Recent Developments in Accounting and M&A for Banks

Size: px

Start display at page:

Download "Recent Developments in Accounting and M&A for Banks"

Eileen Beasley
6 years ago
Views:

1 2014 CliftonLarsonAllen LLP Recent Developments in Accounting and M&A for Banks Community Bankers of Washington Annual Convention September 11, 2014 CLAconnect.com

2 Today s presenter Todd Sprang Todd is a principal in the firm s financial institutions group. He has more than 20 years of audit and consulting experience and serves as an engagement partner on privately-held banks and SEC registrant banks throughout the United States. Todd serves as a member of the AICPA Depository Institutions Expert Panel and is a frequent speaker at national banking industry conferences. 2

3 Exposure Draft Proposed Accounting Standards Update Financial Instruments-Credit Losses, issued December 20, 2012 Financial assets not accounted for at fair value with changes in fair value reflected in net income with exposure to potential credit risk Examples applicable to financial institutions Loans Debt securities Loan commitments 3

4 Exposure Draft Expected credit loss is an estimate of the present value of cash flows not expected to be collected based on quantitative and qualitative information such as: Past events Historical loss experience Current conditions Borrower credit worthiness Forecasts of expected credit losses* Current point and forecast direction of economic cycle* 4

5 Initial Responses - Overall Clear distinction between supporters of the proposed model and opponents Proposed model will not fully correct the problem of too little too late Interaction with Recognition and Measurement proposal and Basel III 5

6 Initial Responses - Smaller Institutions Inability to accurately predict losses and lack of available data Requires significant implementation cost Regulators will utilize this as a tool to increase ALLL and decrease capital Violates matching principle Exclude smaller or non-public institutions 6

7 Initial Responses Community Bank Audit Firms Proposed model will be more challenging to support and audit Life of loan losses aren t reasonable and supportable Modify or exclude application to debt securities Costs of additional disclosure requirements outweigh benefits Eliminate TDR designation 7

8 Impact of Comments Alternatives to CECL have been discussed Alternatives to lessen impact on equity have been discussed FASB considered Alternative models Alternative threshold for incurred model 8

9 What to Expect A final standard in Q with an effective date of 2017 or If issuance is delayed until 2015, an effective date of 2018 or 2019 could occur. Few substantial changes to the exposed standard Potential modification for instances when the remaining life of the asset exceeds the institution s supportable forecast period Illustrative methodology calculations of limited use to preparers 9

10 In the Meantime Historical losses Stability of loss environment may justify return to longer historical loss periods (5 yrs -> 3yrs > 1 yr > 3 yrs) Document reasons for changes Qualitative factors Common for qualitative factors to comprise largest percentage of current ALLL Incorporating range of loss 10

11 In the Meantime Specific reserves on impaired loans Shrinking percentage of ALLL Troubled Debt Restructurings with zero reserve due to: Improved borrower financial condition Improved collateral supporting the loan Increasing collateral fair value Additional collateral obtained 11

12 The Evolution of a TDR Initial assessment of a TDR 1. Financial reporting 2. Accrual vs. Nonaccrual 3. Impairment calculation When do these initial assessments change? 12

13 The Evolution of a TDR Subsequent assessment of a TDR 1. Accrual vs. Nonaccrual 2. Financial reporting 3. Impairment calculation 13

14 The Evolution of a TDR Loan A New Origination CRE Loan 80% LTV Market Rate Strong Guarantor Pass Rated (expected) Loan B Existing Renewal CRE Loan 80% LTV Market Rate Strong Guarantor Pass Rated (actual) 14

15 The Potential Alternative Current variances in practice as to whether or not there is an alternative 1. Once a TDR, always a TDR = specific reserve calculation 2. New loan = Return to the FAS 5 portion of calculation 15

16 The Potential Alternative FAS 91 Refinancing Guidance ( ) If the terms of the new loan resulting from a loan refinancing or restructuring other than a troubled debt restructuring are at least as favorable to the lender as the terms for comparable loans to other customers with similar collection risks who are not refinancing or restructuring a loan with the lender, the refinanced loan shall be accounted for as a new loan. 16

17 The Potential Alternative FAS 91 Refinancing Guidance ( ) Conditions to consider: 1. The new loan's effective yield is at least equal to the effective yield for similar loans and 2. Modifications of the original debt instrument are more than minor 17

