Credit Quality - CliftonLarsenAllen

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POLICE OFFICERSCREDIT UNION CONFERENCE

2012

NEW ALLOWANCE FOR LOAN LOSSESLOAN CREDIT QUALITY DISCLOSURESLOAN CREDIT QUALITY DISCLOSURES

ASU – No. 2010 ‐ 20

©2012 CliftonLarsonAllen LLP ©20

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AICPA ACCOUNTING STANDARDS UPDATE (ASU) No. 2010‐20DISCLOSURES ABOUT THE CREDIT QUALITY OF FINANCING RECEIVABLES AND THE ALLOWNCE FOR CREDIT LOSSES

Issued July 2010 , Receivables (ASC Topic 310)

“Financing Receivables” Represents Loans for Credit Unions

“Allowance for Credit Losses” ALL for Credit Unions

Applicable for All Entities – Not Just Financial Institutions

Effective for Non Public Entities for Periods Ending After December 15Effective for Non Public Entities for Periods Ending After December 15, 2011, Optional Comparative Presentation for Initial Year

Will Require Comparative Reporting for Periods Ending After December 15, 2012


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No. 2010 ‐ 20 Why Is This Necessary ?

P id fi i l t t t ith tProvide financial statement users with greatertransparency about an entity’s allowance for creditlosses and the credit quality of its financing receivables.The Update is intended to provide additionalinformation to assist financial statement users inassessing a Credit Union’s credit risk exposures andassessing a Credit Union s credit risk exposures andevaluating the adequacy of its Allowance for LoanLosses.


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What It Doesn’t Cover

Short Term Trade Receivables

Fi i R i bl M d t F i V lFinancing Receivables Measured at Fair Value

Financing Receivables Measured at Lower of Cost or Fair Value


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What Are The New Disclosure Objectives?

The Nature of Credit Risk Inherent in the Loan Portfolio

How That Credit Risk is Analyzed and Assessed in Arriving at the AllowanceHow That Credit Risk is Analyzed and Assessed in Arriving at the Allowance for Loan Losses Estimate

Provide Disclosures on a Disaggregated Basis 2 Levels of Disaggregation:Provide Disclosures on a Disaggregated Basis – 2 Levels of Disaggregation: By Segment and Class

f fDisclose Any Changes and Reasons for Those Changes in the Allowance for Loan Losses Estimate Methodology


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What Is Continued From Prior Disclosures?Loan Portfolio Schedule By Major Segments and Class

Rollforward Schedule of the Allowance for Loan Losses for the Beginning to End of the Period ‐ Now by Portfolio Segment

The Recorded Investment of Each Portfolio Segment on a Disaggregated Basis as Evaluated

The Non‐Accrual Status of Loans – Now by Class

Disclosure of Impaired Loans – Now by Class


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What is New for DisclosureCredit Quality Indicators for Loan Classes at End of Period

Aging of Loans at End of Period by Class

Nature and Extent of TDR Activity During the Period by Loan Class including TDR Defaults and the Effect on the ALL

Significant Purchases or Sales of Loans During the Period by Segment


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Segments vs. Classes

The guidance discusses certain new disclosures to be presented by segments and other disclosures to be presented by classes.

Segment: The overriding level at which an entity develops and documents a systematic method for determining itsand documents a systematic method for determining its allowance for credit losses.

(Ex: Real Estate, Consumer, Commercial)

Class: Disaggregation of portfolio segment.(Ex: 1 Mortgage, Unsecured , Vehicle)


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Best Practice Recommendation Use Classes

CliftonLarsonAllen will most often recommend using classesCliftonLarsonAllen will most often recommend using classesfor all disclosures in most Credit Union Financial Statementsin order to simplify the disclosure process, ease preparationburdens and also to eliminate financial statement userconfusion when shifting between segments and classes.

Note :The key to all disclosures is to ensure they are customized to the individual Credit Union’s practices and procedures.


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New TDR Disclosure Requirements

ASU No. 2010‐20 requires entities to disclose the nature and extent oftroubled debt restructurings that occurred during the reporting periodtroubled debt restructurings that occurred during the reporting periodby class of financing receivables and their effect on the allowance forcredit losses.

It also requires disclosure of the nature and extent of financing receivablesmodified as TDRs within the previous 12 months that defaulted duringthe reporting period by class of financing receivables and their effect onthe allowance for credit lossesthe allowance for credit losses.

Prior to these new disclosures, entities were required to report their dollarvolumes of TDRs and the amount of any commitments to lend additionalyfunds to borrowers whose terms were modified in a TDR.


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Note 1‐Summary of Significant Accounting Policies

Previously Note 1 included a “Loans Net” section whichPreviously, Note 1 included a Loans, Net section whichincluded discussion of loans and the allowance for loanlosses

Now, the “Allowance for Loan Losses” section is broken outseparately within Note 1 and includes additional discussionrelated to credit risks, impaired loans, inherent loss factorsor credit quality factors considered.


