In August 2009, the staff of the Division of Corporation Finance of the Securities and Exchange Commission (the “Staff”) sent a letter1 to certain public companies describing a number of disclosure issues to be considered in preparing Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”).2 The letter identifies a number of common MD&A disclosure suggestions that the Staff has provided to financial institutions regarding disclosure to consider providing with respect to provisions and allowances for loan losses. Public companies that did not receive such a comment letter should nevertheless consider the materiality of the issues raised by the Staff.
Higher-Risk Loans. Higher-risk loans, which include option adjustable rate mortgage, or ARM, products, junior lien mortgages, high loan-to-value ratio mortgages, interest-only loans, subprime loans and loans with initial teaser rates, can have a greater risk of non-collection than other loans. Therefore, additional disclosure may be necessary to allow a reader to understand the risks associated with a loan portfolio and to evaluate any known trends or uncertainties that could have a material impact on results of operations. The items to consider disclosing are:
Changes in Practices. Changes in practices used to determine the allowance for loan losses can impact the amount of the allowance and can also impact an understanding of the presented credit quality information. If a practice is changed, the company should discuss why the change was made and quantify the effect of the change, if possible. If a company does make a change in practice, the Staff guidance highlights the following items to consider disclosing:
Declines in Collateral Value. If a decline in the value of assets serving as collateral for loans may impact the ability to collect on those loans, the items to consider disclosing are:
Other. The Staff guidance highlights the following additional items to consider disclosing to the extent relevant and material:
Finally, the Staff guidance points out that it would be inconsistent with generally accepted accounting principles to delay recognizing credit losses that can be estimated based on current information and events.
In reviewing the Staff guidance set forth in the form letter, the following should also be considered:
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1. A form of the letter is available at http://www.sec.gov/divisions/corpfin/guidance/loanlossesltr0809.htm.
2. Item 303 of Regulation S-K.
3. Financial Accounting Standards Board Financial Accounting Standards Statement 141 (revised 2007), Business Combinations.
4. American Institute of Certified Public Accountants Statements of Position 03-3, Accounting for Certain Loans of Debt Securities Acquired in a Transfer.
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