The CARES Act, which was signed into law on March 27, 2020, contained the following provisions of interest to banks:

• Community Bank Leverage Ratio (CBLR) set at 8% - the CBLR will be temporarily lowered to 8%, beginning when federal banking regulators issue an interim final rule and ending on December 31, 2020 or 60 days after the end of the COVID-19 national emergency, whichever is earlier.
• Resurrection of the Temporary Liquidity Guaranty Program (TLGP) – the TLGP was initially created in 2008 in response to the Great Recession, but it expired on December 31, 2010. Under the CARES Act, the TLGP will provide additional deposit insurance for holders of noninterest- bearing transaction accounts. The amount of the guarantee will be established by the FDIC.
• Expansion of SBA 7(a) program – community banks, who are not currently established 7(a) lenders may be able to participate in the 7(a) program, allowing bankers to make small business "paycheck protection loans" under the program to their customers impacted by COVID-19. The Department of the Treasury, in consultation with federal banking regulators, will establish the criteria for insured depository institutions to participate in lending under 7(a).
• Delay of CECL implementation – much has been made in various industry publications about the delay in implementing CECL. However, this is only for institutions who were required to implement CECL effective January 1, 2020. The majority of community banks will not see a delay in CECL implementation because of the CARES Act.
• OCC Authorized to Waive Lending Limits – the OCC has been authorized to waive national lending limits until December 31, 2020 or the end of the COVID-19 national emergency, whichever is earlier.

On March 22, 2020, federal and state banking regulators issued an Interagency Statement on Loan Modification and Reporting for Financial Institutions Working with Customers Affect by the Coronavirus (COVID-19). The statement directs that short-term loan modifications which have been made for borrowers affected by the virus do not have to be automatically categorized as TDRs.

Typically a loan is classified as a TDR when a financial institution grants a concession to the borrower for legal or economic reasons that is going though financial difficulty. Concessions given to borrowers could involve a reduction in the interest rate, extension of the loan or some other loan modification that changes the contractual cash flow of the loan from its original terms. The TDR requires ongoing analysis at each reporting date to determine any potential impairment.

In the Interagency Statement, which was affirmed by the Financial Accounting Standards Board (FASB), it states that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief, are not TDRs. This includes short-term (six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. Borrowers who were current refer to any borrower that was less than 30 days past due at the time of the modification. So, the new TDR guidance would be more advantageous to the financial institution if they implemented a modification program prior to the customer becoming more than 30 days past due and the modification was for a short-term period, less than 6 months. Any loan modifications under those conditions are not considered a TDR and there would be no further analysis needed.

Additionally, the guidance provides information related to past due reporting and nonaccrual status for those loans that have been modified. Financial institutions should be able to identify those loans that were modified in their system-generated reports in order to accurately report past due and nonaccrual loans on the Call Report.

On March 27, 2020 the CARES Act was signed into law and Section 4013 of the Act provides temporary relief from troubled debt restructurings for the period March 1, 2020 through December 31, 2020. The Act suspends the requirements under Generally Accepted Accounting Principles (GAAP) for loan modifications related to COVID-19. Any loan modified under the suspension period shall be applicable for the term of the loan modification. Loan modifications under the Act include forbearance agreements, interest rate modifications, repayment plans and any other similar arrangements that defers or delays the payment of principal or interest. The temporary TDR relief only applies to loans that were not more than 30 days past due as of December 31, 2019 and shall not apply to any adverse impact on the credit of a borrower that is not related to COVID-19.

We want to highlight that the temporary TDR relief under the CARES Act is different from the TDR guidance under the Interagency Statement issued. Absent further regulatory guidance, we recommend banks adhere to the more stringent guidelines outlined in the Interagency Statement.

In accordance with the Call Report instructions, loans must be placed in a nonaccrual status if the financial condition of the borrower causes the asset to be maintained on a cash basis, if full payment of principal or interest is not expected or if the principal or interest has been in default for more than 90 days unless the asset is both well secured and in process of collection. To return a loan to an accrual status there are a few rules or guidelines that should be followed. In accordance with the Call Report instructions, loans must be placed in a nonaccrual status if the financial condition of the borrower causes the asset to be maintained on a cash basis, if full payment of principal or interest is not expected or if the principal or interest has been in default for more than 90 days unless the asset is both well secured and in process of collection. To return a loan to an accrual status there are a few rules or guidelines that should be followed.

Any loan that meets the following criteria can be returned to accrual status:

1. None of the principal or accrued interest is past due and the bank expects repayment of the remaining contractual obligation. (see exceptions below)
2. When the loan becomes well secured and in process of collection.

