raising capital

The Federal Deposit Insurance Corporation (FDIC) recently issued its second quarter 2024 Quarterly Banking Profile. The report provides financial information based on call reports filed by 4,539 FDIC-insured commercial banks and savings institutions. The report also contains a section specific to community bank performance. In the second quarter of 2024, this section included the financial information of 4,104 FDIC-insured community banks. BerryDunn’s key takeaways from the report are as follows:

Second quarter of 2024 resulted in community banks’ quarterly net income increasing $72.6 million from the previous quarter.

Quarterly net income for community banks increased 1.1% in second quarter 2024, resulting in $6.4 billion in quarterly net income. This increase was the result of higher net interest and noninterest income, which more than exceeded the increase in noninterest expense. Despite the increase in quarterly net income, full year net income declined. Compared to second quarter 2023, net income had decreased $568.9 million, or 8.2%. More than half (61.6%) of all community banks reported an increase in net income compared to first quarter 2024.

Net interest margin (NIM) sees its first quarterly increase to 3.30% since fourth quarter 2022, but continues to remain below the average quarterly NIM of 3.51% over the past 10 years.

Community banks’ NIM increased 7 basis points from the prior quarter. However, NIM was down 9 basis points from the year-ago quarter. The yield on earning assets increased 54 basis points while the cost of funds increased 63 basis points from the year-ago quarter. Community banks’ NIM performance continued to prevail over the overall banking industry’s NIM of 3.16%, which declined 1 basis point in second quarter 2024. Community banks have only shown quarter-over-quarter NIM growth while the overall banking industry showed a decline once over the past five years.

Loan and lease balances continued to grow in second quarter 2024, with 75.7% of community banks reporting quarterly loan growth. 

Loan and lease balances continued to see widespread growth in second quarter 2024. Community banks saw loan growth in all major portfolios. Nonfarm, nonresidential commercial real estate (CRE) loans exhibited the most growth from first quarter ($7.9 billion or 1.4%), followed closely by residential real estate ($7.8 billion, 1.7%). Total loans and leases grew 6.3% from one year ago. This year-over-year growth was also driven by residential real estate and nonfarm, nonresidential CRE loans, which showed growth year-over-year of $30.5 billion (7.0%) and $33.9 billion (6.3%), respectively. The largest loan growth year-over-year, percentage-wise, was with farm loans, which saw a 7.2% increase.

The gap between the quarterly net charge-off rate for community banks and all other banks continues to build. 

Community banks witnessed a 2 basis point increase from the prior quarter and a 5 basis point increase from the prior year. However, the ratio remains 1 basis point lower than the pre-pandemic average of 0.15%. The increase was significantly impacted by the nearly 39% annual increase in net charge-off volume in the moderately sized loan portfolio of commercial and industrial loans (represents 12.8% of total loan balances for community banks). The net charge-off rate for commercial and industrial loans increased 16 basis points from one year earlier to 0.37%. The industry’s net charge-off rate increased 3 basis points to 0.68% from the prior quarter and was 20 basis points higher than one year earlier and the pre-pandemic average. The industry banks’ net charge-off rate for the quarter was the highest reported rate since second quarter 2013.

In September, the Federal Reserve cut interest rates by 50 basis points, the first time the Federal Reserve has cut interest rates since 2020. Although most were speculating that a rate cut was imminent, there was some dissent as to the magnitude of the rate cut and whether it would be 50 basis points or a more modest 25 basis points. Even with the more aggressive 50 basis point cut, the Federal Reserve has signaled that more rate cuts in 2024 are likely. With the reduction in rates, and the expectation this will only bolster bank profitability in the long run, attention has returned to bank merger and acquisition (M&A) activity. As indicated in the second quarter Quarterly Banking Profile, in quarter 2 alone, community banks declined to 4,104, down 27 from the previous quarter. This decline was primarily due to M&A, with 22 out of the 27 community banks having merged out of existence during the quarter. Many believe this is just the beginning. As the need for cutting-edge technology becomes more prevalent to remain competitive, some banks are being squeezed out of the industry as the upfront technology investment needed to remain competitive is too steep.