18 The Potential Alternative More than Minor ( ) A modification of a debt instrument shall be considered more than minor under the preceding paragraph if the present value of the cash flows under the terms of the new debt instrument is at least 10 percent different from the present value of the remaining cash flows under the terms of the original instrument. 18

19 The Potential Alternative More than Minor ( ) If the difference between the present value of the cash flows under the terms of the new debt instrument and the present value of the remaining cash flows under the terms of the original debt instrument is less than 10 percent, a creditor shall evaluate whether the modification is more than minor based on the specific facts and circumstances (and other relevant considerations) surrounding the modification. 19

20 Policy and Procedures Loan types and circumstances Commercial Multiple renewals/modifications Processes and approvals Documentation Consideration of 10% threshold Verification 20

21 Definition of a Public Business Entity A public business entity is a business entity meeting any one of the criteria below: a) It is required by the SEC to file financial statements (FS), or file them voluntarily, with the SEC (including other entities whose FS or financial information are required to be or are included in a filing). b) It is required by the Securities Exchange Act of 1934 (the Act), as amended, or rules or regulations promulgated under the Act, to file or furnish financial statements with a regulatory agency other than the SEC. c) It is required to file or furnish financial statements with a foreign or domestic regulatory agency in preparation for the sale of or for purposes of issuing securities that are not subject to contractual restrictions on transfer. d) It has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market. e) It has one or more securities that are not subject to contractual restrictions on transfer, and it is required by law, contract, or regulation to prepare U.S. GAAP financial statements (including footnotes) and make them publicly available on a periodic basis (for example, interim or annual periods). An entity must meet both of these conditions to meet this criterion. 21

22 Definition of a Public Business Entity Is your bank a public business entity (PBE)? Yes, if the bank stock is unrestricted and it is required to file financial statements as part of FDICIA Part 363 Annual Report (>$500 million in total assets) Yes, if the bank stock is unrestricted and it is required to make financial statements available because of state laws, regulations, or other contracts If a PBE, a bank cannot avail itself of the Private Company Council accounting standards nor delayed PBE effective dates in general standards 22

23 M&A Accounting Consider the impact of the following on financial reporting: 1. Closing date 2. Measure assets and liabilities at fair value Loans OREO Deposits Core Deposit Intangible Goodwill 3. Contingencies Assets or liabilities Consideration 23

24 M&A Accounting Day 1 - Acquired loans will fall in two primary classifications 1. ASC uses the acquirer s cash flows expected at acquisition to Calculate the loan yield (interest income) and Determine whether the loan is impaired and how to measure impairment. 2. ASC measures yield and impairment using contractual cash flows as the benchmark with the discount accreted back to par generally over remaining contractual term of the loan. 24

25 M&A Accounting Additional Day 1 Considerations: 1.No ALLL on acquired loans 2.Use of valuation specialists a) Assumptions b) Inputs c) Methodology 25

26 M&A Accounting Additional Day 2 Considerations: 1. Acquired loans a) Revenue recognition b) Impairment c) Past due reporting 2. Goodwill impairment procedures and conclusions 3. Adjustments during the measurement period 26

27 Revenue Recognition Standard Effective 2017 for public companies (2018 for non-public) Significantly impacts borrower financial reporting in 1. Construction 2. High-Tech/Software 3. Some manufacturing Impact on Bank s financial reporting: 1. Real estate sale minimum requirements 2. Credit card incentive programs 3. Asset management incentive fees 27

28 COSO Framework Update Original framework available during the transition period that extends to December 15, 2014, after which time COSO will consider it as having been superseded. SEC banks and FDICIA banks are required to make management assertions or certifications regarding internal controls over financial reporting (ICOFR) The reporting requires the institution to identify the framework they used to support their assertion or certification. 28

29 Questions? 29

30 2014 CliftonLarsonAllen LLP Todd A. Sprang, Principal CliftonLarsonAllen LLP 1310 West 22 nd Street, Suite 1100 Oak Brook, IL CLAconnect.com twitter.com/ CLAconnect facebook.com/ cliftonlarsonallen linkedin.com/company/ cliftonlarsonallen 30

Allowance for Loan Losses - Understanding CECL and Current Trends

2014 CliftonLarsonAllen LLP Presentation for the National Association of Federal Credit Unions Allowance for Loan Losses - Understanding CECL and Current Trends September 2, 2015 CLAconnect.com Today s