CSH’s Financial Services team has compiled some of the latest information helping community financial institutions understand new operations guidance for serving their customers during the Covid-19 crisis.
Allowable Deferral for Appraisals
Federal banking agencies have issued an interim final rule stating certain appraisals and evaluations can be delayed up to 120 days after the closing of residential and commercial real estate loan transactions. This will allow regulated institutions to extend financing quickly to creditworthy individuals and businesses. These temporary provisions will expire on December 31, 2020, unless extended by the banking agencies. Acquisition, development and construction of real estate transactions are excluded from this temporary relief.
Accounting for Loan Interest During Loan Modifications
Several weeks ago, regulatory agencies announced that institutions should consider workout strategies with their customers who experience financial difficulties due to Covid-19. If a modification is given where the institution delays payments for a period of time (typically 90 days), the institution is still able to record interest income during that time. Institutions are encouraged to communicate with their core processor to determine whether this can be performed in the software. If not, this may need to be a manual process.
Paycheck Protection Program (PPP) Loan Documents
Lenders have had to quickly respond to hundreds of PPP applications from customers along with trying to accurately gather needed information. The current pace of applications has presented challenges. The national governing body for Certified Public Accountants, the AICPA, has provided guidance to customers so they can quickly and accurately provide financial institutions with the documents related to the underwriting process. (See the website links at the end of this article.)
Recording of PPP Loans
The recording and evaluation of PPP loans is providing challenges to financial institution accounting, finance and credit departments. Below is a step-by-step process of recording the initial loan, the monthly maintenance of accounting entries, the evaluation process by the credit department and subsequent pay-off.
- Record the loan and a receivable from the SBA for the processing fee.
- This loan is recorded on the balance sheet of the institution.
- CSH recommends evaluating these loans in the ALLL calculation, but as a separate pool with its own qualitative and environmental factors. Although any anticipated losses to an institution are expected to be extremely minimal, the institution should acknowledge the loan in their ALLL calculation.
- Based on the size of the loan, the institution will receive a processing fee from the SBA.
- When a processing fee is received, GAAP states that this amount should be recorded as a deferred loan fee. The deferral period will be two years and should be adjusted for prepayments like any other loan.
- Anticipated loan forgiveness from the SBA is June 30; however, since there will likely be another round of PPP loans, all loan fees and related expenses will likely not be recognized in the same quarter.
- Accrual of interest will be at 1.0% with repayment, either by the borrower or the SBA forgiveness program.
- Once a forgiveness amount is determined, the loan should be reclassified to receivable from the SBA and a deferred net loan fee recognized.
- For any unforgiven amounts that are recorded as loans on the institution’s balance sheet, principal and interest is not due for six months. If a borrower defaults, the institution should seek the guaranteed restitution from the SBA.
- Principal and interest on unforgiven loan amounts is due two years after the origination date. During this time, from origination date to due date, all deferred loan fees on the unforgiven portion should be recorded like any other commercial loan.
Changes to Regulatory Capital Rule for the PPP Lending (PPPL) Facility
Loans provided under the PPP can be excluded as loans pledged as collateral to the PPPL facility from an institution’s capital requirements. Also, loans under PPP receive a zero percent risk weight under regulatory capital rules regardless of whether they are pledged as collateral to the PPPL facility.
Deferral of Employer Portion of Social Security Tax
An available option for further relief during this unprecedented time, as announced in the CARES Act, employers can defer the payment of the employer’s share of social security taxes equating to 6.2% of employee wages. The deferral is eligible beginning March 27, 2020, for payments that otherwise would have been deposited and paid on the employer’s quarterly Form 941 and goes through December 31, 2020. The second quarter Form 941 will be revised to take advantage of this deferral. There is no special election that is required to defer payments.
To avoid penalty, social security taxes that are being deferred must be repaid according to the following:
- 50% of the deferred amount must be deposited by December 31, 2021
- The remaining 50% of the deferred amount must be deposited by December 31, 2022
Businesses that received a PPP loan may also take advantage of this deferral, but only up until the date of notice of loan forgiveness.
Employee Retention Tax Credit
Also discussed in the CARES Act is an Employee Retention Tax Credit, designed to encourage eligible employers to keep employees on the payroll even if a financial hardship occurs due to Covid-19. The 50% credit applies to qualified wages paid between March 13, 2020, and December 31, 2020. The maximum amount of qualified wages for purposes of this credit is $10,000 equating to a maximum credit of $5,000 per employee. The IRS defines an eligible employer as those that carry on a trade or business during calendar year 2020, that either:
- Fully or partially suspended operations during any calendar quarter in 2020 due to order from a governmental authority regarding Covid-19
- Experiences a significant decline in gross receipts during the calendar quarter (gross receipts less than 50% compared to the same quarter in 2019)
Businesses that qualify for the credit can use the credits against the employer social security tax as filed on Form 941 and reduce any amount owed and obtain a refund if the amount of the credit exceeds the total owed. For example, if an eligible employer paid $20,000 in qualified wages, they are entitled to a credit of $10,000. If the employer owes $8,000 for employer portion of social security taxes, the employer would not remit the $8,000 and can also request an advanced payment of those credits for the remaining $2,000 by filing out a Form 7200.
This credit cannot be used if a business received a PPP loan.
Ohio Bureau of Workers’ Compensation Dividend
On April 10, the Ohio Bureau of Workers’ Compensation (BWC) Board approved a $1.6 billion dividend for Ohio employers. The dividend will be equal to approximately 100% of the premiums that each employer paid in 2018. Checks will be mailed to employers at the end of April, so keep an eye on your mail. In addition to the dividend, the BWC announced that employers can delay the monthly premium installment for March-May 2020 until June 1, 2020.
Please contact your CSH representative for further information and discussion. Katie Schnieber and David Klopfer can be contacted at [email protected] and [email protected].
Federal Banking Agencies to Defer Appraisals and Evaluations for Real Estate Transactions Affected by Covid-19 – https://www.federalreserve.gov/newsevents/pressreleases/bcreg20200414a.htm
Frequently Asked Questions for Financial Institutions Affected by the Coronavirus Disease 2019 (Referred to as Covid-19) – As of April 15, 2020 – https://www.fdic.gov/coronavirus/faq-fi.pdf
PPP Application – Lender Documents – https://www.aicpa.org/content/dam/aicpa/press/pressreleases/2020/aicpa-ppp-recommendations-letter.pdf
Changes to the Regulatory Capital Rule to Accommodate the Paycheck Protection Program – https://www.fdic.gov/news/news/financial/2020/fil20037.html
Deferral of Employment Tax Deposits and Payments Through December 31, 2020 – https://www.irs.gov/newsroom/deferral-of-employment-tax-deposits-and-payments-through-december-31-2020
FAQs: Employee Retention Credit under the CARES Act – https://www.irs.gov/newsroom/faqs-employee-retention-credit-under-the-cares-act