Another notable trend from quarter 1 to quarter 2 2024 was an increase in the number of institutions on the FDIC’s “Problem Bank List,” which increased from 63 to 66 (this stat is for all banks, not just community banks). This jives with the increases in the net charge-off ratios, as noted above. The consensus we’ve received from those with “boots on the ground” is that regulators are laser-focused on well-defined weaknesses in credits and are being more stringent and unwavering on ratios that are indicative of a needed downgrade. For instance, if debt service coverage ratio is below 1, unless liquidity and/or guarantor strength is a mitigant to downgrade and there is clear support for this mitigant, that relationship should be downgraded to a classified risk rating category. If anything, this is a sign of the regulators’ concerns about credit quality, even with the possibility of a “soft landing” seemingly on the rise. As always, please don’t hesitate to reach out to your BerryDunn’s Financial Services team should you have any questions.

In April 2024, the Governmental Accounting Standards Board (GASB) issued GASB Statement No. 103, Financial Reporting Model Improvements. The objective of this statement is to improve key components of the financial reporting model to enhance its effectiveness in providing information that is essential for decision-making and assessing a government’s accountability.

The biggest news about GASB Statement No. 103 is that it did not change the basis of accounting or presentation of governmental fund financial statements as we all had anticipated. For the past 10 years, GASB was reexamining the effectiveness of GASB Statement No. 34 Basic Financial Statements – and Management’s Discussion and Analysis – For State and Local Governments. Through this re-examination, they found the guidance was working well, but there were opportunities to make targeted improvements.

Previously, BerryDunn issued an article that, at a high level, summarized GASB Statement No. 103. In this article, we are going to focus specifically on the impact that GASB Statement No. 103 has on your Management's Discussion and Analysis (MD&A).

GASB Statement No. 103 reestablished a full set of requirements for the MD&A. This encourages governments to take a fresh look at the effectiveness of their MD&A. The new guidance directs governments not to just describe what changed during the reporting period, and by how much, but to also explain why those changes occurred. The guidance now requires greater description and detail about items discussed as currently known facts, decisions, or conditions expected to have a significant financial impact in the subsequent reporting period.

What makes a good MD&A and what your organization should focus on

The MD&A should be a story of your financial statements and an explanation of the significant changes in your entity’s finances from the prior year. When well written, the MD&A provides readers of the financial statements highly valuable information.

GASB Statement No. 103 emphasizes the following:

• The MD&A should be written for a reader who may not have a detailed knowledge of governmental accounting and financial reporting and may not be from the government’s geographical area.
• The MD&A should assist the reader in understanding why finances changed from the prior year, NOT just present the amount of the change.
• Encourage governments to avoid repetitive explanations in multiple sections of the MD&A.
• Clarify that the MD&A should discuss significant long-term financing activity during the year, not just debt, but leases, subscription-based information technology arrangements, and all other forms of long-term borrowing.

GASB states that the information presented in the MD&A should be confined to the following five sections:

1. Overview of the Financial Statements
2. Financial Summary
3. Detailed Analyses
4. Significant Capital Asset and Long-Term Financing Activity
5. Currently Known Facts, Decisions, or Conditions

Helpful tips when preparing your MD&A

To assist your entity in preparing the MD&A, we’ve laid out some helpful tips below.

• Write in a manner that is easily readable and can be understood by users who may not have a detailed knowledge of governmental accounting and financial reporting.
• Use charts, graphs, and tables to enhance the understandability of the information.
• Avoid unnecessary duplication.
• Avoid “boilerplate” discussion.
• Focus on the “why” and explanations.

The MD&A should include explanations and interpretations that explain the why. Some specific examples include:

• Increase in intergovernmental grant revenues
• Growth in revenues due to specific economic circumstances
• Increases in specific programs and functions
• Transfers to other funds
• Expenditures due to specific events

Use visuals to make information clear

To make the MD&A more visual and help the reader understand critical information, you can incorporate charts, graphs, and tables.

Below are a few examples that could be incorporated:

Contents of the Basic Financial Statements

Governmental Activities Revenues by Source

Governmental Activities Expenses by Source

If your organization follows the above tips, you will have an impactful MD&A that will be beneficial to the readers of your financial statements. Be sure to check out Exhibit 1 that is included in GASB Statement No. 103 for an example MD&A.

