Financial Institutions Executive Briefing

March 22, 2013

The Financial Institutions Executive Briefing offers updates on financial reporting, governance, and risk management topics from Crowe Horwath LLP. In each issue of this electronic newsletter, you will find abstracts of recent standard-setting activities and regulatory developments affecting financial institutions.

From the Federal Financial Institution Regulators

FDIC Quarterly Banking Profile Issued
The Federal Deposit Insurance Corporation (FDIC) issued the fourth-quarter 2012 “Quarterly Banking Profile” on Feb. 26, 2013. This quarterly publication provides the earliest comprehensive summary of financial results for all FDIC-insured institutions. The FDIC reported $34.7 billion in FDIC-insured institutions’ fourth-quarter net income, a 36.9 percent increase over the fourth quarter of 2011. Full-year net income totaled $141.3 billion for 2012, a 19.3 percent improvement over 2011 and a total that is second only to the $145.2 billion earned by FDIC-insured institutions in 2006.

Asset quality continued to improve as the number of troubled loans and leases fell for the 11th consecutive quarter. Net charge-offs totaled $18.6 billion in the fourth quarter, down $7 billion (27.4 percent) from a year earlier. In the seventh consecutive quarter of decline, the FDIC’s problem institutions list shrank from 694 to 651 institutions. Total assets of problem institutions fell by $29 billion to $233 billion.

Community Bank Supervision Discussed by the Comptroller of the Currency

Community bank supervision was the topic of a speech delivered by Comptroller of the Currency Thomas J. Curry at the Independent Community Bankers of America (ICBA) National Convention on March 14, 2013. He noted that, although the supervisory portfolio of the Office of the Comptroller of the Currency (OCC) includes the largest financial institutions, the vast majority of OCC resources – including more than two-thirds of its examiners – are dedicated to community bank supervision.

Curry’s remarks focused on what community banks and thrifts need to do to remain strong and profitable and what the OCC is doing to support institutions. He encouraged OCC-supervised institutions to use their local exam team as a resource. Curry cited additional resources available from the OCC, including workshops for bank and thrift directors, online information and tools, and numerous publications, including the “Semiannual Risk Perspective.”

According to Curry, the newest resource from the OCC is “A Common Sense Approach to Community Banking,” a booklet that identifies some of the fundamental practices that distinguish the community institutions that thrive throughout various economic cycles from those that just get by or don’t survive. The booklet will be available in the next few weeks from the assistant deputy comptrollers who manage local offices.

Reporting Requirements Proposed for Annual Stress Tests
Seeking comment on proposed new annual stress-test reporting guidelines, the OCC published in the Federal Register a notice of proposed information collection on March 11, 2013. Titled “Company-Run Annual Stress Test Reporting Template and Documentation for Covered Institutions With Total Consolidated Assets of $10 Billion to $50 Billion Under the Dodd-Frank Wall Street Reform and Consumer Protection Act,” the proposal describes the reports the applicable financial institutions would need to file in order to meet the reporting requirements of Section 165(i)(2) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank).

Dodd-Frank requires certain financial companies, including national banks and federal savings associations, with total consolidated assets between $10 billion and $50 billion to conduct annual stress tests. Further, the act requires the primary financial regulator of those financial companies to issue regulations implementing the stress-test requirements.

On Oct. 9, 2012, the OCC published a final rule implementing Dodd-Frank annual stress-test requirements. Earlier, on Aug. 16, 2012, the OCC had published a separate proposal addressing the reports required to be filed by institutions with assets of at least $50 billion.

According to the notice, the OCC “intends to use the data collected through this proposal to assess the reasonableness of the stress test results of covered institutions and to provide forward-looking information to the OCC regarding a covered institution's capital adequacy.”

Comments on the OCC proposal are due May 10, 2013.

Bulletin Issued on Mortgage Servicers’ Transfer Activities

On Feb. 11, 2013, the Consumer Financial Protection Bureau (CFPB) issued CFPB Bulletin 2013-01 warning mortgage companies about their legal obligations to protect consumers during loan transfers between mortgage servicers. The CFPB’s concern about these practices is heightened, given the large number and size of recent servicing transfers. The bulletin indicates that the CFPB will take a close look at the following:

  • How a servicer has prepared for the transfer of servicing rights and responsibilities
  • How the new servicer handles the files it receives through the transfer
  • What policies the servicers have to prevent harm to the borrower for loans with loss mitigation in process

From the Bipartisan Policy Center (BPC)

Proposal on Housing Reform Released
The Housing Commission of the BPC released a report on Feb. 25, 2013, recommending scaling back the government’s role in the nation’s housing finance system. The report, “Housing America’s Future: New Directions for National Policy,” proposes the following:

  • A new housing finance system, in which the private sector would play a larger role
  • A continued but limited role for the federal government
  • The winding down and eventual elimination of Fannie Mae and Freddie Mac
  • Reform of the Federal Housing Administration to improve efficiency and avoid crowding out private capital

The commission – composed of former Cabinet secretaries, former senators, and other leading housing and economic experts – was formed to help set a new direction for federal housing policy. Its proposal is intended to resurrect Congress’ stalled discussions on government-sponsored enterprises. Many industry observers believe any new discussions on housing reform, however, are likely to be pushed into 2014 by other priorities during the current congressional session.

