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What Matters Most April 2015

This is the first installment of HoganTaylor’s Financial Institutions briefing, we call What Matters Most. If you work in a financial institution, your world is changing rapidly. Your email is full of daily news briefings and you receive monthly or quarterly periodicals from large firms or industry associations.

With What Matters Most, we will summarize what is relevant for community financial institutions in a digestible and plain-English format. We will give you a unique perspective (otherwise, why bother, right?) on matters impacting you. Rather than daily or monthly, we will issue these briefings when it matters most, based on our conversations with regulators, analysts, and financial institution leaders. We will also include our commentary at the end and keep it light and entertaining.

In this issue, we remind community banks of the new Basel III capital requirements effective in 2015, including a critical one-time election required in your March 31, 2015 call reports. We will describe how to make the election and remind you of other changes in the rule. Our commentary discusses the recent Federal Reserve statement about interest rates.

Basel III Capital Rules Require New Capital Measures

It’s not too late to understand and apply the new Basel III capital rules. You have until the filing of your March 31, 2015 call report, due April 30, to make those changes. There are plenty of resources on the rule itself. So we will focus our reminders on what matters most to community banks.

AOCI and Opting-Out – Explained

The FDIC on March 23, 2015 reminded institutions in FIL-12-2015 that most banks must make a one-time, permanent election and may opt-out of including unrealized gains and losses on available for sale securities in common equity tier 1 capital. Unrealized gains and losses for banks is a component of accumulated other comprehensive income (AOCI), a GAAP equity account. The one-time election allows banks to exclude most AOCI items from regulatory capital. Read More

Deferred Tax Asset and Mortgage Servicing Assets Limitations in Capital

The new Basel III rules reduce the amount of deferred tax assets (DTAs) and mortgage servicing assets MSAs that count towards regulatory capital. Many community banks have DTAs, not as many have MSAs, so we’ll focus on DTAs. Basel III no longer permits using the tax liability on twelve months of future earnings to support deferred tax assets.  The new rules for deferred taxes are quite different than the old rules in that they require an allocation of deferred tax liabilities (DTLs) between allowed and disallowed DTAs. Disallowed DTAs include net operating loss (NOL) and tax credit carryforwards, net of DTLs apportioned to the NOL/carryforward. Allowed DTAs include DTAs arising from temporary differences, net of DTLs arising from timing differences, subject to threshold limits described below.  BDO, USA LLP has a nice illustration of this rather complicated exercise.

Net DTAs and MSAs not deducted from capital, those eligible to include in capital, are each limited to 10 percent of common equity tier 1 capital and in combination are limited to 15 percent of common equity tier 1 capital. Those assets are subject to 250% risk weighting, or 100% if supported by tax history.

High Volatility Commercial Real Estate

Basel III also amends the risk weights applied to certain riskier bank assets in the calculation of the new capital ratios. For example, commercial real estate loans that are high volatility commercial real estate (HVCRE) carry a higher risk weighting under the new rule. Community banks must determine whether they have any HVCRE loans in their loan portfolios. HVCRE loans are acquisition development and construction (ADC) loans, less those meeting certain criteria. Read More

Resources and Help with Basel III Implementation

Last week, the FFIEC released report forms, an instruction book update, and supplemental instructions for the March 31, 2015 call report. The FDIC, OCC and Federal Reserve websites include community bank guides explaining the rules. We encourage you to read these instructions and review your capital ratios under these new rules carefully. If you have any questions, feel free to call Jeff Harjo or Natalie Parker at 918-745-2333.

HT Commentary – Losing Patience?

Reaction to a statement released by Janet Yellen, Chair of the Federal Reserve and the Federal Open Markets Committee, March 18, 2015. Read More