Be on the lookout for future GASB Statement No. 103 articles and how this new standard impacts your entity. When it comes to writing an impactful MD&A, BerryDunn’s Governmental Accounting Team can be a resource to your organization.

Read this if you work within a State Medicaid Agency (SMA). This is the fifth and final article in a series of articles published in follow-up to the Medicaid Enterprise Systems Conference (MESC) 2024. Prior articles highlighted industry MES trends, the value of the CMS and SMA MES partnership, the roles outcomes play in supporting enterprises, how SMAs can embrace Artificial Intelligence (AI), and further support their teams in achieving organizational excellence. 

If you attended the Medicaid Enterprise Systems Conference (MESC) back in August, you likely had the opportunity to join one of the many exciting workshops on day one of the conference. One of those workshops was focused on leading people through change. Facilitators guided attendees through an interactive exercise that replicated the chaos and confusion experienced during change. This exercise quickly became a frequent topic of conversation among MESC attendees because it demonstrated the importance of building and executing a plan that attends to communication, education, and motivation during times of change. The workshop, along with a handful of sessions throughout the week, highlighted the importance of having a people-focused strategy, and the resulting power from doing so. These refreshing conference topics gave meaningful insight into the pain points of invested MES parties, as well as practical solutions to help support them. 

So how can we all maintain focus on the people? 

• Be in tune with the energy (positive or negative) and engagement (high or low) of the group. If you’re not, find someone who is, and then build and maintain high energy and positive engagement through open communication, milestone celebration, collaboration, support, and recognition.  
• Identify resistance and address it quickly. Ask people about their concerns to help you understand their resistance. 
• Tactfully involve resistors in helping solve the problems they see. 
• Remember your "why" and find the reasoning. Why are we here? Why do we do what we do, and why are we changing? What are the benefits associated with this change? 
• Focus on the areas where you have influence. 
• Be sure team members have clarity and are committed to the project and its approach before jumping in. 
• Identify how you as a project team will be flexible: Flexibility is knowing the approach that was previously successful might not work the next time. 
• Collaborate with invested parties to identify and integrate lessons learned from prior efforts into existing ones. 
• Strategically identify and leverage your change catalysts as influencers to early adopters.  
• Consider how to contain and support the ‘fervent resistors’ to prevent increasing the resistance of the late adopters. 
• When leading, designing, and driving change, create a strategy and plan that pays attention to communication, education, and motivation. 

Other insights to help support your team, help ensure people come first, and help achieve success in your multimodule multivendor environment include the following: 

What’s Your North Star? Establish a vision that is the product of your agency and the people it serves. To establish a vision, SMAs should engage leadership and other invested parties to identify and align on long-term goals. This typically involves conducting a situational analysis (i.e., SWOT), clarifying the mission and values, and facilitating collaborative workshops to generate ideas on the agency’s vision. Once established, speak it, maintain it, and discuss how you’re achieving it. If you really want to be an all-star, identify your vision’s goals, outcomes, and metrics…then track against it! 

Workload: Be mindful of your SMA capacity. Measuring an organization’s capacity involves assessing its ability to deliver services, manage resources, and achieve goals. Key areas to evaluate include human resources, operational efficiency, technology, financial health, and strategic alignment. Tools like capacity assessments, KPIs, and process analysis help identify gaps and measure performance, while regular evaluation of these areas helps ensure the organization can be well positioned for growth, resilience, and effective decision-making.  

Portfolio, Program, and Project Management: Establish consistent processes (risk and issue management, change request process, etc.) across all invested parties (i.e., vendors and staff) and educate them during onboarding. Typically, MES organizational layers like a portfolio, program, and/or project management office can help establish, implement, and maintain these processes. Consistent processes are vital for ensuring the successful execution and governance of projects across an SMA. This uniformity not only reduces risks and operational inefficiencies but also supports scalability and continuous improvement, ensuring that the portfolio of initiatives delivers maximum value to the organization. 

Governance: Governance is critical for MES projects within an SMA involving multiple vendors because it ensures accountability, alignment, and oversight across all project activities. A strong governance framework provides clear decision-making structures, establishes performance metrics, and enforces compliance with state and federal regulations. This helps manage risks, streamlines communication, and ensures that vendors work collaboratively toward the SMA’s strategic goals, ultimately improving project outcomes and service delivery for Medicaid beneficiaries. 

