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Community Banks | COVID-19 Considerations

[ Updated December 22, 2020 | 2:41pm ]

We are experiencing an unprecedented time: exponential growth of Covid-19 (Coronavirus) cases, social distancing, and growing unemployment. As the United States economy and daily life is being reshaped by COVID-19, maintaining “normal” business functions during these times is a challenge.

At YHB we work with Community Banks across the region of all shapes and sizes. Over the past few days we have been in touch with many of our clients as we work together to lead through this pandemic. Below we have included some ideas and updates to help your financial institutions during this time.

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Questions to ask when making COVID-19 Risk Disclosures

Efforts to contain the spread of the novel coronavirus (COVID-19) have led to suspension of many economic activities, putting unprecedented strain on businesses. The Securities and Exchange Commission (SEC) recently issued guidance to help public companies provide investors and other stakeholders with useful, accurate financial statement disclosures in today’s uncertain marketplace.

Loan Modification Considerations

  • Troubled debt restructuring (TDR) analysis
    • Insignificant delay in timing of payments is not a concession (ASC 310-40-15-17)
      • Amount of restructured payments subject to the delay is insignificant relative to the unpaid principal or collateral value of the debt and will result in an insignificant shortfall in the contractual amount due.
      • The delay in timing of the restructured payment period is insignificant relative to any of the following: frequency of payments, debt’s original contractual maturity, debt’s original expected duration.
    • Documentation of the rationale for the conclusion is paramount given the uncertainty in the current environment when these decisions are being made.
    • General consensus is that short term modifications are preferred to allow for a subsequent analysis in the near future of how temporary the current conditions are to the economics of business. Longer term modifications made based on present assumptions/facts/circumstances are more likely to have the conclusions criticized based on hindsight afforded to auditors and regulators.
      • Subsequent modification decisions should accumulate the impacts of all modifications to determine whether the subsequent modification qualifies as a TDR and should not be determined on the subsequent modification alone.
    • Risk rating adjustments
      • Payment deferrals likely warrant downgrade to special mention as affected loans should be more closely monitored in the near term.
      • Upon end of modification term, more permanent risk rating decision depending on the current circumstances, return to original terms and customer performance.
    • Liquidity stress testing
      • Consider the need to perform an analysis of liquidity to determine the level of modification requests the Bank can entertain based on impacts to cashflow and capital.

Allowance for Loan Losses

  • Impaired loans where the Bank has selected the present value of expected future cash flows as the method of assessing impairment should re-evaluate the support that the regular payment remains an expected cash flow.
    • All qualitative factors should be re-evaluated by segment in light of the uncertainty and changes in the lending and economic environment.

Triggering Event for Goodwill Impairment Consideration

  • ASC 350-20-35-3C lists the following when evaluating whether an interim impairment test may be required (examples and not all-inclusive):
    • Company’s stock price and its market capitalization suggest that the fair value of a reporting unit is less than its carrying value
    • Recent news articles or analysts’ reports indicate a decline or expected decline in the performance in the company’s market or industry
    • Earnings remain at a level below forecasted levels, indicating that goodwill may not be recoverable
    • The company has experienced lower-than-expected earnings or expects lower earnings in the next quarter or year
    • The company has signaled to the market that earnings expectations for the quarter or year have been revised downward
    • There is sustained decrease in the company’s stock price (in either absolute terms or relative to the stock prices of its peers)
    • Macroeconomic indicators
    • None of the factors individually results in a conclusion, but rather, the company weighs positives and negatives for a holistic evaluation of all events since the most recent quantitative impairment test.
    • Weighting should be done in a manner that applies more significance to those considerations that most affect the reporting unit’s fair value.
    • If the analysis, documentation and conclusion drawn does not indicate that it is more likely than not (i.e. greater than 50%) that the fair value is in excess of the carrying value of the reporting unit, then a quantitative impairment analysis is required under ASC 350.
    • The SEC staff has said it does not expect a registrant to determine its market capitalization using a point-in-time market price as of the date of its goodwill impairment assessment. Instead, the registrant may consider recent trends in its stock price over a reasonable period leading up to the impairment testing date. Typically a reasonable period is a short period of time but the registrant should not ignore a recent decline in market capitalization.

FDIC Resources for Bankers

According to the FDIC, they are “…working with federal and state banking agencies, as well as, financial institutions to consider all reasonable and prudent steps to assist customers in communities affected by the Coronavirus (COVID-19).” The agency also stated it is communicating with regulatory agencies and encouraging financial institutions to work with customers impacted by the coronavirus.

FDIC Urges FASB to Delay Certain Accounting Rules

In a press release issued by the FDIC on March 19, 2020, the agency revealed it has sent a formal letter to to the Financial Accounting Standards Board (FASB) “…urging a delay in transitions to and exclusions from certain accounting rules.” The letter focused on three primary areas of relief for banks:

  • Excluding COVID-19-related modifications from being considered a concession when determining a troubled debt restructuring (TDR) classification;
  • Permitting financial institutions currently subject to the current expected credit losses (CECL) methodology an option to postpone implementation of CECL given the current economic environment; and
  • Imposing a moratorium on the effective date for those institutions that are not currently required to implement CECL to allow these financial institutions to focus on immediate business challenges relating to the impacts of the current pandemic and its effect on the financial system.

In the letter the FDIC stated delaying some of these accounting rules would allow the banking industry to focus their efforts on caring for their employees, customers and, “allow banks to help their communities at this time of need.”

Interagency Statement on Loan Modifications

A joint effort by financial agencies released the Interagency Statement on Loan Modifications and Reporting by Financial Institutions Working with Customers Affected by the Coronavirus. The effort was led by The FDIC, the Board of Governors of the Federal Reserve System (FRB), the Office of the Comptroller of the Currency, the National Credit Union Administration, the state banking regulators, and the Consumer Financial Protection Bureau.

