COVID 19 Tax and Other Relief Provisions for Financial Institutions

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Community Bank Leverage Ratio

The office of the Comptroller of the Currency (OCC), along with the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation (collectively, the agencies) have approved an interim final rule as of April 6, 2020 that makes temporary changes to the community bank leverage ratio framework (CBLR framework), pursuant to section 4012 of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, and a second interim final rule that provides a graduated increase in the community bank leverage ratio requirement after the expiration of the temporary changes implemented pursuant to section 4012 of the CARES Act. Note: This interim final rule applies to qualifying community banks with less than $10 billion in total consolidated assets that meet other criteria and opt into the CBLR framework.

Under the rule, the CARES Act reduces the Community Bank Leverage Ratio (CBLR) to 8% from the previous minimum of 9%. The two interim final rules modify the CBLR framework in the following ways:

  • The leverage ratio requirement will be 
    • 8 percent or greater, effective the second quarter of 2020.
    • greater than 8.5 percent, effective January 1, 2021.
    • greater than 9 percent, effective January 1, 2022.
  • A bank that elects to use the CBLR framework but temporarily fails to meet all of the qualifying criteria, including the leverage ratio requirement, will have a two-quarter grace period to return to compliance, provided that the bank maintains a leverage ratio of 
    • 7 percent or greater, effective the second quarter of 2020.
    • greater than 7.5 percent, effective January 1, 2021.
    • greater than 8 percent, effective January 1, 2022.
  • A bank that that fails to meet the grace period minimums must immediately apply the risk-based capital standards.

S-Corporation Distributions

An interim rule permits S-Corporation banks to pay distributions to their shareholders despite being in the “buffer zone” in relation to Basel III.  Prior to the interim rule, banks who wish to make these distributions while being in the “buffer zone” would have to obtain prior approval from the applicable bank regulators.

Tax Credits and Payroll Tax Considerations

The Employee Retention Credit (ERC) is a refundable credit of up to $5,000 per employee for those eligible employers who retained their employees during COVID-19.  The time period includes wages paid from March 13, 2020 to December 31, 2020.  Note that employers who participated in the Paycheck Protection Loan (PPP) program are ineligible for the credit.  Institutions will have to show either a 50% reduction in 2020 gross receipts compared to the same quarter in 2019 or whose operations have been fully or partially suspended as a result of a government order limiting commerce, travel or group meetings due to COVID-19. Click here for more information. 

In addition to the ERC, banks will have the opportunity to defer payments of the employer portion of Social Security taxes on employee wages incurred from March 27, 2020 through December 31, 2020.  Half of the amount deferred would be payable by December 31, 2021 and the other half by December 31, 2022.  Note that employers are ineligible for this deferral for those who have a PPP loan debt forgiven (up to the point of forgiveness the deferral is available).  The amount that is deferred would have to be recorded on the balance sheet as the amount has still be incurred. Click here for more information. 

Other areas to focus on for tax savings is changes in the net operating loss rules (NOLs) generated in 2018, 2019, and 2020.  These losses can be carried back five years.  Not only can this provide permanent tax savings by applying the NOLs to years in which the tax rates are higher but it can also reduce the deduction from capital on the Call Report is the deferred tax asset is converted to an income tax receivable.   Lastly, deferred tax assets that are attributable to NOLs are not included in Tier One capital under regulatory guidelines.  For banks that have leasehold improvements the CARES Act updated tax depreciation on leasehold improvements to be eligible for 100% bonus depreciation starting in 2018. Click here for more information. 

Please contact a Brady Martz financial institution team member with additional questions.  Our team is here to help.  

 

Borrower Accounting for a Forgivable Loan Received Under the Small Business Administration Paycheck Protection Program (PPP)

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While much attention has been given to the PPP loan program, including the effects on the lenders, many borrowers have posed questions on how to record the loan and related forgiveness.  The Financial Accounting Standards Board has provided some clarity on the issue to help borrowers record and report the transaction appropriately.  Borrowers with financial statements that include footnotes should disclose in the accounting policy section the method selected as well as include relevant footnote information that is consistent to the policy selected.  See below for a summary of the options available.

