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Tax & Regulatory ReportingPresented By:Sheryl Vander Baan, CPA, Tax Partner, Crowe Horwath LLPKristin Rasmussen, CPA, Tax Partner, Crowe Horwath LLPLori St. Marie, Vice President, Tax Manager, Umpqua BankDecember 3, 2014

Disclaimer The information provided herein is educational in nature and is based on

authorities that are subject to change. You should contact your tax adviser regarding application of the information provided to your specific facts and circumstances.

About Crowe HorwathCrowe Horwath LLP (www.crowehorwath.com) is one of the largest public accountingand consulting firms in the United States. Under its core purpose of “Building Valuewith Values®,” Crowe uses its deep industry expertise to provide audit services topublic and private entities while also helping clients reach their goals with tax,advisory, risk, and performance services. With a total of more than 3,000 personnel,Crowe and its subsidiaries have offices coast to coast. The firm is recognized bymany organizations as one of the country's best places to work. Crowe serves clientsworldwide as an independent member of Crowe Horwath International, one of thelargest global accounting networks in the world, consisting of more than 150independent accounting and advisory services firms in more than 100 countriesaround the world.

Crowe Horwath LLP is an independent member of Crowe Horwath International, a Swiss verein. Each member firm of Crowe Horwath International is aseparate and independent legal entity. Crowe Horwath LLP and its affiliates are not responsible or liable for any acts or omissions of Crowe HorwathInternational or any other member of Crowe Horwath International and specifically disclaim any and all responsibility or liability for acts or omissions ofCrowe Horwath International or any other Crowe Horwath International member. Accountancy services in Kansas and North Carolina are rendered byCrowe Chizek LLP, which is not a member of Crowe Horwath International. © 2014 Crowe Horwath LLP.

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Agenda

Regulatory Developments Affecting Taxes• BASEL III• Tax Allocation Agreements Income Tax Accounting Developments

• Low Income Housing Tax Credit Investments• Private Company Accounting Items• Miscellaneous

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Regulatory Developments Affecting Taxes

U.S. Basel III Rules on Regulatory Capital New rules are effective in March Call Reports of –

• 2014 for Advanced Approaches (AA) banks (generally, total assets in excess of $250 billion)

• 2015 for all other (Non-AA) banks Similarly effective in holding company Form FR Y-9C Create a new type of capital – Common Equity Tier 1

(CET1) to accompany total Tier 1 (CET1 + Additional Tier 1), and Tier 2 Substantially change how deferred tax assets and

liabilities (DTAs and DTLs) impact the capital calculation, including eliminating the ability to project 12 months of future income to “cover” existing DTAs

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U.S. Basel III Deferred Tax Basics

Calculations and analysis must be made on a jurisdiction-by-jurisdiction basis. i.e., • State DTLs cannot be netted against Federal DTAs• There can be no calculation of temporary difference DTAs

that could be realized through loss carryback for a jurisdiction that does not allow loss carrybacks (e.g., some states do not permit such carrybacks)

• This is not really new but perhaps more impactful due to loss of projecting future 12 months

Some adjustments are phased-in between now and 2018 when they become fully effective

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Basel III Deferred Tax Basics - Netting Any valuation allowances (VAs) must be netted against

the DTAs to which they relate• References to DTAs in the remainder of this presentation

assume they have already been reduced by related VAs Items deducted from CET1 capital under Sec. 22(b) of the

regulatory capital rules must be deducted net of associated DTLs and DTAs• Sec. 22(b)(2) allows Non-AA banks a one-time election to

“opt out,” i.e., deduct all AOCI items (but the one below) from CET1

• AA banks & those not opting out only deduct AOCI related to cash flow hedges not fair-valued on the balance sheet

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Basel III Deferred Tax Basics - Netting All other assets subject to regulatory capital deduction or

limitation may be reduced by qualifying associated, or allocated, DTLs• Such assets include goodwill & other intangibles (deducted),

and mortgage servicing assets and DTAs (limited)• Once a bank chooses to net or not, it cannot change without

regulatory approval• When risk-weighting any includable asset that was reduced

by a DTL, a bank must risk-weight it without regard to the DTL reduction

The remainder of this presentation assumes all optional netting was chosen

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U.S. Basel III Deferred Taxes – Step 1

