Trouble Debt Restructuring / Non-Accrual Designation
By: Stephen Rountree
During August 2021, the Office of the Comptroller of the Currency issued its Bank Accounting Advisory Series1. The 306 page document includes very detailed Q&A addressing Troubled Debt Restructures as well as Non-Accrual Loans. The TDR discussion includes forty six questions, and the Non-Accrual discussion encompasses thirty two questions. The document is a quality reference source of accounting treatment for the above ‘hot topic’ items.
For TDR, Question 45 addresses: Is it possible that a modification of a performing loan is a TDR?
Yes. A borrower may be contractually current when the bank modifies the loan and the modification will be a TDR, if it meets the accounting definition… This may occur, for example, when the bank modifies a variable-rate loan after concluding that a borrower will be unable to meet higher payments when the rate resets to a higher interest rate. In this example, the modification is considered a TDR if the bank concludes that (a) the borrower is experiencing financial difficulties, and (b) the modification is a concession to the borrower that is granted for economic or legal reasons related to the borrower’s financial difficulties….If the TDR designation has been removed (i.e., the conditions above were met) but the loan is subsequently determined to be impaired, then the impairment on the loan should be measured under ASC 310-10.
Question 46 addresses the following scenario: A bank properly accounted for a modified loan as a TDR. The bank subsequently restructures the loan at current market terms (i.e., no concession) and the borrower is no longer experiencing financial difficulties. Does the bank have to continue to account for the subsequently restructured loan as a TDR?
It depends. The facts and circumstances of each subsequent restructuring of a TDR should be carefully evaluated to determine the appropriate accounting. The staff will not object to a bank no longer treating a loan as a TDR if:
For Non-Accrual loans, Question 13 addresses: A bank takes a partial charge-off on a loan, because it believes that part of the obligation will be uncollectible ultimately. The loan is also placed on nonaccrual status. One year later, with two years remaining in the loan term, the borrower’s financial condition improves dramatically. The loan is brought contractually current, and the bank now fully expects to collect the original contractual obligation, including the amount previously charged off. May the loan be returned to accrual status?
Yes. If the doubt about full collectability, previously evidenced by the charge-off, has been removed, the loan meets the criteria in the call report for return to accrual status.
Non-Accrual loans Question 14: A loan with a borrower is past due in principal and interest. The bank takes a partial charge-off on the loan, because it believes that it will be unable to collect part of the obligation. The loan is also placed on nonaccrual status. One year later, the borrower’s financial condition improves dramatically. The borrower has made regular monthly payments and is paying additional amounts to reduce the past due amount. Although the bank now fully expects to collect the original contractual obligation, including the amount previously charged off, the loan is not yet contractually current. May this loan be returned to accrual status?
Yes. A loan, on which the borrower has resumed paying the full amount of the scheduled contractual obligation, may be returned to accrual status, even though it has not been brought fully current, if:
1 https://www.occ.treas.gov/publications-and-resources/publications/banker-education/files/pub-bank-accounting-advisory-series.pdf
For TDR, Question 45 addresses: Is it possible that a modification of a performing loan is a TDR?
Yes. A borrower may be contractually current when the bank modifies the loan and the modification will be a TDR, if it meets the accounting definition… This may occur, for example, when the bank modifies a variable-rate loan after concluding that a borrower will be unable to meet higher payments when the rate resets to a higher interest rate. In this example, the modification is considered a TDR if the bank concludes that (a) the borrower is experiencing financial difficulties, and (b) the modification is a concession to the borrower that is granted for economic or legal reasons related to the borrower’s financial difficulties….If the TDR designation has been removed (i.e., the conditions above were met) but the loan is subsequently determined to be impaired, then the impairment on the loan should be measured under ASC 310-10.
Question 46 addresses the following scenario: A bank properly accounted for a modified loan as a TDR. The bank subsequently restructures the loan at current market terms (i.e., no concession) and the borrower is no longer experiencing financial difficulties. Does the bank have to continue to account for the subsequently restructured loan as a TDR?
It depends. The facts and circumstances of each subsequent restructuring of a TDR should be carefully evaluated to determine the appropriate accounting. The staff will not object to a bank no longer treating a loan as a TDR if:
- At the time of the subsequent restructuring the borrower is not experiencing financial difficulties, and;
- Under the terms of the subsequent restructuring agreement, no concession has been granted.
For Non-Accrual loans, Question 13 addresses: A bank takes a partial charge-off on a loan, because it believes that part of the obligation will be uncollectible ultimately. The loan is also placed on nonaccrual status. One year later, with two years remaining in the loan term, the borrower’s financial condition improves dramatically. The loan is brought contractually current, and the bank now fully expects to collect the original contractual obligation, including the amount previously charged off. May the loan be returned to accrual status?
Yes. If the doubt about full collectability, previously evidenced by the charge-off, has been removed, the loan meets the criteria in the call report for return to accrual status.
Non-Accrual loans Question 14: A loan with a borrower is past due in principal and interest. The bank takes a partial charge-off on the loan, because it believes that it will be unable to collect part of the obligation. The loan is also placed on nonaccrual status. One year later, the borrower’s financial condition improves dramatically. The borrower has made regular monthly payments and is paying additional amounts to reduce the past due amount. Although the bank now fully expects to collect the original contractual obligation, including the amount previously charged off, the loan is not yet contractually current. May this loan be returned to accrual status?
Yes. A loan, on which the borrower has resumed paying the full amount of the scheduled contractual obligation, may be returned to accrual status, even though it has not been brought fully current, if:
- All principal and interest amounts contractually due are reasonably assured of repayment within a reasonable period of time, and;
- There is a sustained period of repayment performance by the borrower.
1 https://www.occ.treas.gov/publications-and-resources/publications/banker-education/files/pub-bank-accounting-advisory-series.pdf