Facilitated by: Loan Modifications Defined Troubled Debt Restructuring Defined

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1 Facilitated by: Dan Mahalak, Cindrich, Mahalak & Co. John Kohloff, OFIR John Karisny, NCUA Loan Modifications Defined Troubled Debt Restructuring Defined What is the difference? Accounting Issues and Considerations FASB Accounting Standards Update Regulatory Issues and Considerations NCUA Proposed Rule Roundtable Discussion/Questions February 15,

2 Restructuring terms of existing loan Renegotiation of existing loan Can include changes to some, a combination of, or all terms of a loan Designed to help members who are struggling Designed to minimize credit union foreclosures/repossessions/defaults February 15, Interest rate Reduction in rate Conversion from adjustable to fixed rate Final maturity date Principal forgiveness Interest only payments for a period of time Balloon options Waiver of late fees Reduction or capitalization of past due amounts February 15,

3 A loan modification where lender, for legal or economic reasons, related to the borrower s financial difficulties, grants a concession to borrower it would not otherwise consider Interest rate less than market Maturity date longer than other similar loans Reduction in loan balance Reduction in accrued interest February 15, The concession is granted by the creditor in an attempt to protect as much of its investment as possible Stems from an agreement between creditor and debtor or is imposed by law or a court February 15,

4 In business loans, may include Transfer of assets to creditor in partial or full settlement Taking an equity interest in business February 15, For a modification to be classified as a TDR, the following must be present: The borrower is experiencing/has experienced financial difficulty The credit union has granted a concession Something it would not otherwise do under normal circumstances February 15,

5 To be a TDR, both of the following must exist: The restructuring constitutes a concession The debtor is experiencing financial difficulties February 15, When is a member experiencing financial difficulty? Delinquent on loan(s) Filed or filing for bankruptcy Unable to service existing debt load No available credit For business loans Projected cash flows not sufficient to service debt Concerns about ability to continue as a going concern February 15,

6 A creditor has granted a concession when, as a result of the restructuring, it does not expect to collect amounts due, including interest accrued at the original contract rate If debtor does not otherwise have access to funds at a market rate for debt similar to the restructured debt, it is considered below market rate A temporary or permanent increase in interest rate as a result of the restructuring does not mean it is not a concession A restructuring that results in insignificant delay in payment is not a concession February 15, Amount of restructured payments subject to the delay are insignificant relative to unpaid principal or collateral value Delay is insignificant relative to Frequency of payments Original contractual maturity Original expected duration If debt has been previously restructured, must consider cumulative effect in determining if delay is insignificant February 15,

7 A creditor may conclude that a debtor is experiencing financial difficulties even if not in default Creditor should evaluate if debtor would go in to default if no modification February 15, June 15, 2011 for public entities December 15, 2012 for non-public entities February 15,

8 A creditor grants a concession, thereby creating a TDR to: Make the best of a difficult situation Creditor expects to collect more cash or other value, or Increase probability of collection Than if they didn t grant concession February 15, A loan modification is not always a TDR, but all TDRs are loan modifications February 15,

9 When a loan is modified and/or is a TDR, it must be judged for impairment A loan is impaired if it is probable that the creditor will not be able to collect all amounts due according to the original contractual terms of the loan This includes both contractual principal and contractual interest as scheduled in the loan agreement February 15, A loan is not impaired during a period of delay in payment if the creditor expects to collect all amounts due including accrued interest for the period of delay. Generally a TDR is already identified as impaired, otherwise there would have been no consideration of a modification A TDR is an impaired loan, it is not a new loan, but an attempt to collect the loan February 15,

10 Measuring impairment requires judgment and estimates, and the eventual outcome may differ from the estimates Can be measured loan by loan, or can be aggregated (FASB ASC 310 vs FASB ASC 450) Impairment should be based on the present value of expected future cash flows discounted at the loan s effective interest rate February 15, Effective interest rate is the contractual interest rate adjusted for any net deferred loan fees or costs, premium, or discount existing at the origination or acquisition of the loan February 15,

11 As a practical expedient, it can be based on observable market price or fair value of collateral if loan is collateral dependent Loan is collateral dependent if repayment is expected to be provided solely by underlying collateral If foreclosure is probable, should use fair value of collateral February 15, Consider estimated costs to sell If present value of expected future cash flows is less than the recorded loan, it is impaired If there is a significant change or if actual cash flows are significantly different than projected, impairment should be recalculated February 15,

12 If a state-chartered CU, remember mandatory charge-off rules: BoD considers loan uncollectible Loan is 12 or more contractual payments delinquent, no contractual payment in last 90 days, and CU has not started legal proceedings to collect Commissioner orders CU to charge-off the loan February 15, Report TDRs as delinquent According to original terms of loan until borrower makes six consecutive monthly payments at restructured terms This may mean delinquency status worsens over this period Cannot accrue for interest until after this requirement is met February 15,

13 This may require manual process as most systems probably cannot report this way February 15, Why? Prudent & sound loan workouts can be effective in helping members Need exists to balance this with safety-andsoundness considerations NCUA board seeks to balance these 2 considerations February 15,

14 Establishes consistent standards for management of loan workouts Streamlines regulatory reporting requirements Removes manual tracking and eliminates confusion between TDRs and other modifications Reaffirms non-accrual status at 90 days CUs can consider parameters established by FFIEC already February 15, Thank You February 15,

15 Daniel J. Mahalak, CPA Managing Partner Cindrich, Mahalak & Co., P.C Jefferson Ave. St. Clair Shores, MI ext CMCO Toll Free Our Focus.Credit Unions February 15,