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Credit Quality - CliftonLarsenAllen


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Ken Welch's presentation on credit quality during the Volunteer Track of the 9th Annual Police Officers' Credit Union Conference.

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Credit Quality - CliftonLarsenAllen

  2. 2. 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 UnionsApplicable for All Entities – Not Just Financial InstitutionsEffective 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 YearWill Require Comparative Reporting for Periods Ending After December  15,  2012 ©2011 LarsonAllen LLP ©2012 CliftonLarsonAllen LLP
  3. 3. AICPA ACCOUNTING STANDARDS UPDATE (ASU) No. 2010‐20DISCLOSURES ABOUT THE CREDIT QUALITY OF FINANCING RECEIVABLES AND THE ALLOWNCE 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. ©2011 LarsonAllen LLP ©2012 CliftonLarsonAllen LLP
  4. 4. AICPA ACCOUNTING STANDARDS UPDATE (ASU) No. 2010‐20DISCLOSURES ABOUT THE CREDIT QUALITY OF FINANCING RECEIVABLES AND THE ALLOWNCE 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 ©2011 LarsonAllen LLP ©2012 CliftonLarsonAllen LLP
  5. 5. AICPA ACCOUNTING STANDARDS UPDATE (ASU) No. 2010‐20 DISCLOSURES ABOUT THE CREDIT QUALITY OF FINANCING RECEIVABLES AND THE ALLOWNCE  FOR CREDIT LOSSES  What Are The New  Disclosure Objectives?The Nature of Credit Risk Inherent in the Loan PortfolioHow 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 EstimateProvide Disclosures on a Disaggregated Basis – 2 Levels of Disaggregation: Provide Disclosures on a Disaggregated Basis 2 Levels of Disaggregation: By Segment and ClassDisclose Any Changes and Reasons for Those Changes in the Allowance for  f f Loan Losses Estimate Methodology ©2011 LarsonAllen LLP ©2012 CliftonLarsonAllen LLP
  6. 6. AICPA ACCOUNTING STANDARDS UPDATE (ASU) No. 2010‐20 DISCLOSURES ABOUT THE CREDIT QUALITY OF FINANCING RECEIVABLES AND THE ALLOWNCE  FOR CREDIT LOSSES  What Is Continued From Prior Disclosures?Loan Portfolio Schedule By Major Segments and ClassRollforward Schedule of the Allowance for Loan Losses for the Beginning to End  of the Period  ‐ Now by Portfolio SegmentThe Recorded Investment of Each Portfolio Segment on a  Disaggregated Basis as  EvaluatedThe Non‐Accrual Status of Loans – Now by ClassDisclosure of Impaired Loans – Now by Class p y ©2011 LarsonAllen LLP ©2012 CliftonLarsonAllen LLP
  7. 7. AICPA ACCOUNTING STANDARDS UPDATE (ASU) No. 2010‐20 DISCLOSURES ABOUT THE CREDIT QUALITY OF FINANCING RECEIVABLES AND THE ALLOWNCE  FOR CREDIT LOSSES  What is New for DisclosureCredit Quality Indicators for Loan Classes at End of PeriodAging of Loans at End of Period by ClassNature and Extent of TDR Activity During the Period by Loan Class including TDR  Defaults and the Effect on the ALLSignificant Purchases or Sales of Loans During the Period by Segment ©2011 LarsonAllen LLP ©2012 CliftonLarsonAllen LLP
  8. 8. Segments vs. ClassesThe 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) ©2011 LarsonAllen LLP ©2012 CliftonLarsonAllen LLP
  9. 9. Best Practice Recommendation Use 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. ©2011 LarsonAllen LLP ©2012 CliftonLarsonAllen LLP
  10. 10. New TDR Disclosure RequirementsASU 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. ©2011 LarsonAllen LLP ©2012 CliftonLarsonAllen LLP
  11. 11. Note 1‐Summary of Significant Accounting  PoliciesPreviously,Previously Note 1 included a “Loans Net” section which Loans, Net included discussion of loans and the allowance for loan lossesNow, 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. ©2011 LarsonAllen LLP ©2012 CliftonLarsonAllen LLP
  12. 12. Note 1‐Summary of Significant Accounting  PoliciesContinued: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 UnionAdded – A discussion of loan modifications and troubled debt restructurings, their impact on the loan portfolio and Allowance for Loan LossesAdded – A discussion and definition of impaired loans and their measurement principles ©2011 LarsonAllen LLP ©2012 CliftonLarsonAllen LLP
  13. 13. Note 1‐Summary of Significant Accounting Policies Troubled Debt Restructuring ©2011 LarsonAllen LLP ©2012 CliftonLarsonAllen LLP
  14. 14. Note 1‐Summary of Significant Accounting  PoliciesHomogeneous 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 ) ©2011 LarsonAllen LLP ©2012 CliftonLarsonAllen LLP
