New Jersey League of Community Bankers New Jersey Bankers Association Financial Managers Society New

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New Jersey League of Community Bankers New
Jersey Bankers Association Financial Managers
Society New York/New Jersey Chapter Accounting
Issues UpdateDennis Hild Americas Community
BankersNovember 22, 2005
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Agenda

• Other-Than-Temporary Impairment
• FSP FAS115-1
• FAS 140 Amendment Project
• Accounting for Loan Participations
• Business Combinations
• Allowance for Loan and Lease Losses
• FHLB Stock

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OTTI

• Background on EITF 03-1
• Some Board members expressed a desire to remove
  AFS but decided to focus on bigger projects right
  now
• June 29, 2005 Decided to nullify paragraphs
  10-18 in Issue 03-1 which caused concern over
  tainting of portfolio

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FSP FAS 115-1 and FAS 124-1

• Issued November 3, 2005
• Effective for reporting periods beginning after
  December 15, 2005
• Discusses three steps
• Is it impaired?
• Is the impairment OTTI?
• If yes, recognize impairment loss through
  earning?

Hard Part
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FSP FAS 115-1

• Determination of OTTI is based on
• Severity of impairment
• Duration of recovery period
• Par 14 However, an investor shall recognize an
  impairment loss when the impairment is deemed
  OTTI even if a decision to sell has not been
  made.
• Par 17 - Disclosures on unrealized loss positions
  
• Aggregate and continuous loss positions - 12
  months
• Cause of impairment, severity and duration of
  impairment
• Overall rationale on why no impairment charge
  example on interest rate impairment, and
  assertion on ability and intent to hold until
  recovery

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FSP FAS 115-1 on OTTI

• Should nullify the tainting concept that
  originated from the issuance of Issue 03-1
• See SEC speech at http//www.sec.gov/news/speech/s
  pch120604jmj.htm

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FAS 140 Amendment Loan Participations

• Comment period closed on October 10, 2005 for
  three FAS 140 Exposure Drafts
• New term - participated interests
• Do not need to use QSPE, but expected to get
  legal true sale opinions (Appendix A)

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FAS 140 AmendmentLoan Participations

• Concerns
• Par. 27 in Appendix A - Transfer is isolated
  only if legal analysis would support
• Says legal true sale opinions are often required
• Then says legal opinion is not required if a
  transferor has reasonable basis to conclude it
  would be given
• Absent a standardized agreement, can we really
  accomplish this?

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FAS 140 Amendment Loan Participations

• Definition of recourse
• Some standard representations and warranties in
  participation agreements could cause it to not
  meet definition of participated interest, thus
  always need a QSPE to get sale accounting

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FAS 140 Amendment Loan Participations

• FASB currently evaluating 54 comment letters
• Banking regulators letter recently posted to
  FASB website
• Final standard scheduled to be issued in first
  half of 2006

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Business Combinations

• Two important community bank issues
• Prohibition of allowance carryover for acquired
  loans
• Less transparency, more complexity in disclosures
• Hinders comparability
• Mutual combinations required to use acquisition
  (purchase) accounting

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Business Combinations

• Comment period closed October 28, FASB had
  roundtable on October 27
• 225 comment letters received (FASB IASB)
• Many other concerns
• Valuing and recognizing contingent considerations
• Expense acquisition costs
• Final standard not expected until end of 2006

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Allowance for Loan Lease Losses

• Continuing debates between regulators and
  auditors on levels, methodologies and
  documentation
• FASB has said it does not anticipate taking up
  the issue as a major project
• AcSEC voting on November 16, 2005 on whether to
  issue a proposed, disclosure-only SOP
• Would then need FASB clearance for exposure draft
• SOP would require some meaty disclosures,
  especially for unallocated portions

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Allowance

• Regulatory Initiatives
• Agencies developing common template for examiner
  training (not for public consumption)
• Amending 1993 Interagency Policy Statement
• Rid of benchmarks
• Clarify reserving for OBS items
• QA document (mid 2006?)

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FHLB Stock

• Recent events at some FHLBs have caused some to
  question whether there is impairment of FHLB
  stock that should be recognized (OTTI)
• SOP 01-6 provides that FHLB stock should be
• Classified as a restricted investment security
• Carried at cost, and
• Evaluated for impairment

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FHLB Stock Impairment Guidance

• FHLB stock is generally viewed as a long-term
  investment
• Accordingly, when evaluating for impairment, FHLB
  stock value should be determined based on
  ultimate recoverability of the par value rather
  than by recognizing temporary declines in value

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FHLB Stock Impairment Guidance

• Ultimate recoverability is influenced by
  criteria, such as
• The significance of the decline in net assets of
  the FHLBs as compared to the capital stock and
  the length of time this situation has persisted
• Commitments by the FHLBs to make payments
  required by law or regulation and the level of
  such payments in relation to the operating
  performance of the FHLBs
• The impact of legislative and regulatory changes
  on the institutions and, accordingly, on the
  customers of the FHLBs
• The liquidity position of the FHLBs

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FHLB Stock Impairment Guidance

• Measurement of any impairment value should be
  based on the ultimate recoverability of the par
  value
• Many questions remaining on
• Is there impairment, as defined by SOP 01-6?
• What is impairment value?