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The Federal Deposit Insurance Corporation (FDIC) recently issued its first quarter 2024 Quarterly Banking Profile. The report provides financial information based on call reports filed by 4,568 FDIC-insured commercial banks and savings institutions. The report also contains a section specific to community bank performance. In the first quarter of 2024, this section included the financial information of 4,128 FDIC-insured community banks. BerryDunn’s key takeaways from the report are as follows:

The first quarter of 2024 resulted in community banks’ quarterly net income increasing $363.2 million from the previous quarter. 

Quarterly net income for community banks increased 6.1% in first quarter 2024, resulting in $6.3 billion of quarterly net income. Despite the increase in quarterly net income, full year net income declined. Compared to first quarter 2023, net income had decreased $1 billion or 13.9%. Half (49.9%) of all community banks reported a decline in net income compared to fourth quarter 2023. Net income for community banks was impacted by higher noninterest expense and lower net interest income.

Despite remaining consistent in the prior quarter-over-quarter comparison, NIM (net interest margin) resumes the declining trend into 2024.

Community banks’ NIM dropped in the first quarter to 3.23%. NIM was down 26 basis points from the year-ago quarter. The yield on earning assets increased 66 basis points, and the cost of funds increased 92 basis points. Despite the significant decline, the community banks’ NIM performance continued to prevail the overall banking industry’s NIM of 3.17%, which declined 10 basis points in first quarter 2024. The banking industry’s NIM dropped seven basis points below the pre-pandemic average NIM of 3.25% for the first time since third quarter 2022.

Loan and lease balances continued to grow in first quarter 2024, with 62.9% of community banks reporting quarterly loan growth. 

Loan and lease balances continued to see widespread growth in first quarter 2024. Community banks saw loan growth in all major portfolios except construction and development loans and agricultural production loans. Nonfarm, nonresidential commercial real estate (CRE) loans exhibited the most growth from fourth quarter at 1.4%, followed closely by residential real estate and C&I loans, both at 0.9%. Total loans and leases grew 7.1% from one year ago. This year-over-year growth was also driven by farm, residential real estate and nonfarm, nonresidential CRE loans, which showed growth year-over-year of 8.8%, 8.5%, and 6.7%, respectively.

More than half of all community banks (61.9%) reported an increase in deposit balances from the previous quarter. 

First quarter 2024 showed growth in interest-bearing deposits of $35.6 billion but a decline in noninterest-bearing deposits of $12.9 billion from the previous quarter. Total assets at community banks increased 0.8% quarter-over-quarter and 4.0% year-over-year. Community banks’ total deposits as a percentage of total assets have been declining since reaching 86.71% in first quarter 2022; however, community banks have yet to return to the low of 81.75% shown in first quarter 2020. The average total deposits as a percentage of total assets has shown year-over-year increases of 0.41%, 2.57%, and 0.95% from 2019 through 2022, respectively; however, the community banks have shown a year-over-year decrease in average total deposits as a percentage of total assets of 2.44% and 0.15% into 2023 and the first quarter of 2024, respectively.

BerryDunn and Stifel recently held the 11th annual New England Banking Summit on May 30th in Portsmouth, New Hampshire. The firms were joined by over 30 different organizations and touched on current economic trends, accounting standards and tax updates, strategies for maximizing benefits and minimizing risks within financial institutions, navigating change, and ways to optimize Current Expected Credit Losses (CECL) processes. Chief Economist Lindsey Piegza, Ph.D. from Stifel, spoke, amongst other things, about the May Federal Open Market Committee (FOMC) meeting. She noted she believes the FOMC will remain on the sidelines for longer than previously expected. The FOMC stated that “readings on inflation have come in above expectations.” This could continue to put downward pressure on NIMs more so than already seen in the above graph.

The inactivity by the FOMC has also wreaked havoc on some bank’s budgets, especially those that optimistically budgeted some rate cuts in 2024. But this projected inaction should not be reason to declare defeat. Bankers are great at pivoting, which was proven continuously during the pandemic. This is another opportunity for banks to pivot and change strategic direction. For instance, this may be a time to focus on other, non-interest revenue sources, or possibly revisit recurring operating costs for opportunities to streamline.

As always, BerryDunn’s Financial Services team will be right alongside you, navigating every rise, bump, and drop of this rollercoaster ride together.

Read this if you are preparing for a retirement plan audit.

Few things can feel as daunting as preparing for an audit, especially if it’s your first time being audited. With all the information circulating about new laws and regulations dictating who is required to undergo an audit, compliance issues can become even more complicated. Here are some considerations to help you as you prepare for a retirement plan audit.

While it might seem obvious, it’s worth noting that the purpose of an employee benefit plan is to generate and protect retirement income on behalf of your employees. Plan transactions should be processed in accordance with plan provisions so that employees receive the maximum retirement benefits they have earned. This is why laws and regulations exist and, in some cases, audits are required. 

Fiduciary responsibility

Those who hold authority over employee benefit plan operations and assets—such as plan administrators—have a fiduciary responsibility to oversee and protect the plan, acting in the best interests of the plan’s participants and their beneficiaries. Fiduciaries can be held personally liable if this responsibility is not upheld. Yet this is only one of the many complexities that comes along with maintaining an employee benefit plan. Additional complexities to consider include diversifying plan investments and selecting and monitoring service providers.

Even if your employee benefit plan does not meet the participant threshold that requires an annual audit, your plan is still subject to the same laws and regulations as plans requiring an audit. One of the most important things you can do as a fiduciary, or as someone involved in the operations of an employee benefit plan, is to stay current on changing laws and regulations. 

