Author: Alexis Long

In the current unpredictable and volatile economy, community banks need to stay at the top of their game to maintain both stability and profitability. To that end, banks have many technological, regulatory and digital factors to consider. Among the most basic factors is attracting and sustaining the bank’s core deposits.

Take these steps

Here are some steps your bank can take to grow core deposits, while keeping costs under control:

Avoid short-term fixes. It’s important to recognize that building core deposits is a long-term strategy — there are no quick fixes. Offering above-market interest rates, for example, may attract new customers in the short term, but it’s unlikely to support sustainable deposit growth. That’s because customers who’re attracted to higher rates are more likely to abandon you when a better rate comes along. In the long run, it’s better to focus on customers who value service over interest rates.

Recognize the importance of branches. A recent J.D. Power banking satisfaction study offers insights into the value of branches. According to the study, although 28% of retail bank customers are now digital-only, they’re among the least satisfied. The most satisfied customers are “branch-dependent digital customers” — those who take advantage of online or mobile banking but also visit a branch two or more times during a three-month period.

Interestingly, the satisfaction gap between branch-dependent customers and more “digital-centric” customers was most pronounced among Millennials and Generation Xers. This is a bit surprising, since it’s commonly thought that younger customers eschew branches. It’s still the case that most customers, including younger generations, prefer to open accounts at a branch — with personalized guidance — because they find it confusing to do online.

Focus on service. According to J.D. Power, weaker performance in the areas of communication and advice, new account openings, and products and fees caused lower satisfaction levels among digital-only customers. To attract and retain engaged customers and grow core deposits, banks need to improve communications and provide quality, personalized advice and other services consistently. It’s key to make these strides across both digital and branch channels.

In addition, community banks that specialize in particular industries or types of banking are often able to attract customers who value specialized services over interest rates. The right niche — whether it’s health care, professional services, hospitality, agriculture or some other industry — depends on the bank’s history and the needs of the community.

Consider reciprocal deposits

A provision of the Economic Growth, Regulatory Relief and Consumer Protection Act of 2018 created an opportunity for community banks to boost deposits by taking advantage of reciprocal deposits. A bank receives these deposits through a deposit placement network in exchange for placing matching deposits at other banks in the network. One advantage of these networks is that they enable banks to attract large-dollar, stable, local depositors by offering them insured deposits beyond the $250,000 FDIC threshold. (Insurance coverage is increased by spreading deposits among several network banks.)

The 2018 law made it easier for banks to take advantage of reciprocal deposits by providing that these deposits (up to the lesser of 20% of total liabilities or $5 billion) won’t be considered “brokered deposits” if specific requirements are met. Brokered deposits are subject to various rules and restrictions that make them more costly than traditional core deposits.

Keep refining your methods

Competition between community banks has never been higher. Your bank has to find ways to differentiate itself from the crowd. In the end, retaining customers requires a multifaceted effort, and focusing on attracting core deposits is key.

© 2023

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Willie Sutton, when asked why he robbed banks, famously replied, “Because that’s where the money is.” So, it’s no surprise that banks are prime targets for fraud. According to the Association of Certified Fraud Examiners (ACFE), the banking and financial services industry consistently tops the list of industries most frequently affected by occupational fraud.

ACFE conducts a biennial survey and publishes the results in its reports on occupational fraud. Survey participants include certified fraud examiners (CFEs), internal auditors, accounting and finance professionals, compliance and ethics professionals, law enforcement, and other fraud investigators around the world. In the most recent edition, Occupational Fraud 2022: A Report to the Nations, banking and financial services again had the most occupational fraud cases (351 of the 2,110 cases studied). The average loss was approximately $1.74 million and the median loss was $100,000.

Important caveat: A high number of fraud cases may or may not mean that the banking and financial services industry experiences more fraud than other industries. It also might indicate that the industry employs more fraud investigators than other industries do — or it’s more heavily regulated. Either way, fraud is a significant problem.

Categories of fraud

ACFE classifies occupational frauds into the following three categories:

1. Asset misappropriation. These schemes involve employees who steal or misuse the employing organization’s resources. Examples include theft of company cash, false billing schemes or inflated expense reports.
2. Corruption. These schemes involve employees who misuse influence in a business transaction in a way that violates their duty to the employer in order to gain a direct or indirect benefit. Examples are schemes involving bribery or conflicts of interest.
3. Financial statement fraud. This happens if an employee intentionally causes a misstatement or omits material information in the organization’s financial reports. For example, a dishonest employee might file a fraudulent expense report claiming personal travel or nonexistent meals.

In the banking and financial services industry, the majority of occupational frauds (84%) involve asset misappropriation, while corruption occurs in 46% of cases and financial statement fraud happens in 11% of cases. Note that while financial statement fraud is relatively infrequent, it tends to produce the largest losses.

Common schemes

The most common asset misappropriation schemes in banking and financial services are:

• Check and payment tampering (14% of cases),
• Theft of cash on hand (14%),
• Cash larceny, where an employee steals an incoming payment after it’s recorded on the bank’s books and records (11%),
• Noncash misappropriation, including theft or misuse of confidential customer information (11%),
• Skimming, where an employee steals an incoming payment before it’s recorded on the bank’s books and records (10%), and
• Billing schemes, which happen when an employee creates a shell company, bills the bank for fictitious services or personal items, and then submits a false invoice to the bank for payment (10%).