Options available to both business entities and not-for-profits

The borrower could account for the transaction as debt under FASB Accounting Standards Codification (ASC) 470, Debt.  Under this method, the borrower would record the amount received from the program as debt and accrue interest at the stated rate (1%).  The borrower should not impute additional interest to account for the difference between the stated rate and the market rate. This is due to transactions where interest rates are prescribed by governmental agencies are excluded from the guidance in FASB 836-30 on imputing interest. The loan would remain as a liability until either 1) the loan is, in part or wholly, forgiven and the debtor has been “legally released” or 2) the debor pays off the loan to the creditor. Once the loan is, in part or wholly, forgiven and legal release is received, a nongovernmental entity would reduce the liability by the amount forgiven and record a gain on extinguishment.

Business entities that are not classified as not-for-profits can also adopt guidance that non-for-profits would adopt for these transactions. The guidance is addressed in FASB ASC 958-605.  Under this guidance, the borrower would record the inflow as a refundable advance (i.e. conditional contribution).  The borrower would then reduce the refundable advance and recognize the contribution once the conditions of release have been substantially met or explicitly waived.

Options available to both business entities only (not-for profits are excluded)

Borrowers have the option of accounting for the inflow under guidance contained in IAS (International Accounting Standards) 20 as a governmental grant.  The borrower would account for the cash inflow from the loan as a deferred revenue liability.  Once there is reasonable assurance (similar to the “probable” threshold in U.S. generally accounted principles) that the conditions will be met, the liability would be reduced with an offset to earnings on a systemic basis over the periods in which the grant related cost are incurred.  In the income statement the amount would be recorded as a credit to “other income” or a reduction to related expenses (such as compensation expense – costs in which were incurred in related to obtaining the loan/grant).

Borrowers also have the option of following guidance in FASB ASC 450-30, which is the model for gain contingency recognition.  Under this model, the earnings impact of a gain contingency is recognized when all the contingencies related to receipt of the assistance have been met and the gain is realized or realizable. As applied to forgivable loans received under the PPP, a business entity would initially record the cash inflow from the PPP loan as a liability. 

The proceeds from the loan would remain recorded as a liability until the grant proceeds are realized or realizable, at which time the earnings impact would be recognized.

Please contact a Brady Martz financial institution team member with additional questions.  Our team is here to help. 

 

New Regulatory Reporting Changes for Financial Institutions: June 2020

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New Data for June 2020
New to June 2020 call reports will be data surrounding the Federal Reserve Lending Facilities, the Paycheck Protection Program (PPP), and loan modifications under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act).

Loan Modifications
Items added include the number of loans with modifications under Section 4013 of the CARES Act and the outstanding balances of loan modifications under Section 4013 of the CARES ACT.

PPP Loans
Items added include the total number of PPP loans, total PPP loan balances, PPP loans pledged to PPPLF (Federal Reserve Paycheck Protection Program Liquidity Facility), and average PPP loans pledged to the PPPLF.

Note: Banks and credit unions have different call reporting requirements. The above items are examples of disclosures that have aspects that affect both types of institutions.

Capital Treatment for PPP Loans (Banks)
The call report has been revised to mitigate the effects of PPP loans on regulatory capital. The following revisions have been made:

  • Excluding PPP loans from total risk-based assets of advance approach banks.
  • Excluding PPP loans pledged to the PPPLF from Total Leverage Exposure.
  • Including PPP loans in the quarterly average amount of PPP loans pledged to the PPPLF in Schedule RC-R, Part 1, Deductions from Assets for the Leverage Ratio Purposes.

PPP Lender Accounting and Reporting Issues 

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Lender institutions face a variety of issues when it comes to PPP lending.  These include, but are not limited to proper accounting of the PPP loan itself and related fees as well as various restructuring of loans.  On June 30, 2020 the AICPA issued a set of technical questions and answers (TQA’s) to address some of these issues. Listed below is a summary of some of the common issues that PPP lenders will face.

Classification of Advances Under the Paycheck Protection Program

Question: Should the lending institution account for an advance under this program as a loan or as a facilitation of a government grant?

The instrument is legally a loan with a stated principal, interest, and maturity date. The institution is expected to collect amounts due from either the borrower or the Small Business Administration (SBA) as guarantor. The institution should account for this instrument as a loan.