It is also important to understand your plan’s adoption agreement, including its nuances, which vary from plan to plan. These nuances can include, but are not limited to, navigating the intricacies of vesting provisions, participant loans, distribution types, and defining what constitutes plan-eligible compensation.

Independent auditors

Plan sponsors can also benefit from working with an independent auditor, even when it is not legally required. Many service providers offer consulting services, typically referred to as audit-readiness assessment services, at a lower cost than an audit and with similar benefits, including an understanding of any gaps in internal controls, a deeper understanding of accounting standards and compliance requirements, and an opportunity to improve documentation and processes to maintain operational compliance with plan documents and regulatory guidance. These services are vast and customizable and can help you maintain compliance with ERISA and IRS regulations, work efficiently with third-party administrators, and test operational workflows to identify processes that should be occurring throughout the plan year. 

As retirement plan auditors, a common challenge we see when conducting first-time plan audits is the amount of time it takes the employer to remit employee contributions to the plan and how quickly those funds are invested in the employee’s retirement account. Optimally, this transaction should align with the same date the employee funds are withheld during the payroll process. This is an area that would be examined by an auditor in an audit-readiness assessment and is one example of the many ways this type of service can support improvements to your plan operations and compliance.

Other things to be aware of include the timeline for processing electronic deferral election changes in the plan sponsor payroll software, calculation of participant vesting and identification of forfeited amounts, and making sure all calculations for contributions are based on the correct definition of plan compensation per your plan documents.

Audit-readiness assessments

Is your plan a candidate for an audit-readiness assessment? While not suitable for everyone, investing in an audit-readiness assessment service is certainly worth considering. This is especially true if your plan is growing, you are seeking to become better prepared should that audit come, or you are simply feeling overwhelmed. Whatever the case, if you would like to discuss your options, the BerryDunn Employee Benefit Plan Audit team is here to help. 

Read this if you sponsor an employee benefit plan. 

Sponsors of defined benefit and defined contribution retirement plans should keep the following deadlines and other important dates in mind as they work toward ensuring compliance for their plans in 2024. Dates assume a calendar year plan. Some deadlines may not apply, or dates may shift based on the plan sponsor’s fiscal year. 

JANUARY

• 15 / Fund: Possible fourth quarter 2023 contribution due for defined benefit pension plans.
• 31 / Action: File IRS Form 945, Annual Return of Withheld Federal Income Tax, by January 31 for non-payroll income taxes, such as taxes withheld by retirement plans, during 2023.
• 31 / Action: Distribute IRS Form 1099-R to participants by January 31 for 2023 retirement plan distributions.

Best Practice: Plan sponsor should confirm the accuracy of the prior year’s census data to the recordkeeper. This information is used for ADP/ACP testing, among other things.

FEBRUARY

• 28 / Action: File IRS Form 1096, Annual Summary and Transmittal of US Information Returns, with IRS if using paper transmittal by February 28 for 2023 tax year.
• 28 / Action: File IRS Form 1099-R in paper format with the IRS by February 28 for 2023 retirement plan distributions.

Best Practice: Review and approve compliance testing results sent by plan administrator.

MARCH

• 15 / Action: Highly compensated employees who fail the ADP/ACP test for the prior plan year must have refunds processed by March 15 (other than eligible automatic contribution arrangements).
• 15 / Fund: Partnerships and S Corporations that are not getting an extension must fund employer contributions to receive tax deductions for the prior year.

APRIL

• 1 / Action: 401(k) plans with publicly traded employer stock that follow Article 6A of the Regulation S-X (SEC format) must file Form 11-K with the Securities and Exchange Commission by April 1.

Note: The IRS “weekend rule” does not roll the April 1 deadline to the next business day if April 1 falls on the weekend or holiday.

• 1 / Action: Recordkeeper (or other responsible party) completes and files Form 1099-R electronically with the IRS by April 1 for 2023 retirement plan distributions.
• 1 / Action: April 1 deadline for 5% of business owners and terminated participants who turned 73 in 2023 to receive their required minimum distribution (RMD).
• 15 / Fund: April 15 possible first quarter 2024 contribution due for defined benefit pension plans (i.e., contribute by April 15 before the weekend, as contribution deadlines are not extended to the next business day).
• 15 / Distribute: Participants who contributed over 402(g) or 415 limits in the previous year must be refunded the excess amount by April 15.
• 15 / Action: File PBGC Form 4010, Notice of Underfunding for single-employer defined benefit plans with more than $15 million aggregate underfunding by Monday, April 15.
• 15 / Fund: C-Corporations and Sole Proprietors that are not getting an extension must fund employer contributions by April 15 to receive tax deductions for the prior year.
• 15 / Fund: IRA contributions for the prior tax year must be funded by April 15.
• 29 / Action: Send annual funding notice to participants of single and multi-employer defined benefit plans over 100 participants by April 29.

JUNE

• 28 / Action: 401(k) plans with publicly traded employer stock must file SEC Form 11-K with the Securities and Exchange Commission by June 28 or file an extension on SEC Form 12b-25.
• 30 / Action: Highly compensated employees who fail ADP/ACP test for prior plan year must have refunds processed by June 30, if an eligible automatic contribution arrangement (EACA).