Procure Detailed Schedule of DTAs & DTLs• Determine how you will handle the federal effect of state

deferred taxes (since this is a DTL on a DTA item and a DTA on a DTL item)

Identify and segregate DTAs and DTLs to be netted against specific items that are either subtracted from regulatory capital or individually subject to the 10% inclusion threshold

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Identify remaining gross temporary differences (GTD) that create DTAs; determine the amount that could be realized through carry back• Only for jurisdictions that allow carry back• Under “old” rules, bank assumed GTDs hypothetically reversed on

the last day of the Call Report period, first reducing current year-to-date taxable income and then being carried back if applicable tax law allowed

• New rules are silent as to hypothetical date of reversal; presumably the process would be the same

• Includable in CET1 capital at 100% risk-weighting

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Allocate remaining DTLs (those not netted in Step 1), on a pro rata basis, to the following two “buckets”: • any GTD DTAs that could not be carried back via Step 2

(Excess DTAs) and • any tax loss and credit carry forward DTAs (C/F DTAs)

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Subtract C/F DTAs, net of allocated DTLs • Subtracted from CET1 capital in the following transition

percentages:• 2014 - 20% 2015 - 40% 2016 - 60%• 2017 - 80% 2018 -100%

• During the transition period, the portion not deducted from CET1 capital reduces Additional Tier 1 capital items (e.g., qualifying preferred stock & trust preferred securities)• If insufficient Additional Tier 1 capital to absorb it, the excess

reduces CET1 capital (go back to line 8 on Schedule RC-R)• Point: Even during transition, 100% of C/F DTAs are

excluded; it’s just a matter of where they are excluded

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Subject Excess DTAs, net of allocated DTLs to the 10% and 15% thresholds • Allowed in CET1 capital in an amount not to exceed 10% of

“preliminary” CET1 capital (i.e., CET1 computed before any deductions for threshold limitations)• Any amount over 10% is deducted based on phased-in %s:

• 2014 - 20% 2015 - 40% 2016 - 60%• 2017 - 80% 2018 -100%

• 10% threshold is also applied individually to mortgage servicing assets (MSAs) and investments in the common shares of unconsolidated financial institutions (collectively with Excess DTAs, the “Threshold Items”)

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Subject Excess DTAs, net of allocated DTLs, to the 10% and 15% thresholds • The Threshold Items allowed under the individual 10% step

must be aggregated and then subjected to a 15% threshold; the total amount allowable in CET1 capital cannot exceed the 15% threshold • This 15% threshold is computed differently during the transition

period than it will be in 2018 (see examples in Call Report instructions)

• All allowable amounts of Threshold Items are subject to 100% risk-weighting during the transition period and 250% risk-weighting starting in 2018

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U.S. Basel III – EXAMPLE

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3/31/2015 CALL REPORT FOR A BANK "OPTING OUT" RE: AOCI

Gross Amount

Federal Tax State Tax

Federal Effect of

State Tax

Call Report

Deferred Taxes

Netted Against Specific

Items

GTD DTAs

Able to Carry Back

Excess GTD DTAs, Net of

Allocated DTLs

C/F DTAs, Net of

Allocated DTLs

AOCI-AFS Securities 30,000 10,500 2,400 (840) 12,060 12,060 AOCI-Pension Liab (10,000) (3,500) (800) 280 (4,020) (4,020)

Goodwill (5,000) (1,750) (400) 140 (2,010) (2,010) Core Dep Intang 6,000 2,100 480 (168) 2,412 2,100 312 Mtge Serv Assets (12,000) (4,200) (960) 336 (4,824) (4,824) Fed. Sec. 382 NOLs 100,000 35,000 35,000 35,000 State NOLs (a) 200,000 16,000 (5,600) 10,400 10,400 Other GTD DTAs 130,000 45,500 10,400 (3,640) 52,260 8,700 43,560 Other GTD DTLs (45,000) (15,750) (3,600) 1,260 (18,090) (8,890) (9,200) TOTALS 374,000 60,900 21,920 (7,672) 75,148 (6,834) 10,800 34,982 36,200