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Continued:Added ‐ A discussion of loan segments and/or classes and their

general description of terms and risk characteristics asgeneral description of terms and risk characteristics asevaluated or tracked by the Credit Union

Added A discussion of loan modifications and troubled debtAdded – A discussion of loan modifications and troubled debtrestructurings, their impact on the loan portfolio andAllowance for Loan Losses

Added – A discussion and definition of impaired loans andtheir measurement principles


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Note 1‐Summary of Significant Accounting PoliciesPolicies

Troubled Debt Restructuring


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H f li ( l f l ) bHomogeneous portfolio segments (pools of loans) are to bedefined along with their risk characteristics.

Segments listed need to agree with those in the allowance forloan losses calculation (These may change over time as loan

d ff i l )product offerings evolve) .


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Risk RatingsApplicable for Credit Unions with a risk rating system in place forloans. Most often this will apply to participation loans and memberbusiness loans only (No need to include this section if not applicable).bus ess oa s o y ( o eed o ude s se o o app ab e)

Identify portfolio segments and the risk characteristics for the loancategories that are risk rated.

If member business/commercial loans are accounted for as pools inthe Credit Union’s ALL calculation, they should be included in thehomogeneous pools portion of Note 1 loan segment disclosuresinstead


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Note X ‐ Loans, Net

Loan Portfolio Segment/ Classes ScheduleNeeds to agree with segments/ Classes listed and defined inN 1 Si ifi A i P li iNote 1 Significant Accounting PoliciesNeeds to agree with ALL calculation segments

Allowance for Loan Losses Activity ScheduleThe activity schedule is presented comparatively or both yearsand will be deleted once comparative data on the newand will be deleted once comparative data on the newdisclosures is available for two years (beginning with12/31/2012 reporting).


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Note X ‐ Loans, Net,The composition of loans to members is as follows:

2011 2010Fi t M t $ $First Mortgages -$ -$ Home Equity and Other Real Estate - - Direct Vehicle - - Indirect Vehicle - - Credit Cards - - Share/Certificate Secured - - Other Secured - - Other Unsecured - - Commercial Real Estate - - Commercial Other - -

Net Deferred Loan Origination Costs (Fees) - - Allowance for Loan Losses - -

-$ -$


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New Allowance Activity Schedule


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Columns used in the ALL activity disclosure need to agree withloan portfolio segment risk descriptions in Note 1 of theloan portfolio segment risk descriptions in Note 1 of thefinancial statements and the Loans, Net Segment/Classescomposition in Note X as well as the ALL calculationsegments.

Both 2012 and 2011 data will be presented in this format goingforward as this will need to be a comparative disclosure.


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The same ALL activity line items are presented.Disclosures are now by segment/ class instead of beingDisclosures are now by segment/ class instead of being

combined for the entire portfolio.Need to ensure the total ALL for all segments agrees with

the ALL balance in the loan portfolio schedule.


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Other Changes to the ALL Activity DisclosureOther Changes to the ALL Activity DisclosureFirst Line: Ending ALL for loans individually evaluated for impairment by segment (ASC 310‐40, formerly FAS 114)Second Line: Ending ALL for loans collectively evaluated for impairment by segment (ASC 450, formerly FAS 5)Third Line: Ending ALL for loans acquired with deterioratedThird Line: Ending ALL for loans acquired with deteriorated credit quality (this will most likely not be applicable for the majority of the Credit Unions)


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The sum of the orange boxes will equal the blue highlighted b f hbox for each segment.


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The sum of the orange boxes will equal the blue highlighted box for each segment

De c e mbe r 3 1 , 2 0 1 1First

Mortgages

Allowa nc e for Loa n Losse s:Balance at Beginning of Year -$

Provision for Loan Losses -

box for each segment

Provision for Loan Losses -

Loans Charged- Off -

Recoveries of Loans

Previously Charged- Off -

Balance at End of Year -$

Ending Balance: Individually

Evaluated for Impairment -$

Ending Balance: Collectively


Ending Balance: Loans

Acquired with Deteriorated

Credit Quality -$

Loa ns:Ending Balance: Individually


Ending Balance: Collectively


©2012 CliftonLarsonAllen LLP

Ending Balance: Loans

Acquired with Deteriorated

Credit Quality -$


This schedule shows the risk rated loans (usually participation and commercial loans) by risk rating.

Risk ratings will agree with those defined in Note 1. Totals for segments/ classes will agree with Loans Netsegments/ classes will agree with Loans, Net.

Deleted if not applicable.


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Note X ‐ Loans, Net,

New payment activity disclosures will present all loans bysegment/ class (homogeneous pools and rated loans. Totalsagree to Loans, Net for each segment/ class.