JULY

• 15 / Action: 401(k) plans with publicly traded employer stock that requested a 15-calendar day extension (SEC Form 12b-25) for the SEC Form 11-K must file the SEC Form 11-K with the Securities and Exchange Commission by July 15.
• 15 / Fund: Possible second quarter 2024 contribution due for defined benefit pension plans by July 15.
• 31 / Action: File IRS Form 5500, Annual Return/Report of Employee Benefit Plan, and IRS Form 8955-SSA, Annual Registration Statement Identifying Separated Participants with Deferred Vested Benefits, for the 2023 plan year by July 31.
• 31 / Action: To request an extension of time to file IRS Form 5500, file IRS Form 5558 by July 31.

SEPTEMBER

• 15 / Fund: If an extension was filed, September 15 is the deadline to fund employer contributions for Partnerships and S Corporations.
• 15 / Fund: September 15 is the last date to make 2023 contributions for single and multiemployer defined benefit pension plans.
• 30 / Action: By September 30, distribute the  Summary Annual Report (SAR) to participants if the Form 5500 was filed on July 31.

OCTOBER

• 3 / Action: Distribute annual notices to participants no earlier than October 3 and no later than December 2, including notices for 401(k) Plan Safe Harbor Match, Automatic Contribution Arrangement Safe Harbor, Automatic Enrollment, and Qualified Default Investment Alternatives (QDIA).
• 15 / Fund: On October 15, any possible third quarter 2024 contribution due for defined benefit pension plans.
• 15 / Action: October 15 is the extended deadline for filing IRS Form 5500 and IRS Form 8955-SSA.
• 15 / Action: October 15 is the extended deadline for filing individual and C Corp tax returns.
• 15 / Action: If an extension was filed, October 15 is the deadline to fund defined contribution employer contributions for C Corporations and Sole Proprietors.
• 15 / Action: October 15 to open a Simplified Employee Pension (SEP) plan for extended tax filers.
• 15 / Action: Send annual funding notice to participants of single- and multi-employer defined benefit plans with 100 or fewer participants by October 15.
• 15 / Action: October 15 defined benefit plan PBGC Premium filings and payments due.
• 31 / Action: Single-employer defined benefit plans that are less than 60% funded or are 80% funded and have benefit restrictions triggered must inform participants by October 31 or 30 days after the benefit restriction applies.

Best practice: Make sure administrative procedures align with language in plan document.

DECEMBER

• 2 / Action: Distribute annual participant notices no later than December 2. These include notices for: 401(k) Plan Safe Harbor Match, Automatic Contribution Arrangement Safe Harbor, Automatic Enrollment and Qualified Default Investment Alternatives (QDIA).
• 15 / Action: December 15 is the extended deadline to distribute the Summary Annual Report (SAR) when the Form 5500 was filed on October 15.
• 31 / Action: December 31 is the final deadline to process corrective distributions for failed ADP/ACP testing; a 10% excise tax may apply.
• 31 / Action: Ongoing required minimum distributions (RMDs) for 5% business owners and terminated participants must be completed by December 31.
• 31 / Action: Amendments to change traditional 401(k) to safe harbor design, remove safe harbor feature or change certain discretionary modifications must be completed by December 31. Amendments to change to safe harbor non-elective design must be completed by December 1 of the given plan year for 3% or by December 31 of the following year for 4% contribution level.
• 31 / Action: Plan sponsors must amend plan documents by December 31 for any discretionary changes made during the year.

In addition to those important deadlines and dates, plan sponsors should be aware of the contribution plan limits and other rolling notices for 2024:

• Traditional and Roth Individual Retirement Account contribution limit is $7,000. Catch-up contributions for participants aged 50 and over is $1,000, which is fixed by law and not adjusted each year.
• The employee salary deferral limit for 401(k), 403(b) and 457 plans is $23,000. The catch-up contribution limit for participants who are age 50 or older in 2024 is $7,500.
• Maximum annual additions (i.e., employee deferrals, employer contributions, and forfeitures) that can be allocated to a participant’s defined contribution plan account for 2024 is $69,000.
• Limitation for the annual benefit under a defined benefit plan under Section 415(b)(1)(A) is $275,000.
• The dollar amount used to define “highly compensated employee” under Section 414(q)(1)(B) is $155,000.

BEST PRACTICES:

• Contact your service provider to discuss any required and/or discretionary SECURE 2.0 provisions effective in 2024 to ensure compliance.
• Make sure discretionary amendments that impact plan design and administration are executed and implemented timely per IRS regulations.
• Make sure administrative procedures align with language in plan document.
• Plans may consider doing mid-year compliance testing to avoid failing applicable annual tests.
• Review and approve compliance testing results sent by plan administrator.
• Plan sponsor should confirm the accuracy of the prior year’s census data to the recordkeeper. This information is used for ADP/ACP testing, among other things.

If you want to discuss these considerations or have questions about your specific situation, please contact our Employee Benefits team. We're here to help. 

Read this if you sponsor an employee benefit plan. 

In December 2022, Congress passed the Securing a Strong Retirement Act of 2022, commonly referred to as the SECURE 2.0 Act. The SECURE 2.0 Act includes a multitude of provisions, many of which affect employer-sponsored retirement plans and individual retirement accounts. In this article, we want to specifically focus on changes to catch-up contributions for employer-sponsored retirement plans. 

Catch-up contribution parameters

Currently, salary deferral catch-up contributions are available to participants who are age 50 or older (regardless of when they turn 50 during the calendar year). For 2023, the catch-up contribution limit is $7,500; however, this amount changes annually as it is indexed to inflation. This has historically been a non-issue for plans, payroll providers, and recordkeepers, as payroll provider and recordkeeper portals have been set up to allow contributions over the normal salary deferral limit (currently $22,500) for those participants who are over age 50. These catch-up contributions have traditionally been coded the same as a participant’s regular deferrals—either traditional or Roth.