Included; Included Must be(a) State does not allow carry back Federal Tax Liability: (b) 100% up to sub-(b) Computed as if Bank filed separately 2013 4,000 Risk- 10% & tracted(c) Assumes no AMT created upon carryback 2014 5,000 Weighted 15%

Q1 2015 Estimate 1,800 Thresholds10,800 (c)

U.S. Basel III – DTA Observations

Banks with income tax paid in recent years sufficient to support DTA realizability under the hypothetical carry back rule typically have no limitation for including the DTA in Tier I capital under the “old” rules, and likely would have no limitation under the new rules Banks with significant DTAs in jurisdictions not allowing

carryback may experience a limitation under the new rules (since no reliance on 12 future months of taxable income is allowed) Banks whose net DTA is comprised heavily of tax loss

and credit carry forwards may experience a significantly greater limitation under the new rules

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S-Corporation and the Capital Conservation Buffer

Over the next several years, Basel III will phase in certain dividend restrictions on banks that fall below a calculated “capital conservation buffer” These restrictions could pose a serious problem for an S-

corporation bank with current taxable income if they prohibit the bank from paying dividends to shareholders necessary for them to cover the tax liability on the bank’s taxable income passed through to them To address this concern, the FDIC recently issued

Financial Institution Letter 40-2014 which offers these banks a forum for requesting relief from the dividend restrictions if necessary to cover these tax obligations

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Intercompany Tax Allocation Agreements

In June 2014, the federal banking agencies issued “Addendum to the Interagency Policy Statement on Income Tax Allocation in a Holding Company Structure,” to supplement and clarify the 1998 policy statement The agencies felt the guidance was necessary in light of

some recent court cases involving tax refunds received by a bankrupt parent corporation whose bank subsidiary was in FDIC receivership In some of those cases, the courts determined that the

bank was merely a creditor with respect to its share of the consolidated tax refund received by the parent

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Advises consolidated groups subject to federal or state corporate income tax to review and revise their tax allocation agreements to ensure the following:• Clearly acknowledge that an agency (not debtor-creditor)

relationship exists between the holding company and its subsidiary insured depository institutions with respect to tax refunds attributable to the institution

• Do not contain other language suggesting a contrary intent The guidance includes a sample paragraph that

institutions could include in their tax allocation agreements to facilitate compliance with the Addendum

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Clarifies application of Sections 23A & 23B of the Federal Reserve ActRequires the holding company to forward

promptly any tax payment due to an insured depository institution The agencies expected implementation by

October 31, 2014

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Income Tax Accounting Developments

ASU 2014-01 – Accounting for Investments in LIH Tax Credits

Applies to low income housing tax credit investments Broadens ability to present net investment performance

as a component of income tax expense (benefit) instead of amortizing the investment “above-the-line” with all tax benefits presented “below-the-line” Eliminates the effective yield method currently in ASC

323-740 paragraphs 35-2 and 45-2 Allows an election to use a new proportional amortization

method, if certain conditions are met; otherwise use equity or cost methods per ASC 970-323

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ASU 2014-01 – Investments in LIH Tax Credits Provides examples of all three allowable methods on a $100,000

investment yielding $80,000 credits over 10 years, $7,273/yr. K-1 tax loss (depreciation), and no residual value, at a 40% tax rate

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Year 1 Journal Entry

Proportional Amortization

Method Equity

Method

Cost Method w/

Amortization Investment (9,091) (7,273) (10,000)

Tax Currently Payable 10,909 10,909 10,909 Deferred Taxes 1,091

Other Expense 7,273 10,000 Income Tax (Benefit) (1,818) (10,909) (12,000)

Income Statement Impact (1,818) (3,636) (2,000)

ASU 2014-01 – Investments in LIH Tax Credits

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Effective for –• Public business entities: annual periods beginning after