From the Financial Accounting Standards Board (FASB)

Exposure Draft Issued on Accounting for Financial Instruments
The FASB issued a proposed Accounting Standards Update (ASU) on Feb. 14, 2013, intended to improve reporting for financial instruments by developing a consistent, comprehensive framework for classifying those instruments. The exposure draft, “Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities,” addresses the feedback the FASB received about its 2010 exposure draft and offers the possibility of closer convergence with the International Accounting Standards Board’s proposal issued in November 2012.

Under the new proposal, the classification and measurement of a financial asset would be based on the asset’s cash-flow characteristics and the entity’s business model for managing the asset. The legal form of the asset – that is, whether it is a loan or a security – would not be a determining factor. Based on this assessment, financial assets would be classified into one of three categories:

  • Amortized cost – financial assets with only payments of principal and interest that are held for collection of contractual cash flows
  • Fair value through other comprehensive income – financial assets with only payments of principal and interest that are both held for collection of contractual cash flows and for sale
  • Fair value through net income – financial assets that do not qualify for either of the other two categories

Financial liabilities generally would be carried at amortized cost, unless the entity’s business strategy is subsequently to transact at fair value or the obligation results from a short sale. For financial assets and liabilities measured at amortized cost (except for receivables and payables due in less than a year and demand deposit liabilities), public companies would be required to disclose their fair values parenthetically on the face of the balance sheet. Nonpublic entities would not be required to disclose this fair value information.

The FASB encourages stakeholders to consider this proposal concurrently with the proposed ASU on credit losses the board issued on Dec. 20, 2012. Comments on the Feb. 14 proposal are due May 15, 2013. The FASB also plans to issue, in a separate exposure document, consequential amendments to the various FASB Accounting Standards Codification (ASC) topics that this proposed guidance would affect.

A “FASB in Focus” article, a short recap of the proposed ASU, is available on the FASB website.

Exposure Draft Issued on Benchmark Interest Rate
The exposure draft “Derivatives and Hedging (Topic 815): Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes” was issued on Feb. 21, 2013. It addresses whether the Fed Funds Effective Swap Rate (also known as the Overnight Index Swap Rate) should be included as a U.S. benchmark interest rate for hedge accounting purposes. Currently only the interest rates on direct U.S. Treasury obligations and the London Interbank Offered Rate (LIBOR) swap rate are considered benchmark interest rates. The amendments in the proposed ASU would permit the Fed Funds Effective Swap Rate to be included as a U.S. benchmark interest rate for hedge accounting purposes.

The FASB will determine an effective date for the proposed ASU after the board considers stakeholder feedback. Comments on the proposal are due April 22, 2013.

Exposure Draft Issued on Presentation of Unrecognized Tax Benefits
Also on Feb. 21, 2013, the FASB issued the exposure draft “Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward or Tax Credit Carryforward Exists.” The proposed ASU is intended to eliminate diversity in practice in the presentation of unrecognized tax benefits. Currently, some entities present unrecognized tax benefits as a liability unless the unrecognized tax benefit is directly associated with a tax position taken in a tax year that results in the recognition of a net operating loss (NOL) carryforward for the year and the NOL carryforward has not been used. Other entities present unrecognized tax benefits as a reduction of a deferred tax asset for an NOL carryforward or a tax-credit carryforward.

The proposed guidance would require an unrecognized tax benefit, or a portion of an unrecognized tax benefit, to be presented in the statement of financial position as a reduction to a deferred tax asset for an NOL carryforward or a tax-credit carryforward, with the following exception: To the extent that an NOL carryforward or a tax-credit carryforward at the reporting date is not available under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position, the unrecognized tax benefit would be presented as a liability. The proposed guidance would require no new disclosures.

The FASB will determine an effective date for the proposed ASU after the board considers stakeholder feedback. Comments on the proposal are due April 22, 2013.

Standard Issued on Joint and Several Liability Arrangements
The FASB issued ASU 2013-04, “Liabilities (Topic 405): Obligations Resulting From Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date,” on Feb. 28, 2013. The guidance addresses how an entity should measure obligations resulting from joint and several liability arrangements for which the total amount of the obligation in the scope of the guidance is fixed at the reporting date. The obligation should be measured as the sum of the amount the reporting entity agreed to pay on the basis of its arrangements among its co-obligors and any additional amounts the reporting entity expects to pay on behalf of its co-obligors. Disclosures about the nature and amount of the obligation are also required.