Effective dates: Roth catch-up contributions requirement

Effective January 1, 2024, catch-up contributions will be required to be made on a Roth basis for participants with wages greater than $145,000 (indexed annually for inflation) in the prior year. However, on Friday, August 25, 2023, the IRS issued Notice 2023-62, which provides a two-year administrative transition period to implement the new catch-up contribution provisions.

Specifically, until taxable years beginning after December 31, 2025, catch-up contributions to participants with wages greater than $145,000 in the prior year will not need to be designated as Roth contributions.

Note that the $145,000 limit is determined by looking at wages for social security tax purposes. That may or may not be the same definition that is used by a plan for other purposes (e.g., salary deferral and employer contributions). This may create an administrative burden for payroll providers and recordkeepers as these vendors will need to be able to differentiate between employees under and over this compensation threshold. Furthermore, for those above the threshold, software and systems will need to be set up to help ensure any catch-up contributions are properly coded as Roth contributions, for payroll and retirement plan reporting. Employees with wages of $145,000 or less may still elect to have Roth catch-up contributions, if allowed by the plan documents.

Recommendations

We recommend reaching out to payroll providers and recordkeepers today to see how they plan to approach compliance with the new provision. These conversations should not be independent of one another—it will take a concerted effort amongst plan management, payroll providers, and recordkeepers to help ensure compliance.

NOTE: There is one other change on the horizon for catch-up contributions. Beginning in 2025, the SECURE 2.0 Act creates an additional “special” catch-up limit for employees who are ages 60 to 63. This special catch-up limit will be the greater of $10,000 or 150% of the regular catch-up amount in effect for the year. This amount will also be indexed for inflation annually.

Additional changes effective in 2024

• Elimination of Required Minimum Distributions (RMDs) for Roth 401(k) and 403(b) plans
• RMDs for surviving spouses
• Student loan repayments matching contributions
• Emergency savings accounts
• Optional Rothification of catch-up contributions for high earners (as discussed above, this will be mandatory in 2026)
• Higher forced rollover limit
• Retroactively amending plan to increase benefits for prior plan year
• Waiver of early withdrawal penalties for certain distributions
• Permanent safe harbor for correcting auto-enrollment and auto-escalation failures
• Uniform rollover forms
• 403(b) hardship distributions conform to 401(k) rules
• Starter 401(k) or 403(b) plans
• Separate top-heavy tests allowed 
• SIMPLE plan updates
• Reform of family attribution rules
• Improved defined benefit plan annual funding notices
• Indexing individual retirement account (IRA) catch-up limit
• Section 529 rollovers
• Retirement savings lost and found

For more information on these changes and others going into effect in 2025, read the previous article on the SECURE 2.0 Act.

If you have questions about the SECURE 2.0 Act, catch-up contributions, or your specific situation, please contact our Employee Benefits team. We're here to help. 

Read this if you are thinking of implementing a new software solution or want to learn more about System and Organization Controls (SOC) reports.

Vendor due diligence is a crucial step when considering new software to use at your organization. Maybe this is a familiar topic or maybe you are just learning how to better assess vendors before you sign a contract. Either way, a software demo should be an important part of your decision-making process—but it cannot be the only criteria you use before buying new software. 

SOC 1 and SOC 2 reports: Background

Developed by the American Institute of Certified Public Accountants (AICPA), SOC 1 and SOC 2 reports provide software providers with the opportunity to demonstrate the existence of strong internal controls in place (see more below on why this is important). A SOC 1 report covers Internal Control over Financial Reporting (ICFR) and is an important tool for vendors that process data or provide services critical to their customers' financial reporting. SOC 2 reports are intended to provide detailed information and assurance about the vendor’s controls relevant to the AICPA’s Trust Services Criteria (TSC) for five categories: Security, Availability, Processing Integrity, Confidentiality, and Privacy. Each SOC 2 report must include the Security category and the others are optional based on the services provided. 

The Security category requires that vendors demonstrate their controls related to risk assessment, mitigation, and monitoring practices; user access to systems and physical access to equipment; monitoring security vulnerabilities; software development; change management practices for network devices; incident response procedures; and management’s control environment for oversight, ethics, accountability, and communication.

SOC 1 and SOC 2 reports: Benefits

Both SOC 1 and SOC 2 reports should provide information on the internal controls related to the software development lifecycle. A comprehensive SOC report will include tests on the development and approval processes for software code changes. This is important when assessing whether a software vendor has a mature process for changes that affect its customers. If reviews and approvals are not tested in the report, this can indicate that that the organization doesn’t currently have a structured and consistent process in place. In this scenario, there is a risk that software developers have the freedom to write code and make changes to the software that impact customer data without a proper review of the effects of those changes. This could create an unintended change in the software that leads to unreliable data for your organization. 

Each SOC report is the result of an independent audit by a CPA firm that thoroughly tests the internal controls in place at the software or service company. Reviewing the results of this audit can help you understand the vendor’s controls and demonstrate whether the software functions as intended, includes controls to prevent unauthorized code changes, and has security controls to protect your data. 