Performing vs non‐performing will be determined by thePerforming vs. non‐performing will be determined by thenumber of days at which CU policy indicates loans stopaccruing interest (60 or 90 days).


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New Loan Aging Analysis Scheduleg g y

Accruing interest portion will agree with the Credit Union’spolicy (60 or 90 days).p y ( y )

2nd column will either read 30‐89 days past due or 30‐59days past due depending on the accrued interest policy ofy p p g p ythe Credit Union.

Numbers appearing in the disclosure are the loan balancespp gwith totals by portfolio segment/ class.


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N L A i A l i S h d l E lNew Loan Aging Analysis Schedule ExampleDe c e mbe r 3 1 , 2 0 1 1

Nona c c rua l30- 89 90 Days or 90 Days or Total

Accruing Interest

y y

Current Days Past Due More Past Due More Past Due Loans

First Mortgages -$ -$ -$ -$ -$

HELOC and Other Real Estate

Direct Vehic le - - - - -

Indirect Vehic le - - - - -Indirect Vehic le

Credit Cards - - - - -

Share/Certificate Secured - - - - -

Other Secured - - - - -

Other Unsecured - - - - -

Commercial Real EstateCommercial Real Estate - - - - -

Commercial Other - - - - -

-$ -$ -$ -$ -$



Interest income foregone on nonaccrual loans:S t d h b l dd d f i d di lSuggested paragraphs below added for required disclosure.You will need to choose the correct option for inclusion in thefootnotes. This data is not usually readily available and can beestimated


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New ‐ Impaired Loans ScheduleImpaired Loans must now be disclosed by loan segment/ class for the following:Impaired Loans must now be disclosed by loan segment/ class for the following:

Impaired loans with no related allowance

Impaired loans with an allowance recorded

Total impaired loans

Note ‐ This information must be comparative in 2012Note This information must be comparative in 2012


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Note X ‐ Loans, NetDe c e mbe r 3 1 , 2 0 1 1 Unpaid Average Interest

Recorded Principal Related Recorded IncomeInvestment Balance Allowance Investment Recognized

With No Related Allowance:

First Mortgages -$ -$ -$ -$First Mortgages $ $ $ $

HELOC and Other Real Estate

Direct Vehic le - - - -

Indirect Vehic le - - - -

Credit Cards - - - -

Share/Certificate Secured - - - -

Other Secured - - - -

Other Unsecured - - - -

Commercial Real Estate - - - -

Commercial Other - - - -

With An Allowance Recorded:First Mortgages - - - - - HELOC and Other Real EstateDirect Vehic le - - - - -

Indirect Vehic le - - - - -

Credit Cards - - - - -

Share/Certificate Secured - - - - -

Other Secured - - - - -

Other Unsecured - - - - -

Commercial Real Estate - - - - -

C i l OthCommercial Other - - - - - Total Impaired Loans:First Mortgages -$ -$ -$ -$ -$ HELOC and Other Real EstateDirect Vehic le -$ -$ -$ -$ -$ Indirect Vehic le -$ -$ -$ -$ -$ Credit Cards -$ -$ -$ -$ -$ Share/Certificate Secured -$ -$ -$ -$ -$


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POther Secured -$ -$ -$ -$ -$ Other Unsecured -$ -$ -$ -$ -$ Commercial Real Estate -$ -$ -$ -$ -$ Commercial Other -$ -$ -$ -$ -$


Impaired Loans Schedule Columns:Unpaid Principal Balance: The amount the borrower owes onthe loan

Recorded Investment: The amount recorded on the generalledger for various loan segments

Note: Unpaid principal balance and recorded investment willmost often be the same for Credit Unions. If loans werespecifically written down, they may differ.specifically written down, they may differ.


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Impaired Loans Schedule ‐ ContinuedImpaired Loans Schedule ContinuedRelated Allowance: The allowance provided on the variousimpaired loans by segment

Average Recorded Investment: We will disclose the simpleaverage of beginning and ending balances for the auditperiod (or other quantifiable methods)

Interest Income Recognized: The amount of interest incomerecognized using cash‐basis during the time within theaudit period that loans were impaired, if practicable.


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New required disclosure regarding commitments q g gexisting in TDRs and nonaccrual loans.

To be modified as necessary:


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New Disclosures related to TDRs (first three columns):Number of loans by segmentNumber of loans by segmentLoan balance by segmentSpecific reserve by segment

The above disclosures are for all TDRs modified duringThe above disclosures are for all TDRs modified during the reporting period and not total TDRs.


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New disclosures also exist for TDRs that subsequentlyq ymissed a payment (modified as TDRs within the previoustwelve months and for which there was a paymentdefault during the reporting period)default during the reporting period).

