Preparing the Financial Statement Credit Quality Disclosure

Size: px

Start display at page:

Download "Preparing the Financial Statement Credit Quality Disclosure"

Meryl Simmons
6 years ago
Views:

1 Preparing the Financial Statement Credit Quality Disclosure Twenty Twenty Analytics is the Exclusive CUNA Strategic Service provider for your Loan Portfolio Analytics and Regulatory Compliance

2 Objective of New Disclosures The main objective of this guidance is to provide financial statement users with greater transparency about an entity s allowance for loan losses (ALL) and the credit quality of its loans receivables by helping the users evaluation of the following: The nature of credit risk inherent in the entity s loan portfolio; How that risk is analyzed and assessed in arriving at the ALL; and The changes and reasons for those changes in the ALL.

3 Portfolio Segment Portfolio Segment - The level at which an entity develops and documents a methodology to determine its ALL. Some possible examples could include Real Estate, Auto, Commercial and Consumer Loans. The ALL is disclosed at the segment level

4 Example of Segments ALL Disclosure Commercial Real Estate Consumer Total Allowance for credit losses: Beginning balance 5,750,000 6,230,000 3,500,000 15,480,000 Charge-offs (CFS) 1,756,000 2,087, ,000 4,717,000 Recoveries (CFS) (825,000) (700,000) (140,000) (1,665,000) Provision (CFS & IS) 95,000 20,000 12, ,000 Ending balance (BS and NFS) 6,776,000 7,637,000 4,246,000 18,659,000 Ending balance: individually evaluated for impairment (NFS) 3,731,000 2,651, ,000 7,183,000 Ending balance: collectively evaluated for impairment (BS and NFS) 3,045,000 4,986,000 3,445,000 11,476,000 Financing Receivables: Ending balance (BS balance includes deferred income) 448,098, ,045, ,707,000 1,668,850,000 Ending balance: individually evaluated for impairment (NFS) 246,244, ,225, ,201, ,670,000 Ending balance: collectively evaluated for impairment (BS) 201,854, ,820, ,506,000 1,090,180,000

5 Portfolio Segments ALL Disclosure Include in italics on the previous slide are indicators of other places that the balance should be reflected These include (CFS) Cash Flow Statement, (BS) Balance Sheet, (IS) Income Statement and (NFS) Note to the Financial Statement Also throughout these disclosures the loan balances may include Deferred Fees If your system does not allow for these fees to be assigned to specific loans it is acceptable to allocate them to Loan Segments / Classes / Balances that they relate.

6 Portfolio Classes Class of Financing Receivable is a further disaggregation of Portfolio Segment where loans that share similar risk characteristics are pooled. An example of classes within the Consumer Loans Segment could be: New Auto, Used Auto, and Unsecured, while an example of Real Estate Loans Segment could be First Mortgage, Second Mortgage or HELOC.

7 Portfolio Classes The following are disclosed at the Class Level: Total Loans, Individually Impaired Loans with and without a specific allowance, Aging of Past Due Loans, TDR Loans and Loans by Credit Quality

8 Portfolio Classes Total Loans Disclosure Commercial: Real estate 268,459, ,658,000 Construction 175,456, ,025,000 Total commercial 443,915, ,683,000 Real estate: First mortgage 220,288, ,581,000 Second mortgage 219,522, ,804,000 HELOC 172,000,000 16,800,000 Total real estate 611,810, ,185,000 Consumer: New Auto 256,879, ,458,000 Used Auto 224,021, ,089,000 Unsecured 88,479,000 85,489,000 Other secured 31,198,000 32,985,000 Total consumer 600,577, ,021,000 Total loans 1,656,302,000 1,524,889,000 Net deferred loan costs (fees) 12,548,000 11,578,000 1,668,850,000 1,536,467,000 Allowance for loan losses (18,659,000) (15,480,000) Total loans, net 1,650,191,000 1,520,987,000

9 Portfolio Classes Individually Impaired Loan Disclosure As of Year-End For the Year Ended Recorded Unpaid Principal Specific Average Recorded Interest Income Investment Balance Allowance Investment Recognized With no related allowance: Commercial: Real estate 50,110,000 55,614, ,058,000 64,000 Construction 40,458,000 43,364, ,658,000 21,000 Real estate: First mortgage 24,694,000 23,548, ,584,000 8,000 Second mortgage 21,548,000 20,220, ,252,000 4,000 HELOC 18,584,000 18,958, ,524,000 3,000 Consumer: New Auto 10,504,000 12,568, ,587, Used Auto 9,015,000 9,565, ,985, Unsecured 625, , , Other secured 2,457,000 2,457, ,854,

