©2012 CliftonLarsonAllen LLP
Troubled Debt Restructuring and
What It Means to Your Credit Union
ACUIA
Denver, CO
June 20, 2012
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©2012 CliftonLarsonAllen LLP
Presenter-Greg Schwartz, CPA
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Principal with LarsonAllen Credit Union Group
30 years of experience working with credit unions
Commercial and financial institution clients
Speaker/Presenter at:
– AICPA national CU conference
– ACUIA national conference
– Various state league and chapter meetings
• Graduate of Minnesota State, bachelor of science in accounting
• Member of:
– AICPA
– Minnesota Society of CPAs
– AICPA Credit Union Committee.
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©2012 CliftonLarsonAllen LLP
About CliftonLarsonAllen
• One of the nation’s largest certified public
accounting firms
• Founded in 1953
• More than
3,800 professionals
serving clients from
90 offices across the country
• # 1 provider of audit services to credit unions
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AGENDA
• Troubled Debt Restructuring (TDR) – Definition
• Recent Accounting Change Regarding TDRs
• TDRs and the Allowance for Loan and Lease Losses
(ALLL)
• How Does this Affect Your Credit Union
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Definition
Restructuring of debt constitutes a TDR if:
The creditor (credit union) for economic or
legal reasons related to the debtor’s
(member’s) financial difficulties grants a
concession to the debtor that it would not
otherwise consider
Both conditions must be present for a
restructuring to be considered a TDR
– Grant a concession and
– Borrower needs to be experiencing financial
difficulty
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Definition
• So what does that mean?
– Member has financial difficulties
◊ Bankruptcy (11 or 13)
◊ Slow pay or inability to pay due to hardships
• Loss of job
• Decreased pay
• Divorce or illness
– Grant a concession
◊ Extend payment/loan terms
◊ Reduce interest rate
◊ Forgiveness of debt
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Definition
• Do we or have we had any TDR at my credit union?
– Unequivocally - Maybe
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Recent Accounting Change
• In April 2011, the Financial Accounting Standards
Board (FASB) issued Accounting Standards Update
(ASU) No. 2011-02, Receivables (Topic 310): A
Creditor's Determination of Whether a Restructuring
Is a Troubled Debt Restructuring
• The ASU is effective for nonpublic entities, (credit
unions) for annual periods ending on or after
December 15, 2012, and should be applied
retrospectively to the beginning of the annual period
of adoption
– i.e. credit unions with 12/31 year-end to adopt January 1,
2012
– Early adoption is permitted
• Prospective application
– Go forward not look back
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Recent Accounting Change
• Why was this new ASU issued?
– Due to economic downturn the number of restructurings
increased
– Concerns about what constitutes a concession and
financial difficulty
• ASU’s intent is to help clarify what constitutes a
concession and financial difficulty, in determining
whether a restructuring is considered to be a TDR
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©2012 CliftonLarsonAllen LLP
Recent Accounting Change
• Key misconceptions that new ASU did NOT:
– Change definition of TDR it only clarified what constitutes
a concession and financial difficulty
– Change how credit union is to identify, track and
allow/reserve for these troubled loans in ALLL
– Change how credit union is to report TDR as delinquent on
NCUA Call Report until 6 consecutive payments were
made by member
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©2012 CliftonLarsonAllen LLP
Recent Accounting Change
• Clarification of Concessions:
– Objective is to make the best of a difficult situation –
creditor expects to:
◊ Obtain more cash or value from debtor
◊ Increase probability of repayment
– Granted concession when, as a result of restructuring, you
do not expect to collect all amounts due (P&I) at the
original contract rate
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Recent Accounting Change
• Indicators of granting concession:
– Borrower does not otherwise have access to funds at a
market rate for debt with similar risk characteristics as the
restructured debt
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©2012 CliftonLarsonAllen LLP
Recent Accounting Change
• Indicators of granting concession:
– A temporary or permanent increase in the interest rate as
a result of a restructuring could still be considered a
concession granted by the credit union if the new interest
rate is still below the market interest rate
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©2012 CliftonLarsonAllen LLP
Recent Accounting Change
• Indicators of granting concession:
– More than insignificant payment delays
◊ Typically any extension greater than 3 months (90 days)
– Insignificant payment delays that do not constitute a TDR:
◊ Amount of the restructured payments subject to the delay is
insignificant relative to the unpaid principal or collateral value of
the debt and will result in an insignificant shortfall in the
contractual amount due
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Recent Accounting Change
◊ Delay of restructured payment period is insignificant relative to
any one of the following:
• Frequency of payments due under the debt
• Debt's original contractual maturity
• Debt's original expected duration
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Recent Accounting Change
◊ Evaluate cumulative affect of all past restructurings to determine
if now a TDR, for example:
• Original 3 month extension in Year 1
– Not a TDR
• But extend again in Year 2 for 3 additional months
– Now in Year 2 it is a TDR (6 month extension)
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Recent Accounting Change
• Indications of borrower financial difficulty:
– Borrower may have financial difficulty even
though not currently in payment default with the
credit union
– Borrower is currently delinquent on any of its
debt (with or outside of the credit union)
– Borrower has declared/declaring bankruptcy
– Substantial doubt as to whether the borrower will
continue to be a going concern (MBL)
•
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Recent Accounting Change
• Indications of borrower financial difficulty:
– Forecasted cash flows will be insufficient to
service existing debt for foreseeable future
– Without modification, borrower cannot obtain
funds from other sources at the same rate as a
non-troubled borrower
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Recent Accounting Change
• Therefore, you will have to look at the member’s
financial condition and ability to pay outside of the
performance at your credit union, which may entail:
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Gathering current financial statements or records
Pulling a credit report for the member
Performing or reviewing forecasts or projections, and/or
Using judgment
©2012 CliftonLarsonAllen LLP
Recent Accounting Change
• In theory, if the restructuring is outside of the
credit unions’ policies and outside of industry
guidelines (i.e. terms, rates, loan-to-values,
etc.); then it most likely would be considered
a TDR
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©2012 CliftonLarsonAllen LLP
Recent Accounting Change
• ASU also clarifies that a credit union can no longer
use the effective interest rate test as defined in ASC
470-60-55-10 in determining whether a restructuring
constitutes a TDR
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TDR and ALLL
• All TDR loans are considered “impaired loans”
– It is probable that the credit union will be unable to collect
all principal and interest payments as scheduled in the
original contractual terms
• Therefore to be allowed for under ASU … (old FAS
114)
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TDR and ALLL
• TDR reserves are to be based on:
– Reserve for difference between cash flows based on
discounted present value of original vs. modified terms,
plus
– Additional reserves for re-default, OR
– Collateral based loans - reserve for difference between
estimated value of collateral less costs to sell compared to
the loan balance
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TDR and ALLL
• Why discounted cash flow method?