Number of Loans by segment

Loan Balance by segment

Specific Reserve by segmentSpec c ese e by seg e t

Note ‐ this information is not generally readily available


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New TDR Disclosure Schedule ExampleNew TDR Disclosure Schedule ExampleDuring the Year Ended December 31, 2011

Troubled Debt Restructurings

Troubled Debt Restructurings That Subsequently Defaulted

Number of Post- modification Specific Number of Post- modification Specific

Loans Outstanding Balance Reserve Loans Outstanding Balance Reserve

First Mortgages - -$ -$ - -$ -$

HELOC and Other Real Estate - - - - - -

Direct Vehic le - - - - - -

Indirect Vehic le - - - - - -

Credit Cards - - - - - -

Share/Certificate Secured - - - - - -

Other Secured - - - - - -

Other Unsecured - - - - - -

Commercial Real Estate - - - - - -

Commercial Other

- -$ -$ - -$ -$



This disclosure will be necessary when CreditUnions have added interest and fees to loansUnions have added interest and fees to loansthrough the modification process related toTDRs.TDRs.

Disclose the appropriate option:


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This additional TDR disclosure schedule presents loan pbalances by class, based on the type of concession granted:

Rate and MaturityPaymentOthOther

Totals in this schedule should agree with totals in theTDR activity scheduleTDR activity schedule.


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A summary of loans that were mod

Rate and

Maturity Payment Other Total

First Mortgages -$ -$ - -$

HELOC and Other Real Estate - - - -

Direct Vehic le - - - -

Indirect Vehic le - - - -

Credit Cards - - - -

Share/Certificate Secured - - - -

Other Secured - - - -

Other Unsecured - - - -

Commercial Real Estate - - - -Commercial Real Estate

Commercial Other

-$ -$ - -$


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Other Items to Consider

Changes in Accounting Policies or Methodology from the Prior Period

Need to disclose any material changes from the prior period and the entity’s rationale for the change.

Need to disclose the quantitative effect on current‐period provision.

Only disclosed when material.y


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Other Qualitative Disclosures –Add if the CU has purchased loan participations:The Credit Union has purchased loan participations originated by various other credit unions/financialoriginated by various other credit unions/financial institutionswhich are secured by commercial property, real estate, and vehicles to members of other credit

i /fi i l i i i Th l i i iunions/financial institutions. These loan participations were purchased without recourse and the originating Credit Union/Bank performs all loan servicing functions on these loans.


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Use only if CU has Third‐Party Sub‐Prime LoansThe Credit Union has third party sub prime loansThe Credit Union has third‐party sub‐prime loans outstanding of $_____ and $______ at December 31, 2011 and 2010, respectively. In addition, the Credit

$ $Union reported $_____ and $_____ in collateral in process of liquidation pertaining to the sub‐prime loan program as of December 31, 2011 and 2010, p g , ,respectively. Management evaluates the collectability of these loans and the collateral in process of liquidation on a monthly basis Management has reserved for thea monthly basis. Management has reserved for the estimated loan losses on this portfolio through its allowance for loan losses and has determined that there


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Pis no further impairment on the collateral in process of liquidation.


Use if the CU has non‐traditional loans (1st mortgages or hybrid loans) and modify based on adjustable rate loans vs. interestloans) and modify based on adjustable rate loans vs. interest only –

The Credit Union offers non‐traditional mortgage loans to itsThe Credit Union offers non traditional mortgage loans to its members. These loans include hybrid and variable interest only mortgages. Hybrid loans consist of loans that are fixed for an initial period of three, five or seven years. After this period, the mortgagesperiod of three, five or seven years. After this period, the mortgages are converted to variable rates using an indexed rate, which can result in significant payment shock to the borrower. The interest only loans allow the borrower to pay only interest for a specifiedonly loans allow the borrower to pay only interest for a specified number of years. These types of loans may result in a lack of principal amortization or even negative amortization, if the minimum payment is less than the interest accruing on the loan


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Pminimum payment is less than the interest accruing on the loan

Best Practice Recommendations

Communicate with all necessary departmentsy pregularly (accounting, lending, collections)

Prepare monthly and YTD schedules throughout thePrepare monthly and YTD schedules throughout the fiscal year

Allowance activity roll forwardyImpaired loans (average recorded Investment and interestincome recognized)TDR activity roll forward

Adopt proof and validation procedures surrounding di l h d l


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Best Practice Recommendations

Define your loan “impairment” policy clearly and reportconsistently GAAP definition:consistently – GAAP definition:

“a loan is impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts pdue according to the contractual terms of the loan agreement.”

Disclose the accounting policy basis for determiningDisclose the accounting policy basis for determiningcollective inherent impairment and individualimpairment classifications

Ensure your ALL adequacy model reconciles with yourfinancial statement disclosures


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Questions

Kenneth Welch, CPAPartner Credit Union GroupPh. (703) 825‐2182 K h l h@ lif l ll


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[email protected]

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