Organizational Change Management (OCM): OCM is crucial for SMA initiatives (technology or otherwise) as it helps ensure that the change brought about by an initiative aligns with the needs and concerns of the people impacted by the change. By prioritizing activities such as communication, training, and support, OCM helps ease the transition for invested parties, facilitating buy-in and reducing resistance. This focus on the human element not only enhances user adoption of new programs, policies, systems, and processes but also promotes a positive organizational culture, ensuring that the implementation leads to sustainable improvements in service delivery and overall agency effectiveness. 

Collaboration: Effective collaboration within an SMA for MES projects involves establishing clear roles and responsibilities, using centralized communication tools, and following standardized project management practices. Engaging invested parties early, focusing on data-driven decision-making, and fostering transparency are key to helping ensure alignment and continuous improvement.  

Timely Issue Identification, Resolution, and Communication: Early identification allows for timely resolution, minimizes disruptions, and helps maintain project momentum. It also fosters transparency and trust within teams, ensuring that all invested parties are informed and can collaborate on effective solutions. Swift issue escalation promotes better decision-making and reduces the risk of missed deadlines or budget overruns. Be sure to also communicate the root cause and solution in place to address issues in order to further foster buy-in and credibility.  

Leading through change isn’t just about managing tasks—it’s about guiding people. By focusing on communication, education, and motivation, we help ensure our teams are not only prepared for change but empowered by it. As we navigate the complexities of our work, let’s remember that real progress comes from putting people first, fostering collaboration, and maintaining a clear vision. With these principles at the forefront, we’re not just managing change—we’re driving meaningful transformation. 

Although MESC 2024 has come to a close, conference presentations, innovative discussions, and the work of the industry’s brightest minds live on. Conferences like MESC and the upcoming Information Technology Solutions Management for Human Services (ISM) reaffirm the importance of collaboration, adaptability, and putting people first in our journey toward modernizing HHS programs and the technology needed to support them. As we move ahead, let's remain focused on building strong relationships, staying adaptable in the face of change, and continuously aligning our efforts with the ultimate goal: Better serving the country’s most vulnerable populations. Together, through thoughtful leadership and strategic partnership, we can transform challenges into opportunities for meaningful impact. 

Previous articles in this series: 

CMS is your enterprise partner: Are you leaning in yet?

MITA 4.0, APDs, and more: Clearer guidance and helpful templates are coming!

Medicaid outcomes, measures, and metrics are here to stay

Practical Approaches to Using Artificial Intelligence in State Medicaid Agencies

Read this if you work within a State Medicaid Agency (SMA). This is the fourth article in a series of articles published in follow-up to the Medicaid Enterprise Systems Conference (MESC) 2024. Prior articles highlighted industry trends, the value of the CMS and SMA MES partnership, and forthcoming guidance on APDs, SMC, and MITA 4.0, while future articles will discuss how SMAs can further support their teams in achieving organizational excellence.

Artificial Intelligence (AI) continues to dominate tech innovation headlines and Medicaid industry partners continue to express both fear and excitement over its potential to tactically support the enterprise. State Medicaid Agencies (SMAs) and their industry partners have been tactfully integrating Artificial Intelligence—whether generative, predictive, analytical, automated, or assisted—into Medicaid discussions and initiatives...and generating positive results!

Below are a few examples of SMAs testing the AI waters and getting favorable results:

• Tennessee is using AI to rapidly locate policy answers to address constituent questions and expedite eligibility determinations.
• Kentucky is using a chat knowledge bot to help eligibility workers search for policy and process information.
• New York is leveraging docAI to match EOBs to claims and identify potential mismatches for human review.
• Louisiana is using a chatbot for non-MAGI call centers to answer basic questions and allow customer service representatives to focus on other work and calls. (Spoiler: Constituents love it!)
• Wisconsin is using a chatbot to examine existing policies and help team members find answers needed to support their responsibilities.

