FMS/CBA Accounting and Tax Update October 24, 2012 Presented by Marty Caine, CPA and Charles J. Frago, CPA Wolf &

1. FMS/CBA Accounting and Tax UpdateOctober 24, 2012Presented by Marty Caine, CPAand Charles J. Frago, CPAWolf & Company, P.C.

2. About Wolf & Company, P.C. • Established in 1911 • Offers Assurance, Tax, Business Consulting & Risk Management Services • Offices located in: • Boston, MA • Springfield, MA • Albany, NY • Over 180 professionals • PCAOB Registered & Inspected • Member of AICPA Center for Audit QualityMember of PKF North America As a leading regional CPA firm founded in 1911, we provide our clients with specialized industry expertise and outstanding service.

3. Our Financial Institution Expertise • Provide service to over 200 financial institutions: • Approximately 50 FIs with assets > $1 billion • Approximately 30 publicly traded FIs • Constant regulatory review of our deliverables • Over 45 Risk Management professionals • IT Assurance Services Group professionals • Internal Audit Services Group professionals • Regulatory Compliance Services Group professionals • WolfPAC® Solutions Group professionals • Provide Risk Management Services in 19 states and 1 U.S. territory

4. Our Tax Practice Expertise • Wolf’s Tax Practice is comprised of over 30 professionals • Wolf’s Tax Group provides customized services including: Wolf’s Tax professionals include individuals with proven expertise in corporate, individual, partnership, non-profit, estate, and trust taxes as well as multi-state income and sales tax matters.

5. Our Presenters Martin M. Caine, CPA Member of the Firm, Wolf & Company 413-726-6852 mcaine@wolfandco.com Charles J. Frago, CPA Principal, Wolf & Company 413-726-6862 cfrago@wolfandco.com

6. FASB Update Standards applicable in 2012 • ASU 2011-02 Troubled Debt Restructuring • ASU 2011-03 Effective Control for Repurchase Agreements • ASU 2011-04 Fair Value Measurement and Disclosure • ASU 2011-05 Presentation of Comprehensive Income • ASU 2011-08 Testing Goodwill for Impairment • ASU 2012-02 Testing Indefinite-Lived Intangible Assets for Impairment Issued Standards Applicable In Future Periods • Update No. 2011-11 Disclosures About Offsetting Assets and Liabilities Other Projects

7. ASU 2011-02 Determination of Whether a Restructuring is a Troubled Debt Restructuring • Public companies – first interim or annual period beginning on or after June 15, 2011. Applied retrospectively to beginning of fiscal year of adoption, with measurement occurring in period of adoption. • Non-public companies – first annual period ending after December 15, 2012. • Early adoption is permitted. • Disclosure requirements of ASU 2010-20 for TDR’s • Effective annual periods ending after December 15, 2011 for non-public companies

8. ASU 2011-02 TDR (continued) A restructuring of a debt constitutes a troubled debt restructuring “if the creditor for economic or legal reasons related to the debtor’s financial difficulties grants a concession to the debtor that it would not otherwise consider.”

9. ASU 2011-02 TDR (continued) TDRs may include: • Transfer of assets from the debtor to the lender • Granting of an equity interest to the lender by the debtor • Modification of debt terms: • Reduction in stated interest rate • Payment deferrals • Extension of maturity date at a less than market rate (for similar risk) • Reduction of the face amount or maturity amount owed • Reduction/write-off of accrued interest

10. ASU 2011-02 TDR (continued) In determining if the debtor is experiencing financial difficulties, a creditor must consider the following: • The debtor is in payment default on any of its debt. • It is probable that the debtor will be in payment default on any of its debt in the foreseeable future without the modification. • The debtor has declared or in the process of declaring bankruptcy. • There is substantial doubt as to whether the debtor will continue to be a going concern.

11. ASU 2011-02 TDR (continued) • The creditor forecasts that the debtor’s entity-specific cash flows will be insufficient to service any of its debt in accordance with the contractual terms for the foreseeable future. • Without the current modification, the debtor cannot obtain funds from sources other than the existing creditor at an effective interest rate equal to the current market interest rate for similar debt for non- troubled debtors.

12. ASU 2011-02 TDR (continued) What constitutes a concession? A concession is deemed to be granted: • When, as a result of the restructuring, the creditor does not expect to collect all amounts due, including interest accrued at the original contract rate • If repayment of the loan upon maturity is collateral dependent, the current value of collateral should be assessed in the repayment determination. • When additional collateral or guarantees received do not serve as adequate compensation for other terms of the restructuring

13. ASU 2011-02 TDR (continued) Other items to consider: • Restructuring with a below-market rate may indicate a concession; does the borrower have access to funds at the restructured rate? • Restructuring with a temporary or permanent increase in rate does not preclude TDR status, as the higher rate may still be below market for similar risk.

14. ASU 2011-02 TDR (concluded) An insignificant delay in payment is not considered a concession. Indicators of an insignificant delay in payment are: • The restructured payments subject to delay are insignificant relative to unpaid principal or collateral value and will result in an insignificant shortfall in the contractual amount due. • A timing delay is insignificant relative to the following: • The frequency of payments due under the debt • The debt’s original contractual maturity • The debt’s original expected duration The cumulative effect of previous restructurings should also be considered.

