Credit Quality - CliftonLarsenAllen

©2012 CliftonLarsonAllen
LLP
POLICE OFFICERS
CREDIT UNION CONFERENCE
2012

NEW ALLOWANCE FOR LOAN LOSSES
LOAN CREDIT QUALITY DISCLOSURES
LOAN CREDIT QUALITY DISCLOSURES
ASU – No. 2010 ‐ 20

©2011 LarsonAllen LLP
©2012 CliftonLarsonAllen LLP

AICPA ACCOUNTING STANDARDS UPDATE (ASU) No. 2010‐20
DISCLOSURES 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 15,
Effective 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


FOR CREDIT LOSSES

No. 2010 ‐ 20 Why Is This Necessary ?

Provide fi
P id financial statement users with greater
i l t t t ith t
transparency about an entity’s allowance for credit
losses and the credit quality of its financing receivables.
The Update is intended to provide additional
information to assist financial statement users in
assessing a Credit Union’s credit risk exposures and
Union s
evaluating the adequacy of its Allowance for Loan
Losses.


FOR CREDIT LOSSES

What It Doesn’t Cover

Short Term Trade Receivables

Financing Receivables Measured at Fair Value
Fi i R i bl M d tF i V l

Financing Receivables Measured at Lower of Cost or Fair Value


FOR CREDIT LOSSES

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 Allowance
How 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

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


FOR CREDIT LOSSES

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
p y


FOR CREDIT LOSSES

What is New for Disclosure
Credit 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


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 its
and 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)


Best Practice Recommendation Use Classes

CliftonLarsonAllen will most often recommend using classes
for all disclosures in most Credit Union Financial Statements
in order to simplify the disclosure process, ease preparation
burdens and also to eliminate financial statement user
confusion 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.


New TDR Disclosure Requirements
ASU No. 2010‐20 requires entities to disclose the nature and extent of
troubled debt restructurings that occurred during the reporting period
by class of financing receivables and their effect on the allowance for
credit losses.

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

Prior to these new disclosures, entities were required to report their dollar
volumes of TDRs and the amount of any commitments to lend additional
y
funds to borrowers whose terms were modified in a TDR.


Note 1‐Summary of Significant Accounting
Policies

Previously,
Previously Note 1 included a “Loans Net” section which
Loans, Net
included discussion of loans and the allowance for loan
losses

Now, the “Allowance for Loan Losses” section is broken out
separately within Note 1 and includes additional discussion
related to credit risks, impaired loans, inherent loss factors
or credit quality factors considered.


Policies

Continued:
Added ‐ A discussion of loan segments and/or classes and their
general description of terms and risk characteristics as
evaluated or tracked by the Credit Union

Added – A discussion of loan modifications and troubled debt
restructurings, their impact on the loan portfolio and
Allowance for Loan Losses

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


Policies
Troubled Debt Restructuring


Policies

Homogeneous portfolio segments (
H f li (pools of l
l f loans) are to b
) be
defined along with their risk characteristics.

Segments listed need to agree with those in the allowance for
loan losses calculation (These may change over time as loan
product offerings evolve) .
d ff i l )


Policies

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

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

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


Note X ‐ Loans, Net

Loan Portfolio Segment/ Classes Schedule
Needs to agree with segments/ Classes listed and defined in
Note 1 Si ifi
N Significant A
Accounting P li i
i Policies
Needs to agree with ALL calculation segments

Allowance for Loan Losses Activity Schedule
The activity schedule is presented comparatively or both years
and will be deleted once comparative data on the new
disclosures is available for two years (beginning with
12/31/2012 reporting).


,
The composition of loans to members is as follows:

2011 2010
First M t
Fi t 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 - -
$ - $ -


New Allowance Activity Schedule



Columns used in the ALL activity disclosure need to agree with
loan portfolio segment risk descriptions in Note 1 of the
financial statements and the Loans, Net Segment/Classes
composition in Note X as well as the ALL calculation
segments.

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


The same ALL activity line items are presented.
Disclosures 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.



