WILL NOW BE REQUIRED ABOUT: Impaired loans Delinquency aging Roll forward information required separately by

portfolio or loan class Disclosures required in footnotes to audited financial

statements Reporting will be required in NCUA call reports

WHAT IS THE SCOPE?

Applies to all entities, public and private that have financing receivables, including: Loans and notes receivable Trade receivables exceeding one year Lessor’s receivables for direct finance and

sales type Lessor’s receivables for leveraged leases

WHAT IS THE SCOPE? (CONTINUED)

Scope excludes: Short-term receivables arising from sale of

goods or services Receivables or loans measured at the lower of

cost or market (LOCOM) or fair value Debt securities and beneficial interests in

securitizations Unconditional promises to give.

TERMINOLOGY

Portfolio segment – the level at which a creditor develops and documents a systematic methodology to determine its allowance for credit losses, for example: Commercial vs. consumer loans A portfolio segment will generally have more

than one class Additional disclosure required for loans

evaluated collectively vs. individually

TERMINOLOGY (CONTINUED)

Credit quality indicator – a statistic about the credit quality of financing receivables, for example: Delinquency status FICO scores Loan-to-value ratios

TERMINOLOGY (CONTINUED)

Class of financing receivables – level of information that enables user of the financial statements to understand the nature and extent of exposure to credit risk arising from financing receivables: Classes must segregate financing receivables on the

basis of measurement attributes (amortized cost, LOCOM, fair value)

Classes must then disaggregate to the level management uses to assess and monitor risk and performance of the portfolio

For example: product type of loans (auto, residential mortgage etc..)

NEW DISCLOSURE REQUIREMENTS

Category Portfolio segment Class

Roll-forward of allowance for loan

losses

Credit Quality information

Non-accrual and past due loans

Impaired loans (individually evaluated)

Modifications (for both portfolio segment and

class levels)

ALLOWANCE FOR LOAN LOSSES – PORTFOILIO SEGEMNT

Previous requirements New requirements

Accounting policies related to the allowance for loan losses

Accounting policies regarding the allowance for loan losses methodology by portfolio segment•Description of factors that influence managements judgment including historical losses and existing economic conditions•Discussion of risk characteristics relevant to each portfolio segment•Identification of any changes from prior periods and rationale

Roll-forward of total allowance for loan losses

Roll-forward is required by portfolio segment; additional disclosures:•Quantitative effect and rationale for changes in ALLL methodology on current provision•Amount of significant loan purchases, sales or reclasses•Balance in ALLL disaggregated on basis of impairment method (general vs. specific reserves)

Recorded investment in financing receivables

Recorded investment in financing receivables by portfolio segment and disaggregated on the basis of impairment method

CREDIT QUALITY INDICATORS - BY CLASS

Previous requirement New requirement

None By class of financing receivables:•Description of the credit quality indicator•The recorded investment in loans by credit quality indicator•How internal risk ratings relate to the likelihood of loss (qualitative)

NONACCRUAL AND PAST DUE LOANS – BY CLASS

Previous requirement New Requirement

Accounting policies for financing receivables:•Placing receivables on nonaccrual•Recording payments received on nonaccrual receivables•Resuming accrual of interest•Charging off uncollectible receivables•Determining past due or delinquent rates

Same disclosures required by class of financing receivables except that the disclosures of the accounting policy for charging off uncollectible receivables is required by portfolio segment

Recorded investment in receivables on nonaccrual status

Now required by class of financing receivables

Recorded investment in receivables past due by 90 days or more and still accruing

Now required by class of financing receivables

None An entity shall provide, by class of financing receivables, an analysis of the age of the recorded investment in loans that are past due at the end of the reporting period.

IMPAIRED LOANS – BY CLASS

Previous requirement New requirement

For individually-evaluated impaired loans accounted for under ASC 310-10-35 (formerly FAS 114):•The rerecorded investment in impaired loans•The amount for which there is an allowance•The amount for which there is no allowance•Accounting policy for recognizing interest income, including how cash receipts are recorded•The average recorded investment•The related interest income recognized when loans were impaired•The amount of interest income recognized on the cash basis

Same disclosure, but require by class of financing receivables

Additionally, the following new disclosures are also required by class:•The accounting for impaired loans•The amount of impaired loans•The total unpaid principal of impaired loans•The entity's policy for determining which loans it assess for impairment on an individual basis•The factors considered in determining that the loan is impaired.