30-Day Grace Period on Call Reports for the First Quarter of 2020

On March 25, 2020 the FDIC along with several other federal banking agencies issued a press release stating they will not take action against any institution for submitting its March 31, 2020 Consolidated Reports of Condition and Income after the official filing deadline. The release did stipulate that the report must still be submitted within 30 days. The grace period allows banks experiencing adverse effects from COVID-19 some relief in filing regulatory reports. It’s important to note this is not an extension, rather a 30 day grace period only. If institutions have the ability to file on time, they should.

SEC Resources

The SEC has also started providing guidance for banks as they adapt to this pandemic. The commission transitioned to telework on March 10, 2020 and has since remained operational. Beginning in March the SEC has released a flurry of statements and updated guidance which can be found at the link below.

SEC Extends Conditional Exemptions From Reporting and Proxy Delivery Requirements

In a Press Release issued by the SEC on March 25, 2020, “the Securities and Exchange Commission announced that it is extending the filing periods covered by its previously enacted conditional reporting relief for certain public company filing obligations under the federal securities laws, and that it is also extending regulatory relief previously provided to funds and investment advisers whose operations may be affected by COVID-19.”

The release covered three primary areas:

  • Public Company Relief
    • The statement states, subject to certain conditions, public companies will have a 45-day extension to file certain disclosure reports that would normally be due between March 1 and July 1, 2020.  The new order supersedes and extends the Commission’s Original Order of March 4, 2020. 
    • They continue, “Among other conditions, companies must continue to convey through a current report a summary of why the relief is needed in their particular circumstances for each periodic report that is delayed.” If the Commission deems appropriate, additional relief may be provided. 
  • Investment Fund and Adviser Relief
    • The Commission’s initial orders allowing additional time for investment funds and advisers to hold in-person meetings was expanded for the filing periods covered by the Commission’s Original Orders of March 13, 2020.
    • Entities must still notify the Division staff and/or investors, as applicable, of the intent to rely on the relief. However, entities no longer need to describe why they are relying on the order or estimate a date by which the required action will occur. 
  • Public Company Disclosure Guidance
    • The Division of Corporation Finance issued Disclosure Guidance Topic No. 9. Additional information on this Disclosure can be found from the link above and is summarized in the next section.

Division of Corporation Finance
Securities and Exchange Commission

On March 25, 2020 the Division of Corporation Finance Securities and Exchange Commission released CF Disclosure Guidance: Topic No. 9. The guidance provides some clarity on the Division’s views regarding disclosure and other securities law obligations that companies should consider in relation to COVID-19. Particular the following areas:

  • Assessing and Disclosing the Evolving Impact of COVID-19
  • Need to Refrain from Trading Prior to Dissemination of Material Non-Public Information
  • Reporting Earnings and Financial Results

AICPA’s Financial Reporting Considerations

The American Institute of Certified Public Accountant’s Center for Plain English Accounting released a report addressing financial reporting matters that should be considered in light of the COVID-19 Pandemic. The report covers several specific areas, including:

  • Subsequent Events
  • Accounting Estimates
  • Asset Impairment
  • Loss Contingencies
  • Going Concern
  • Leases
  • Variable Consideration Under FASB ASC 606, Revenue from Contracts with Customers
  • Risks and Uncertainties Disclosures
  • Hedging Relationships
  • Financial Statements Prepared Under a Special Purpose Framework (SPF)
  • Auditor and Accountant Reporting – Emphasis of Matter

CARES Act provides option to delay CECL reporting

The Coronavirus Aid, Relief and Economic Security (CARES) Act was signed into law on March 27. Among other economic relief measures, the new law allows large public banks to temporarily postpone the controversial current expected credit loss (CECL) standard. Here are the details.

Updated accounting rules

The Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, in response to the financial crisis of 2007–2008. The updated CECL standard relies on estimates of probable future losses. By contrast, existing guidance relies on an incurred-loss model to recognize losses.

In general, the updated standard will require entities to recognize losses on bad loans earlier than under current U.S. Generally Accepted Accounting Principles (GAAP). It’s scheduled to go into effect for most public companies in 2020. In October 2019, the deadline for smaller reporting companies was extended from 2021 to 2023, and, for private entities and nonprofits, it was extended from 2022 to 2023.

Option to delay

Under the CARES Act, large public insured depository institutions (including credit unions), bank holding companies, and their affiliates have the option of postponing implementation of the CECL standard until the earlier of:

  • The end of the national emergency declaration related to the COVID-19 crisis, or
  • December 31, 2020.

Many public banks have made significant investments in systems and processes to comply with the CECL standard, and they’ve communicated with investors about the changes. So, some may decide to stay the course. But many large banks are expected to take advantage of the option to delay implementation.

Congress decided to provide a temporary reprieve from implementing the changes for a variety of reasons. Notably, the COVID-19 pandemic has created a volatile, uncertain lending environment that may result in significant credit losses for some banks.

To measure those losses, banks must forecast into the foreseeable future to predict losses over the life of a loan and immediately book those losses. But making estimates could prove challenging in today’s unprecedented market conditions. And, once a credit loss has been recognized, it generally can’t be recouped on the financial statements. Plus, there’s some concern that the CECL model would cause banks to needlessly hold more capital and curb lending when borrowers need it most.

Stay tuned

So far, the FASB hasn’t delayed the CECL standard. But the COVID-19 crisis has front-loaded concerns about the CECL standard, prompting critics in both the House and Senate to step up their efforts to block the standard. Contact us for the latest developments on this issue.

© 2020

We will continue to share helpful tips and resources on key issues as they develop to ensure you are prepared to navigate these unprecedented issue.

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