Dec. 15, 2014 (calendar year 2015) and related interim periods

• All other entities: annual periods beginning after Dec. 15, 2014 (calendar year 2015) and interim periods in the following year

• If elected, apply retrospectively to all periods presented• However if the effective yield method was used, can

continue to apply that method to those pre-existing investments

• Early adoption permitted 25


If elected –• Take care in recording taxes & reconciling tax accounts,

at both interim and year-end periods, since the investment amortization will run through the tax accounts

Also requires new financial statement disclosures, regardless of accounting method applied

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ASU 2013-12 – Definition of a Public Business Entity Issued Dec. 23, 2013; defines “public” for financial reporting (not

legal) purposes; 5 criteria, some surprising, including – d. It has issued, or is a conduit bond obligor for, securities that are traded, listed, or

quoted on an exchange or an over-the-counter market. e. It has one or more securities that are not subject to contractual restrictions on

transfer, and it is required by law, contract, or regulation to prepare U.S. GAAP financial statements (including footnotes) and make them publicly available on a periodic basis (for example, interim or annual periods). . .

FDIC has observed that more banks are considered public under FASB’s new definition that what some had expected

Public Business Entity (Public) Not a Public Business Entity (Private)

Typically subject to earlier effective dates and more disclosure

Typically subject to later effective dates and lessdisclosure

Cannot use alternatives (practical expedients) developed by the Private Company Council (PCC) under U.S. GAAP

Can use alternatives (practical expedients) developed by the Private Company Council (PCC) under U.S. GAAP

ASU 2014-02 – Accounting for Goodwill

Consensus of the Private Company Council (PCC) allowing privatecompanies to elect to amortize goodwill, for GAAP purposes, over 10 years (or less if could support a lesser life) and to apply a simplified impairment model

Q3 supplemental call report instructions memorialize banking agencies’ acceptance of PCC alternatives for call reporting purposes (for banks not deemed to be public business entities)

Effective for annual periods beginning after Dec. 15, 2014 (calendar year 2015) and interim periods in the following year• If elected, apply prospectively to goodwill existing at beginning of

election period (and any new goodwill)• Early adoption permitted

Income tax accounting could be tricky if both book and tax goodwill exist, but in different initial amounts

Note: FASB added agenda item to reconsider goodwill for all entities28

ASU 2014-04 – Transfers to OREO

Clarifies timing: for GAAP purposes, consumer mortgage loan collateral should be recorded into OREO when the lender has obtained legal title or a deed in lieu of foreclosure is completed. Lender should not wait until any subsequent redemption period has expired Effective Dates (early adoption is permitted)

• Public business entities: annual periods beginning after Dec. 15, 2014 (calendar year 2015) and related interim periods

• All other entities: annual periods beginning after Dec. 15, 2014 (calendar year 2015) and interim periods in the following year

Consider any book-tax differences, particularly if this will change current “book” accounting practice

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Proposed ASU: Financial Instruments – Credit Losses

FASB is still re-deliberating the proposal which would impact the recognition and measurement of credit losses via the allowance account; final ASU is slated for 2015 Focus is on the CECL (current expected credit loss)

model which would immediately record all current expected credit losses Whether this might impact the timing and amount of

actual charge-offs (which typically drive tax bad debt deductions) is uncertain until finalized Additional book-tax differences might result

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Proposed ASU: Financial Instruments –Classification & Measurement

Includes a tentative decision regarding evaluating the need for a valuation allowance on deferred tax assets related to unrealized losses on debt securities classified as available-for-sale• Realizability must be evaluated in combination with all other

deferred tax assets• Switch from original exposure draft that this DTA does not

require a source of future taxable income for realization (if intent and ability to hold till maturity, or value recovery, exists)

• No accounting policy changes required until the effective date of the final ASU

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For More Information, Contact

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Crowe Horwath LLP Sheryl L. Vander Baan, CPA – Partner

Grand Rapids, [email protected] Kristin Rasmussen, CPA – Partner

Los Angeles, [email protected] www.crowehorwath.com

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