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Exhibit 99
October 14, 1999
Mr. Michael A. Bean
Executive Vice President
Community Bank
Gentlemen:
We have been engaged to report on the appropriate application of generally
accepted accounting principles to the specific transaction described below. This
report is being issued to Community Bank (the Bank) for assistance in evaluating
accounting principles for the described specific transaction. Our engagement has
been conducted in accordance with standards established by the American
Institute of Certified Public Accountants.
DESCRIPTION OF THE TRANSACTION
The facts, circumstances, and assumptions relevant to the specific transaction
as provided to us by management of the Bank are as follows:
The Bank has a number of auto loans that are in default. The Bank filed an
insurance claim with its fidelity bond insurance carrier to recover the carrying
amount of the loans. The Bank reasonably expects to receive the full carrying
amount of the loans from the insurance carrier.
ACCOUNTING ISSUES
Issue 1. If the loans are individually evaluated for impairment would the
loans be considered to be impaired under Statement of Financial
Accounting Standards No. 114, Accounting by Creditors for Impairment
of a Loan (Statement No. 114)?
Issue 2. If the loans are impaired loans, should the expected insurance
proceeds be included in the loans' expected future cash flows in
measuring impairment under Statement No. 114?
Issue 3. If the insurance proceeds should not be included in measuring
impairment, how should the Bank record the effect of the expected
reimbursement?
APPROPRIATE ACCOUNTING PRINCIPLES
Issue 1. Paragraph 8 of Statement No. 114 states that "a loan is impaired
when, based on current information and events, it is probable that a
creditor will be unable to
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collect all amounts due in according to the contractual terms of the
loan agreement ... all amounts due according to the contractual
terms means that both the contractual interest payments and the
contractual principal payments of a loan will be collected as
scheduled in the loan agreement." Since the loans are in default and
all amounts due according to the contractual terms will not be
collected, the loans are considered to be impaired according
Statement No. 114. The expected proceeds from the insurance claim
are not amounts that are due according to the contractual terms of
the loan agreement, and accordingly, would not be considered in
determining whether the loans are impaired.
Issue 2. Paragraph 13 of Statement No. 114, states that "...a creditor shall
measure impairment based on the present value of expected future
cash flows discounted at the loan's effective interest rate, except
that as a practical expedient, a creditor may measure impairment
based on a loan's observable market price, or the fair value of the
collateral if the loan is collateral dependent. Regardless of the
measurement method, a creditor shall measure impairment based on the
fair value of the collateral when the creditor determines that
foreclosure is probable."
Based on the foregoing, we believe that the Bank should measure
impairment as the difference between the carrying value of the loans
and the present value of the expected future cash flow from the
borrowers. Since the expected proceeds from the insurance carrier
are not legally a part of the expected future cash flows from the
borrowers, and the expected insurance proceeds would not be
considered collateral, such proceeds should not be included in
measuring impairment.
Issue 3. Statement of Concepts No. 6, Elements of Financial Statements (CON6)
defines an assets as "probable future economic benefits obtained or
controlled by a particular entity as a result of past transactions
or events." Based on the facts of this case, management expects to
receive a full recovery of the loss from its insurance carrier. This
right to reimbursement represents a future economic benefit.
Accordingly, we believe that the Bank should recognize an asset
equal to the expected proceeds. The related income statement impact
would be included as a component of non-interest income.
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The ultimate responsibility for the decision on the appropriate application of
generally accepted accounting principles for an actual transaction rests with
the preparers of the financial statements who should consult with their
continuing accountants. Our judgement on the appropriate application of
generally accepted accounting principles for the described specific transaction
is based solely on the facts provided to us as described above; should these
facts and circumstances differ, our conclusions may change.
Very truly yours,
KPMG, LLP