TROUBLED DEBT RESTRUCTURINGS

Previous requirement New Requirement

GAAP required minimal disclosures of loans modified in TDR’s

NCUA requires the following is call reporting:•_Page 8 –Additional Delinquency Information for Modified Loans•Page 9 - Loan Charge & Recoveries for Modified Loans•Page 15 – Schedule A, Specialized Lending, Section 5 – Modified Loans•Report as delinquent until six consecutive payments have been made

Modified Loans – “…all loans and leases whose terms have been modified because of a deterioration in the financial condition of the borrower, whether or not such modified loans are trouble debt restructurings under GAAP.” the modified terms offered the borrower could include an increased term, a reduction in interest rate or principal, or other concession.”

By class:•Qualitative and quantitative information about the nature of modifications and related impact on the allowance for loan lossesBy portfolio segment:•Qualitative information about how TDR’s and TDR re-defaults are factored into the determination of the allowance for loan losses•Disclosures about loans modified as TDR’s within the previous 12 months for which there was a payment default during the current periodBy Class of Financing Receivables:•Qualitative and quantitative information about the type and amount of TDR’s that defaulted on their modified terms during the current period

TROUBLED DEBT RESTRUCTURINGS (CONTINUED)

Consider the interaction of these new disclosure requirements with the clarifications to the TDR definition in ASU no. 2011-12

To determine if a loan restructuring is a TDR, credit unions should conclude that both of the following exist: The restructuring constitutes a concession The debtor is experiencing financial difficulties

TROUBLED DEBT RESTRUCTURINGS (CONTINUED)

Concession means: No access to funds at market rates If new interest rate is below market Delay in payments is generally not a concession,

unless significantFinancial difficulties means:Default is not required if future default is probable,

without a modification

Illustrations of new Disclosure Requirements

Loan mix – (exhibit A) existing disclosure Allowance for loan loss roll-forward by loan class

(exhibit B) Credit quality indicators (Exhibit C) Aging analysis by loan segment (Exhibit D,D-1,D-2) Impaired loans by loan segment (Exhibit E & F) Loan non accrual status by loan segment (Exhibit D-,2)

Loan modifications disclosure, by loan class (Exhibit G&H)

SAMPLE FOOTNOTE DISCLOSURE

Exhibit I

NCUA REGULATORY AND CALL REPORTING CONSIDERATIONS

There are no immediate plans to add data collections to the Call Report to parallel this disclosure rule. 

Generally the Call Report conforms to recognition and measurement GAAP; NCUA does not necessary collect all disclosure information nor conform in presentation. 

NCUA will continue to evaluate the usefulness of the additional disclosures and monitor Call Report users needs, both inside and outside the agency, for conforming changes. 

IMPACT ON FINANCIAL RATIOS

Profitability – impact on net income Liquidity – None Capital adequacy – capital ratio Asset quality – loan ratios

IMPLEMENTATION CONSIDERATIONS

Step 1 – Gather information Compare existing requirements with new and identify if your

systems will be able to compile the information. Consider NCUA call reporting requirements.

Step 2 – Identify judgment areas identify judgment areas early in the process Portfolio segment definition Loan class definition Credit quality indicator definition Past due aggregation TDR information – how to collect information

IMPLEMENTATION CONSIDERATIONS (CONTINUED)

Identify data sources Most critical step in the process NCUA call report gathering may help Reports from credit union processing systems may not be

available Some data may have to be collected manually on spreadsheets

Test data Perform a test early in the year so problems don’t arise for year

end audit Create an audit trail so you know where the numbers and

information is gathered from

SAMPLE ALLL COMPUTATION

Sample loan loss reserve calculation (exhibit J) Narrative explanations of spreadsheets General valuation reserves Special valuation reserve Q&E reserve

SAMPLE MBL MATRIX

Sample MBL risk Matrix and corresponding reserve rates (exhibit K)

SAMPLE QUALITATIVE & ENVIRONMENTAL FACTORS (Q&E)

REVIEW

Sample Q&E review (Exhibits L&M)

SAMPLE TDR POLICY MONITOR

Sample TDR monitor policy (Exhibit N)

QUESTIONS