A&A / Tax UpdatePresented by John Hemmer and Anthony Pasternak

Agenda

•Tax update•Trick or Treat???

•A&A Update•Updates, Refresh & Delays!!!

•Questions

Tax UpdateTrick or Treat

Overview

•Status updates since integrating tax reform changes

•Tax Reform Trick or Treat

•Other practical considerations and ongoing developments

Status Updates

• Tax Cuts and Jobs Act (“TCJA”) signed into law on December 22, 2017

• Most banks are fully integrated into changes in tax return, financial statements, call reports, etc.

• C Corp banks - Deferred tax remeasurement

• Need for further guidance, tax form, etc.

• Will the 21% rate survive?

Tax Reform – “Tricks”

• Sec 163(j) Business Interest Expense Limitation

• Applicable to taxpayer with gross receipts of $25M or more

• Virtually every bank will not be limited

• However, may apply to bank owned partnerships

• Various information disclosed to S Corporation shareholders to determine their respective limitation

Tax Reform – “Tricks”

• Parking expenses

• IRS Notice 2018-99

• Farther reaching than originally thought

• Employer pays for employee parking

• Amount is either taxable to the employee or non-deductible to the company

• Employer owns or leases all or a portion of a parking facility

• Non-deductible parking expense “may be calculated using any reasonable method”

• Using the value of employee parking is not reasonable

Tax Reform – “Tricks”

• 50% deductible meals • Furnished on the business premises of the

taxpayer primarily for its employees• Directly related to business meetings for

employees, stockholders, agents or directors• Client business meals not considered

entertainment, amusement or recreation• Business meals during travel

Tax Reform – “Tricks”

• 100% deductible meals• Included in compensation• Reimbursed by another party• Provided for recreational, social or similar

activities (including facilities), primarily for the benefit of employees (other than employees who are considered highly compensated)

• Provided to the general public• Meals sold to customers

Tax Reform – “Tricks”

• 100% deductible entertainment

• Provided to the general public

• Entertainment, amusement and recreation expenses directly related to business meetings for employees, stockholders, agents or directors

• Entertainment sold to customers

• Includible in income of persons who aren’t employees

• Included in an employee’s compensation

• Reimbursed by another party

• Provided for recreational, social or similar activities (including facilities therefore), primarily for the benefit of employees (other than employees who are considered highly compensated)

Tax Reform – “Tricks”

• 100% nondeductible entertainment• All entertainment, amusement and recreation expenses

not meeting one of the previously provided categories• Such nondeductible expenses may include entertaining

at night clubs, cocktail lounges, theaters, country clubs, golf and athletic clubs, sporting events and hunting, fishing, vacation and similar trips

• Business meals with clients at such entertainment events will be 50 percent deductible if separately itemized on the invoice

Tax Reform – “Treats”

• C Corporation Implications:• Tax rate reduced to 21% – “permanent”• AMT Repealed – effective 1/1/2018• NOL Carryovers (Trick or Treat)• Cash method

Tax Reform – “Treats”

• Qualified business income (QBI) deduction under Sec. 199A• Deduction of 20% of QBI

• Temporary – sunsets on 12/31/2025• Subject to limitations at shareholder levels• QBI – Ordinary income from qualified trade or business

• Rental income/loss and impacts from tax credit partnership investments

• Not QBI – Portfolio interest and dividend income, short and long term capital gains/losses

• SSTB

Tax Reform – “Treats”

Tax Reform – “Treats”

• Bonus Depreciation• Pre-9/27/2017 – 40%• 9/27/2017 – 12/31/2022 – 100%• 2023 - 80%• 2024 – 60%• 2025 – 40%• 2026 – 20%• 2027 – 0%• Available for new and used assets• Consideration for cost segregation study for asset acquisitions• “Leasehold improvement” property glitch (Trick or Treat)

Tax Reform – “Treats”

Ongoing Developments & Practical Considerations

• S vs. C Considerations

• BOLI – transfer for value rules

• Technical corrections

• Limitation on Taxable Income Deferral – revenue recognition

• Qualified Opportunity Funds

• Impact of SCOTUS Decision in SD vs. Wayfair

• Upcoming GAAP changes and related tax effects

Proposal Issued on FASB Effective Dates –“Updates”

• Would create 2 “buckets” for effective date determination for CECL and Leases

• SEC filers that do not qualify as a SRC (as currently defined by SEC)• SRC determined based on last business day of its most recent 2nd quarter

• “Locked in” based on most recent determination date when standard is finalized (anticipated that this will be 6/30/19 determination date)

• All others, including SRCs• All other PBEs

• Private Companies

• All NFPs

• All EBPs

Proposal Issued on FASB Effective Dates –“Delays!!!”

