February 6, 2013
SFAS 141 was revised in 2008 (SFAS 141-R). The acquisition method will be required for all credit union business combinations for fiscal years (acquirer) beginning after December 15, 2008.
More to follow soon.
This blog entry you have just read was written by Edward Lis, Vice President of Finance & Compliance. If you enjoyed this article I encourage you to learn more about Edward by visiting www.edwardlis.com.
Edward B. Lis is a well respected credit union executive known by his peers as being decisive; a visionary; communicative; and energetic. He has led during difficult economic times driving change, achieving objectives, and effectively managing projects moving from a vision and strategy phase to implementation and final execution.
FDIC Accounting for Business Combinations
July 28, 2012
Credit Union, Creditor, Debt, Debt restructuring, Debtor, Loan
Troubled Debt Restructuring Final Rule
The NCUA board recently adopted a final TDR rule (Part 741) and loan workout guidance (Part 741, Appendix C). The final rule sets no limit on the amount of troubled loans that credit unions can work out with members. The rule also removes unnecessary manual tracking procedures and allows credit unions to modify loans without having to immediately classify TDRs as delinquent. Specific changes include:
- October 2012-Requiring federally-insured credit unions to adopt and adhere to written policies that govern loan workout arrangements that assist borrowers.
- June 2012-Allowing credit unions to calculate the past due status of all loans consistent with loan contract terms, including amendments made to loan terms through a formal TDR.
- June 2012-Eliminating the dual and often manual delinquency tracking burden on credit unions for managing and reporting TDR loans.
- October 2012-Reaffirming current industry practices by requiring credit unions to discontinue interest accrual on loans past due by 90 days or more and to establish requirements for returning such loans to accrual status.
Key TDR Accounting Guidance
• Codification Topic 310-40 (Receivables/Troubled Debt Restructurings by Creditors)
• Formerly: • FAS 15, Accounting by Debtors and Creditors for Troubled Debt Restructuring
• FAS 114, Accounting by Creditors for Impairment of a Loan
• FAS 118, Accounting by Creditors for Impairment of a Loan, Income Recognition and Disclosures
Loans that fit the troubled debt restructuring definitions share the traits of modified loans yet have two additional characteristics:
- The modification is due to economic or legal reasons related to the debtor’s financial difficulties; and
- The modification provides for a reduction in interest and principal.
All TDRs are modified loans; however, not all modified loans are considered TDRs.
In a trouble debt restructuring, the credit union, the creditor, grants a concession to the member, the debtor, that the creditor would otherwise not consider if it were not for the financial difficulties being experienced by the debtor. These difficulties could be either legal or economic. Trouble debt restructures are always evidence by an agreement between the parties or based on terms imposed by a court of law.
The benefits of a TDR for the member are as follows:
- Assist the debtor through a period of financial difficulty; and
- Assist the debtor avoid a repossession or foreclosure.
The benefits of a TDR for the credit union are as follows:
- Increases the likelihood of repayment on loans by members having financial difficulty;
- Lessens the likelihood of repossession or foreclosure; and
- Increases member retention.
Loans that are refinanced or modified just to keep members whose loans are current from refinancing elsewhere for a better rate are not modified loans.
How do I calculate a loss on a TDR? More
July 7, 2012
Board of directors, Credit Union, National Credit Union Administration, Net worth, Risk
CU officials and management have a fiduciary responsibility to identify, measure, monitor, and control concentration risk. Concentration risk must be managed in conjunction with credit, interest rate and liquidity risks; as a negative event in any category may have significant consequences on the other areas, as well as strategic and reputation risks.
Concentration risk has increased in importance during the recent economic recession. Poor risk management of residential and commercial mortgage loan concentrations, in particular, is having an adverse effect on credit unions nationwide; resulting in significant loan losses, earnings deterioration, capital depletion, and increased credit union failures.
The board of directors should establish a policy addressing its philosophy on concentration risk, limits commensurate with net worth levels, and the rationale as to how the limits fit into the credit union’s overall strategic plan. Take a global perspective when developing the policy, including identifying outside forces (such as economic or housing price uncertainty) which will affect the ability to manage concentration risk.
The parameters set by the board should be specific to each portfolio and should include limits on loan types, share types, third party relationship exposure, etc. The risk limits should correlate to the overall growth objectives, financial targets, and net worth plan. The risk limits set forth in the concentration risk policy should be closely linked to those codified in related policies, including, but not limited to, real estate loan, member business loan, loan participation, asset/liability management (ALM), investment and liquidity policies. Any Concentration exceeding 100 percent of net worth must be monitored carefully, and the board of directors should document an adequate rationale for undertaking that level of risk. More
May 1, 2012
Credit Union, Financial services, National Credit Union Administration, Net worth
Due to recent declines in the equity markets, some credit unions may experience an increased flow of funds coming into their organization at a time of weak loan demand and low investment returns. This “flight-to-safety” for some credit unions could result in the need to submit a “Net Worth Restoration Plan”.
The Net Worth Restoration Plan commonly referred to as NWRP serves as a blueprint for the board and management to restore and maintain for four consecutive quarters the credit union’s net worth ratio to 6% or greater and to establish a financial framework for the 1/10th percent (0.1%) quarterly earnings waivers transfers.
Understanding the implications of the credit union having an inadequate level of net worth is important. Your primary goal should be safeguarding the member’s deposits through sound policies and practices, and by creating and sustaining a sufficient amount of net worth and reserves to absorb possible losses without endangering the stability of the credit union.
Your plan needs to meet the criteria set forth in NCUA Rules and Regulations 702.206-NWRP including: More