For public companies, the amendments in the ASU are effective for fiscal years, and interim periods within those years, beginning after Dec. 15, 2013. For nonpublic entities, the amendments are effective for fiscal years ending after Dec. 15, 2014.

Private Company Council Agenda Expanded
At the second public meeting of the Private Company Council (PCC), held on Feb. 12, 2013, the council announced the addition of three projects to its formal agenda. The new items are:

  • Consolidating variable interest entities (ASC Topic 810), specifically when applied to related party arrangements
  • Accounting for “plain vanilla” interest-rate swaps with single counterparties (ASC Topic 815) that are used to convert variable interest rates on loans to fixed interest rates
  • Recognizing and measuring various identifiable intangible assets acquired in business combinations, including the use of Level 3 fair value measurements and their associated disclosures (ASC Topics 350 and 805)

The PCC and the FASB also voted to seek additional public input on the proposed private company decision-making framework, which will outline criteria to determine whether and in what circumstances it is appropriate to adjust financial reporting requirements for private companies.

The Financial Accounting Foundation established the PCC in May 2012 to work with the FASB to determine whether and when to modify U.S. generally accepted accounting principles (GAAP) for private companies.

XBRL Implementation Guide Published
The FASB announced on Feb. 11, 2013, the publication of the first in a planned series of implementation guides to help users understand how certain disclosures are structured in the eXtensible Business Reporting Language (XBRL) taxonomy. Using the elements of the taxonomy, the guide, “U.S. GAAP Financial Reporting Taxonomy Implementation Guide – Subsequent Events,” demonstrates the modeling of disclosures required about events that occur after a public company’s reporting period ends.

In addition, the FASB issued its first style guide, “Definition Components & Structure,” a reference for users of the taxonomy intended to provide further insight into design criteria.

From the Securities and Exchange Commission (SEC)

JOBS Act Guidance Issued on Exemption From Broker-Dealer Registration
On Feb. 5, 2013, the staff of the SEC’s Division of Trading and Markets issued “Jumpstart Our Business Startups Act Frequently Asked Questions About the Exemption From Broker-Dealer Registration in Title II of the JOBS Act.” The publication answers frequently asked questions about the exemption from broker-dealer registration in Title II of the Jumpstart Our Business Startups Act (JOBS Act). It includes guidance on the following topics:

  • Reliance on the exemption from broker-dealer registration in Section 4(b) of the Securities Act before the SEC adopts rules to eliminate the ban in Rule 506 on general solicitation
  • Whether the exemption is available to a platform that offers and sells securities other than those offered and sold under Rule 506 of Regulation D
  • Forms of compensation that would cause someone to be unable to rely on the exemption
  • Whether the exemption from the requirement to register as a broker-dealer means that the persons engaging in the activities described in Section 4(b) are not brokers or dealers

From the International Accounting Standards Board (IASB)

Proposal Issued on Credit Losses
On March 7, 2013, the IASB published for public comment an exposure draft, “Financial Instruments: Expected Credit Losses.” The IASB and the FASB have been working to converge their standards for financial instruments, but the IASB proposal takes an approach different from the FASB proposal on credit losses published in December 2012. Both the IASB and the FASB are moving from an incurred-loss model to an expected-loss model, but the boards have different views on when expected losses should be recognized.

The IASB contends that its model is designed to recognize credit losses on a timelier basis while avoiding excessive front-loading of losses. For all financial instruments within the scope of the proposal, expected credit losses would be recognized from when they are originated or purchased. Full lifetime expected credit losses would be recognized when the credit quality of a financial instrument deteriorates significantly.

Comments on the IASB exposure draft are due July 5, 2013.

From the Internal Revenue Service (IRS)

IRS Reverses Course on Capitalization of Costs of Holding REO

In recent years, the IRS has asserted that costs incurred by banks related to real estate owned (REO) acquired through foreclosure proceedings such as real estate taxes, insurance, and maintenance should be capitalized rather than deducted when incurred.

In generic legal advice released on Feb. 22, 2013, the IRS reversed its position and concluded that these costs are deductible when incurred when a loan-originating bank acquires REO through foreclosure and promptly attempts to sell the REO without improvement. The IRS indicated that the costs were deductible because the acquisition and sale of REO is an extension of the bank’s lending activities and not the result of traditional resale activities.

The generic legal advice does not address the impact on deductibility when a bank makes improvements to the property prior to offering it for sale or does not promptly put the property on the market.

It is hoped that in the near future the IRS will provide additional guidance on cost capitalization for all REO property as well as guidance for taxpayers who have been capitalizing these costs.


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Sydney K. Garmong
Office Managing Partner, Washington, D.C.