COVID-19 Impact on Financial Institutions
Published April 14, 2020
COVID-19 has dramatically changed the operational environment for all businesses including financial institutions. In addition, recent legislation, the Coronavirus Aid, Relief, and Economic Security (CARES) Act, has added to and relieved some pressures on financial institutions. The FDIC has issued additional guidance via Frequently Asked Questions (FAQ) for those Impacted by Coronavirus Disease 2019, dated March 27, 2020, that provides answers to some questions financial institutions likely have. This article will briefly cover some of the areas impacted by the above-mentioned items and some items all financial institutions should consider.
With the signing of the CARES act on March 27, 2020, two sections directly apply to FASB standards, Sections 4014 and 4013. Section 4014 allows a financial institution that has adopted Accounting Standards Update No. 2016-13, Financial Instruments – Credit Losses (Topic 326) (CECL), to suspend implementation until the end of the national emergency related to the pandemic or December 31, 2020. For many non-SEC institutions this section has little impact, as the required implantation date is currently January 1, 2023. Section 4013, however, will have an impact across all financial institutions, as it allows for the election to suspend troubled debt restructuring accounting under FASB Accounting Standards (Subtopic 310-40) – Troubled Debt Restructurings by Creditors (TDR). Under the election accommodations / modifications made to a borrowers loan, if they are made as a result of conditions influenced by COVID-19. If modifications were made due to conditions that were not related to COVID-19, they would not qualify for the exemption from TDR treatment.
Another part of the CARES Act is the Paycheck Protect Loan Program. This new program is a Small Business Administration (SBA) loan product that financial institutions will be responsible for administering. The rules are newly created and subject to periodic changes/updates, causing additional stress on financial institutions as there is a high demand for this new loan product. Flexibility will be required to monitor this new program as changes/updates may occur in the near future.
On the same date the CARES act was signed, March 27, 2020, the FDIC also released a FAQ related to COVID-19 issues. The following is a summary of some of the items addressed in the FAQ, the full version of the FAQ can be seen on the FDICs website (https://www.fdic.gov/coronavirus/index.html).
Reporting Delinquent Loans: Loans that were current prior to COVID-19 and then received payment accommodations as a result of COVID-19 issues, generally would not be reported as past due. For loans subject to a payment deferral program, their current or past due status will remain frozen until the end of the deferral period.
Documentation: Documentation of an institution’s consideration of the COVID-19 impact on a borrower should be maintained and include the status of the borrower prior to COVID-19.
Troubled Debt Restructurings (TDRs): The FDIC guidance falls in line with Section 4013 of the CARES Act, allowing for modification to be made to loans impacted by COVID-19 and not fall under the treatment of TDR accounting.
Accommodations for Loans Guaranteed by the SBA: Institutions can make payment accommodations to modify, extend, suspend, or defer repayment terms on SBA-guaranteed loans to borrowers affected by COVID-19. Institutions should review and determine if SBA approval is required for modifications.
Filing Applications: the FDIC does not require a filed application to close a facility due to staffing or precautionary measures. The FDIC does recommend informing/notifying primary federal and state regulators and customers of temporary closures and availability of alternative service options as soon as practical.
First Quarter 2020 Regulatory Report Filings: The FDIC will not take action against any institution for submitting its March 31, 2020, Call Report after the filing deadline, as long as the report is filed within 30 days of the filing date (May 29, 2020). It is recommended to notify the FDIC prior to the original filing deadline if a late submission is going to be made.
Sales of Held-to-Maturity (HTM) Securities: If an institution sells HTM securities to address liquidity needs as a result of the impact of COVID-19, it will not necessarily call into question the institution’s intent to hold other HTM debt securities to maturity.
In addition to the new legislative and regulatory guidance issued recently, noted above, the following items are areas of consideration that have been impacted or will be impacted by COVID-19 issues.
- Branch / ATM Operations
- Due to social distancing and employee sickness, how is the institution going to address Branch and ATM operations? Possible actions include reduced lobby hours, promoting drive through and ATM operations, and personal protective equipment for lobby employees (employees that interact with customers).
- Communications between management, the Board, and employees should be increased. Ensuring employees are up to date on operational changes is critical to ensuring customer communications are consistent and accurate.
- Flex and Remote Work
- Social distancing is one of the most critical aspects of the plan to reduce the spread of the disease. Enabling employees to work remotely can greatly reduce the individuals at a location. Having additional backup personnel to address flexible schedules of personnel that cannot work remotely may be needed if employees become sick.
- Infrastructure / Capacity
- IT infrastructure is critical to enabling part of the work force to work remotely. Policies and procedures are needed to ensure the security and safety of the institutions systems.
Financial / Risk and Controls
- Liquidity Management
- Liquidity issues can escalate quickly.Ensure liquidity contingency funding plans are operational and accurate. Actively monitor liquidity as this crisis continues.
- Capital Management
- COVID-19 could impact capital ratios significantly. Look at capital preservation growth planning in the current environment.
- Loan Covenant and Exception Management
- It is likely that many borrowers may experience loan covenant violations due to the impact of COVID-19 on their business. Ensure exceptions are properly managed and understandings of exceptions are documented in the borrowers file.
- Market Risk
- Market volatility can impact investment valuations. Significant fluxes in unrealized gains/losses could impact pledging and liquidity.
- Risk Governance
- Consider addition risk associated with remote work / flexible schedules.
- Dividends and Stock Buybacks
- Based on the current and expected future outlook should dividends and stock buyback programs be put on hold or altered.
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Nothing in this document should be construed as providing tax advice. Please consult with your own professional tax advisor. In addition, this document represents the information that we have up to the date the presentation was made and cannot be relied upon for additional updates beyond that date.