Returning TDRs to Accruing Status
As loan portfolios generally continue to improve within the banking industry, banks are seeing that many of the loans that have been restructured, categorized and reported as troubled debt restructurings (TDRs) have begun to illustrate sustained levels of performance. The questions then arise, at what point can these currently performing loans be returned to accrual status? And do these loans continue to be impaired now that they have been performing?
As long as a nonaccuring TDR loan has demonstrated that the loan is current, there is no doubt about the future collectability of the loan, and there has been a demonstration of performance, bank management should perform a well documented analysis to assess the overall likelihood of collection of the full principal and interest amounts under the new terms of the modified agreement. If management determines that these requirements have been met, and that the loan has satisfied the requirements to be returned to accrual status, these loans should be returned to accruing status. The return to accruing status generally should not have any immediate impact to interest income recognition. Generally, the bank should record a discount for the amount of interest that was applied toward the principal balance during the nonaccrual status of the loan, and the discount is then accreted to income over the remaining term of the loan.
Another issue that arises, if the loan is now accruing, is the loan still deemed to be impaired. Once a loan has been designated as a TDR, it will typically always be included in the evaluation and evaluated for impairment with a banks ASC 310 impairment model until the loan is either paid in full, settled or sold. However, a loan that has returned to accruing status, has an interest rate consistent with market rates at the time of restructuring, and has been determined to be in compliance with the new modified terms, is not required to be reported in call reports or disclosed after the year in which the restructuring took place and the loan returned to accruing status. As a result, even though the bank may not be reporting or disclosing TDRs, these loans will continue to be deemed impaired for internal monitoring purposes and as mentioned above, continue to require impairment analysis as part of the ASC 310 evaluation.