Keep in mind that these are only the most common occupational fraud schemes. Banks also may be victimized by a variety of external fraud schemes, such as check fraud, vendor fraud and cybercrimes.

Internal controls

A strong system of internal controls is an excellent fraud prevention measure. For example, background checks, segregation of duties, dual authorization and management review are some of the most effective tools for preventing fraud.

Indeed, ACFE’s survey found that many frauds occur because of the lack of internal controls (29%), the override of existing controls (20%) or the lack of management review (16%). Although deterring fraud is the best strategy, despite your best efforts, fraud may still occur. Have controls in place to detect fraud and put a stop to it before it gets out of hand. (See “Antifraud controls and percentage of fraud reduction,” below.)

Detection methods

According to the ACFE, the most common way frauds are initially detected is through tips (42%). Most often, tips are from employees, but they also may come from customers, vendors and others. It’s a good idea for banks to set up hotlines where people can report suspected fraud via phone, email or online forms (preferably all three).

Regardless of which mechanisms your bank uses, you should allow for anonymous reporting. The ACFE reports that around 16% of tips were anonymous. In addition, frauds are commonly detected through internal audits (16%), management review (12%) and document examination (6%).

Evaluate your risk

Each institution is different, so it’s a good idea to conduct a formal risk assessment to identify your bank’s specific vulnerabilities to fraud. Such an assessment will help you develop an antifraud program designed to mitigate those vulnerabilities and protect your bank from fraud.

Sidebar:   Antifraud controls and percentage of fraud reduction

The following table summarizes the antifraud controls that were most effective in terms of reducing fraud losses and duration, according to Occupational Fraud 2022: A Report to the Nations.

Antifraud control	Loss reduction	Duration reduction
Job rotation/mandatory vacations	54%	50%
Surprise audits	50%	50%
Hotline	50%	33%
Proactive data monitoring/analysis	47%	56%
Antifraud policy	45%	33%
Formal fraud risk assessments	45%	44%
Fraud training for employees	45%	33%
Code of conduct	40%	33%

© 2023

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The Corporate Transparency Act (CTA) was signed into law to fight crimes commonly associated with illegal business activities such as terrorist financing and money laundering. If your business can be defined as a “reporting company” under the CTA, you may need to comply with new beneficial ownership information (BOI) reporting rules that take effect on January 1, 2024.

Who’s who?

A reporting company includes any corporation, limited liability company, or other legal entity created through documents filed with the appropriate state authorities. A reporting company may also be any private entity formed in a foreign country that’s properly registered to do business in a U.S. state. Reporting companies must provide information about their “beneficial owners” to the Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Department of the Treasury.

A beneficial owner is someone who, directly or indirectly, exercises substantial control over a reporting company, or who owns or controls at least 25% of its interests. Indirect control is often exhibited by a senior officer or person with authority over senior officers.

The CTA does exempt a wide range of entities from the BOI reporting rules — including government units, nonprofit organizations and insurers. Notably, an exemption was created for “large operating companies” that: Employ more than 20 employees on a full-time basis, Have more than $5 million in gross receipts or sales (not including receipts and sales from foreign sources), and Physically operate in the United States. However, many of these businesses need to comply with other reporting requirements.

What info must be provided?

The BOI reporting requirements are extensive. Reporting companies must file a report with FinCEN that includes the entity’s legal name (or any trade or doing-business-as name), address, jurisdiction where the entity was formed, and Taxpayer Identification Number. Reporting companies must also submit the name, address, date of birth, and “unique identifying number information” of each beneficial owner. A unique identifying number may be a U.S. passport or state driver’s license number. An image of the document containing the identifying number must be included in the filing.

In addition, the CTA requires reporting companies to provide identifying information about their “company applicants.” A company applicant is defined as someone who’s responsible for: Filing the documents that created the entity (for a foreign entity, this is the person who directly files the document that first registers the foreign reporting company to conduct business in a U.S. state), or Directing or controlling the filing of the relevant formation or registration document by another individual. Note: This rule often encompasses legal representatives acting in a business capacity.

When to file?

Reporting companies have either 30 days or one year from the effective date of January 1, 2024, to comply with the CTA. Reporting companies created or registered before the effective date have one year to file their initial reports with FinCEN. Those created or registered on or after January 1, 2024, will have 30 days upon receipt of their creation or registration documents to file initial reports. After initially filing, reporting companies have 30 days to file an updated report reflecting any changes to previously reported BOI. In addition, reporting companies must correct inaccurate BOI in previously filed reports within 30 days after the date they become aware of the error.

Who can help?

With the effective date closing in quickly, now’s the time to determine whether your business is a nonexempt reporting company that must comply with the BOI reporting rules. We can help you make this determination in consultation with your legal advisors. 

