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Community banks are sure to be winners under the new tax reform. The cut in the corporate tax rate from 35 percent to 21 percent will free up cash that could result in bigger dividends for public banks, investments in new products and special projects, and hiring more talent.

But before the benefits kick in, many banks are looking at what could be a significant one-time write-down that is unavoidable under the lower corporate tax rate.

That’s because of the way deferred tax assets and liabilities are accounted for on a bank’s balance sheet.

DTAs are expenses incurred for book purposes, for which a tax deduction has not yet been realized, but might be in the future. These items have been recorded on the balance sheet as an asset using the current effective tax rate in place. Examples of items creating DTAs include the loan loss allowance, deferred compensation programs or unrealized losses on available-for-sale investments.

Under generally accepted accounting principles, many financial institutions determine the value of its DTAs based on the current enacted federal and state tax rates. So, by the very nature of the federal corporate rate going down, so too will the value of the deferred tax assets.

“How do you account for a change in the tax rate when the original transaction that caused the tax asset or liability did not go through net income?” Russell Golden, chairman of the Financial Accounting Standards Board, told Banker & Tradesman

Citigroup, for example, could be looking at a $17 billion write-down due to its DTAs, according to various media reports.

A few community banks in Massachusetts, such as Eastern Bank and Boston Private, have already accumulated over $50 million in DTAs through the third quarter of this year with no deferred tax liabilities, according to call reports.

Eastern Bank listed a deferred tax asset of close to $70 million for the year 2016. Although it’s difficult to determine the exact number, the 14 percent reduction in the corporate tax rate would have resulted in close to a $10 million write-down in 2016 for Eastern.

Tight Capital Ratios Could Be Effected

The one-time write down of deferred taxes has caused a little bit of a stir due to its impact on a bank’s capital ratios.

This could possibly create regulatory issues with banks that have capital ratios tightly in accordance with the minimum standards, said Giuseppe Joe Femia, vice president and director at Milton-based CPA firm GT Reilly & Co.

It boils down to how the adjusted numbers are accounted for, he said. As it currently stands, the write-down, including any other comprehensive income related deferred taxes, would be counted as expenses in net income, which could significantly reduce the tier 1 capital ratio, a number that regulators watch closely.

“We would like there to be a change by the FASB so that write-downs related to OCI-related deferred taxes such as unrealized losses on AFS investments do not have to be recorded as an expense, but rather can be recorded into OCI, a component of equity, which would not impact regulatory capital,” he said. “We think it’s the right thing to do.”

Other banks and advocacy groups, including the American Bankers Association and Massachusetts Bankers Association, have taken a similar stance.

“Adjustments recorded through net income often have different regulatory capital impacts than those recorded in [accumulated other comprehensive income (AOCI)],” Michael Gullette, vice president at the ABA, wrote in a letter to the FASB in December. “Regulatory capital in the banking industry often excludes amounts in AOCI and is normally the basis to determine capital available for dividends and other key items to investors.”

“In Massachusetts, nearly 70 percent of the banks are mutual in governance form,” Daniel Forte, president and CEO of the Massachusetts Bankers Association, wrote in a letter to the FASB in mid-December. “While the deferred tax asset/liability is problematic for all banks, it could particularly affect mutual banks that are sometimes ‘scored’ by independent rating agencies utilizing very cursory analytics, often for marketing purposes.”

FASB’s Golden said board staff has been in contact with those requesting change, and is working on potential solutions.

The FASB will hold a public meeting Jan. 10, where Golden said he expects “staff will present to the board to either solve or reduce problems that banks would observe.”

If a majority at the meeting agree to a draft solution, the FASB could move ahead with seeking comments, and potentially finalize a change before the end of the first quarter of 2018.

GT Reilly will most likely not issue financials and tax returns until the FASB finalizes the rule, said Femia, and therefore may need to extend issuance of financial statements past April, although the hope is that the FASB acts quickly.