At the Medicaid Enterprise Systems Conference (MESC) in August, SMAs and industry leaders also discussed and provided advice for interested parties looking to start the AI conversation:

• Identify clear objectives for AI—through defined use cases and measurable goals—to help ensure AI initiatives align with your agency’s overall mission, vision, and goals.
• Build a strong data foundation and clear boundaries through data quality, governance, and interoperability.
• Start small with pilot projects.
• Invest in upskilling staff and establish teams to help them understand AI technologies, how to work with them, and how to interpret AI-driven insights. Don’t forget to test your AI technologies!
• Draft and implement agency policies and protocols to monitor AI systems, create transparency, and help ensure ethical and responsible AI use.
• Collaborate with federal and industry partners to share knowledge, resources, and best practices.
• Focus on the scalability of solutions, the need to continuously improve AI technologies, and how teams are using them.

As an industry leader who is partnering with SMAs nationwide, BerryDunn is often called upon to be at the forefront of helping SMAs design innovative solutions for their Medicaid programs. AI provides SMAs the unique opportunity to address operational challenges as well as existing business processes in areas such as program integrity, care management, member engagement, and data analytics and reporting. In addition to the great points industry leaders shared at MESC, below are some additional considerations for Medicaid innovators looking to get started:

Understand the opportunities for AI: Each Medicaid program is unique, and understanding where there may be opportunities for efficiency or enhanced effectiveness is a good first step to identifying where AI may be able to support your program. Typically, the areas of program integrity, provider enrollment, member enrollment, care management, and data analytics and reporting are some of the more typical business areas where AI-related opportunities may exist. An SMA’s Medicaid Information Technology Architecture (MITA) State Self-Assessment (SSA) may be a great document to reference when looking for those opportunities for AI.

Assess the current state: Assessing the current state of an SMA does not just entail focusing on the program’s policy- or technology-related needs. It also entails understanding the organizational capacity for change and its understanding of AI. Change and AI have a tendency to bring about excitement and apprehension, and understanding your SMA's readiness for change and AI is essential part of gaining SMA buy-in.

Define your AI use cases: As an output from your analysis of those opportunities for AI and your assessment of the current state, consider those areas where AI could make the most immediate impact. Maybe it’s in program integrity where predictive analytics and AI-based fraud detection could identify anomalies in billing, or maybe it’s in care management where assistance identifying high-risk patients is needed. As mentioned earlier, start small!

Build a cross-functional team: Successful AI requires collaboration across the agency and more specifically within those areas impacted by your use cases. Typically, AI teams are comprised of a sponsor, more technical resources familiar with the SMA’s technology and infrastructure, your business leads, and AI experts. Your federal partners are also an invaluable resource for you on your AI journey.

Invest in data governance and infrastructure: AI thrives in high-quality data environments, so SMAs will need data governance and its supporting infrastructure to help ensure AI solutions can be effective. Prioritize clean, standardized, and accessible data, and ensure appropriate safeguards (i.e. policy) are in place to support AI usage.

Plan for long-term AI integration (and change!): AI is here to stay. Investing in your agency’s AI roadmap is one effective way to help establish an AI plan and infrastructure that can improve operational efficiency, enhance program effectiveness, and enhance rates of adoption.

By starting with a focused, methodical approach, SMAs can leverage AI to enhance service delivery, improve operational efficiency, and better serve their constituents. Embracing AI is an existing SMA challenge. Let’s continue the conversation on how we can help today!

Previous articles in this series: 

CMS is your enterprise partner: Are you leaning in yet?

MITA 4.0, APDs, and more: Clearer guidance and helpful templates are coming!

Medicaid outcomes, measures, and metrics are here to stay

It seems these days as though there’s a policy or some fine print for everything. As I grow older, I find myself more and more ensconced in reading the fine print on things—be it a food ingredient label, a contract, or the Apple user agreement (ok, maybe I just skim that one). Just last week, I went to return some school clothes my son had already grown out of and was asked if I had reviewed the store’s return/refund policy (I hadn’t). There’s no question that a review of applicable policies is a best practice for everyone—including exempt organizations.

If it’s been a while since your nonprofit organization last conducted a review of its governing documents and policies, worry not, you’re not alone! This article will highlight a few of the most critical documents applicable to nonprofits to ensure you remain in compliance and good standing.

