1. 1 Generally Accepted Accounting Principles (GAAP) Guidance FAS 5 - Accounting for Contingencies (1973) (as amended) FAS 5 - Accounting for Contingencies (1973) (as amended) FAS 114 - Accounting by Creditors for Impairment of a Loan (1993) (as amended) FAS 114 - Accounting by Creditors for Impairment of a Loan (1993) (as amended) Website: Accounting Research Manager accessible from the FDIC Library’s homepage

2. 2 GAAP Guidance - FAS 114 Guidance on recognition and measurement of impairment Guidance on recognition and measurement of impairment Applies to individual loans identified as impaired, not to large groups of smaller-balance homogeneous loans collectively evaluated for impairment Applies to individual loans identified as impaired, not to large groups of smaller-balance homogeneous loans collectively evaluated for impairment Three methods to measure impairment Three methods to measure impairment

3. 3 GAAP Guidance - FAS 114 Definition of Impairment: An individually reviewed loan is deemed to be impaired when, based on current information, it is probable that a creditor will be unable to collect all amounts due (principal and interest) in accordance with the contractual terms of the loan agreement.

4. 4 GAAP Guidance - FAS 114 Impairment measured using these methods: General Rule per FAS 114: Expected future cash flows discounted at loan’s effective interest rate General Rule per FAS 114: Expected future cash flows discounted at loan’s effective interest rate Practical Expedients: Practical Expedients: –Fair value of collateral, less estimated costs to sell (for collateral dependent loans only) or –Observable market price of loan

5. 5 GAAP Guidance – FAS 114 Measurement of Impairment: A valuation allowance must be established for the amount by which the value calculated using one of the three impairment measurement methods is less than the recorded investment in the loan