Accounting for the Loan Origination Fee Received From the SBA

Question: What is the accounting for the fee received or receivable from the SBA for originating the loan.  How would the clawback feature/considerations be accounted for? 

Upon funding of the loan, the fee should be accounted for as a nonrefundable loan origination fee under FASB ASC 310-20, Receivables—Nonrefundable Fees and Other Costs. As a result, it should be offset against loan origination costs and deferred in accordance with FASB ASC 310-20-25-2 and amortized over the life of the loan (or estimated life if prepayments are probable and the timing and amount of prepayments can be reasonably estimated and the entity qualifies and elects to apply the guidance in paragraphs 26–32 of FASB ASC 310-20-35) as an adjustment to yield in accordance with FASB ASC 310-20-35-2.  However, institutions should determine the significant of the fees to their financial statements.  Current policies may dictate that the fee and related expenses be recorded when received and incurred, respectively.

As noted in question .43, the loan guarantee is embedded in the loan and is part of the same “unit of account.” As a single unit of account, the arrangement involves multiple counterparties, which are (1) the lending institution, (2) the borrower, and (3) the SBA as guarantor, which through that role could be looked to for payment if the borrower either (a) provides the institution/SBA with documentation it has met the conditions to have the loan forgiven or (b) defaults on its obligation. The loan origination fee is paid to the institution by one of the counterparties, the SBA. In effect, the SBA is paying a loan origination fee that would have ordinarily been paid by the borrower. In certain program documents, the fee may be referred to as a processing fee, but the labeling of the fee is not determinative.

The fee received from the SBA for originating the loan may be subject to clawback (or if the SBA has not yet paid the fee, the fee may not be paid), after full disbursement of the PPP loan if 

  • the PPP loan is cancelled or voluntarily terminated and repaid after disbursement but before the borrower certification safe harbor date,
  • the PPP loan is cancelled, terminated, or repaid after disbursement (and after the borrower certification safe harbor date) because SBA conducted a loan review and determined that the borrower was ineligible for a PPP loan, or 
  • the lender has not fulfilled its obligations under the PPP regulations.

In addition, lenders should consider guidance in FASB ASC 450, Contingencies, related to fees that may be subject to clawback or not received. If determined necessary, a lender would establish a loss contingency when it is probable that events or conditions precedent to a loss have occurred, and the resulting amount of the loss is estimable. The ability to estimate this contingent liability will be difficult for institutions since there is no historical data related to the loan program. However, clawback history will emerge over time related to each institution as well as publicly available information.  Each institution should use information as available to support their assessment. Most loans under $2M likely will not be subject to the clawback provisions.

Reporting Considerations

Lenders will use the SBA form 1502 to report information on fully disbursed loans. Upon submission of form 1502, the SBA will initiate payment of the PPP processing fee. The SBA has published an interim final rule extending the deadline to electronically upload form 1502 reporting information to the later of (1) May 29, 2020, or (2) 10 calendar days after disbursement or cancellation of the PPP loan. On May 22, 2020 the SBA will begin accepting PPP 1502 forms on May 22, 2020. PPP loan information will be submitted to the SBA on a monthly basis. This would include loans that were cancelled or voluntarily terminated.  Those that were repaid after disbursement will also be reported. It should be noted that if the lender sells a PPP loan, the originating lender would still be entitled to the processing fees.

Please contact a Brady Martz financial institution team member with additional questions.  Our team is here to help.  

Financial Institutions Using CARES Act Deferrals Won’t Violate GAAP

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In a new article from the Journal of Accountancy, author Ken Tysiac states, “Eligible financial institutions will not be in violation of GAAP if they take advantage of the deferrals or suspensions of two FASB standards as permitted in the new federal coronavirus relief law, SEC Chief Accountant Sagar Teotia said Friday in a statement issued by the commission.”

Please click here to view the full article.

30 Day Extension for HUD Submissions Due March 31, 2020

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The U.S. Department of Housing and Urban Development (HUD) has issued audit submission deadline extensions and other waivers for audits of certain for-profit entities under the HUD Consolidated Audit Guide.

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COVID-19 Financial Institution Impact

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As we at Brady Martz have been assisting our clients with COVID-19 related questions, many financial institutions have been working with their clients and finding ways to handle the economic stress resulting from COVID-19.

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