15. ASU 2011-03 Reconsideration of Effective Control for Repurchase Agreements • Effective for first interim or annual periods beginning on or after December 15, 2011. • Guidance applied prospectively to transactions or modification of existing transactions occurring after effective date. • Early adoption is not permitted.

16. ASU 2011-03 Repurchase Agreements (concluded) The amendments in this Update remove from the assessment of effective control: • (1) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee, and • (2) the collateral maintenance implementation guidance related to that criterion. • Other criteria applicable to the assessment of effective control are not changed by the amendments in this update.

17. ASU 2011-04, fair value measurement (topic 820), amendments to achieve common fair value measurement and disclosure requirements in u.s. gaap and ifrs

18. ASU 2011-04 Fair Value Measurement (continued) Effective dates • Public entities – Effective during interim and annual periods beginning after December 15, 2011. Early application is not permitted. • Non-public entities – Annual periods beginning after December 15, 2011. Early application is permitted, but no earlier than interim periods beginning after December 15, 2011.

19. ASU 2011-04 Fair Value Measurement (continued) • Removes the concept that a fair value measurement of a financial asset or liability needs to take into account the highest and best use of the financial asset or liability. • Fair value of an instrument classified in a reporting entity’s shareholders’ equity should be measured from the perspective of market participant that holds the asset. • Application of premiums and discounts in a fair value measurement is related to the unit of account.

20. ASU 2011-04 Fair Value Measurement (continued) New Disclosure Requirements - Public entity • Items for which fair value is only disclosed in the financial statements, but not recorded (FAS 107), disclose the following information: • Level within FV hierarchy • Level 2 and 3, description of valuation techniques and inputs used in FV measurement • Level 3 – narrative description of sensitivity to changes in unobservable inputs

21. ASU 2011-04 Fair Value Measurement (continued) New Disclosure Requirements – All entities • Level 2 and Level 3 recurring and non-recurring • Description of valuation techniques and inputs used • Level 3 – quantitative information about significant unobservable inputs • Ex. If using discount rates, prepayment speeds, loss severity rates, disclose the ranges of the inputs that are used (i.e. 6%-10%)

22. ASU 2011-05, Comprehensive income (topic 220), Presentation of Comprehensive Income

23. ASU 2011-05 Presentation of Comprehensive Income Effective Dates • Public entity – Fiscal years, and interim periods within those years, beginning after December 15, 2011 • Non-public entity – Fiscal years ending after December 15, 2012 • Requires retrospective application • Early adoption is permitted • No transition disclosures required

24. ASU 2011-05 Presentation of Comprehensive Income (continued) 2 • Currently 3 ^ alternatives to reporting OCI • In statement of changes in stockholders equity • In the income statement • Separate statement • Does not change components of OCI • Tax effects still required for each item of OCI, but can be provided in notes to FS

25. ASU 2011-05 Presentation of Comprehensive Income (concluded) EXAMPLE BANK, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In Thousands)

26. ASU 2011-08 Testing Goodwill For Impairment • Effective for annual and interim goodwill impairment tests for fiscal years beginning after December 15, 2011. Early adoption permitted. • First perform a qualitative analysis to determine if it is more likely than not (> 50% chance) that the fair value of a reporting unit is less than its carrying amount. • If it is not more likely than not, do not have to perform 2 step test for impairment • No requirement to perform qualitative, can go right to 2 step test.

27. ASU 2012-02 Testing Indefinite-Lived Intangible Assets for Impairment • Effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted. • Gives entity the option to first assess qualitative factors to determine whether it is more likely than not that the asset is impaired. • If determined to be more likely than not, must perform quantitative test.

28. ASU 2011-11 Disclosures About Offsetting Assets and Liabilities • Effective for annual reporting periods beginning on or after January 1, 2013 and interim periods within those annual periods. Applied retrospectively for all periods presented.

29. ASU 2011-11 Disclosures About Offsetting Assets and Liabilities (concluded)

30. Questions On Issued Standard Updates?

31. Timeout for a brief survey….

32. FASB Update Other Projects • Leases • Financial Instruments • Impairment • Liquidity and Interest Rate Risk Disclosures • Private Companies

33. Leases - Lessee New guidance would require the recording of a right-to-use asset and a liability representing the obligation to make lease payments (leases of 12 months or less excluded). Five Key Areas • Definition of a lease • Lease term • Variable/uncertain cash flows • Profit and loss recognition pattern • Lessor accounting

34. Leases – Lessee (continued) • Definition of a lease • Contract in which right to use a specified asset is conveyed for a period of time in exchange for consideration. • Customer must have right to control the asset • Ability to direct the use and receive benefit from use throughout the lease term • Lease term • Noncancellable period, together with any options to extend or terminate the lease when there is significant economic incentive to exercise or not to exercise an option to terminate.