SOC 1 and SOC 2: Resources 

SOC reports and your review of them can strengthen your vendor due diligence process and help your organization determine the best software vendor for your needs. Our team has developed checklists to help you identify the key areas of attention as you review SOC reports, and you can download them here. These checklists are also helpful for software vendors you are already using to help understand the controls in place and whether you should ask questions about controls you do not see in the report. Please watch our video on how to effectively use our checklists.

Our SOC experts are here to help. Please contact us to learn more about SOC reports or if you have specific questions about protecting your organization from ineffective software development practices.

Read this if you are an IT director, information security officer, compliance officer, risk manager, or an organizational leader interested in enhancing resilience and robust continuity strategies.

In today’s business environment, the ability to navigate and recover from unexpected disruptions is crucial. Whether facing cyberattacks, health crises, or even natural disasters, the faster your organization can resume operations, the better. To enhance organizational resilience, it is important to distinguish between business continuity (BC), disaster recovery (DR), and incident response (IR). This short article outlines the distinct roles of BC, DR, and IR, emphasizing their contributions to resilience and offering insights for developing strategies to address disruptions effectively.

What is business continuity?

Business continuity is focused on sustaining an organization's mission and essential business processes during and after a disruption. For many organizations, this includes critical functions, such as payroll or customer service.

A business continuity plan (BCP) can be customized for a single unit or the entire organization, emphasizing specific functions. The BCP's objective is to help ensure the uninterrupted operation or timely restoration of critical business processes, regardless of the disruption's nature, whether it be IT-related or if it affects other aspects of the business.

BCP components include:

• Identifying potential risks and threats and assessing their impact on critical processes, as well as prioritizing functions based on criticality
• Developing strategies to mitigate disruption impacts on critical functions and exploring alternative approaches to conducting business
• Outlining procedures for immediate threats or emergencies, providing contact details for key personnel and emergency services, and specifying evacuation plans and safety protocols
• Establishing guidelines for internal and external communication during disruptions and protocols for keeping employees, customers, and stakeholders informed
• Describing the recovery and restoration of IT systems and data (refer to the disaster recovery section below), including backup and recovery procedures, and defining the roles of IT personnel during disruptions

What is disaster recovery?

Disaster recovery addresses significant disruptions that deny access to the primary IT infrastructure for an extended period. Examples of disasters include natural disasters, terrorist attacks, cybersecurity incidents, power outages, network failures, pandemics, etc.

A disaster recovery plan (DRP) is a targeted strategy to restore operability to the IT infrastructure following a disaster. It complements a BCP by recovering supporting systems for essential business processes. The DRP’s objective is to minimize downtime and data loss by restoring IT systems, applications, and data in a timely manner to resume normal operations.

DRP components include:

• Identifying risks and threats to IT systems and data and assessing their impact on critical functions.
• Establishing recovery time objectives (RTO) and recovery point objectives (RPO) for critical systems and prioritizing each based on criticality.
• Implementing procedures for regular data backups, selecting appropriate methods, and working to ensure off-site storage for data redundancy
• Providing detailed recovery instructions for IT systems and applications, with designated personnel responsible for execution
• Conducting regular testing through simulation exercises, evaluating DRP effectiveness, and adjusting as necessary

What is incident response?

Incident response manages and mitigates the impact of security incidents, such as ransomware attacks or data breaches. Its goal is to detect, respond to, and recover from incidents promptly to minimize damage and protect sensitive information. 

An incident response plan (IRP) outlines procedures for addressing cybersecurity attacks, helping to identify, mitigate, and recover from incidents like unauthorized access or denial of service. The IRP is often included as an appendix to the BCP and DRP.

IRP components include:

• Identifying covered incident types
• Establishing an incident response team with roles, responsibilities, and key personnel contacts
• Setting criteria for classifying incidents by severity and impact, defining severity levels and corresponding response actions
• Outlining immediate steps upon incident detection, activating the response team, and initiating preliminary assessments
• Establishing procedures for post-incident reviews, documenting lessons learned, and recommending improvements to the IRP

Conclusion

BC, DR, and IR are each crucial for organizational resilience against unexpected disruptions. BC works to ensure sustained critical business functions, DR restores IT systems post-disaster, and IR manages security incidents. The synergy of these three components forms a comprehensive strategy, empowering organizations to navigate disruptions effectively.

For more information on organizational resilience or if you have questions about your specific situation, please don’t hesitate to contact our cybersecurity consulting team. We’re here to help.

There’s an old folk story about two men who had a contest to see who could cut the most firewood in a day. One of the men, an energetic young man, was confident he would be the winner. Much to his surprise, his opponent, a wise old man, bested him. “How did you beat me? I saw you taking all those breaks in the shade of that tree!” the young man exclaimed. The wise old man chuckled and said, “What breaks? I was sharpening my axe!”

Summer is when we sharpen our axes. For the valuation team, the year typically gets off to a busy start with ESOP clients looking for an updated share price. Additionally, many business owners began making decisions—buying or selling companies and planning for ownership transitions—in the spring after reviewing financial results for the prior year.

By summer, this activity is winding down. Things never quite get slow, but in the summertime, we make time to set ourselves up for sustainability during the busy times. Our summers are full of training analysts, getting acquainted with future talent through our intern program, refining templates, and exploring new ways to help our clients create, grow, and protect value.

We also spend a little more time digesting economic trends and forecasts and considering what implications these variables may have on business value.

We track trends in several databases of private company transactions, among them GF Data, Capital IQ, DealStats, and BIZCOMPS. As presented below, transaction volume normalized following a decrease in interest rates. Transaction volume peaked in the last quarter of 2021.¹

Don’t get too fixated on the multiples in this chart as an indicator of value for your company. Look at the trends. Multiples vary dramatically from industry to industry and business to business. If you are interested in exploring value drivers for your company, read this recent article.  

