FDIC limit on holding ORE is 10 years unless state has lower limit.
When selling ORE, does subsequent loss go to other expenses or reserve account?
If held for a brief period (3-6 months?) then through the ALLL.
If held longer, it is an other operating expense (loss on sale of ORE)
Timeframe: 3-6 Months is considered a short holding enough holding period (????)
The bank had a loan at $90M, received property with deed in lieu of foreclosure. Fair value is $75M. Three days later, the bank sold the property for $80M. What is the net adjustment to the ALLL.
Decrease by $10M
Loan with remaining balance of $200M taken into ORE. Appraised value at the time it was transferred was $125M. Sold for $140M five days later. Net effect on the ALLL?
(a) $ 75M
(c) $ 0M
(d) $200M
Can one take ORE gains previously written off to ALLL if sale is within 5 days? YES
A bank takes a $150M property into ORE via deed-in-lieu. The appraised value is $75M. Three days later the bank sells the property for $90M. What is the net affect of the ALLL?
Charge off of $60M. Call report glossary: if an asset is sold shortly after it was received in foreclosure or repossession, the value received in sale shall be substituted for the fair value estimated at time of foreclosure and adjustment made to loss charged to the ALLL.
Bank took in ORE. Loan balance $80M; FV $70M when taken in; $10M loss taken through ALLL. Property sold one year later for $80M. What is correct entry to make when ORE is sold?
Credit ALLL $10M and ORE $70M; debit cash $80M
Credit ORE $70M and income $10M; debit cash $80M
Debit ALLL $80M; credit income $10M and ORE $70M
Do nothing. Just hope the regulators don't find out.
The bank had a loan at $90M. Received property with deed in lieu of foreclosure. Fair value is $70M. Sold property for $75M, financed with below-market interest. How is this booked?
a. Recognize Loss $20M through ALLL, recognize $5M gain immediately on sale of ORE
b. Recognize Loss $20M through ALLL, defer $5M gain and recognize over the life of the loan.
c. Recognize Loss $15M sale of ORE
$20M through ALLL. Difference between new loan amount and "economic value" - treated as unearned discount. Asset shown net of unearned discount -- which is reduced periodically as it is earned over the life of the new loan. (If economic value is less than carrying value, additional loss should be recognized.)
ORE - one piece of other real estate is on books for $50M, you have 3 different offers for $30M each, the bank refused to sell stating it is worth book value. Classification?
$30M Substandard, $20M Loss.
In evaluating ORE, examiner will:
1) ascertain reason for acquisition
2) analyze carrying value in relation to appraised value, "asking" price, and offers received,
3) determine length of time property held, intentions for disposal, and reasons why not sold, and 4) other -- title, liens, taxes, etc. Any portion of carrying value in excess of AV should be classified loss.
Bank has ORE that it puts for sale through an agent. Agent is going to charge a 5% commission. Bank expects to get BV for property. How accounted for? (don't recognize commission until happens, set up general valuation to ORE and run through expenses, book charge as liability, expense ...) b
After foreclosure, each parcel must be carried at the lower of its fair value less the estimated costs to sell the asset or its "cost." If fair value less selling costs is lower than "cost" (what on books for), the deficiency must be recognized as valuation allowance against the asset which is created through charge to expense.
ORE taken in. Loan balance $100M, AI $5.5M, RE taxes $2M, legal fees $2.5M. Fair value is $115M - what is value of ORE on books? ($100M, $105.5M, $107.5M, $110M)
ORE booked at lesser of fair value or recorded amount of loan at time of foreclosure. Recorded amount of loan includes: unpaid balance of defaulted loan, any senior debt, and any completion and holding costs (RE taxes, maintenance + insurance). Legal fees and other direct costs should be expensed as
Scenario: Piece of ORE taken in. Old AV of $5MM. Question gives you income, expense, and cap rate. Classify?
· Pass
· II
· New appraisal amount II, difference IV.
The BV of a loan is $5MM and management has taken it into ORE, but was still waiting for an appraisal. However, management told you that vacancy rates were 10%, the average rental rate was $400 (150 unit apartment building), and you were given a list of expenses. There is a 10% cap rate. What amount is classified...the $5MM BV or the figured Value (II) with any deficiency (IV)? Can you appraise the value yourself and require management to take a loss? What about if they are giving you the numbers?
Make a determination of the current BV and list as Sub with the remaining amount Loss.
Mgmt has taken property to ORE. There is an appraisal. What are the proper classifications if you discount the appraisal and arrive at a different valuation - is this allowable?
Yes, we are allowed to discount appraisal and determine a BV. This cannot be the sole basis for classification, but since these are ORE property - they are obviously troubled. Sub + Loss
A property is taken into ORE on 4-15-95. The outstanding balance as of that date was $100,000 and the appraised value was $130,000. The bank paid $2,000 in property taxes on 3-15-95 and $5,000 in legal fees on 4-30-95. Loan origination fees totaled $3,000. What amount should the property be booked at?
Property taxes should have been expensed as incurred because they were paid prior to taking the parcel into ORE. Legal fees should never be capitalized to the cost of the property. The loan origination fees should be deferred and amortized in a separate account, in accordance with FASB 91.
Three phases of ORE? (3.5-1)
ORE - If bank has a sales agreement equal to the book value, how should it be classified?
Pass - If it is signed by a credit-worthy borrower. If financed by the bank, the credit may need to still be reported as ORE until the down payment threshold is met.
Needs to met criteria of a bona fide sale: purchaser equity is satisfactory, default is not present or imminent, & purchaser is responsible.
What happens if the bank assumes a first lien on a property taken in foreclosure - recordkeeping, other liabilities, mortgages increase ORE balance?
Bank increases ORE balance and tries to sell to pay for 1st and 2nd of their own and must list mortgage indebtedness as a liability. (Bought out 1st to gain access to 2nd)
Depends on whether it's partial or full satisfaction of debt.
Partial = Liability
Full = Loss
During an examination of a bank, the examiner discovers during ORE review that the bank has received and rejected several offers on the sale of a particular parcel. The property was recently appraised, with a valid appraisal, at an amount significantly below book value. All of the offers were comparable to the fair market value in the appraisal. In the ECC page, the EIC instructed the bank to not defer writedowns and losses on ORE, to write the property to the appraised fair market value, to reflect the transactions accurately in the GL and Call Report, and to accept the next offer that comes in at fair value on that parcel. The examiner violated which of the following accepted examination procedures for Page 1?
Scenario: Loan originated at $100M. At time of foreclosure, loan had balance of $95M, property had AV of $98M (in-house appraisal 24 months old). The bank has a contract for $96M and the examiner thinks the sale will actually happen. How do you classify ORE?
$95M Pass