The exceptions to meeting the first criteria are as follows:

1. If the loan has been formally restructured and the Bank is reasonably assured of repayment and performance under the modified terms. There should be a history of performance of at least 6 months activity and adequate credit documentation of the restructuring.
2. The loan is a purchased impaired loan.
3. If the loan has been acquired at a discount.
4. The borrower is making the contractual principal and interest payments and, while the loan may not be fully current, the bank is reasonably assured that the borrower will be able to get current within a reasonable period and the borrower has shown a sustained period (six months or more) of being able to make the contractual payments. Any loans meeting this last exception should continue to be reported as past due on schedule RC-N but can be returned to accrual status.

When the Bank puts a loan on non-accrual status and any payments received are applied toward the principal balance, these payments should not be reversed when the loan is placed back on accrual status. Generally, there is no immediate income recognition when putting a loan back on accrual status. The Bank should record a discount for the amount of interest that was applied toward the principal balance during the non-accrual status of the loan and the discount is then accreted to income over the remaining term of the loan.

This accounting guidance is more of a regulatory accounting issue. Deferring the immediate interest income recognition to more of an effective yield to maturity method is in accordance with the Call Report instructions included in the glossary section. Financial institutions should set up the appropriate accounting treatment for these types of loans when filing their quarterly Call Reports.

In accordance with the Call Report instructions, loans must be placed in a nonaccrual status if the financial condition of the borrower causes the asset to be maintained on a cash basis, if full payment of principal or interest is not expected or if the principal or interest has been in default for more than 90 days unless the asset is both well secured and in process of collection. To return a loan to an accrual status there are a few rules or guidelines that should be followed. In accordance with the Call Report instructions, loans must be placed in a nonaccrual status if the financial condition of the borrower causes the asset to be maintained on a cash basis, if full payment of principal or interest is not expected or if the principal or interest has been in default for more than 90 days unless the asset is both well secured and in process of collection. To return a loan to an accrual status there are a few rules or guidelines that should be followed.

Any loan that meets the following criteria can be returned to accrual status:

1. None of the principal or accrued interest is past due and the bank expects repayment of the remaining contractual obligation. (see exceptions below)
2. When the loan becomes well secured and in process of collection.

The exceptions to meeting the first criteria are as follows:

1. If the loan has been formally restructured and the Bank is reasonably assured of repayment and performance under the modified terms. There should be a history of performance of at least 6 months activity and adequate credit documentation of the restructuring.
2. The loan is a purchased impaired loan.
3. If the loan has been acquired at a discount.
4. The borrower is making the contractual principal and interest payments and, while the loan may not be fully current, the bank is reasonably assured that the borrower will be able to get current within a reasonable period and the borrower has shown a sustained period (six months or more) of being able to make the contractual payments. Any loans meeting this last exception should continue to be reported as past due on schedule RC-N but can be returned to accrual status.

When the Bank puts a loan on non-accrual status and any payments received are applied toward the principal balance, these payments should not be reversed when the loan is placed back on accrual status. Generally, there is no immediate income recognition when putting a loan back on accrual status. The Bank should record a discount for the amount of interest that was applied toward the principal balance during the non-accrual status of the loan and the discount is then accreted to income over the remaining term of the loan.

This accounting guidance is more of a regulatory accounting issue. Deferring the immediate interest income recognition to more of an effective yield to maturity method is in accordance with the Call Report instructions included in the glossary section. Financial institutions should set up the appropriate accounting treatment for these types of loans when filing their quarterly Call Reports.

On March 1, 2017, the Texas Department of Banking updated the supervisory memorandum discussing bank owned life insurance.

The supervisory memorandum establishes supervisory requirements and best practices surrounding the purchase and holding of BOLI. In addition, the supervisory memorandum provides detailed descriptions of the different types of insurance products available to banks and explains how the risk-weighting for each is assigned. This is especially useful as the Basel III Capital Rules changed the risk weightings for the various types of BOLI.

While these guidelines are only authoritative for Texas state chartered institutions, the guidance is similar that issued by the federal banking regulatory agencies in 2014, and provides useful information for all institutions.

Specific topics covered by the supervisory memorandum include:

• Pre-purchase analysis requirements
• Financial considerations
• Risks associated with BOLI
• Other areas for consideration accounting, legal/regulatory and tax consequences
• Post-purchase monitoring requirements

Emphasis was placed on the importance of the pre-purchase due diligence and the annual post-purchase monitoring. Two appendices were also included to assist bankers with these reviews. Appendix A covers information such as employee information, compensation information, and insurance policy information. In Appendix B, the information includes a review of the company limits which details insurance company information, performance information, and policy information. It is suggested that the information included in the appendices is reviewed annually by the Board of Directors. All Texas state-chartered institutions that hold BOLI, or are considering the purchase of BOLI, should review the updated guidance in order to understand the new regulatory expectations surrounding these products.

Texas Department of Banking Supervisory Memorandum 1010 – Bank Owned Life Insurance

The U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) has finalized its beneficial ownership rule, which it proposed in 2014. The regulation does two things. First, it extends Customer Due Diligence (CDD) requirements under Bank Secrecy Act (BSA) rules to the natural persons behind a legal entity. Second, the regulation adds a fifth pillar to the traditional “four pillars” of an effective anti-money laundering (AML) program by requiring covered financial institutions to establish risk-based procedures for conducting ongoing customer due diligence.