• What does this mean?• No change for standards already effective

• Leases• Still effective for periods beginning after 12/15/18 (FY 19 for calendar year ends)

for PBE’s as it is currently effective for these entities

• All other entities get an extra year (annual periods beginning after 12/15/20 and interim periods after 12/15/21)

• CECL• Still effective for SEC filers not considered SRC in Q1 2020

• All others would have effective date for interim and annual periods beginning after 12/15/22 (Q1 2023 for calendar year ends)

CECL Impact on Acquisitions – Purchased Assets with Credit Deterioration

Purchased Financial Assets with Credit Deterioration (PCD)

Acquired individual financial assets (or groups of financial assets with similar risk characteristics) that as of the date of acquisition have experienced a more-than-insignificant deterioration in credit quality since origination, as determined by an acquirer’s assessment (emphasis added)

ASU 2016-13 Glossary

CECL Impact on Acquisitions – Purchased Assets with Credit Deterioration – “Updates”

Some factors for assessment of PCD assets (326-20-55-59)

• Financial assets that are delinquent as of the acquisition date

• Financial assets that have been downgraded since origination

• Financial assets that have been placed on nonaccrual status

• Financial assets for which, after origination, credit spreads have widened beyond the threshold specified in its policy

Accounting for Acquired Financial Assets PCD vs. Non-PCD – “Updates”

What Happens to PCI Assets at the Transition Date? – “Updates”• PCI assets prior to effective date become PCD assets. Do not

re-evaluate non-PCI• PCD assets as of the effective date will be required to be grossed

up on the balance sheet by the amount of its allowance for expected credit losses as of the effective date

• No retained earnings impact• Subsequent changes in allowance by charges or credits to

earnings• Accrete the noncredit discount or premium to interest income

(based on effective interest rate after gross-up for the CECL allowance at adoption)

Revenue Recognition – “Refresh”

• Will be effective at year end 2019 (was effective 2018 for PBEs)

• Out of scope• Interest income on loans and investments

• Loan origination and commitment fees

• Mortgage servicing income

• Prepayment and late fees

• In Scope• Deposit-related fees

• Interchange income

• Asset management fees

• Real estate sales

• Gain or losses on seller-financed sales of ORE

Revenue Recognition – “Refresh”

•Enhanced financial statement disclosures• Disclosures will require revenue to be disaggregated “into categories

that depict how the nature, amount, timing & uncertainty of revenue & cash flows are affected by economic factors”

• More narrative disclosures

• Types of performance obligation

• When performance obligations are satisfied

Leases – “Refresh”

• Effective this year for PBEs

• Effective annual periods beginning after 12/15/20 and interim periods after 12/15/21 for all others*

• Determination of a lease

• Identified asset AND the right to control the use of the asset

• In most cases, all leases on the balance sheet

• Lease liability

• ROU Asset

* Assuming Effective Date proposal is finalized

Fair Value Measurement (ASU 2018-13) –“Updates”Eliminates the following disclosures • The amount of & reasons for transfers between Level 1 & Level 2• The policy for timing of transfers between levels. An entity still must apply a consistent

policy for timing of transfers; however, it would no longer have to disclose the policy • The valuation processes for Level 3• For nonpublic entities, the change in unrealized gains & losses for the period included in

earnings for Level 3 recurring measurements held at the end of the reporting period New disclosures for public business entities • The changes in unrealized gains & losses for the period included in earning & other

comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period

• For recurring Level 3 instruments, the range & weighted average & time period used to develop significant unobservable inputs. For certain unobservable inputs, a company may disclose other quantitative information, such as the median or arithmetic average, in lieu of the weighted average, if it is a more reasonable & rational method to reflect the distribution of unobservable inputs

Fair Value Measurement

Effective Date • Annual and interim reporting periods beginning after 12/15/19 for

all entities

• An entity is permitted to early adopt any removed or modified disclosures upon issuance of this ASU for which financial statement have not been issued or made available for issuance, & delay adoption of the additional disclosures until their effective date

Recognition and Measurement of Financial Assets and Liabilities (ASU 2016-01) – “Refresh”

Two areas of particular interest to banks (effective in 2018 for PBEs and 2019 for others)

• Fair value disclosures of financial instruments• Non-PBEs can remove tabular disclosure for assets and liabilities

recorded at amortized cost (most probably did in 2018)• PBE must estimate exit price when measuring FV of financial

instruments• Changes to accounting for equity investments

• Must be measured at FV with changes recognized in net income• Eliminates cost method of accounting for equity investments

without readily determinable FV • Can use cost minus impairment, if any, plus or minus changes

in observable price changes for the identical or similar investment of same issuer

• Specifically excludes FHLB and FRB stock (not bankers bank stock)

Small Bank Assessment Credits – “Updates”

• Assessment credit of approximately $764 million are outstanding

• Approximately $320 million will offset Q2 2019 assessments of small banks that are due 9/30/19

• Going forward, credits will be applied again assessments only in assessment periods when the reserve ratio is > 1.38%

• In the 9/30/19 Call Reports, institutions awarded credits should adjust the deposit insurance assessment expense accrued for Q2 for the credits that will be applied to offset Q2 assessments due

John Hemmer, jhemmer@bkd.com; Anthony Pasternak, apasternak@bkd.com

The information contained in these slides is presented by professionals for your information only and is not to be considered as legal advice. Applying specific information to your situation requires careful consideration of facts & circumstances. Consult your BKD advisor or legal counsel before acting on any matters covered.

BKD, LLP is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of accountancy have final authority on the acceptance of individual courses for CPE credit. Complaints regarding registered sponsors may be submitted to the National Registry of CPE Sponsors through its website: www.nasbaregistry.org.