Other Changes to the ALL Activity Disclosure
Other Changes to the ALL Activity Disclosure
First 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 deteriorated
Third Line: Ending ALL for loans acquired with deteriorated
credit quality (this will most likely not be applicable for the
majority of the Credit Unions)



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


The sum of the orange boxes will equal the blue highlighted
box for each segment
box for each segment
D e c e mb e r 3 1 , 2 0 1 1
First
Mortgages
A llo wa n c e f o r L o a n L o sse s:
Balanc e at Beginning of Year $ -
Provision for Loan Losses -
Loans Charged- Off -
Rec overies of Loans
Previously Charged- Off -
Balanc e at End of Year $ -

Ending Balanc e: Individually
Evaluated for Impairment $ -

Ending Balanc e: Collec tively

Ending Balanc e: Loans
Ac quired with Deteriorated
Credit Quality $ -

L o a n s:
Ending Balanc e: Individually

Ending Balanc e: Collec tively

Ending Balanc e: Loans
Ac quired 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, Net.
segments/ classes will agree with Loans Net
Deleted if not applicable.


,

New payment activity disclosures will present all loans by
segment/ class (homogeneous pools and rated loans. Totals
agree to Loans, Net for each segment/ class.
Performing vs non‐performing will be determined by the
vs.
number of days at which CU policy indicates loans stop
accruing interest (60 or 90 days).



New Loan Aging Analysis Schedule
g g y
Accruing interest portion will agree with the Credit Union’s
p y(
policy (60 or 90 days).
y)

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

Numbers appearing in the disclosure are the loan balances
pp g
with totals by portfolio segment/ class.



New Loan Aging Analysis Schedule Example
N L A i A l i S h d l E l
De c e mbe r 3 1 , 2 0 1 1 Accruing Interest
Nona c c rua l
30- 89 90 Days or
y 90 Days or
y Total
Current Days Past Due More Past Due More Past Due Loans
First Mortgages $ - $ - $ - $ - $ -
HELOC and Other Real Estate
Direc t Vehic le - - - - -
Indirec t Vehic le - - - - -
Credit Cards - - - - -
Share/Certific ate Sec ured - - - - -
Other Sec ured - - - - -
Other Unsec ured - - - - -
Commerc ial Real Estate - - - - -
Commerc ial Other - - - - -
$ - $ - $ - $ - $ -


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


New ‐ Impaired Loans Schedule
Impaired 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 2012
Note ‐ This information must be comparative in 2012


D e c e mb e r 3 1 , 2 0 1 1 Unpaid Average Interest
Rec orded Princ ipal Related Rec orded Inc ome
Investment Balanc e Allowanc e Investment Rec ognized
With No Related Allowanc e:
First Mortgages $ - $ - $ - $ -
Direc t Vehic le - - - -
Indirec t Vehic le - - - -
Credit Cards - - - -
Share/Certific ate Sec ured - - - -
Other Sec ured - - - -
Other Unsec ured - - - -
Commerc ial Real Estate - - - -
Commerc ial Other - - - -
With An Allowanc e Rec orded:
First Mortgages - - - - -
Direc t Vehic le - - - - -
Indirec t Vehic le - - - - -
Credit Cards - - - - -
Share/Certific ate Sec ured - - - - -
Other Sec ured - - - - -
Other Unsec ured - - - - -
Commerc ial Real Estate - - - - -
Commerc i l Oth
C ial Other - - - - -
Total Impaired Loans:
First Mortgages $ - $ - $ - $ - $ -
Direc t Vehic le $ - $ - $ - $ - $ -
Indirec t Vehic le $ - $ - $ - $ - $ -
Credit Cards $ - $ - $ - $ - $ -
Share/Certific ate Sec ured $ - $ - $ - $ - $ -
Other Sec ured $ - $ - $ - $ - $ -

Other Unsec ured $ - $ - $ - $ - $ -
Commerc ial Real Estate $ - $ - $ - $ - $ -
Commerc ial Other $ - $ - $ - $ - $ -


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

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

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



Impaired Loans Schedule
Impaired Loans Schedule ‐ Continued
Related Allowance: The allowance provided on the various
impaired loans by segment

Average Recorded Investment: We will disclose the simple
average of beginning and ending balances for the audit
period (or other quantifiable methods)

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



New required disclosure regarding commitments
q g g
existing in TDRs and nonaccrual loans.
To be modified as necessary:


New Disclosures related to TDRs (first three columns):
Number of loans by segment
Number of loans by segment
Loan balance by segment
Specific reserve by segment

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



New disclosures also exist for TDRs that subsequently
q y
missed a payment (modified as TDRs within the previous
twelve months and for which there was a payment
default during the reporting period)
period).

