Placing Nonaccrual and TDR Loans Back on Accruing Status
In light of many community banks having strong, performing loan portfolios over the past several years, we often receive calls with questions regarding loans that have been placed on nonaccrual status, or have been labeled as Troubled Debt Restructurings (TDS’s), that have become current and now warrant being placed back on accrual status. Accounting rules and Call Report instructions currently require a loan to be placed on a nonaccrual status and to be maintained on a cash basis, if full payment of principal or interest is not expected or if the principal or interest has been in default for more than 90 days unless the asset is both well secured and in process of collection. However, when a loan subsequently becomes current and demonstrates an ability to meet all contractual obligations, restoration to an accrual status may be deemed appropriate.
When a bank puts a loan on nonaccrual status all payments received are applied toward the principal balance. When the loan returns to accruing status these payments made will remain as principal reductions and will continue to result in a book value that is less than the contractual amount of principal that is due. No interest income will be recorded immediately upon returning the loan to accrual status. Rather, the discounted payments that have been applied to the loan principle will be accreted to interest income through the maturity date of the loan resulting in an increased yield on the remaining loan life.
Many core systems currently have the ability to properly account for these situations. However, our firm has seen many situations where bank employees were required to manually adjust their accounting records to properly reflect these loans. If you have any questions or would like some assistance in working through some of these situations, please feel to contact us.