  15. 15. Note 1‐Summary of Significant Accounting PoliciesRisk RatingsApplicable for Credit Unions with a risk rating system in place forloans. Most often this will apply to participation loans and memberbus ess oa s o y ( o eed obusiness 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 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 ©2011 LarsonAllen LLP ©2012 CliftonLarsonAllen LLP
  16. 16. Note  X ‐ Loans, NetLoan Portfolio Segment/ Classes ScheduleNeeds to agree with segments/ Classes listed and defined inNote 1 Si ifiN Significant A Accounting P li i i PoliciesNeeds to agree with ALL calculation segmentsAllowance for Loan Losses Activity ScheduleThe activity schedule is presented comparatively or both yearsand will be deleted once comparative data on the newdisclosures is available for two years (beginning with12/31/2012 reporting). ©2011 LarsonAllen LLP ©2012 CliftonLarsonAllen LLP
  17. 17. Note  X ‐ Loans, Net , 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 - - $ - $ - ©2011 LarsonAllen LLP ©2012 CliftonLarsonAllen LLP
  18. 18. Note  X ‐ Loans, NetNew Allowance  Activity  Schedule ©2011 LarsonAllen LLP ©2012 CliftonLarsonAllen LLP
  19. 19. Note  X ‐ Loans, NetColumns 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. ©2011 LarsonAllen LLP ©2012 CliftonLarsonAllen LLP
  20. 20. Note  X ‐ Loans, NetThe 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. ©2011 LarsonAllen LLP ©2012 CliftonLarsonAllen LLP
  21. 21. Note  X ‐ Loans, NetOther 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 deteriorated Third Line: Ending ALL for loans acquired with deterioratedcredit quality (this will most likely not be applicable for the majority of the Credit Unions) ©2011 LarsonAllen LLP ©2012 CliftonLarsonAllen LLP
  22. 22. Note  X ‐ Loans, NetThe sum of the orange boxes will equal the blue highlighted  box for each segment. b f h ©2011 LarsonAllen LLP ©2012 CliftonLarsonAllen LLP
  23. 23. Note  X ‐ Loans, NetThe sum of the orange boxes will equal the blue highlighted box for each segmentbox 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 Evaluated for Impairment $ - Ending Balanc e: Loans Ac quired with Deteriorated Credit Quality $ - L o a n s: Ending Balanc e: Individually Evaluated for Impairment $ - Ending Balanc e: Collec tively Evaluated for Impairment $ - Ending Balanc e: Loans Ac quired with Deteriorated Credit Quality $ - ©2012 CliftonLarsonAllen LLP
  24. 24. Note  X ‐ Loans, NetThis 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 NetDeleted if not applicable. ©2011 LarsonAllen LLP ©2012 CliftonLarsonAllen LLP
  25. 25. Note  X ‐ Loans, Net ,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). ©2011 LarsonAllen LLP ©2012 CliftonLarsonAllen LLP
  26. 26. Note  X ‐ Loans, NetNew Loan Aging Analysis Schedule g g yAccruing interest portion will agree with the Credit Union’sp y(policy (60 or 90 days). y)2nd column will either read 30‐89 days past due or 30‐59days past due depending on the accrued interest policy of y p p g p ythe Credit Union.Numbers appearing in the disclosure are the loan balances pp gwith totals by portfolio segment/ class. ©2011 LarsonAllen LLP ©2012 CliftonLarsonAllen LLP
  27. 27. Note  X ‐ Loans, Net 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 - - - - - $ - $ - $ - $ - $ - ©2012 CliftonLarsonAllen LLP
  28. 28. Note  X ‐ Loans, NetInterest income foregone on nonaccrual loans:Suggested paragraphs b lS 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 thefootnotes. This data is not usually readily available and can beestimated ©2011 LarsonAllen LLP ©2012 CliftonLarsonAllen LLP
  29. 29. Note  X ‐ Loans, NetNew ‐ 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 allowanceImpaired loans with an allowance recordedTotal impaired loansNote  This information must be comparative in 2012Note ‐ This information must be comparative in 2012 ©2011 LarsonAllen LLP ©2012 CliftonLarsonAllen LLP
  30. 30. Note  X ‐ Loans, NetD 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 ognizedWith No Related Allowanc e:First Mortgages $ - $ - $ - $ -HELOC and Other Real EstateDirec 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 - - - - -HELOC and Other Real EstateDirec 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 OthC ial Other - - - - -Total Impaired Loans:First Mortgages $ - $ - $ - $ - $ -HELOC and Other Real EstateDirec t Vehic le $ - $ - $ - $ - $ -Indirec t Vehic le $ - $ - $ - $ - $ -Credit Cards $ - $ - $ - $ - $ -Share/Certific ate Sec ured $ - $ - $ - $ - $ -Other Sec ured $ - $ - $ - $ - $ - ©2011 LarsonAllen LLPOther Unsec ured $ - $ - $ - $ - $ -Commerc ial Real Estate $ - $ - $ - $ - $ -Commerc ial Other $ - $ - $ - $ - $ - ©2012 CliftonLarsonAllen LLP
