Troubled Debt Restructurings (TDRs) are often a source of confusion for bankers. Many questions stem from identifying, accounting for, reporting and removing TDRs. This webinar covers: an overview and definition of TDRs, evolution of guidance on TDRs, identification of financial difficulty and concessions, measuring impairment, pooling of TDRs, risk grading and accrual status and general best practices and regulatory demands with respect to TDRs.

1. TDR 101: “ALLL” ABOUT
TROUBLED DEBT
RESTRUCTURINGS
Tim McPeak
Sr. Risk Management Consultant
Wednesday April 29th, 2015PRESENTED BY:
Garrett Morris
Director of Consulting Services

2. Questions
+ A copy of the slides and webinar recording will be emailed to you following the
webinar
+ To ask a question during the webinar, enter it into the chat box in the
GoToWebinar panel on right side of screen:
+ Brief Q&A held at end of webinar

3. About Sageworks
+ Financial information company that provides credit and risk management
solutions to financial institutions
+ Data and applications used by thousands of financial institutions and
accounting firms across North America
+ Awards
+ Named to Inc. 500 list of fastest growing privately held companies in the U.S.
+ Named to Deloitte’s Technology Fast 500
+ NC Tech Awards: Excellence in Customer Service

4. Presenters
Garrett Morris
Director of Consulting
Services
Tim McPeak
Sr. Risk Management
Consultant

5. 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

6. 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

7. FASB’s ASC 310-40
+ “Troubled Debt Restructurings by
Creditors (Subtopic 310-40)”
+ Provides guidance on:
+ Measurement
+ Derecognition
+ Disclosures
+ Impairment measurement

8. 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)

9. 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

10. 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

11. What is a TDR?

12. 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

13. 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

14. 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.

15. What is NOT a TDR?
+ Insignificant delays in payment as result of restructuring NOT
deemed 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

16. 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

17. 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.

18. 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

19. 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

20. 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

21. 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.”

22. 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

23. 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?

24. 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?

25. 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!)

26. Contact Information
Tim McPeak
Senior Risk Management Consultant
Sageworks
Tim.mcpeak@sageworks.com
919.851.7474 ext. 642
Garrett Morris
Director of Consulting Services
Sageworks
Garrett.morris@sageworks.com
919.851.7474 ext. 568

27. 2015 Risk Management Summit
+ September 23-25 in Chicago
+ ALLL & Stress Testing
+ Peer Roundtables
+ Banker Appreciation Night on Lake Michigan
+ sageworks.com/summit
Todd Sprang
Principal
CliftonLarsonAllen
David Heneke
Principal
CliftonLarsonAllen
John Behringer
Partner
McGladrey
Graham Dyer
Senior Manager
Grant Thornton

28. 2015 Bank and Credit Union Exam Survey
+ Share feedback from recent
federal exam
+ ALLL, stress testing, credit
analysis, loan review, etc.
+ 10-15 minutes
+ Learn from peers – receive
compilation of results
+ sageworks.com/survey/

29. Resources
+ The destination website for the ALLL calculation
+ Latest news, peer discussions, industry expert opinions
+ www.ALLL.com
+ www.sageworksanalyst.com
+ Whitepapers, webinars, thought leadership
+ CECL Webinar
+ Fill out form, we’ll email you invite when guidance passed
+ Web.sageworks.com/CECL/

30. Questions?