The importance of an independent loan review

The greatest level of risk to a bank’s balance sheet generally resides in its loan portfolio. An effective loan review function will help your bank manage credit risk by identifying, monitoring, and addressing credit quality issues in an accurate and timely manner. An effective credit management system should work to ensure the accuracy of internal credit classification or grading systems and, thus, the quality of the information used to assess the appropriateness of your bank’s allowance for loan losses or allowance for credit losses. The scope and complexity of your bank’s loan review system should vary based on the size and complexity of your institution. The approach should be adaptable to changes in local and broader markets conditions.

With today’s level of regulatory oversight, there is increased focus on having a quality, independent loan review program. Most community banks find it challenging or cost prohibitive to handle internally.

How We Can Help

Maggart’s approach is tailored to your bank’s size and complexity. We offer:

  • Full scope loan reviews
  • Limited/targeted scope loan reviews
  • Due diligence loan reviews
  • Outsourced or co-sourced loan review to supplement or enhance your current loan review department

We build relationships with your credit administration team to develop a practical solution that will help you:

  • Assess individual loans and repayment risks
  • Identify lapses in loan documentation
  • Determine compliance with approved lending policies and procedures
  • Evaluate credit and underwriting quality
  • Identify opportunities to improve your bank’s lending function
  • Validate the accuracy of your bank’s risk ratings
  • Find opportunities to improve your bank’s lending function
  • Identify and communicate market trends and conditions that could impact your portfolio

Our Loan Review Approach

We will provide you with a report that summarizes your bank’s risk characteristics, documentation exceptions, and includes various graphs and peer group comparisons. The report will allow your management team and Board of Directors to further understand the risk profile of your loan portfolio. We’ll also provide risk rating recommendations about individual loans and loan relationships as well as opportunities to improve your underwriting and credit administration policies and procedures.

Why Maggart?

  • We take a hands-on approach to our loan review to ensure you stay well-informed of regulatory issues and industry trends.
  • You will receive useful insights from a relationship-based firm with national firm expertise. Maggart has been providing services to small privately held community banks to publicly traded multi-billion-dollar institutions for over 40 years.
  • We will complete your review in a timely and efficient manner to ensure that you maintain your good standing with regulators.
  • Our services go beyond providing loan review — our team is a partner with you. We will provide you with recommendations, sample policies, templates, or other materials to help you take improve your credit risk management practices.
  • We will provide documentation or equivalent in accordance with AICPA standards to your audit firm to maximize efficiency and minimize staff disruption.
  • You will be assigned a partner that is intimately involved in the relationship from day one. We won’t assign unsupervised inexperienced staff to you.

Tracking Down Donation Substantiation

If you’re like many Americans, letters from your favorite charities may be appearing in your mailbox acknowledging your 2021 donations. But what happens if you haven’t received such a letter? Can you still claim a deduction for the gift on your 2021 income tax return? It depends.

What’s Required?

To support a charitable deduction, you need to comply with IRS substantiation requirements. This generally includes obtaining a contemporaneous written acknowledgment from the charity stating the amount of the donation if it’s cash. If the donation is property, the acknowledgment must describe the property, but the charity isn’t required to provide a value. The donor must determine the property’s value.

“Contemporaneous” means the earlier of the date you file your tax return or the extended due date of your return. So, if you donated in 2021 but haven’t yet received substantiation from the charity, it’s not too late (as long as you haven’t filed your 2021 return). Contact the charity and request a written acknowledgment.

Keep in mind that, if you made a cash gift of under $250 with a check or credit card, generally a canceled check, bank statement or credit card statement is sufficient. However, if you received something in return for the donation, you generally must reduce your deduction by its value and the charity is required to provide you a written acknowledgment as described earlier.

Deduction for Non-Itemizers

Generally, taxpayers who don’t itemize their deductions (and instead claim the standard deduction) can’t claim a charitable deduction. But, under the CARES Act, individuals who didn’t itemize deductions could claim a federal income tax write-off for up to $300 of cash contributions to IRS-approved charities for the 2020 tax year.

Fortunately, the Consolidated Appropriations Act extended this tax break to cover $300 of cash contributions made in 2021. The law also doubled the deduction limit to $600 for married, joint-filing couples for cash contributions made in 2021.

Let Us Assist You

Additional substantiation requirements apply to some types of donations. We can help you determine whether you have sufficient substantiation for the donations you hope to deduct on your 2021 income tax return. We also can guide you on the substantiation you’ll need for gifts you’re planning this year to ensure you can enjoy the desired deductions on your 2022 return.

Estate Planning through Intrafamily Loans & Family Banks

Among the primary goals of estate planning is to put in writing how you want your wealth distributed to loved ones after your death. But what if you want to use that wealth to help a family member in need while you’re still alive? This has become an increasingly common and pressing issue this year because of the COVID-19 pandemic and changes to the U.S. economy.

One way to help family members hit hard by job loss or increased debt is through an intrafamily loan or even by establishing a full-fledged family bank.

Structure Loans Carefully

Lending can be a way to provide your family financial assistance without triggering unwanted gift taxes. As long as a loan is structured in a manner similar to an arm’s-length loan between unrelated parties, it won’t be treated as a taxable gift.

This means, among other steps, documenting the loan with a promissory note and charging interest at or above the applicable federal rate (which is now historically low). You’ll also need to establish a fixed repayment schedule and ensure that the borrower has a reasonable prospect of repaying the loan.

Even if taxes aren’t a concern, intrafamily loans offer important benefits. For example, they allow you to help your family financially without depleting your wealth or creating a sense of entitlement. Done right, these loans can promote accountability and help cultivate the younger generation’s entrepreneurial capabilities by providing financing to start a business.

Maybe Open a Family Bank

Too often, however, people lend money to family members with little planning or regard for potential unintended consequences. Rash lending decisions may lead to misunderstandings, hurt feelings, conflicts among family members and false expectations. That’s where a family bank comes into play.

A family bank is a family-owned and funded entity — such as a dynasty trust, a family limited partnership or a combination of the two — designed for the sole purpose of making intrafamily loans. Often, family banks can offer financing to family members who might have difficulty obtaining a loan from a bank or other traditional funding sources, or lend at more favorable terms.

By “professionalizing” family lending activities, a family bank can preserve the tax-saving power of intrafamily loans while minimizing negative consequences. The key to avoiding family conflicts and resentment is to build a strong governance structure that promotes communication, decision making and transparency.

Establishing guidelines regarding the types of loans the family bank is authorized to make — and allowing all family members to participate in the decision-making process — ensures that family members are treated fairly and avoids false expectations.

Learn More

More than likely, someone in your extended family has faced difficult financial circumstances this year. Contact Maggart to learn more about intrafamily loans.