  31. 31. Note  X ‐ Loans, NetImpaired Loans Schedule Columns:Unpaid Principal Balance: The amount the borrower owes onthe loanRecorded Investment: The amount recorded on the generalledger for various loan segmentsNote: Unpaid principal balance and recorded investment willmost often be the same for Credit Unions. If loans werespecifically written down, they may differ. ©2011 LarsonAllen LLP ©2012 CliftonLarsonAllen LLP
  32. 32. Note  X ‐ Loans, NetImpaired Loans Schedule Impaired Loans Schedule ‐ ContinuedRelated Allowance: The allowance provided on the variousimpaired loans by segmentAverage 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. ©2011 LarsonAllen LLP ©2012 CliftonLarsonAllen LLP
  33. 33. Note  X ‐ Loans, NetNew required disclosure regarding commitments  q g g existing in TDRs and nonaccrual loans.To be modified as necessary: ©2011 LarsonAllen LLP ©2012 CliftonLarsonAllen LLP
  34. 34. Note  X ‐ Loans, NetNew Disclosures related to TDRs (first three columns):Number of loans by segmentNumber of loans by segmentLoan balance by segmentSpecific reserve by segmentThe above disclosures are for all TDRs modified during The above disclosures are for all TDRs modified during the reporting period and not total TDRs. ©2011 LarsonAllen LLP ©2012 CliftonLarsonAllen LLP
  35. 35. Note  X ‐ Loans, NetNew 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 segmentLoan Balance by segmentSpec c ese e by seg e tSpecific Reserve by segmentNote ‐ this information is not generally readily available ©2011 LarsonAllen LLP ©2012 CliftonLarsonAllen LLP
  36. 36. Note  X ‐ Loans, Net 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 ReserveFirst 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 - $ - $ - - $ - $ - ©2012 CliftonLarsonAllen LLP
  37. 37. Note  X ‐ Loans, NetThis 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: ©2011 LarsonAllen LLP ©2012 CliftonLarsonAllen LLP
  38. 38. Note  X ‐ Loans, NetThis additional TDR disclosure schedule presents loan  p balances by class, based on the type of concession  granted:Rate and MaturityPaymentOtherOthTotals in this schedule should agree with totals in the TDR activity schedule. ©2011 LarsonAllen LLP ©2012 CliftonLarsonAllen LLP
  39. 39. Note  X ‐ Loans, Net 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 $ - $ - - $ - ©2011 LarsonAllen LLP ©2012 CliftonLarsonAllen LLP
  40. 40. Other Items to ConsiderChanges in Accounting Policies or Methodology from the  Prior PeriodNeed 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 ©2011 LarsonAllen LLP ©2012 CliftonLarsonAllen LLP
  41. 41. Other Items to ConsiderOther 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. ©2011 LarsonAllen LLP ©2012 CliftonLarsonAllen LLP
  42. 42. Other Items to ConsiderUse 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  ©2011 LarsonAllen LLP liquidation. ©2012 CliftonLarsonAllen LLP
  43. 43. Other Items to ConsiderUse 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. interestonly –The Credit Union offers non traditional mortgage loans to its The Credit Union offers non‐traditional mortgage loans to itsmembers. 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 mortgagesare 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 specifiednumber 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 loanminimum payment is less than the interest accruing on the loan ©2011 LarsonAllen LLP ©2012 CliftonLarsonAllen LLP
  44. 44. Best Practice RecommendationsCommunicate 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 yImpaired loans (average recorded Investment and interestincome recognized)TDR activity roll forwardAdopt proof and validation procedures surrounding  disclosure schedules di l h d l ©2011 LarsonAllen LLP ©2012 CliftonLarsonAllen LLP
  45. 45. Best Practice RecommendationsDefine 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  pdue according to the contractual terms of the loan agreement.” Disclose the accounting policy basis for determining collective inherent impairment and individual impairment classificationsEnsure your ALL adequacy model reconciles with your financial statement disclosures ©2011 LarsonAllen LLP ©2012 CliftonLarsonAllen LLP
  46. 46. Questions Kenneth Welch,  CPAPartner Credit Union GroupPh. (703) 825‐2182 Kenneth.welch@cliftonlarsonallen.comK h l h@ lif l ll ©2011 LarsonAllen LLP ©2012 CliftonLarsonAllen LLP