• Feature: Greetings from Morrison, Brown, Argiz & Company, LLP


• Feature: Tax Pitfalls: Converting from an International Agency
to a Branch


• Feature: Revised Accounting Impact of Banking Acquisitions


• On the Calendar: Financial Institutions Workshop


• Today's Tax Note: Alternative Minimum Tax


• Up Close: Frank Gonzalez, CPA

I’m happy to present to you today the inaugural issue of The Balance Sheet, a quarterly e-newsletter containing the latest financial facts and news for financial institutions. As witnesses to the growth and volatility of South Florida’s diverse financial landscape, we want to share with you the knowledge and experience we’ve gained over the past three decades providing accounting and management consulting services to community banks, international agencies and investment firms.

The Balance Sheet will cover a full range of topics, from internal audit recommendations and technology updates to tax tips and regulatory news. Our goal is to provide you with easy access to timely information that will help you optimize operations and maximize your bottom line.

Morrison, Brown, Argiz & Company specializes in the auditing and financial reporting needs of financial institutions. We work with dozens of South Florida banks and investment companies providing both internal and external auditing services, as well as tax planning and profitability reviews. Some of our valued clients include Banco Colpatria, Banco de Credito del Peru, Banco de Sabadell, BCI Management, Executive National Bank, Gulf Bank, International Finance Bank, and Terra Bank, N.A., among many others. If you would like more information about mbaf, visit: www.mba-cpa.com.

I hope you enjoy this newsletter and find its content of immediate use. If you would like other members of your organization to receive The Balance Sheet, please feel free to forward them this email and they can complete a simple registration form provided below.

Warm regards,

Frank Gonzalez, CPA
Partner
fgonzalez@mba-cpa.com

Traditionally, the vast majority of international banks in South Florida are structured as agencies, which are limited in the type of business that they can conduct. For the most part, they are prohibited from accepting deposits from U.S. businesses and individuals, thereby significantly limiting potential revenue sources.

Because of this restriction and the current global economic situation, the trend is to convert agencies and Edge Act corporations to branches. These branches can conduct business with U.S. subsidiaries and/or affiliates of foreign companies. As a result, they gain flexibility in formulating local business relationships, selecting clients and offering additional services. These conversions will definitely allow international banks to expand their business and grow their gross profits.

Converting banks, however, must be aware of the tax effects of such conversions. International bank agencies have traditionally been exempt from U.S. corporate income tax or have paid taxes at a reduced rate due to several tax incentives unique to international banks. The most important adjustment made to an international bank’s net book income to arrive at taxable income is the exclusion of income that is not “effectively connected” to a U.S. trade or business.

In determining whether income is effectively connected with a U.S. banking business, the Internal Revenue Service’s position is that the significant factor is whether the U.S. office of the bank actively and materially participates in soliciting, negotiating, or performing other activities required to generate the revenue.

The issue is not how many activities are performed by personnel from offices outside the United States, but whether activities of the U.S. office are limited to general administrative or clerical activities, including loan funding. The bank must have appropriate documentation in its files, such as internal memorandums, telexes and confirmation letters, to support that this income is not effectively connected with its U.S. operations.

The U.S. business that newly designated branches will be able to generate will most likely be solicited or negotiated by personnel in South Florida. Therefore, it appears that most if not all of the additional income to be generated by the conversion will be effectively connected to the bank’s U.S. trade or business and, thus, taxable.

If your international bank is considering converting to a branch, it is imperative that you have an effective tax plan in place in order to minimize the tax impact. If the income from the conversion is determined to be effectively connected, there are various tax planning opportunities available, including:

• Interest expense deductions
• Allocation of head office expenses
• Allocation of expenses relating to non-effectively connected income
• Planning for branch profits taxes and branch level interest taxes

To learn more about these tax saving opportunities and other issues related to the conversion of an international bank agency to a branch, please contact Raul Incera, Director of International Tax, at (305) 377-9224 or at rincera@mba-cpa.com.

