tdr 101: "alll" about troubled debt restructurings
TRANSCRIPT
TDR 101: “ALLL” ABOUT
TROUBLED DEBT
RESTRUCTURINGS
Tim McPeakSr. Risk Management Consultant
Wednesday April 29th, 2015PRESENTED BY:
Garrett MorrisDirector of Consulting Services
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Presenters
Garrett Morris Director of Consulting
Services
Tim McPeakSr. Risk Management
Consultant
Learning Objectives
+ Evolution of guidance on TDRs
+ What is a TDR?
+ How to identify TDRs
+ ALLL Implications
+ Risk grading & accrual status
+ Pooling of TDRs
+ Once a TDR always a TDR?
+ Conclusion/Resources
FASB 15
+ June 1977
+ “Accounting by Debtors and Creditors for Troubled Debt Restructurings”
+ Definition of TDR
+ Set initial accounting expectations
+ Covered which modifications are considered concessions
+ Outlined disclosures required for TDRs
FASB’s ASC 310-40
+ “Troubled Debt Restructurings by Creditors (Subtopic 310-40)”
+ Provides guidance on:
+ Measurement
+ Derecognition
+ Disclosures
+ Impairment measurement
FASB’s ASU 2010-20
+ July 2010
+ “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses”
+ Provided some additional clarification on existing guidance
+ Primarily focused on additional disclosures for the ALLL which included TDR reporting (for financial statements & call report)
FASB’s ASU 2011-02
+ April 2011
+ “A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring”
+ Significant expansion/clarification on what constitutes both borrower financial difficulty and concessions
+ Prohibited use of “effective interest rate” test to determine TDR status
Interagency Guidance
+ Interagency policy statement on prudent commercial real estate loan workouts
+ FIL-61-2009
+ Troubled Debt Restructurings Interagency Supervisory Guidance
+ FIL-50-2013
+ Provided needed definition around risk grading, measuring impairment for TDR loans and expanded definitions around collateral-dependent loans
What is a TDR?
What is a TDR?
+ “Creditor for economic or legal reasons related to the debtor’s financial difficulties grants a concession to the debtor that it would not otherwise consider”
+ Two things must exist:
1) Financial difficulty of borrower, AND
2) Concession granted
Financial Difficulty of Borrower
+ ASU 2011-02 gives additional clarification
+ Debtor currently in default on any of his/her debt
+ If objective evidence of borrower going into default in foreseeable future without modification
+ May presume debtor financial difficulty even if debtor not currently in default (judgment call)
+ Has declared or is in process of declaring bankruptcy
+ Securities that have been delisted, are in process of being delisted, or under threat of being delisted from an exchange
Concession Granted
+ Creditor grants concession to debtor that it would not otherwise consider and as a result does not expect to collect all amounts due including accrued interest at original contract rate
+ Creditor “makes best of difficult situation”
+ Creditor expects to obtain more cash or other value from debtor, or to increase probability of receipt, by granting the concession than by not granting it.
What is NOT a TDR?
+ Insignificant delays in payment as result of restructuring NOTdeemed concession
+ ASC 310-40-15-17 & ASC 310-40-15-18 (consider amount & length of time)
+ Amount of delayed restructured payments insignificant relative to unpaid principal or collateral value of debt/results in insignificant shortfall in contractual amount due
+ Delay in timing of restructured payment period 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
+ Must factor in previous restructurings in this determination
Within the ALLL
+ By definition, TDR loans impaired for allowance purposes
+ Impairment: probable that the lender will not receive all the principle and interest payments to which the borrower has contractually agreed
+ Original contractual terms have been modified by the restructuring
Valuation and Measurement
+ Collateral valuation method:
+ “Repayment is expected to be provided solely by the underlying collateral”
+ Sale of or continued operation of collateral
+ Requires judgment
+ Any potential cash from guarantors should be carefully considered
+ If repayment from sale of collateral, include liquidation costs – if repayment based on continued operation, liquidation costs not included.
Valuation and Measurement
+ Present value of expected future cash flows:
+ If loan is not collateral dependent
+ Includes default, recovery and prepayment assumptions
+ Discount rate used to calculate present values should be original contractual rate of the loan
+ Justify and document expected future cash flows
+ Do not rely solely on scheduled amortization
+ Recent payment history and/or credit analysis of borrower to justify expectations
Risk Grading & Accrual Status
+ Impaired loans not always non-accrual
+ Not all renewals or extensions to substandard loans considered TDR
+ Interagency Guidance on TDRs (FIL-50-2013)
+ “A TDR designation means the loan is impaired for accounting purposes, but it does not automatically result in an adverse classification or credit risk grade”
+ Use thorough credit analysis & recent payment history
+ Accrual treatment of TDR loans similar to risk grading
+ Reasonable interpreted to mean 6 months
+ Interest-only payments may not meet threshold
Pooling of TDRs
+ ASC 310-10-35-21
+ “Impaired loans may be aggregated and measured for impairment with other impaired loans that share common risk characteristics by using historical statistics, such as average recovery period and average amount recovered, along with a composite effective interest rate”
+ OCC Bulletin 2012-10 and FDIC Supervisory Insight – Summer 2012 echo this statement
+ Reiterate that methods used to measure impairment must adhere to ASC 310-10-35 (formerly FAS 114)
+ Applying historical loss rates and qualitative adjustments per ASC 450-20 (formerly FAS 5) methodology would NOT be appropriate
Once a TDR Always a TDR?
+ Allowance vs. Reporting
+ Allowance: considered impaired for allowance purposes and measured for specific reserves under ASC 310-10-35
+ Reporting: TDRs performing under modified terms and meeting other conditions (accruing, < 30 days past due, market interest rate, etc.) do not need to be disclosed as TDRs for call report purposes in following years
+ Troubled Debt Restructurings Interagency Supervisory Guidance + “A TDR designation does not automatically mean that a loan should remain
adversely credit risk graded or classified for its remaining life if it already was or becomes adversely credit risk graded or classified at the time of the modification.”
Once a TDR Always a TDR?
+ Supplemental Call Report Instructions Sept. 30, 2014
+ TDRs that are subsequently restructured again, under certain conditions, can drop TDR designation altogether.
+ Would not need to be disclosed for reporting purposes
+ Would not be treated as impaired loans going forward
Common Questions
+ Does TDR guidance apply to all loans, including small-dollar-balance homogeneous loans?
+ Is concession granted if bank restructures loan from an amortizing loan to an interest-only loan?
+ Are short-term extensions, i.e. interest only for short period, considered a TDR?
Common Questions
+ Can modification of loan that is current on payments be considered a TDR?
+ If a borrower is experiencing financial difficulty and agrees to pledge additional collateral when the loan is up for renewal, is this a TDR?
+ Does a TDR have to be placed on nonaccrual status?
Key Takeaways
+ Both borrower financial difficulty and a concession must be present for a loan to be designated a TDR
+ Financial difficulty and concessions are not always so clear cut – responsibility falls on the lender to identify and document
+ All TDR loans are considered impaired and have significant implications on the allowance for loan and lease loss
+ Clear policies, procedures and documentation are critical (as always!)
Contact Information
Tim McPeakSenior Risk Management Consultant
Sageworks
919.851.7474 ext. 642
Garrett MorrisDirector of Consulting Services
Sageworks
919.851.7474 ext. 568
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