Common questions surrounding the ASC 310 10-35 (FAS 114) calculation

These slides cover key characteristics of ASC 310-10-35 loans, such as the difference between ASC 450-20 (FAS 5) & ASC 310-10-35 loans, when an ASC 310-10-35 can be moved back to ASC 450-20 status and the three valuation methods for calculating ASC 310-10-35s and best practices for each.

1. COMMON QUESTIONS
SURROUNDING THE ASC 310-
10-35 (FAS 114) CALCULATION
r
Aaron Lenhart
Sr. Risk Management Consultant
Wednesday January 21
st
, 2014PRESENTED BY:
Garrett Morris
Managing 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. Who will be speaking?
Garrett Morris
Managing Director of
Consulting Services
Aaron Lenhart
Sr. Risk Management
Consultant

5. Learning Objectives
+What is ASC 310-10-35 (FAS 114)?
+Key characteristics of ASC 310-10-35
+Difference between ASC 310-10-35 and ASC 450-20 (FAS 5)
+Three valuation methods
+Common challenges in calculating the ASC 310-10-35 reserve
+How automated ALLL solutions help in complying with ASC 310-10-35

6. What is ASC 310-10-35 (FAS 114)?
+ASC 310-10-35 is a source of guidance on accounting for
impairment in a loan portfolio under GAAP
+Under ASC 310-10-35, a loan is impaired when it is
probable that the bank will be unable to collect all amounts
due (including both interest and principal) according to the
contractual terms of the loan agreement

7. Key Characteristics
+ASC 310-10-35 (FAS 114) loans often include:
+Substandard loans
+TDR loans
+Nonaccrual loans
+Loans > 90 days past due
+Tiered for asset size?

8. ASC 310-10-35 vs. ASC 450-20 (FAS 5)
+Specific reserve vs. General reserve
+Impaired loans vs. Non-Impaired loans
+Individual loans vs. Homogeneous pools

9. More About ASC 310-10-35
+Requires the evaluation of impaired loans on an individual basis,
not in pools
+Three valuation methods
+Applies to all loans except:
+Large groups of smaller-balance homogeneous loans that are collectively
evaluated for impairment (such as credit card, residential mortgage, etc.)
and which have not been restructured as troubled debt
+Loans that are recorded at fair value or at the lower of cost or fair value
(e.g., loans held for sale)
+Leases
+Debt securities

10. Three Valuation Methods
1.Fair market value of collateral
2.Present value of future cash flows
3.Loan pricing

11. Total Recorded Investment
+For all three methods, institutions need to take into
account all items that should be included in the “total
recorded investment” for the loan
+These items include:
+Outstanding principal balance
+Accrued interest
+Net deferred fees or costs
+Unamortized premium / discount

12. Fair Market Value of Collateral
+Method used for all collateral-dependent loans
+Calculate reserves by using the loan balance above the
collateral’s fair market value (less selling costs)
+Also consider:
+Use a current appraisal or make adjustments to older appraisal
+Consider any cross-collateralization, prior liens and/or loan
guarantees to ensure the appropriate equity value
+Document assumptions for any selling costs

13. Fair Market Value of Collateral
Appraised collateral value minus discounts and/or liquidation costs = Fair Value/Valuation
amount
The Total Recorded Investment exceeds the valuation amount
Therefore, the difference is the reserve amount

14. Present Value of Future Cash Flows
+Method used for loans still expected to be supported by
repayment from the borrower
+Used for most troubled debt restructures (TDR)
+Reserve for the present value of all expected payments
+Be able to justify expected monthly payment
+Also consider:
+Use the effective (original) interest rate as a discount rate
+Set up a month-by-month analysis with the expected payment
discounted appropriately for each month
+Be wary of the “NPV” function in Excel

15. Present Value of Future Cash Flows

16. Loan Pricing
+Used infrequently
+Reserve amount derived from loan’s observable market
price
+Reserve for any portion of the loan balance which exceeds
the loan’s market value

17. Moving a Loan Back to ASC 450-20 (FAS
5) Status
+Can a loan be ASC 310-10-35, but non-impaired?
+Nonaccruals that return to performing status
+What about TDRs?
+What if I evaluate all my substandard loans individually at first?
+Can I apply an ASC 450-20 (FAS 5) reserve rate instead of a
specific reserve rate even if a loan is actually impaired?

18. Common ASC 310-10-35 Challenges
+Determining which loans to evaluate under ASC 310-10-35
+Ensuring loans are not double-counted for reserves
+Determining the appropriate valuation method
+Using appropriate values for impairment analysis
+Knowing when and how to move an ASC 310-10-35 loan back
to its appropriate ASC 450-20 pool

19. How ALLL Solutions Can Help
+Save time in data aggregation
+Reduce manual errors
in calculations
+Generate documentation
+Reduce examiner criticism
+Create custom reports

20. Key Takeaways
+ASC 310-10-35 is a source of guidance on accounting for
impairment in a loan portfolio under GAAP
+Determine and consistently apply an institution-specific standard for
identifying loans to be evaluated under ASC 310-10-35
+Individual impairment may be calculated utilizing one of three
different valuation methods afforded by the guidance
+Beware of moving loans from ASC 310-10-35 back to ASC 450-20
+Automated ALLL solutions can help
+Document, Document, Document & don’t be afraid to defend!

21. Contact Information
Aaron Lenhart
Senior Risk Management Consultant
Sageworks
[email protected]
919.851.7474 ext. 702
Garrett Morris
Managing Director of Consulting Services
Sageworks
[email protected]
919.851.7474 ext. 568

22. Resources
+The destination website for the ALLL calculation
+ALLL Forum for Bankers
+Commercial Credit Risk Professionals
+www.sageworksanalyst.com
+Whitepapers, webinars, thought leadership
+Brief survey following webinar: topics for
upcoming webinars? Speaker feedback?

23. Questions?