The banking industry is responding to the needs of their customers during the COVID-19 crisis. But many questions have surfaced as to how they should respond to certain situations, what resources are available in this rapidly changing environment, and how to ensure they are complying with the most current regulations. We have compiled some common concerns and considerations, along with the current answers.

    Loans/allowance for loan loss

    Loan modifications/TDR  – updated regulatory guidance for providing loan modifications to borrowers FED/FDIC/FASB

    • Short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief, are not TDRs. This includes short-term (e.g., six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms or other delays in payment that are insignificant.
    • Modifications of loan terms do not automatically result in TDRs.
    • Past due reporting – With regard to loans not otherwise reportable as past due, financial institutions are not expected to designate loans with deferrals granted due to COVID-19 as past due because of the deferral.
    • Nonaccrual status and charge-offs – During the short-term arrangements discussed in this statement, modified/restructured loans generally should not be reported as nonaccrual. As more information becomes available indicating a specific loan will not be repaid, institutions should refer to the charge-off guidance in the instructions for the Consolidated Reports of Condition and Income. 

    Allowance for loan loss (ALL) consideration of qualitative factors and changes for the first quarter (March 31, 2020)

    • Unemployment rates – expected to increase significantly with March 2020 employment report due out in early April (and further April employment report due out in May before 10-Q is filed)
    • Concentration risks of commercial loans affected due to COVID-19 shutdown and further governor-ordered shutdowns or “stay-at-home” orders for “nonessential businesses” (e.g., construction loans, C&I loans, etc.)
    • Enhanced disclosures related to loan customers requesting payment deferrals due to COVID 19 (i.e., number of loan modifications due to COVID 19, loan segments impact, concessions granted, impact on interest income due to payment deferral, modified loans due to COVID 19 that are still accruing interest, etc.)

    Highlight additional potential risks in the qualitative and quantitative disclosures about credit risk and the allowance for credit losses. They should also consider the disclosures related to the basis of inputs and assumptions and estimation techniques used, and how forward-looking information has been incorporated

    Nonaccrual/impaired loans impact

    • Valuations/DCF calculations inputs – need to consider revision especially due to potential negative impact of COVID-19 on commercial borrowers experiencing difficulties

    Interest rates – disclose impact of the Federal Reserve’s reduction of interest rates to near zero on both loans and deposits  

    Impaired/classified loans – evaluate any commercial loan customers classified as substandard/impaired and consider impact of COVID 19 and whether additional impairment is necessary due to customer going out of business  (e.g., businesses dependent on oil and gas industry due to significant liquidity issues of shale drillers) 

    Goodwill/intangible assets impairment

    • While short-term or temporary disruptions may not indicate an impairment, the effects of a prolonged outbreak may cause asset impairments.
    • Goodwill and indefinite-lived intangible assets are tested for impairment at least annually and more frequently if events or changes in circumstances indicate that it is more likely than not that the asset is impaired. ASC 350 provides examples of events and circumstances that should be considered in evaluating whether an interim impairment test is required for both goodwill and indefinite-lived intangible assets.

    Other assets

    Other assets for which impairment or similar guidance exists include:

    • Debt securities (ASC 320 before the adoption of ASU 2016-13 and ASC 326 after the adoption of ASU 2016-13)
    • Equity securities (ASC 320 before the adoption of ASU 2016-01, Financial Instruments— Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Liabilities, and ASC 321 after the adoption of ASU 2016-01)
    • Other investments (ASC 325)
    • Deferred tax asset valuation allowance assessments (ASC 740) – Valuation Allowance

    Fair value measurements

    • For example, fair value measurements may be required in measuring impairment of long-lived assets, goodwill, indefinite-lived intangible assets and equity securities.
    • The objective of a fair value measurement is to determine the price at which an orderly transaction would take place between market participants under the market conditions that existed at the measurement date.

    Financial statement disclosures/ 10-Q considerations

    SEC CF Disclosure Guidance: Topic No. 9

    AICPA financial reporting considerations 

    Risk factors – COVID 19 related

    • A registrant is required to disclose in its quarterly report on Form 10-Q any material new risks or changes in risk factors previously disclosed in its annual report on Form 10-K. In its next quarterly (or annual) report, a registrant should consider whether there have been material changes in its previously disclosed risk factors or whether the company is exposed to any new risk factors, as a result of the coronavirus outbreak.
    • What financial statement areas have been or are expected to be most affected?
    • Can the effects for the first several months of 2020 be quantified or reasonably estimated?

    Subsequent events

    • Loss contingencies
    • ASC 450 requires disclosure of the nature of a contingency when there is at least a reasonable possibility that a loss has been incurred. For contingencies that meet the threshold for disclosure but no liability has been recognized, companies must disclose an estimate of the possible loss or the range of possible losses or state that such an estimate cannot be made.

    Risks and uncertainties

    • ASC 275 requires disclosures about certain risks and uncertainties. They include qualitative disclosures about risks and uncertainties that in the near term (i.e., within one year from the date of the financial statements) could significantly affect the amounts reported in the financial statements or the functioning of the reporting entity.
    • Examples include concentration in the volume of business with a particular customer or supplier or in a market or geographic area.

    Significant estimates (MD&A)

    • The objective of this disclosure is to provide an early warning signal regarding the possibility that certain estimates made by management in preparing the financial statements may change in the near term. Public companies have similar responsibility under SEC requirements to discuss in MD&A known material events and uncertainties that may make historical financial information not indicative of future operations or financial condition.