10 Portfolio Classes Individually Impaired Loan Disclosure - continued As of Year-End For the Year Ended Recorded Unpaid Principal Specific Average Recorded Interest Income Investment Balance Allowance Investment Recognized With an allowance recorded: Commercial: Real estate 73,092,000 75,845,000 2,510,000 74,058,000 65,000 Construction 82,584,000 83,576,000 1,221,000 82,985,000 31,000 Real estate: First mortgage 60,673,000 62,716,000 1,273,000 61,504,000 9,000 Second mortgage 50,258,000 53,002, ,000 49,054,000 5,000 HELOC 40,468,000 42,093, ,000 41,580,000 4,000 Consumer: New Auto 44,548,000 44,006, ,000 43,584, Used Auto 28,470,000 29,589, ,000 29,454, Unsecured 12,834,000 12,834, ,000 12,658, Other secured 7,748,000 7,748,000 82,000 7,232, Total: Commercial 246,244, ,399,000 3,731, ,759, ,000 Real estate 216,225, ,537,000 2,651, ,498,000 33,000 Consumer 116,201, ,392, , ,952,000 2, ,670, ,328,000 7,183, ,209, ,000

11 Portfolio Classes Individually Impaired Loan Disclosure The Recorded investment includes FAS 91 deferred income and should agree with the ALL Disclosure The Specific Allowance for the Impaired Loans should agree with the ALL Disclosure The disclosure only includes impaired loans included in the ALL Disclosure and is broken into two sections loans that have a Specific Allowance and those that use a General Reserve.

12 Commercial: Portfolio Classes Aging of Past Due Loans Disclosure Days Delinquent Days Delinquent 90 or More Delinquent Total Delinquent Loans Total Current Loans Total Loans Real estate 697, , ,000 1,199, ,160, ,359,000 Construction 2,000, , ,000 3,680, ,059, ,739,000 Real estate: First mortgage 1,235, , ,000 2,499, ,789, ,288,000 Second mortgage 715, , ,000 1,929, ,645, ,574,000 HELOC 700,000 1,875, ,000 3,043, ,140, ,183,000 Consumer: New Auto 625, , ,000 1,895, ,984, ,879,000 Used Auto 56, , , , ,220, ,151,000 Unsecured 346, , ,000 1,221,000 87,258,000 88,479,000 Other secured 289, , , ,000 30,584,000 31,198,000 Total 6,663,000 6,359,000 3,989,000 17,011,000 1,651,839,000 1,668,850,000

13 Portfolio Classes Aging of Past Due Loans Disclosure The Loan Balances by Aging include Deferred Fees The Note should also include a disclosure of how loans greater than 90 days are treated (Example) The Credit Union places loans on nonaccrual status when the loan reaches 90 days past due or when management determines that the full and timely collection of interest or principal becomes uncertain. Loans on which the accrual of interest was discontinued approximated $3,989,000 as of December 31, There were no loans 90 days or more past due and still accruing interest as of December 31, 2011.

14 Portfolio Classes TDR Loan Disclosure TDR Balance at Beginning of The Year TDRs Approved During The Year TDR Repayments TDR Which Defaulted During The Year TDR Balance End of the Year Commercial: Commercial Real Estate 4,520,000 8,250,000 (1,725,000) (2,100,000) 8,945,000 Real Estate: First Mortgage 1,500,000 1,500,000 (275,000) (350,000) 2,375,000 Second Mortgage 2,425, ,000 (425,000) (250,000) 2,650,000 Total 8,445,000 10,650,000 (2,425,000) (2,700,000) 13,970,000

15 Portfolio Classes TDR Loan Disclosure The balance of the TDRs should include any Deferred Income All TDRs are impaired loans but not all impaired loans are TDRs so the TDR balance may not agree with the ALL Disclosure for Individually Impaired Loans

16 Portfolio Classes Loans by Credit Quality Disclosure There are any number of ways that you can assign Credit Quality to your loans for this disclosure some examples include by FICO Tier (800 and above, 750 to 799, 650 to 749, 600 to 649, 599 and below) Risk Tiers (High Risk, Moderate Risk, Low Risk) Payment Activity (Performing, Nonperforming) Loan Grading (Pass, Watch, Special Mention, Substandard, Doubtful, Loss)

17 Portfolio Classes Loans by Credit Quality Disclosure In all cases, however you choose to classify your loans has to be disclosed and defined for the reader of the Notes to the Financial Statements This disclosure should fit your methodology. Feel free to use or change any of the language included on the following slides.

18 Portfolio Classes Loans by Credit Quality Disclosure This disclosure should be at the Class Level and include Deferred Revenue under FAS 91 The following pages include possible language that can be used to classify the Credit Quality of your loans, however the language should be customized based on your methodology.

19 Loans by Credit Quality Disclosure - Examples FICO Tier - Example 800 and above- Member poses little to no additional risk. 750 to 799- Member poses a nominal risk of loss Composed of the Credit Union s average member profile Members are experiencing some degree of financial difficulty. 599 and below- Members are showing above average risk

20 Loans by Credit Quality Disclosure - Examples Risk Tier Example The Credit Union performs a multidimensional portfolio analysis on the individual loans and assigns a default score based on the following criteria: FICO Score, payment performance, FICO migration, collateralization, guarantors. Based on the weight of these indicators a credit quality grade of Low, Medium or High Risk is assigned.

