Question regarding FAS 114 & ALLL calculation. My external Loan review is indicating that in order to have a loan to have an impairment identified, that loan has to be on Non-Accrual. He sites in FAS 114 that this is a requirement, but I can't find anything on that, and haven't seen anything on that previously. Does anyone know of a requirement that a Loan has to be Non-Accrual to be allowed to identify an Impairment for FAS 114 in computing your ALLL requirements. We are a State Bank in Illinois. Thank you in advance for your assistance.

Not an expert, but if the loan is impaired it is probable that the creditor will be unable to collect all interest and principal payments due according to the contractual terms of the loan agreement. How then could you continue to have it in an accrual status? Look at paragraph 17 regarding accounting for future periods.

By definition a loan is impaired when it is probable that the bank will be unable to collect all amounts due according to the terms of the note. Looking at it this definition is similar to standards for non accrual. So yes any loan on non accrual should be classified under 114. We look beyond the loans just on non accrual status and look for loans that may become impaired in the near future and set reserves for them so we do have some loans that are not on non accrual under 114. For the most part section 114 of our calculation mirrors or non accrual report.

FDIC and our external auditors didn't any problems with our methods.

Hi Ricary, could you please elaborate on your quote: " Look at paragraph 17 regarding accounting for future periods." where I can find this paragraph?

Impaired loans are a subset of nonaccrual loans. Refer to ASC 310-10-35-2 to 30 (formerly known as FAS 114). I am guessing that Randy is referring to paragraph 17 of the ASC.

I'm not the original poster but I have a differrnt type question. We bought a participation through a state bank in Illinois that has impaired the loan but it remains on accrual status (I disagree with that, but that's not the point). We are an OCC bank. If the lead bank has impaired the loan and we are privy to that information, are we subsequently duty-bound to impair our portion of the loan, even though it is accruing? Anyone ever gotten a regulatory opinion on this? I don't want to throw up a red flag to my regulator, but I do want to avoid criticism.

IMO, you should evaluate the loan based on the information you have and do your own impairment testing. If you find that it should be on nonaccrual and it is impaired, it's up to you to take appropriate action. My experience has been that the regulators will want to ensure you are doing your homework on the deal. In the same way, you may have a loan that you classify or place on nonaccrual when the lead bank has not taken such action. We've had this happen several times - each bank has to face their own reality - some are willing to do that, some are not. And each one will have to deal with their own regulator.

You will also find this Banking Circular from the OCC helpful:

http://www.occ.gov/news-issuances/bulletins/pre-1994/banking-circulars/bulletin-1984-181.html

It is specific to loan participations; and while it is old (1984), the OCC still refers to it.

Have any of you had lead banks "buy back" the participation once it heads south? Or have you bought back the participation as a lead? I'm wondering where to head on guidance for this. We are a Fed-regulated bank. It just seems like it would be easier to manage without all of the players. We have no lending limits or other concerns in increasing our impaired balance.

It completely depends on the loan (size, number of participants, etc.). We've bought back a participation as the lead bank on perhaps on one loan in the last couple of years, but there were extenuating circumstances and it would not be a regular strategy by any stretch. Even healthy banks don't want to increase impaired balances by choice.

all participations, to be treated as loans rather than investments, must be bought and sold as non-recourse loans, meaning there is no obligation to buy back or sell back the loan.

Unless there was fraud by the selling bank, there would no reason to agree to buy back a non-performing loan.

All are without recourse....don't have to buy it back...and,goodness, no fraud. And, yes,.....given the number of players and the circumstances, it just feels like, in this one instance, it would be easier. Granted, we'll have to explain the decision to increase our substandard balance, but I can't think of anything that would prohibit us from asking if we can have the whole things back. And I can't think of a bank that wouldn't happily make it ours! It should be resolved before we have to do our explaining to auditors or examiners.

But I'm still surfing for something that says we can't do it. The hard part has been checking the state code!

I don't think there is anything that says you can't, other than safety and soundness/fiduciary issues. As long as the addiontal loss isn't so great as to cross into those territories, you can.

Not knowing the particulars, I am not sure why you would voluntarily assume greater losses.

Agreed that each participant must make own analysis and decisions. Banks that do not will be severely criticized.

Re buying back a nonrecourse participation...I would not do that without an indepth conversation with your external accounting firm (and even perhaps your regulator). Does it change the characterization of what you have on the books causing retro changes? Does it come under making a substandard or worse loan because you did after all sell without recourse?

Funny you should say that KB, we had the first party on the phone this morning and we're making the call to the second party now that we're rather sure we "can." Just need to have everyone on the same page for why we would, should, could, etc....

I would want every i dotted and t crossed on all sides before I did this.

Emily Ann - Regarding the participation loan question from Tater - If the lead bank is using FMV and not using an appraisal, the loan is collateral dependent, and they do not want to allow an appraiser to come in, what do you suggest?

Thanks.