– Basically you are reserving for lost income/principal due to
restructuring
◊ Discounted cash flow model
– As time goes by and if member re-paying as agreed this
reserve will decline each month and can bring back to
income
◊ Lower provision for loan losses (PLL)
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TDR and ALLL
• Why additional amount for re-default risk?
– Discounted cash flows does not account for potential loss
of principal on these high risk loans
– Calculate based on historical re-default loss
◊ Percentage of TDRs gone bad by loan segment times loss estimate
per loan
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How It Affects Credit Union
• I believe more restructured and modified loans will
qualify as a TDR
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How It Affects Credit Union
• Therefore if a credit union has more restructured
loans that will now be considered a TDR:
– The total amount of reportable loan delinquencies may
increase on quarterly Call Reports, and
– The total amount of reserves in the ALLL may also need to
be increased for the additional impaired TDR loans
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How It Affects Credit Union
• Risks
– Lending and accounting do not talk therefore could have
many TDRs not identified and tracked
– Not reported properly as delinquent loans
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How It Affects Credit Union
• Regulatory Reporting on TDR
– ASU did not change reporting requirements as regulatory
matter
– Delinquency on TDRs is reported on the Call Report
consistent with the original loan contract terms
– Return of TDR to full payment status after 6-month period
of demonstrated ability to repay consistent with the
restructured terms
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How It Affects Credit Union
• Risks
– TDRs not reserved for properly
◊ Could have significant financial statement impact
• Increased ALLL through PLL
• Decrease in net income
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How Affects Credit Union
• Recommendation:
– Early and often communication between accounting and
lending departments is essential
◊ Ensures all loans that have been restructured or modified have
been evaluated for TDR
– Process helps ensure overstatement of earnings is not
issued, and examiners and auditors can have confidence in
the financial strength of the credit union
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Examples
• #1
– Member delinquent by 2 payments
– Lower interest rate by 1%
– TDR?
• #2
– Member not delinquent with you but delinquent on bank
credit card
– Lower interest rate by 1%
– TDR?
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©2012 CliftonLarsonAllen LLP
Examples
• #3
– Member not delinquent on any loan
– Member has loss of job and/or income reduced (i.e. no
overtime, etc)
– States cannot make scheduled payments
– Lower payment by $100/month by extending loan 12
months
– TDR?
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©2012 CliftonLarsonAllen LLP
Examples
• #4
– Member not delinquent on any loan
– Member has no change in income
– Asks for interest rate reduction to match current offered
rates
– Member qualifies for rate if new loan
– Lower interest rate by 0.50%
– TDR?
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©2012 CliftonLarsonAllen LLP
Examples
– #5
◊ Member not delinquent on any loan
◊ Member has no change in income but may be over-extended on
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◊
◊
◊
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credit
States cannot make scheduled payments
Member qualifies loan, except for LTV above policy
Change terms from 5 year balloon to 30 year fixed at going 6%
rate
TDR?
©2012 CliftonLarsonAllen LLP
Examples
• #6
– Member not delinquent on any loan
– Member has no change in income but has some
unexpected medical bills
– States cannot make scheduled payments
– Grant 2 month extension
– TDR?
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©2012 CliftonLarsonAllen LLP
Examples
• #7
– Same conditions as #6 but now 2 years later you grant
another 2 month extension due to divorce
– TDR?
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©2012 CliftonLarsonAllen LLP
Examples
• #8
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Member not delinquent on any loan
Member has slight decline in income (no overtime paid)
States cannot make scheduled payments
Member qualifies loan
Lower payment by $400 for 12 months then goes back to
original payment
– TDR?
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©2012 CliftonLarsonAllen LLP
Questions?
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Contact Us
Greg Schwartz, CPA, CMA
greg.schwartz@cliftonlarsonallen.com
612-376-4684
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©2012 CliftonLarsonAllen LLP