Contact us if you have any questions about the Corporate Transparency Act. © 2023

Heads up: Under Sec. 179, your business may be able to currently deduct eligible property you’ve placed into service in 2023. This generally includes new and used machinery, equipment, off-the-shelf software, roofs, improvements to building interiors and HVAC, as well as fire, security and alarm systems.

For 2023, you can expense a maximum of $1,160,000. That full amount may be claimed until property placed into service exceeds $2,890,000, at which point a dollar-for-dollar phase-out begins. You may also be able to take first-year bonus depreciation of 80% of the adjusted basis of new depreciated property placed into service in 2023.

Contact us for business tax advice.

With the rising cost of college, many families are in search of scholarships to help pay the bills. If your child is awarded a scholarship, you may wonder about how it could affect your family’s taxes.

Good news: Scholarships (and fellowships) are generally tax-free for students at elementary, middle, and high schools, as well as those attending college, graduate school, or an accredited vocational school. It doesn’t matter if the scholarship makes a direct payment to the individual or reduces tuition.

Requirements for tax-free treatment

Despite this generally favorable treatment, scholarships aren’t always tax-free. Certain requirements must be met. A scholarship is tax-free only if it’s used to pay for: Tuition and fees required to attend the school, and Fees, books, supplies, and equipment required of all students in a particular course. For example, expenses that don’t qualify include the cost of room and board, travel, research, and clerical help.

A scholarship award is taxable to the extent it isn’t used for qualifying items. The recipient is responsible for establishing how much of an award is used to pay for tuition and eligible expenses. Therefore, you should maintain records (such as copies of bills, receipts and cancelled checks) that reflect the use of the scholarship money.

Taxable and nontaxable amounts

Subject to limited exceptions, a scholarship isn’t tax-free if the payments are linked to services that your child performs as a condition for receiving the award, even if the services are required of all degree candidates. Therefore, a stipend your child receives for required teaching, research, or other services is taxable, even if the child uses the money for tuition or related expenses.

What if you, or a family member, are an employee of an educational institution that provides reduced or free tuition? A reduction in tuition provided to you, your spouse or your dependents by the school at which you work isn’t included in your income and isn’t subject to tax.

Payments reported and not reported on tax returns

If a scholarship is tax-free and your child has no other income, the award doesn’t have to be reported on a tax return. However, any portion of an award that’s taxable as payment for services is treated as wages. Estimated tax payments may have to be made if the payor doesn’t withhold enough tax. Your child should receive a Form W-2 showing the amount of these “wages” and the amount of tax withheld, and any portion of the award that’s taxable must be reported, even if no Form W-2 is received.

These are just the basic rules. Other rules and limitations may apply. For example, if your child’s scholarship is taxable, it may limit other higher education tax benefits to which you or your child are entitled.

Contact us if you wish to discuss these or other tax matters further. © 2023

Year-end tax planning season is here. The up-and-down financial markets this year may provide you the opportunity to harvest your losses. This tried-and-true tax strategy may be an option if you’ve realized adjusted net capital gains and are now facing a high tax bill as a result.

To soften the tax blow, review your portfolio to see if there are any securities you can sell at a loss to offset the gains. If you end up with a net capital loss, you can use it to offset up to $3,000 in ordinary income. However, beware of the wash sale rule. It bans the deduction of a loss when you acquire “substantially identical” investments within 30 days before or after the sale date.

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This holiday season, you may want to make cash gifts to loved ones. The annual gift tax exclusion for 2023 is $17,000 ($34,000 for married couples). You can give up to that amount to an unlimited number of people by Dec. 31, and the gifts will be exempt from gift tax, the generation-skipping tax and filing obligations.

You can’t “carry over” tax-exempt gifts from year to year, but there may be strategies for making larger gifts. If, for example, you and your spouse want to help your daughter buy a house, you can give her $34,000 on Dec. 31. Then on Jan. 1, you can give an equal or higher amount, when 2024’s gift tax exclusion is projected to be $18,000 ($36,000 for married couples).

Contact one of our experts for help with tax planning.

Taxpayers who purchase assets for business use may be eligible to deduct the full cost in the year of purchase, subject to Section 179 limits. A taxpayer must prove the asset’s cost, where and when it was purchased, and the percentage of business use. Only the percentage of cost that applies to business use may be deducted.

The owner of an electrical services corporation purchased a forklift and a plow attachment, used mostly for business, and a boat that he said was used to entertain clients. The U.S. Tax Court approved a partial deduction for the business use of the forklift and plow. The boat was used mainly for personal purposes, so the court denied that deduction. (TC Memo 2023-114)

Contact one of our experts with questions about tax planning.

The IRS is continuing to warn businesses about aggressive marketing by nefarious actors involving the Employee Retention Tax Credit (ERTC). It has suspended the processing of ERTC claims until at least year end because of a spike in the number of fraudulent claims.

The IRS has now issued a series of red flags businesses should bear in mind. Warning signs include unsolicited calls mentioning an “easy application process,” claims from fraudulent promoters that a business qualifies for the ERTC even before any discussion of the company’s tax situation, large upfront fees, and additional fees based on a percentage of the refund claim. For more information: https://bit.ly/46fh4Yd

Contact one of our experts if you have questions.