¹Used with permission from GF Data Resources, LLC. All recipients of this Quarterly Valuation Update agree to be subject to and comply with GF Data’s Terms of Use.

The value of privately held companies typically isn’t as volatile as share prices for public companies. However, activity in the stock market provides general guidance that is often much timelier than data available for private companies.  

There are a few indexes we keep an eye on. Although the S&P 500 is dominated by a handful of large tech stocks, it is generally considered the go-to benchmark for stock market performance. The Russell Midcap Index cuts out the largest 200 companies in the Russell 1000 Index, keeping 800 US companies with market capitalizations between $2 billion and $10 billion. The Dow Jones Industrial Average is comprised of 30 “blue chip” US stocks that may be similar to many private companies.  

After rebounding from a decline in November and December of 2023, stock prices have continued to rise throughout the first quarter of 2024.

Many drivers of business value can be influenced or controlled by the decisions of the business’s management team, including: product diversification, brand recognition, and employee retention. Other drivers are outside of management’s control, such as inflation and unemployment rates. Below is a table summarizing several key drivers of the US economy.²

² Source: Federal Reserve Economic Data, available at https://fred.stlouisfed.org/.

As many of our clients are located in New England, we’ve included a summary below of some of the key economic drivers that affect businesses in the Northeast. If your business is headquartered outside of New England, reach out to us for an economic analysis specific to your market area. 

Economic activity  

Business activity expanded at a modest pace in recent weeks, prices rose slightly, and employment was flat overall. Convention and tourism activity grew at a robust pace, but retail sales increased only modestly. Manufacturers reported slight revenue growth, while software and IT services firms had flat revenues recently despite strong year-over-year growth in sales. Residential home sales increased by moderate margins from a year earlier, the first such increase in over two years. Activity in the commercial real estate sector—including construction—picked up slightly, on balance. The sector’s outlook also improved a bit, but the risk of financial distress for large office buildings remained elevated. In other sectors, contacts ranged from cautiously optimistic to bullish concerning the outlook, largely in line with the strength of their own recent results.

Labor markets  

Employment was unchanged overall, but labor market conditions were mixed. One large retailer enacted substantial layoffs in a bid to boost profitability, but no other contacts (in any sector) reported layoffs. Restaurant employment increased modestly on the strength of sustained demand and increased supply. Tourism-related employment in greater Boston was flat as firms struggled to reach desired staffing levels. Employers on Cape Cod also faced challenges filling jobs as rising housing costs priced more workers out of the Cape. Software and IT employment increased slightly, and manufacturing employment was flat or down slightly where there was attrition. Wages increased at a moderate pace on average. Contacts did not expect major changes in labor market conditions moving forward, although tourism contacts hoped that an upcoming career fair would help attract more workers for the busy summer season.

Prices 

Prices increased only slightly overall. Retailers reported modest input price increases, and one remarked that recent shipping disruptions overseas had not yet affected its suppliers. Hotel room rates in greater Boston were stable recently, net of seasonal factors, and were up moderately from a year earlier, marking a notably slower pace of growth compared with 2023. Nightly room rates on Cape Cod were flat compared with last year. Software and IT services prices were stable. Manufacturers mostly held prices steady, but some reduced their output prices (either slightly or moderately) in response to declining input prices; those experiencing cost increases, by contrast, reported that they had raised prices moderately. For the most part, the outlook called for slow further price growth moving forward. However, one manufacturing contact, having held prices steady over an extended period, was considering a significant price increase to compensate for accumulated cost pressures.

Retail and tourism 

First District⁵ retail and tourism contacts reported a moderate upswing in sales in the first quarter of 2024 from late 2023, net of seasonal factors. An online retailer boosted its market share and experienced modest revenue growth despite sluggish industrywide performance. Airline passenger traffic through Boston increased at an above-average pace in recent months, with total passengers now exceeding pre-pandemic levels. Domestic travel remained below pre-pandemic levels because of the incomplete recovery of business travel, but growth in international travel more than compensated. Hotel occupancy in greater Boston increased at a strong pace, exceeding seasonal norms, fueled in part by robust convention activity and sporting events. On Cape Cod, retailers and hoteliers said revenues were on par with one year earlier, a modest improvement from the previous report. The outlook for tourism and convention activity in 2024 remained very bullish, and Cape Cod hotel bookings for the remainder of the year looked on track to match those from 2023. In contrast, retailers were only cautiously optimistic.

⁵ The Federal Reserve System’s First District includes Connecticut (excluding Fairfield County), Massachusetts, Maine, New Hampshire, Rhode Island, and Vermont.

Manufacturing and related services 

Manufacturing revenues were about flat on balance, with half of contacts reporting moderate gains in sales over the cycle and the other half experiencing moderate losses. Capital expenditures were mostly unchanged but on balance exceeded typical levels, as two firms were in the process of expanding or upgrading their plants. Contacts were uniformly optimistic for the remainder of 2024, projecting steady to moderately higher sales moving forward; in one case, however, that still meant that total sales in 2024 would fall short of their 2023 levels. The positive forecasts were based largely on firms’ own recent demand trends, but one contact cited the prospects of productivity gains from AI and expected cuts in the federal funds rate as additional sources of optimism.

