New Accounting Rules Impact Community Banks

 Until recently, community banks have not been required to implement significant changes in accounting standards. Now, a number of changes could impact banks, especially community banks, over the next few years. The changes are expected to affect many different aspects of a bank's business, from leases to credit losses.

"Not all the rules will be a help to business, but there are ways that banks can mitigate the negative or be more efficient in how they enact the new rules," says Larry Carboni, a partner in our Hartford office. 

While the reduction in the federal corporate tax rate from 35 percent to 21 percent, enacted at the end of 2017, was not a change in accounting rules, it also had a significant impact on many banks.

"Deferred tax assets, which are calculated using currently enacted tax rates, were recast at the end of last year using the new federal rate, which resulted in a write-down of deferred tax assets for many banks," Carboni explains. "This negatively impacted 2017 earnings. However, going forward, the reduction in the federal rate should result in lower income tax expense for profitable banks," he says.

"Banks are currently in the process of considering how they will use the gains from a lower income tax expense," Carboni says.

Carboni, a certified public accountant, has been advising banking clients for most of his 32-year career. A partner with Whittlesey for two years, Carboni previously worked with two national accounting firms.

Mario Solari, also a partner our Hartford office, has spent his career working with banks. A certified public accountant, Solari has 33 years of experience and previously worked for two national accounting firms.

Whether advising banks on tax strategy or helping them to implement new accounting standards, the partners at Whittlesey play a significant role with their clients.

"As soon as something new comes out, we communicate with our clients directly," Solari says.

Other upcoming changes impacting community banks include:

Derivatives And Hedging

"Changes to derivatives and hedging will allow banks to consider new investment and funding strategies that they might not have considered in the past," Solari says.

"New accounting rules for derivative instruments, such as interest rate swaps, will allow banks greater flexibility and efficiency in accounting for derivatives recorded as hedges, and to hedge certain interest rate risks that were not easily hedged in the past," he adds.

Credit Losses

Banks may need to incur quite a bit of time, and possibly expense, to develop new accounting models, and the data needed to support the models, in order to implement new rules regarding credit losses.

"We can help our clients be more efficient by advising them continuously during this process, which should minimize the time and expense," Carboni says.

"Beginning in 2020 for public banks, and 2021 for nonpublic banks, credit losses, or estimated losses on a bank’s loan portfolio, will be determined based on the expected losses to be incurred over the remaining lives of a bank’s loans," Carboni explains. "This differs from current practice where estimated losses are determined based on losses that are probable based on facts and circumstances existing on the financial reporting date.

“We believe that many larger banks will have to increase loss reserves under this new accounting model; however, the impact on community banks may not be severe due to prior conservative accounting practices,” Carboni adds.

Leases

"Beginning in 2019 for public banks and 2020 for nonpublic banks, banks will be required to record a liability, and related asset, for the present value of future lease payments on all leases with terms greater than one year," Carboni says.  Under current accounting rules, there are no significant assets or liabilities recorded related to most lease commitments, he adds.

"Because banks have regulatory capital requirements, which are measured based on the bank’s capital as a percentage of assets, the increase in assets from this new accounting rule could negatively impact a bank’s regulatory capital ratios," Carboni says.

Whittlesey can advise you on navigating these changes, contact us at www.wadvising.com/contact/ or call 860.524.4485.