As of May 11, 2018, entities subject to BSA will be required to identify and verify the identity of beneficial owners of legal entity customers at the time the customer opens a new account, subject to certain exclusions and exemptions, as well as develop risk profiles and conduct ongoing monitoring of customers.

Covered financial institutions must do two things for all legal entity customers who open new accounts at the financial institution, unless an exception applies: 1) identify and 2) verify the identity of the beneficial owners of the legal entity.

Under the new rule, a “beneficial owner” includes two types of individuals:

• Any individual who, directly or indirectly, owns 25 percent or more of equity interest in the legal entity customer; and
• A single individual who has “significant responsibility to control, manage, or direct a legal entity.”

Under the ownership provision, a legal entity customer could have between zero and four beneficial owners—zero if no individual owns 25 percent or more of an entity or four if each individual owns exactly 25 percent of the entity. For the second, control provision, all legal entities will be required to name at least one individual. Accordingly, each legal entity customer will have between one and five beneficial owners.

The financial institution may comply either by obtaining the required information on a standard Certification Form provided by the rule or by any other means that comply with the substantive requirements of the provision.

The financial institution may rely on the beneficial ownership information supplied by the customer, provided that it has no knowledge of facts that would reasonably call into question the reliability of the information. The identification and verification procedures for beneficial owners are very similar to those for individual customers under a financial institution’s customer identification program (CIP), except that for beneficial owners, the institution may rely on copies of identity documents. Financial institutions are required to maintain records of the beneficial ownership information they obtain, and may rely on another financial institution for the performance of these requirements, in each case to the same extent as under their CIP rule.

FinCEN states that financial institutions should use beneficial ownership information as they use other information they gather regarding customers (e.g., through compliance with CIP requirements), including for compliance with the Office of Foreign Assets Control (OFAC) regulations, and the currency transaction reporting (CTR) aggregation requirements under the BSA.

In preparation for the mandatory compliance date of May 11, 2018, financial institutions should evaluate their current identification, verification and monitoring processes to determine whether changes may be warranted and what employee training is needed. Covered institutions may also need to amend their BSA programs to include the new fifth pillar if the institution does not already conduct ongoing CDD as contemplated by the rule and document its procedures for doing so.

These actions will be critical to complying with the final rule upon its compliance date. It is also important to keep in mind that federal regulators may set their own supervisory expectations, as with any other aspect of BSA/AML.

On December 30, 2016 the federal regulatory agencies finalized a new, streamlined Call Report for small banks (FFIEC 051). This new Call Report can be adopted by banks that have domestic offices only and total assets less than $1 billion beginning with the March 31, 2017 report.

Schedules Eliminated – to be replaced with Schedule SU – Supplementary Information

Schedule RC-D – Trading Assets and Liabilities
Schedule RC-P – 1-4 Family Residential Mortgage Banking Activities
Schedule RC-Q – Assets and Liabilities Measured at Fair Value on a Recurring Basis
Schedule RC-S – Servicing, Securitization and Asset Sale Activities
Schedule RC-V – Variable Interest Entities

Schedules with a Change in Reporting Frequency

Schedule RC-C Part II – Loans to Small Businesses and Small Farms – will be prepared semiannually on FFIEC 051.
Schedule RC-A – Cash and Balances Due from Depository Institutions – will be prepared semiannually on FFIEC 051 for institutions with total assets greater than $300 million. Institutions with total assets less than $300 million remain exempt.

Other Data Items Removed or Changed

A number of data items were completely removed from the FFIEC 051. Most of these were not applicable for small financial institutions and their removal will simply reduce the number of pages in the Call Report. However, there are a handful of changes to be aware of:
Schedule RC-E – Deposit Liabilities – most memoranda items that had previously been reported based on balance thresholds tied to the old FDIC insurance limit of $100,000 have been updated to reflect the updated FDIC insurance limit of $250,000 that was made permanent in 2010. This change has been applied to all Call Report forms, not just the new FFIEC 051.
Schedule RC-F – Other Assets and Schedule RC-G – Other Liabilities – itemized breakout of all other assets and all other liabilities greater than $100,000 and 25% of the line item will now only be reported semiannually.
RC-L –Derivatives and Off-Balance- Sheet Items – eliminated reporting of derivative positions, affecting numerous line items (replaced with limited reporting included on the new Schedule SU – Supplemental Information)
RC-M – Memoranda – eliminated reporting of data related to FDIC loss sharing agreements (replaced with limited reporting included on the new Schedule SU – Supplemental Information)

Helpful Resources

Redlined FFIEC 041 Reporting Form Showing Changes Made to Schedules and Data Items to Create the Proposed FFIEC 051 Reporting Form

Please let us know if you have questions on any of the above items, or if you would like to discuss how to transition to the new FFIEC 051.