    Non-GAAP financial measures

    • Companies should be mindful of the SEC’s rules and regulations regarding the use of non-GAAP financial measures and the SEC staff Compliance and Disclosure Interpretations on the use of these measures.
    • For example, a company may choose to disclose a non-GAAP measure that adjusts for certain costs related to an event such as the coronavirus outbreak

    Furlough of employees?

    • If yes, need to quantify potential impact and disclose if not effective as of March 31 (as subsequent event)

    Capital requirements/impact

    SEC filing relief

    • The SEC recently issued an order providing temporary relief from certain filing and regulatory requirements to registrants affected by the outbreak.
    • The order provides an additional 45 days for registrants to file Exchange Act reports (e.g., Forms 10-K and 10-Q) 

    Banking regulatory relief

    • Call report extension 30-day extension for March 31, 2020, call reports
    • FDIC extension FDIC issued Financial Institution Letter (FIL) 30-2020, which provides additional information and guidance to insured depository institutions (IDI) that may need additional time to submit their annual reports under Part 363 of the FDIC Rules and Regulations due to the effects of of COVID-19. The FDIC will not take supervisory action against any IDI as long as the annual report or notification of late filing of its Part 363 annual report is submitted within 45 days of the 90- or 120-day report filing deadline. 
      FIL 30-2020

    Taxes

    Please visit the Baker Tilly website for additional information and updates.

    Net operating losses

    • The Coronavirus Aid, Relief, and Economic Security (CARES) Act temporarily allows a five-year carryback for net operating losses (NOLs) originating in 2018, 2019 and 2020. 
    • The Act also allows a corporation to offset 100% of its taxable income in years beginning before 2021 with NOL carryforwards from prior years (previously the use of NOL carryforwards to post-2017 years was subject to an 80% of taxable income limitation).  Losses from 2018, 2019 and 2020 that are not carried back continue to be carried forward indefinitely.

    Charitable contributions

    • The CARES Act increases the limitation on the corporate charitable contribution deduction to 25% from 10% of taxable income. 
    • The limitation on contributions of food inventory increased to 25% from 15%.

    Alternative minimum tax credit carryforwards

    • The CARES Act accelerates the timing of the refundable credits and allows a corporation to claim a 100% refund of the remaining alternative minimum tax (AMT) credit in 2018 or 2019. An election is available to take the entire amount in 2018. 

    Bonus depreciation for qualified improvement property

    • In a technical correction to the TCJA, the CARES Act fixes the so-called “retail glitch” and treats qualified improvement property (QIP) as 15-year property, eligible for bonus depreciation. This change is retroactive to 2018.

    Employee retention credit

    • Employers with operations fully or partially suspended by orders issued in response to COVID-19 or employers that have suffered a significant decline in gross receipts due to COVID-19 are eligible for an employee retention credit for wages paid from March 13, 2020, to Dec. 31, 2020. The credit is up to 50% of qualified wages, for a maximum credit of $5,000 per employee. The credit can be taken against the employer’s share of Social Security tax. 
    • For employers with 100 or fewer employees, qualified wages are all amounts paid to employees while the employer is experiencing operational or financial difficulties, without considering whether all or a portion of the employees are unable to work due to these coronavirus-related difficulties. For employers with greater than 100 employees, qualified wages are limited to amounts paid to employees while they are unable to work due to coronavirus-related issues.

    Delay of payment of employer payroll axes

    • Employers can delay payment of the employer portion of payroll taxes that are typically due during 2020. The payroll taxes typically due by Dec. 31, 2020, would be required to be remitted in two equal payments paid by Dec. 31, 2021, and Dec. 31, 2022.

    Grace period for qualified retirement plan contributions

    • For employers with a federal income tax return due date of April 15, 2020, the grace period for making qualified retirement plan contributions for the 2019 tax year is extended to July 15, 2020.

    Contribution to an IRA or HSA

    • The deadline for making contributions to an IRA or HSA for 2019 has been extended to July 15, 2020.

    Tax return filing and payment due dates

    The IRS issued Notice 2020-18 which provides the following to all taxpayers, meaning all individuals, trusts, estates, partnerships, associations, companies or corporations regardless of whether or how much they are affected by COVID-19:

    1. For a taxpayer with a federal income tax return or a federal income tax payment due April 15, 2020, the due date for filing and paying is automatically postponed to July 15, 2020, regardless of the size of the payment owed.
    2. The taxpayer doesn't have to file Form 4868 (automatic extensions for individuals) or Form 7004 (certain other automatic extensions) to get the extension.
    3. The relief is for (a) federal income tax payments (including tax payments on self-employment income) and federal income tax returns due April 15, 2020, for the person's 2019 tax year, and (b) federal estimated income tax payments (including tax payments on self-employment income) due April 15, 2020, for the person's 2020 tax year.
    4. No extension is provided for the payment or deposit of any other type of federal tax (e.g., estate taxes) or the filing of any federal information return; however, the filing and payment due date for gift taxes is extended to July 15, 2020.
    5. As a result of the return filing and tax payment postponement to July 15, 2020, from April 15, 2020, that period is disregarded in the calculation of any interest, penalty, or addition to tax for failure to file the postponed income tax returns or pay the postponed income taxes. Interest, penalties and additions to tax will begin to accrue again on July 16, 2020.

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