Not sure where this really needs to end up, so I'm putting it in this forum.

Under a recent OCC examination we were told we need to do better at compliance with FAS 114 in determining the Net Present Value of Future Cash Flows (NPV) to determine loan impairment for criticized loans.

We have no problem determining a collateral impairment, that's easy. But I cannot seem to find a formula or even basic template to really build this up and modify it for our institution to determine the specific reserve for FAS 114 impaired loans that are not collateral-impaired but MAY be impaired to the point they no longer qualify for FAS 5 pooling.

Any examples anyone would like to share or direction to something I can use to build this template from scratch for our bank?

Thanks so much!

Under FAS 114, NPV is defined as the present value of expected future cash flows of the impaired loan, discounted at the loan's effective interest rate. (Refer to Paragraph 14 of FAS 114 for a complete discussion.)

As for a template, Microsoft Excel provides a NPV calculation -- look under Insert/Function... and call-up the NPV function. If you need further guidance, let me know and I will send you an Excel spreadsheet that includes an example of the NPV function.

I realize that this is a late response to your query but I find the there are still a lot of questions surrounding the calculation of current value of expected future cash flows (NPV) under FAS114 and how to effectively apply it as a collateral impairment measurement tool.

My experience has been that the answer isn't as simple as a straight excel NPV calculation. Yes that is a part of it but the heart of the measurement process is determining the free cash flow the borrower has to work with and the bank's ability to restructure the credit to get it back to a conforming standard.

If you are like most bankers and are still are having problems coming up with an approach that meets the needs of your credit policy, borrowers and the OCC, we can continue this discussion.

Thanks.

Our examiners are talking more about using the PV method especially for TDRs. I have found some examples in the CPA review, but the samples offered are not typical of bank loans.

Trying to understand the source information of the future cash flows appears to be the challenge in utilizing this method under FAS 114.

Any experiences you might be willing to share would be greatly appreciated.

We are also having difficulty understanding the NPV methodology in regards to what payment amount you utilize in the calculation. For example, if we have a customer whose DSC ratio is 0.90 do we discount our payment amount until a 1.0 is attained? If so, for how long do we discount the payment and are we required to modify the loan to reflect this new payment? Any help or clarification anyone can provide would be greatly appreciated.

Since it should be the NPV of future cash flows; I would think you would modify the payment until the DCR becomes 1.0 And, under current conditions, I think that is the payment amount you would expect until the debt is satisfied. As far as modifying the loan; it should be discretionary. Maybe you want to go ahead and foreclose, etc