With rumors of several potential acquisitions and sales surrounding the banking community in South Florida, we would like to make reference to the latest accounting literature impacting the accounting methodology for banking acquisitions. The Financial Accounting Standards Board has issued Statement of Financial Accounting Standards (“SFAS”) No. 147, Acquisitions of Certain Financial Institutions. This statement applies to all acquisitions of a financial institution except those between two or more mutual enterprises (i.e. credit unions). The key provisions of this statement to remember are as follows:

• The excess of the fair value of liabilities assumed over the fair value of tangible and identifiable intangible assets acquired in a business combination represents goodwill that should be accounted for under SFAS No. 142, Goodwill and Other Intangible Assets. Thus, the specialized accounting guidance in paragraph 5 of SFAS No. 72, Accounting for Certain Acquisitions of Banking or Thrift Institutions, will not apply for acquisitions finalized after September 30, 2002. If criteria in SFAS 147 are met, the amount of the unidentifiable intangible asset will be reclassified to goodwill upon adoption of the Statement.

	If a bank acquires another bank under the purchase method of accounting, after September 30, 2002, any goodwill which is generated under the transaction must be accounted for under the requirements of SFAS 142, which includes the periodic assessment for possible impairment of goodwill, the elimination of goodwill amortization, and the assignment of goodwill for any unidentifiable intangible asset with an indeterminate life.

• Financial institutions meeting conditions outlined in SFAS 147 will be required to restate previously issued financial statements. The objective of that restatement requirement is to present the balance sheet and income statement as if the amount accounted for under SFAS 72 as an unidentifiable intangible asset had been reclassified to goodwill as of the date SFAS 142 was initially applied. Those transition provisions are effective on October 1, 2002; however, early application is permitted.

	A financial institution that adopted SFAS 142 on January 1, 2002, would retroactively reclassify the unidentifiable intangible asset to goodwill as of that date and restate previously issued income statements to remove the amortization expense recognized in 2002.

• The scope of FASB Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, is amended to include long-term customer-relationship intangible assets such as depositor- and borrower-relationship intangible assets and credit cardholder intangible assets.

	Any intangible assets which a financial institution or bank has recorded from a prior acquisition of a deposits portfolio or loans portfolio would have to be evaluated for possible impairment under the criteria specified under SFAS 144.

These provisions should be considered for any future bank acquisitions being contemplated. If you have any questions regarding these provisions, please contact Frank Gonzalez, Partner, at (305) 377-9203 or at fgonzalez@mba-cpa.com. To obtain a copy of the actual FASB statement, click here. (369Kb .PDF Document)

Financial Institutions Workshop

Wednesday,
June 25, 2003
5:00 - 7:00 PM
Miami City Club

Save The Date!

The alternative minimum tax net operating loss deduction is limited to 90 percent of the alternative minimum taxable income.

If your bank has taxable income for 2003 and net operating loss carry-forwards to offset it for regular tax purposes, this may result in alternative minimum tax. For years ending in December 31, 2001 and 2002, the deduction was 100 percent of the alternative minimum taxable income.

Frank Gonzalez, CPA
Financial Institutions Division

We would like to congratulate Frank Gonzalez, CPA, partner-in–charge of the Financial Institutions Division at Morrison, Brown, Argiz & Company, for being selected as a finalist for the South Florida Business Journal’s Up & Comers Award. This award is designed to recognize business and civic leaders, under the age of 40, who are making their mark with outstanding achievements throughout the South Florida community.

At MBA, Gonzalez specializes in audit and business advisory services to community banks, international banks, and investment funds. He has several years of experience in South Florida providing extensive services to national and international public and privately held companies in a variety of industries including real estate, telecommunications, manufacturing and technology.

In addition to his professional achievements, Gonzalez is a dedicated community leader. Most recently he was nominated to become a member of the United Way Impact Committee that decides the allocation of funds amongst organizations affiliated with United Way in Miami-Dade County. He is an active member of the Kiwanis Club of Little Havana and co-chairs its yearly fund raising event that generates approximately $1.5 million for community service projects.

If you would like to talk with Frank about your organization’s auditing needs, please call him at (305) 377-9203 or email him at fgonzalez@mba-cpa.com