Conflict of interest policy

If I were playing a rather nerdy version of nonprofit Family Feud, and the category was “Most Important Policies,” I would be shocked if the conflict of interest policy wasn’t the number one answer. It is vital that any potential conflict, either real or perceived, be identified and addressed in a manner consistent with the organization’s policy.

This policy is so important the IRS devotes several questions to it on the Form 990, including a required written narrative detailing how the organization consistently monitors and enforces compliance with said policy. Further, there is a requirement for potential disclosure of certain transactions with “interested persons” on Schedule L of Form 990. Transactions include loans as well as business transactions over a specified dollar threshold. It’s important to note that for Form 990 disclosure, the term “interested persons” includes family members of any officers, directors, trustees, or key employees of the organization, as well as any business entity more than 35% owned or controlled by any of the folks mentioned above.

For these reasons, distribution of a questionnaire to applicable organizational members on an annual basis is a baseline standard.

Gift acceptance policy

The gift acceptance policy is one that often goes overlooked or underappreciated until it’s needed; but when it is needed, it can be a lifesaver. This policy can help to navigate and dictate a myriad of issues, including what sort of gifts the organization is willing to accept and how long the organization is required to retain the gift, as well as provide guidance for board or staff members who are on either the asking or receiving end of contributions. And, perhaps most importantly, the policy can help manage the expectations of donors while maintaining a level of courtesy and respect.

The policy most comes into play when it comes to gifts of something other than cash. For example, if a donor wishes to gift the organization with their interest in a partnership, there could be all sorts of potential tax impacts and complications, including unrelated business income and foreign filing compliance. Another more recent example is the proliferation of cryptocurrency. Having a policy in place that addresses these sorts of non-standard contributions can help mitigate potentially awkward or difficult conversations with donors.

Written whistleblower and document retention and destruction policies

Like the aforementioned conflict of interest policy, the whistleblower and document retention/destruction policies have dedicated questions on the Form 990 asking if the organization has these in place. The key word for both policies is "written." Often times, we will hear that a client follows a policy, but it’s not in writing. Unfortunately, this would warrant a “no” response on the Form 990. Potential donors, members of the media, regulators, and careful job seekers will have greater confidence when you respond “yes” to the policy questions on the Form 990.

While there have not been any sweeping changes or recent regulations on either, it is still a good idea to review these policies on an annual basis to ensure they are still in lockstep with the organization. The IRS does consider these policies to be best practices for any organization (large or small) to have in place.

In addition to reviewing policies of the organization, we also recommend reviewing the governing documents of the organization on a regular basis, especially as IRS guidance or tax laws change.

Dissolution clause

It’s a sad reality that all things must come to an end, including business entities. Historically, nonprofit organizations were able to rely upon Revenue Procedure 82-2. This procedure identified states where a Section 501(c)(3) charity could rely on state law to satisfy the requirement that its organizing documents require that, upon dissolution, the charity must distribute all of its assets for IRC Section 501(c) tax-exempt purposes. However, the IRS recently issued Revenue Procedure 2024-22, which now makes Rev. Proc. 82-2 obsolete. Said in simpler terms, organizations can no longer simply rely upon applicable state law to satisfy dissolution requirements at the federal level.

For this reason, we strongly encourage all organizations to review this particular clause and consult with legal counsel as needed to ensure the wording and procedures followed are in line with current law. It may be necessary in some cases to amend governing documents and/or bylaws to add the required dissolution wording to remain in compliance. 

Sample policies for nonprofits

Policies and governing documents are critical in ensuring the organization and its decision-makers protect themselves from wrongdoing and criticism that could undermine the ability to promote the organization’s mission. Organizations will be better protected if there are sound policies and procedures in place that can be adequately followed. There are a number of various outlets that provide sample policies, including the Internal Revenue Service, among others. Links to sample policies and additional guidance can be found below:

• IRS Sample Conflict of Interest Policy
• Gift Acceptance Policies – National Council of Nonprofits
• Sample Whistleblower Policy – National Council of Nonprofits
• Recordkeeping – Internal Revenue Service
• Document Retention and Destruction Policy – National Council of Nonprofits

If you have any questions about the applicability of certain policies, we are here to help! Please do not hesitate to contact a member of your tax engagement team for further guidance.

Now, what to do with these undersized school clothes… perhaps I can donate them to charity? I better check their gift acceptance policy first!