Number of Loans by segment

Loan Balance by segment

Spec c ese e by seg e t
Specific Reserve by segment

Note ‐ this information is not generally readily available



New TDR Disclosure Schedule Example
New TDR Disclosure Schedule Example
During the Year Ended Dec ember 31, 2011
Troubled Debt Restruc turings
Troubled Debt Restruc turings That Subsequently Defaulted
Number of Post- modific ation Spec ific Number of Post- modific ation Spec ific
Loans Outstanding Balanc e Reserve Loans Outstanding Balanc e Reserve
First Mortgages - $ - $ - - $ - $ -
HELOC and Other Real Estate - - - - - -
Direc t Vehic le - - - - - -
Indirec t Vehic le - - - - - -
Credit Cards - - - - - -
Share/Certific ate Sec ured - - - - - -
Other Sec ured - - - - - -
Other Unsec ured - - - - - -
Commerc ial Real Estate - - - - - -
Commerc ial Other
- $ - $ - - $ - $ -


This disclosure will be necessary when Credit
Unions have added interest and fees to loans
through the modification process related to
TDRs.
Disclose the appropriate option:



This additional TDR disclosure schedule presents loan
p
balances by class, based on the type of concession
granted:
Rate and Maturity
Payment
Other
Oth
Totals in this schedule should agree with totals in the
TDR activity schedule.



A summary of loans that were mod

Rate and
Maturity Payment Other Total
First Mortgages $ - $ - - $ -
HELOC and Other Real Estate - - - -
Direc t Vehic le - - - -
Indirect Vehic le - - - -
Credit Cards - - - -
Share/Certific ate Sec ured - - - -
Other Sec ured - - - -
Other Unsecured - - - -
Commercial Real Estate - - - -
Commercial Other
$ - $ - - $ -


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



Other Qualitative Disclosures –
Add if the CU has purchased loan participations:
The Credit Union has purchased loan participations
originated by various other credit unions/financial
originated by various other credit unions/financial
institutions which are secured by commercial property, real
estate, and vehicles to members of other credit
unions/financial institutions. These loan participations were
i /fi i li i i Th l i i i
purchased without recourse and the originating Credit
Union/Bank performs all loan servicing functions on these
loans.


Use only if CU has Third‐Party Sub‐Prime Loans
The Credit Union has third‐party sub‐prime loans
The 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
p g
program as of December 31, 2011 and 2010,
, ,
respectively. Management evaluates the collectability of
these loans and the collateral in process of liquidation on
a monthly basis. Management has reserved for the
a monthly basis Management has reserved for the
estimated loan losses on this portfolio through its
allowance for loan losses and has determined that there
is 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. interest
loans) and modify based on adjustable rate loans vs. interest
only –
The Credit Union offers non traditional mortgage loans to its
The 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 mortgages
period 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 specified
only 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
minimum payment is less than the interest accruing on the loan


Best Practice Recommendations

Communicate with all necessary departments
y p
regularly (accounting, lending, collections)
Prepare monthly and YTD schedules throughout the
Prepare monthly and YTD schedules throughout the
fiscal year
Allowance activity roll forward
y
Impaired loans (average recorded Investment and interest
income recognized)
TDR activity roll forward
Adopt proof and validation procedures surrounding
disclosure schedules
di l h d l


Best Practice Recommendations
Define your loan “impairment” policy clearly and report
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
p
due according to the contractual terms of the loan agreement.”

Disclose the accounting policy basis for determining
collective inherent impairment and individual
impairment classifications
Ensure your ALL adequacy model reconciles with your
financial statement disclosures


Questions

Kenneth Welch, CPA
Partner
Credit Union Group
Ph. (703) 825‐2182
Kenneth.welch@cliftonlarsonallen.com
K h l h@ lif l ll


Credit Quality - CliftonLarsenAllen

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