IT and software services 

Contacts in IT and software services said that demand and revenues were mostly stable in recent months. On a year-over-year basis, revenues increased by moderate to large margins for all firms. Those latter growth rates were about on par with those of the previous quarter and exceeded expectations in one case. Furthermore, the growth was attributed to factors that had boosted real demand, such as the transition to subscription-based business models. Capital and technology spending was unchanged, and no future changes were anticipated. Contacts expected demand to hold fairly steady at strong levels in the next quarter. One contact noted that the time required to close deals had increased of late, but the implications for their revenues were not yet clear.

Commercial real estate 

Commercial real estate activity in the First District increased slightly on balance since February. Industrial leasing activity slowed a bit due to a lack of inventory, and industrial rents faced slight upward pressure. In the office market, leasing activity held mostly steady at a slow pace, but one Boston contact detected a modest increase in tenant demand; office rents were mostly stable but fell slightly for lower-quality spaces. Leasing activity strengthened modestly for retail properties, with deals concentrated in restaurant- and grocery-anchored centers. Construction activity picked up a bit, primarily in the industrial market but also for retail and hospitality projects. Contacts noted an uptick in refinancing activity for office properties with maturing loans, but borrowers often had to add equity. The investment sales market was nonetheless still “frozen,” as investors waited for interest rates to come down, and large banks remained on the side lines. The outlook improved modestly, as contacts expected leasing activity to either hold steady or increase by late 2024, including for small-to-medium sized office buildings. Contacts remained concerned that certain office properties faced elevated foreclosure risks.

Residential real estate 

For the first time in over two years, residential home sales increased on a year-over-year basis in all First District states that were contacted (Connecticut furnished no data). Closed single-family sales increased at a moderate pace on average (from February 2023 through February 2024) and were led by robust gains in Vermont, Maine, and Rhode Island. Condominium sales fared even better than single-family sales over the same period, with strong overall growth and very large increases in those same three states. Massachusetts posted only modest increases in home sales, although greater Boston had above-average results within the state. Contacts attributed the stronger sales to a combination of recent declines in mortgage rates and increases in property listings but emphasized that inventories remain well below desired levels. Home prices increased at a strong pace from one year earlier, similar to what was last reported. Contacts were optimistic for a strong spring buying season, provided the tight inventory situation showed further improvement.

• To learn more about ESOPs, here is a brief overview of ESOPs we put together. 
• Interested in learning more about business valuations? Pick up a copy of our book, A Field Guide to Business Valuation.
• Today’s business reading, suggested by analyst José Calvo, is Blue Ocean Strategy by W. Chan Kim and Renée Mauborgne. 

Where to find us

Cameron Scott will be attending the 2024 FOX Family Office & Wealth Advisor Forum in Chicago on July 15th through July 17th.

Seth Webber and Casey Karlsen will be presenting a webinar titled “Exit Planning: Helping Business Owners Increase Value and Liquidity” through Business Valuation Resources on August 6th at 1 pm ET. 

Meridith Byrne and Seth Webber will be attending the New England Chapter of The ESOP Association’s Fall Conference in Springfield, Massachusetts on October 15th and October 16th.

Casey Karlsen will be presenting a session titled “Exit Planning and Value Acceleration” at the Maine Tax Forum on November 7th.

Interested in meeting the team? Please reach out to us. We would love to connect. 

Read this if your company is eligible for the Employee Retention Credit (ERC) and has filed a claim.

After conducting a review of ERC claims from businesses and organizations nationwide, the IRS has announced it will be denying tens of thousands of claims. IRS Commissioner Danny Wefel commented, “The completion of this review provided the IRS with new insight into risky ERC activity and confirmed widespread concerns about a large number of improper claims.” Werfel added that the agency will now work to pay claims to help taxpayers and small businesses that didn’t have any red flags on their claims.

The review of claims looked at more than one million ERC claims, representing more than $86 billion. The IRS found that 10 to 20% of the claims to be high-risk, showing clear signs of being incorrect. Additionally, the IRS estimates that between 60 and 70% of claims have unacceptable levels of risk. As a result, the IRS will be gathering more information to improve the agency’s compliance, reduce the time to resolve valid ERC claims, and protect against improper payments moving forward. 

The IRS is asking Congress to close the ERC program to additional applications and extend the statute of limitations to allow them more time to pursue improper claims. These changes are included in a stalled House-passed tax bill that seems unlikely to pass the Senate.

“The whole world has changed involving Employee Retention Credits since the deepest days of the pandemic,” Werfel said. “Anyone applying for this credit needs to talk to a trusted tax professional and closely review the eligibility requirements, not someone playing fast and loose and trying to make a fast buck off well-meaning taxpayers. People need to be cautious of promoters trying to take advantage of today’s announcement to drive more business. People should remember the IRS continues to be very active in our compliance lanes on Employee Retention Credits.”

Our take: For those employers still waiting to receive their ERC claims and who worked with a non-tax professional to calculate and claim the credit, now is the time to determine if you have (or received from the third-party vendor) the appropriate documentation to verify eligibility to claim the credit and confirm the calculation of the credit. At a minimum, you should have documented support for the reduction in gross receipts test or full/partial shutdown test related to the eligibility of the businesses or organizations to claim the credit and detailed support.

IRS encourages patience, as claims processing will take some time

The IRS cautioned taxpayers who filed ERC claims that the process will take time, and the agency warned that processing speeds will not return to levels that occurred last summer. Taxpayers with claims do not need to take any action at this point, and they should await further notification from the IRS. The agency emphasized those with ERC claims should not call IRS toll-free lines because additional information is generally not available on these claims as processing work continues.

