Article written by:
Ethan Lane, CPA
Senior, Assurance & Business Advisory Services
“How are you dealing with the impacts of COVID-19?” This is most likely a question you have heard several times by now. At first, this question may have caused fear, frustration or anxiety. For some, you may have a go-to response when answering this question. For others, you may be as concerned as ever about the future of your business. GBQ has been working hard to eliminate some of this concern for our clients by staying on top of accounting guidance issued by the AICPA, FASB and other regulatory authorities.
The first of these topics relate to the Small Business Administration (SBA) Paycheck Protection Program (PPP) loans. If you’re a financial institution, you have most likely heard about these loans or even participated in the program. These PPP loans are designed to provide an incentive for small businesses to keep their employees on their payroll. A common question we have received is how to account for the fees generated from these loans. The proper accounting is to recognize the fees over the life of the loan. If a loan is forgiven by the SBA, the remaining amount of fees can be immediately recognized as non-interest income. The SBA resumed accepting PPP applications on July 6, 2020, and the new deadline to apply for a PPP loan is August 8, 2020.
Second, estimating the allowance for loan loss has posed a new challenge. All financial institutions are feeling the impacts of COVID-19 whether it is decreased loan interest income due to lower loan volume, limited interchange income as a result of a decrease in consumer spending, or increasing delinquency and charge-offs due to the unemployment of your customers or members. A common question we have received is how to revise estimates in the allowance calculation to account for potential losses given the current COVID-19 crisis. While there is no one-size-fits-all solution, there are certain indicators to which you should be paying close attention. Segregating your portfolio by loans that are COVID-19 assistance loans, unsecured loans, low credit score borrowers, high debt-to-income ratios, high loan-to-collateral value loans, or by those in which borrowers have received a loan deferment is crucial as these loans have the potential to be of higher risk for charge-off. In addition to segregating your portfolio, adding a specific reserve for loans that show signs of non-performance is highly encouraged. Finally, evaluating the use of qualitative and environmental (Q&E) factors into the reserve calculation is an acceptable measure if you are expecting future losses but uncertain of the amount.
One of the many issues financial institutions have been faced with is increasing delinquency. In order to avoid charge-offs and assist customers and members during these challenging times, financial institutions have offered loan deferments, such as skipping payments. Under normal conditions, a loan that has been modified should be evaluated to determine if it is required to be reported as a troubled debt restructuring (TDR). However, loans that have received a temporary deferment of payments due to COVID-19 are not required to be reported as a TDR. Your collections staff should remain in close contact with these borrowers in order to keep them on a current payment schedule once the deferment period has ended.
The era of COVID-19 has proven to be a challenging and confusing time for many, but GBQ is here to help and provide answers. Contact your GBQ advisor today to learn how we can best meet the needs of your business.