35. Leases – Lessee (continued) Two approaches to accounting for a lease based on whether the lessee acquires or consumes more than an insignificant portion of the underlying asset over the lease term: • Straight Line Approach • Recognize liability and asset based on PV of lease payments • Subsequently measure liability using effective interest method • Measure asset as a balancing figure such that total lease expense is recognized on straight line basis. • Recognize lease expense as one amount in IS • Effective Interest/Amortization Approach • Recognize liability and asset based on PV of lease payments • Subsequently measure liability using effective interest method • Amortize asset on systematic basis • Recognize interest expense and amortization expense in IS

36. Leases – Lessee (continued) How to determine whether the lessee acquires or consumes more than an insignificant portion of the underlying asset over the lease term? • Leases of property – straight line approach unless: • Term is for major part of economic life of asset • PV of fixed lease payments accounts for substantially all of FV of asset • Assets other than property – effective interest/amortization approach unless: • Term is insignificant portion of economic life of asset • PV of fixed lease payments is insignificant relative to FV of asset

37. Leases – Lessee (concluded) • Expected to be re-exposed in first half of 2013. Expected to be final in ?? Effective date of 2016? 2017? • Transition guidance requires recording of asset and liability for all operating leases upon adoption based on remaining lease terms.

38. Financial Instruments • Classification and Measurement • Impairment

39. Classification and Measurement • Three categories for financial assets • Fair Value through Net Income (FV-NI) • Held for sale at acquisition or • Actively managed and monitored internally on a fair value basis • Marketable equity securities must be in this category • Fair Value through Other Comprehensive Income (FV-OCI) • Maximize total return by collecting contractual cash flows or selling the asset or • Manage the interest rate or liquidity risk by either holding or selling the asset • Amortized Cost • Manage instrument through customer financing or lending activities (collect contractual cash flows of instrument) and, • Ability to manage credit risk by negotiating any potential adjustment of contractual cash flows with counterparty in event of potential credit loss and, • Not held for sale at acquisition • Liabilities – generally at amortized cost

40. Classification and Measurement (continued) FV measurement of assets based on characteristics of the instrument and entity’s business strategy Characteristic Of Instrument Criterion: Is it a debt instrument held or issued that has all of the following characteristics: • It is not a derivative • An amount is transferred at inception that will be returned at maturity • It cannot be prepaid or settled at loss to investor No – classify/measure at FV-NI (e.g. equity securities) Yes – classify/measure in accordance with business strategy

41. Impairment Measurement Objective: Expected credit losses are defined as the estimate of contractual cash flows not expected to be collected.

42. Impairment (concluded) Allowance for loan losses • Due to complexity and lack of understandability, FASB has moved away from joint project with IASB and three-bucket approach • Current Expected Credit Loss Model (“CECLM”) • Still begin with historical charge-offs adjusted for current economic conditions • Allows use of reasonable and supportable forecasts about the future Debt securities • For amortized cost or FV-OCI any expected credit loss recognized as an allowance and not a cost-basis adjustment • Still working on guidance/model for FV-OCI securities

43. FASB liquidity and Interest rate risk disclosures

44. Disclosures about Liquidity Risk and Interest Rate Risk Stakeholders wanted more information about credit risk, liquidity risk and interest rate risk. • Credit risk addressed in ASU 2010-20 • This proposal attempts to address liquidity and interest rate risk No effective date proposed Significant impact on FI clients

45. Disclosures about Liquidity Risk • Available liquid funds, by class of asset, in a tabular format, as well as an entities’ borrowing availability • Maturity analysis of financial instruments, by class • Each of next four quarters (non-public can combine into one period) • Year 2 • 3-5 years • After 5 years • Information related to cost of funding from issuing time deposits and acquiring brokered deposits • Last four quarters, WAY and WAL • Supplemental narrative re exposure to liquidity risk

46. Disclosures about Interest Rate Risk Required disclosures for financial institutions • Interest rate repricing gap analysis (carrying amount and WAY) of financial instruments, by class • Each of next four quarters (non-public can combine into one period) • Year 2 • 3-5 years • After 5 years • Interest rate sensitivity analysis on after-tax net income for the next 12 month period • Supplemental narrative re exposure to interest risk

47. Private Company Financial Reporting • May 23, 2012, FAF approved creation of Private Company Council (“PCC”) • Key responsibilities of PCC • Agenda Setting – work with FASB to determine criteria for whether and when exceptions or modifications to GAAP are needed • Endorsement Process- exceptions or modifications to GAAP will be exposed for public comment if endorsed by simple majority of FASB members. PCC will redeliberate and present for final approval by FASB.

48. Questions?

49. Tax Agenda • Depreciation Expensing/Bonus Update • New Repair and Capitalization Rules • Health Insurance reporting- Form W-2 • Loan Modifications • IRS examination issues • State Tax Update • MA Security Corp Directive • CT PIC’s • Expiring Tax Rules • Potential legislation/ Tax Reform Proposals • Q & A

50. Depreciation Expensing • Section 179: first year expensing of property additions • Through the end of 2011, $500,000 deduction, phase-out when costs exceed $2,000,000 • For 2012, $139,000 deduction, phase-out when costs exceed $560,000 • Extends Section 179 treatment for software • For 2013, the deduction is $25,000 and investment ceiling is $200,000 • Planning Opportunities