COVID-19 Pandemic and the impact on ALLL April 21, 2020
2 Objectives Dan St. Clair Discussion of regulatory actions Audit Director around COVID-19 Briggs & Veselka Loan modifications and reporting issues Eric Diehl Associate Director COVID-19 impact on Allowance B&V Capital Advisors for Loan and Lease Loss methodologies Lincoln McKinnon Audit Principal Briggs & Veselka
3 Helping Clients Navigate Paycheck Protection Program EIDL, FFCRA, Other Programs (PPP) First Wave: Application Economic Injury Disaster Eligibility Loan • Calculating payroll costs EIDL grant • • Application process • Non-profits Families First Coronavirus • Response Act (FFCRA) Second Wave: Forgiveness Family and medical leave • Use of proceeds Sick leave for employees • • Calculating payroll costs Tax credits • • Forgiveness adjustments • Main Street Lending Program Funds depleted – more coming?
4 Loan Forgiveness The true-up period is coming, and forgiveness is not necessarily guaranteed Forgiveness expected to be granted upon filing an application with the SBA Qualified Eligible for expenses forgiveness Maximum loan Converted to 2 Non-qualified amount received year amortizing expenses by borrower and 1% loan provided by PPP Excess funds borrowed and Returned to SBA not used
5 Maximizing Forgiveness Keeping deliberate, clean records supports maximized loan forgiveness Maximum • Daily payroll data Payroll Costs forgiveness • Daily employee data supported by clean, detailed records proving • Payroll costs (75%) the proceeds Expense were used • Rent, utilities, certain Management interest costs (25%) appropriately
6 What’s Next? Preparing for forgiveness Briggs & Veselka COVID-19 Resources Page PPP Funding Round 2 still on hold B&V Webinar Materials: • Additional guidance is needed on Forgiveness, Tax Updates, PPP for Self Employed Forgiveness application and • process B&V Webinar: COVID-19 • Forgiveness adjustment related • Business Continuity Resources to reduction in FTE & Update Forgiveness adjustment related • B&V Nonprofit Webinar Series • to reduction in employee salaries Important links and other • Tax implications • resources Main Street Lending Program
7 COVID-19 Impact on ALLL Interagency Statement on Loan Modifications and Reporting – Working with Customers Affected by the Coronavirus – (OCC Bulletin 2020-21) “the agencies encourage financial institutions to work prudently with borrowers who are or may be unable to meet contractual payment obligations…”
8 COVID-19 Impact on ALLL Working with Customers Affected by the Coronavirus – Proactive actions are in the best interest of institutions, their borrowers and the economy.
9 COVID-19 Impact on ALLL Proactive actions: Loan modifications Deferral of payments • Waiving modification fees • Assistance with government • backed plans
10 COVID-19 Impact on ALLL COVID-19 proactive actions: Short term modifications includes the example period of six months, and notes payment deferrals and extensions of repayment terms, along with other delays that are considered “insignificant”
11 COVID-19 Impact on ALLL Loan modifications on existing current loans would not be considered TDRs - Either individually or as part of a modification program for creditworthy borrowers.
12 COVID-19 Impact on ALLL Working with Customers Affected by the Coronavirus – The agencies will also not criticize institutions that work with borrowers as part of a risk mitigation strategy intended to improve an existing non-pass loan.
13 COVID-19 Impact on ALLL Programs mandated by state or federal government related to COVID-19 would not be in the scope of ASC 310-40 on TDRs.
14 COVID-19 Impact on ALLL COVID-19 deferrals would not trigger past due reporting or nonaccrual status, if the loan was not so designated before the deferral. COVID-19 deferrals considered contractual, therefore no contractual payments would be past due.
15 COVID-19 Impact on ALLL COVID-19 Next Steps: Know your portfolio – what customers and industries are most likely to be impacted by COVID-19?
16 COVID-19 Impact on ALLL COVID-19 Next Steps: Are there any general modification programs you should consider for groups of loans, such as residential real estate loans or hospitality loans, where a group program may make the most sense?
17 COVID-19 Impact on ALLL Allowance for Loan Losses impact You will need good documentation of modifications made for COVID-19. Remember that this does not automatically come with credit downgrades, but could get there.
18 COVID-19 Impact on ALLL COVID-19 ALLL impact: Find a way to classify COVID-19 modifications to properly tract them. This should include monitoring of short-term concessions and a return to pre-COVID terms if needed.
19 COVID-19 Impact on ALLL COVID-19 ALLL impact: Don’t be reluctant to utilize Pass - Watch or Special Mention categories to better track high risk loans. Don’t delay on further downgrades when they are needed.
20 COVID-19 Impact on ALLL COVID-19 ALLL impact: Don’t wait to look at the qualitative factors in your allowance methodology. COVID-19 has increased risks across the board and we should not be waiting for quantitative factors to catch-up.
21 COVID-19 Impact on ALLL COVID-19 ALLL impact: The ALLL methodology is a living document, and qualitative factors can go down if the quantitative factors become known and go up.
22 COVID-19 Impact on ALLL COVID-19 ALLL impact: Be proactive with the ALLL, just like you are with the loan relationships. Good management now can help limit future negative impact.
23 COVID-19 Impact on ALLL COVID-19 ALLL impact: QUESTIONS?
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