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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.