The turn of the calendar is a logical time to examine the state of the banking industry – where we’ve been, where we are, and where we are headed in the upcoming year.
Baker Tilly recently hosted a year-end webinar in which our banking industry leaders discussed key areas, including:
Tax
Environmental, social and governance (ESG)
Audit and accounting
Mortgage
Risk
Digital assets
Below is a summary of that comprehensive discussion, which was led by Kevin Schalk, the practice leader of Baker Tilly’s banking and capital markets sector.
Tax updates
Tax principal Tanya Thomas began by highlighting the key tax legislation from late 2021 and 2022, including the Infrastructure Investments and Jobs Act (IIJA), and the Inflation Reduction Act (IRA). A key component of the IIJA was the termination of the employee retention credit, while the IRA featured a corporate book alternative minimum tax of 15% on large financial institutions, a new 1% excise tax imposed on net stock buybacks and numerous energy tax benefits and credits.
Thomas also outlined several tax provisions that expired at the end of 2022, including:
The COVID payroll tax deferral, which required businesses to submit the remaining 50% of deferred payroll taxes by the end of 2022
The business meal deduction, which has reverted from 100% back to 50% for restaurant meals, beginning in January 2023
Bonus depreciation deductions (i.e., generally for purchases of assets with a 15-year useful life or less) are phased down 20% a year, beginning in January 2023
In terms of where tax legislation is heading, Thomas noted that a divided Congress is likely to severely limit the passage of a major tax act. So, we certainly could see a slow period of tax legislation over the next couple of years until major tax provisions of the 2017 Tax Cuts and Jobs Act sunset at the end of 2025.
Our practitioners discussed ESG and its associated tax implications. Consumers and organizations up and down the supply chain are demanding that companies create a tax-compliant ESG solution that is sustainable, transparent and adaptable to the ever-changing market.
We highlighted many ESG-related tax implications, including:
Social – Utilizing federal and state tax credits that cover social aspects of ESG
New Markets Tax Credits – U.S. federal and state tax credit incentive for investment in low-income communities, providing a 39% total tax credit to investors who provide capital to community development entities
Environmental tax credits – Utilizing federal and state tax credits that cover the environmental aspects of ESG
Additional tax credits – Including those related to solar, wind, biomass and renewable electricity production
Joe Donnelly, a principal in Baker Tilly’s Professional Practices Group and a leader of Baker Tilly’s ESG attest and readiness program, continued the ESG discussion by exploring how you can prepare yourself to build a sustainable organization. He emphasized the importance of developing an ESG strategy in collaboration with every department in the organization – from finance, legal and risk to marketing, IT and human resources, and every team in between.
Furthermore, he noted an increase in non-SEC registrants that are paying close attention to ESG readiness and attest projects. This typically is because large public companies are requiring their partners, vendors, suppliers and banks to adhere to a certain level of ESG standards. Basically, consumer demand has ESG prioritization trickling down from the very top.
Finally, he cautioned that companies should be careful not to disclose false or exaggerated ESG information. The SEC has a task force that is looking for incorrect filings and taking action against companies that falsify their accomplishments.
Audit and accounting updates
Matt Nitka, a Baker Tilly Banking and Capital Markets audit principal, had two primary takeaways as he reflected on 2022. The first one was current expected credit losses (CECL) and the second was digital assets (cryptocurrency).
In terms of CECL, Nitka cautioned the audience to take a step back when considering their CECL disclosures. “We’re working on it” is no longer an acceptable footnote. At a minimum, Nitka stressed, companies need to offer a more defined range of the impact of the standard. Organizations also need to make sure their governance and control environments are tightly monitored and updated correctly to reflect the new model.
Looking at cryptocurrency from an accounting standpoint, the Financial Accounting Standards Board (FASB) certainly took notice of the increase in crypto adoption in 2022 and began the process of reviewing digital currency from an accounting perspective. FASB came to a tentative decision in October to use fair value of certain crypto assets based on a variety of feedback they received from the marketplace. However, nothing has been finalized, and it remains to be seen what FASB constitutes “fair value.”
Mortgage updates
Jeff Flory, a principal with Baker Tilly’s financial services practice, joined the discussion to shine light on some recent mortgage updates.
Of course, the mortgage market had a rough year in 2022 – originations were down about 2.25 trillion (about 50% year-over-year) and rates were up about 116% from the prior year). In November 2022, production costs exceeded $11,000 per loan for the first time ever, and only two of every four mortgage companies made money.
Looking ahead, Flory noted that mortgage experts anticipate that rates should settle around mid 5% by the end of the year, and there may even be a potential for a refinance opportunity of the 2022 vintage. The Mortgage Banking Association’s expectations are that there will be a recession in 2023 albeit light, and an expected rise in unemployment could put pressure on mortgage servicing portfolios.
Flory also expects year-over-year home price appreciation, which reached a high mark of about 18% in August of 2022, to cool rapidly this year, with overheated markets being more significantly impacted.
Risk outlook
With an eye on risk and regulatory compliance, Mark Boettcher – a principal in our banking capital markets risk advisory practice – pinpointed four areas to watch for in 2023:
Continued focus on “junk fees” and overdraft re-presentment: Regulatory agencies continue to emphasize overdrafts and UAP violations in their examinations.
Community Reinvestment Act proposed rulemaking (expected in 2023): There haven’t been significant changes to the CRA since 1995, so with the expansion of mobile banking in recent years, alterations are quite overdue.
Section 1071 of the Dodd-Frank Act (including proposed rulemaking on small business leading data collection): This area mainly focuses on the collection of data for small business credit applications, including minority-owned and women-owned businesses.
Fair lending (digital redefining): There is a continued focus on fair lending and digital redlining as it pertains to a bank’s digital marketing footprint and the consistency of the products they are offering across their various channels.
Boettcher also highlighted a list of internal audit risks for 2023, including cyberthreats (ransomware and wire fraud), IT and data governance, third-party risk management and organizational resilience. As a best practice, companies want to make sure they conduct their own risk assessment and revisit it at least biannually, if not quarterly, to assess any necessary changes.
Digital assets
Baker Tilly concluded the discussion by noting that Bitcoin has gone from $66,000 a year ago to $17,000 today. The crypto market as a whole has dipped from about a trillion dollars to roughly $880 billion. And as for Bitcoin’s overall dominance in the marketplace, well, that has gone from approximately a 70% market share two years to about 37% today. A big reason for that is stablecoin, which has quickly become a way for individuals and companies to send digital currencies around the world almost instantly, with no intermediaries and no friction.
Some of the major players in the industry at the moment are BNY Mellon, US Bank and Mastercard.
And from a regulatory standpoint, crypto is currently in limbo. There are significant gaps in federal regulations at the moment with several bills going through Congress. Perhaps there will be some clarity on cryptocurrency early in 2023.
For more information on these topics or to discuss how Baker Tilly can assist your organization, contact our team.