21 Loans by Credit Quality Disclosure - Examples Payment Activity Example Classification for Payment Activity is made in regards to timing of payments made. The Credit Union considers loans receivable less than 15 days past due to be current and Performing. The Credit Union classifies loans greater than 15 days past due as Nonperforming.

22 Loans by Credit Quality Disclosure - Examples Loan Grading Examples The Credit Union categorizes their loans into risk categories based on relevant information about the ability of the borrowers to service their debt such as: current financial information, historical payment experience, credit documentation and current economic trends among other factors. These credit quality indicators are used to assign a risk rating to each individual credit. The risk ratings can be grouped into six major categories, defined as follows: Pass. A pass loan is a strong credit with no existing or known potential weaknesses deserving management s close attention.

23 Loan Grading Examples Watch. A watch credit is a loan that otherwise meets the definition of a standard or minimum acceptable quality loan, but which requires more than normal attention due to any of the following items: deterioration of borrower financial condition less severe than those warranting more adverse grading, deterioration of repayment ability and/or collateral value, increased leverage, adverse effects from a downturn in the economy, local market or industry, adverse changes in local or regional employer, management changes (including illness, disability, and death), and adverse legal action. Payments are current per the terms of the agreement. If conditions persist or worsen, a more severe risk grade may be warranted.

24 Loan Grading Examples Special Mention. A special mention credit is a loan that has potential weaknesses that deserve management s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the credit or in the Credit Union s position at some future date. Special Mention credits are not adversely classified and do not expose the Credit Union to sufficient risk to warrant adverse classification.

25 Loan Grading Examples Substandard. A substandard credit is a loan that is not adequately protected by the current sound worth and paying capacity of the borrower or the value of the collateral pledged, if any. Credits classified as substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. Well defined weaknesses include a project s lack of marketability, inadequate cash flow or collateral support, failure to complete construction on time or a project s failure to fulfill economic expectations. They are characterized by the distinct possibility that the Credit Union will sustain some loss if the deficiencies are not corrected.

26 Loan Grading Examples Doubtful. Credits classified as doubtful are loans that have all the weaknesses inherent in those classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions and values, highly questionable and improbably. Loss. Credits classified as loss are loans considered uncollectible and charged off immediately.

27 Portfolio Classes Loans by Credit Quality Disclosure FICO Tier Example New Auto Used Auto Unsecured Other Secured Total 800 and above 23,564,000 21,745,000 5,349,000 2,565,000 53,223, to ,666,000 58,230,000 28,870,000 9,789, ,555, to ,987,000 72,876,000 40,768,000 11,976, ,607, to ,786,000 56,543,000 10,597,000 6,269, ,195, and below 22,876,000 16,757,000 2,895, ,000 43,127, ,879, ,151,000 88,479,000 31,198, ,707,000

28 Portfolio Classes Loans by Credit Quality Disclosure Risk Tier Example First Mortgage Second Mortgage HELOC Total Low Risk 189,602, ,433, ,924, ,959,000 Medium Risk 25,678,000 43,373,000 24,365,000 93,416,000 High Risk 7,008,000 12,768,000 6,894,000 26,670, ,288, ,574, ,183, ,045,000

29 Portfolio Classes Loans by Credit Quality Disclosure Loan Grading Example Credit Grade Commercial Real Estate Commercial Construction Total Pass 254,700, ,047, ,747,000 Watch 15,157,000 10,012,000 25,169,000 Special Mention 236, ,000 1,036,000 Substandard 160, , ,000 Doubtful 106, , ,000 Loss 0 45,000 45,000 Total loans 270,359, ,739, ,098,000

30 Other Points All of these disclosures are closely related and the balances should agree from disclosure to disclosure. Generally it is easier to create a template based on your portfolio Segments / Classes / Credit Quality Classifications to ensure that the balances flow from schedule to schedule.

31 Other Points Note 1 of the Financial Statements should be updated to include the following information: ALL Methodology should disclose the why the Segments and Classes of Loans are used as well as how the Specific Allowance and General Reserve is calculated.

32 Other Points A full copy of FASB issued Accounting Standards Update Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses (ASU ) or a sample disclosure can be found at

33 Questions? For additional information about this presentation or for questions about creating your own disclosure please feel free to or call Steve Miller at

STATE DEPARTMENT FEDERAL CREDIT UNION

STATE DEPARTMENT FEDERAL CREDIT UNION FINANCIAL STATEMENTS (With Independent Auditor s Report Thereon) TABLE OF CONTENTS Page INDEPENDENT AUDITOR S REPORT... 1 FINANCIAL STATEMENTS Statements of Financial Condition... 3 Statements of Income...