“These complex claims take time, and the IRS remains deeply concerned about how many taxpayers have been misled and deluded by promoters into thinking they’re eligible for a big payday. The reality is many aren’t,” Werfel said. “People may think they are on safe ground, but many are simply not eligible under the law. The IRS continues to urge those with pending claims to use this period to review the guideline checklist on IRS.gov, talk to a legitimate tax professional rather than a promoter and use the special IRS withdrawal program when there’s an issue.”

Our take: The IRS is advising employers not to contact the IRS regarding the status of the ERC claims. However, we recommend employers call the IRS to make sure it has received the applicable Form(s) 941-X. We have encountered situations where the employer mailed the Forms 941-X to the IRS via certified mail/return receipt, received the return receipt, and the IRS has no record of receiving the Form. The applicable Forms 941-X should be re-submitted to the IRS.  

In addition, we recommend an employer who has received payment for some, but not all claims call the IRS to verify the outstanding Forms 941-X are actually on file at the IRS.

ERC claims processing moratorium to continue

Last October, the IRS announced a moratorium on processing claims submitted after Sept. 14, 2023, to give the agency time to digitize information on the large study group of nearly 1 million ERC claims. The IRS intends to keep that moratorium in place. This will give the IRS time to gather additional feedback from Congress and other partners, on the future direction of the Employee Retention Credit program.

Our take: It is still possible to submit valid claims during the moratorium. However, any claims submitted after January 31, 2024, would not be valid under the stalled House-passed tax bill. That bill would eliminate new ERC claims after January 31, 2024. It is still unclear if the Senate will take up the bill and, if it does, the January 31st date may not be retained.

IRS resources 

The IRS provides resources to help people learn more about the ERC and check their eligibility. Businesses are encouraged to consult their trusted tax professional. Here are some resources to help you determine if you have a risky ERC claim:

• ERC Eligibility Checklist 
• Seven warning signs ERC claims may be incorrect 
• Frequently asked questions about the Employee Retention Credit 

IRS claim withdrawal process 

As the IRS review found a large number of questionable claims, the IRS encourages taxpayers with unprocessed claims to take advantage of the special IRS ERC Withdrawal Program to avoid future compliance issues. Please note that taxpayers who received an ERC check, but have yet to cash or deposit it, can use this process to withdraw the claim and return the check. The IRS will treat the claim as unfiled and will not accrue any interest or penalties.

If you have any other questions on the ERC or your claim in particular, please contact us. We are here to help.

Read this if you are a nonprofit organization or NFP healthcare organization operating in the state of Maine.

On April 22nd, Maine Governor Janet Mills signed a bill that includes a blanket sales and use tax exemption for all 501(c)(3) organizations. This exemption, effective January 1, 2025, will provide relief to nonprofits and bring clarity to Maine's sales and use tax laws. Prior to the blanket exemption, only specific exemptions were provided for different kinds of nonprofit organizations, such as hospitals, schools, churches, libraries, etc., and this has caused confusion for some Maine nonprofits who are unsure if they meet the requirements for these exemptions.

The blanket tax exemption was propelled by the lobbying efforts of the Maine Association of Nonprofits as well as hundreds of other organizations across the state. This new exemption brings Maine up to speed with all other states in New England that currently provide a blanket sales tax exemption to nonprofits. Maine Revenue Services estimates that over 5,000 organizations will be eligible for the new exemption.  

What to know about the sales and use tax exemption

This exemption will not be granted automatically. Organizations will still need to apply for an exemption certificate. Maine Revenue Services is currently developing the new application form, which will be made available through their website.

Part of this new tax law will include a safeguard to prevent any misuse of the exemption. All exempt purchases made by these charities must be used primarily toward supporting the organization’s mission or exempt purpose.

The exemption will be broadened to include all 501(c)(3) organizations, regardless of whether they are incorporated in Maine. Therefore, 501(c)(3) organizations from other states should be eligible to apply for an exemption certificate for purchases made in Maine, as long as these purchases are used to primarily support their mission.

IRS Determination Letter

Maine Revenue Services has hinted that the only additional documentation needed from the applicants will be a copy of their IRS Determination Letter. All organizations interested in applying for the new exemption should make sure they have a copy of their IRS Determination Letter on hand. If you cannot locate this letter, a copy can be obtained from the IRS through the filing of Form 4506-B.

What about sales made by a 501(c)(3) organization in the state of Maine?

The new law does not provide any sales tax exemptions to sales made by a nonprofit organization. If the nonprofit makes sales to the public on a regular basis, the items sold are still likely subject to sales tax. It is the responsibility of the organization to register with the state of Maine as a retailer and collect and remit sales tax on any items sold.

There are exceptions to collecting and remitting sales tax for the sale of items that are not regularly carried on. For example, if an organization is holding a fundraising event and has a booth set up where they are selling merchandise to attendees, this may qualify as casual or infrequent sales. In this case, the organization would not be required to collect and remit sales tax on the merchandise sold at the event.

Sales and use tax exemption: Conclusion

The blanket sales and use tax exemption for all 501(c)(3) organizations marks a significant and long-awaited victory for Maine nonprofits. Once developed, the new application should streamline the process of applying for the exemption and relieve any uncertainty around eligibility requirements to receive the exemption.

We will continue to monitor any new developments with the exemption and will provide an update once the application is made available. In the meantime, if you have any questions regarding sales and use tax for nonprofits, please contact a member of our NFP Tax Team.