The short-term pain is an indirect result of the corporate tax rate reduction from 35 to 21 percent, signed into law by President Trump in December as part of the Tax Cuts and Jobs Act. The new law affects the number of write-downs banks can take in 2017 on their deferred tax assets, or DTAs.
“The tax bill triggered an accounting event this year banks had to deal with, [and] for some it was a hit,” said John Kinsella, vice president of tax policy for American Bankers Association in Washington, D.C.
For example, American Banker reported Citigroup will suffer a roughly $17 billion loss in 2017 on its balance sheet.
Kinsella estimated of the roughly 5,800 banks in the United States, about 3,300 had net asset balances that would result in a net tax liability because of deferred tax assets. He said banks that are organized as S-corporations – for whom tax status is applied at the shareholder level – were exempt because they don’t pay corporate taxes.
“The key takeaway from a financial accounting perspective is that both financial institutions and the readers of financial statements need to take time to understand the implications of the adjustment. Each bank is going to be in a different position,” said Thomas Malone, a senior manager at Baker Tilly Virchow Krause LLP in Upper Macungie Township.
$250B WRITE-DOWN NATIONALLY
Gary Olson, president and CEO of ESSA Bank & Trust in Stroudsburg, said he expected the banking industrywide write-down to top off at about $250 billion.
“It’s a loss, so it is a done deal. The law is passed and banks have to swallow it,” he said. “Most banks will book a loss. That loss will get recovered in lower taxes.”
Olson said ESSA released a $3.8 million write-down Jan. 17 on its deferred tax assets, which will be a loss against the company’s earnings. Still, Olson said ESSA had no plans to reduce services or cut staff as a result of the loss.
“Going forward, we will get it back in the lower tax rates, but we don’t have it now,” to invest back into services or the community, he said.
REVALUATION OF ASSETS, LIABILITIES
The one-time expense means that banks should catch up on the difference over time and eventually realize savings from the lower corporate tax rate.
The reduction from 35 percent to 21 percent means those assets on which the tax was deferred at 35 percent would have lost some of their value because of the lower tax rate.
“There has to be a revaluation of those assets and liabilities,” Kinsellsa said.
GROWTH THIS YEAR
“It’s too soon to tell how the new tax rates will impact the annual revenue of the Treasury or the impact on the American economy,” Malone said.
“We haven’t had a tax rate change in a long time, so evaluating the impact of this change could take time.”
Kinsella and Olsen agreed the overarching benefit moving forward is a lower tax rate.
“We feel that they [banks] will earn it back quickly and there will be growth in 2018 and beyond in the economy,” Kinsella said.
MONEY TO INVEST IN TECH, SERVICES
John Anderson, interim chief financial officer at Peoples Security Bank & Trust in Scranton, said while the tax rate would have a negative impact in 2017, it will be a positive in 2018.
Anderson, whose bank has branches in the Greater Lehigh Valley, said the benefits of lower taxation could include more money to invest in technology, staff, programming and customer services.
“More to invest in technology, mobile banking and to help our customers and attract new customers,” he said. “I absolutely see it as a positive.”
For others, it may be a time to take stock and reconsider how they do business.
“For many, this change affects how they accounted for taxes within their financial statements, and we’re finding that it is a great time for banks and financial statement readers to educate themselves on how income taxes are accounted for,” Malone said.