Financial Institutions Executive Briefing
June 13, 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
Quarterly Banking Profile Issued by FDIC
The Federal Deposit Insurance Corporation (FDIC) issued the first-quarter 2013 “Quarterly Banking Profile” on May 29, 2013. The FDIC reported $40.3 billion in FDIC-insured institutions’ first-quarter net income, a 15.8 percent increase over the first quarter of 2012. Half of all insured institutions reported year-over-year improvement in quarterly earnings. Only 8.4 percent of institutions reported negative net income, the lowest proportion of unprofitable banks since third-quarter 2006.
Provisions for loan and lease losses fell to $11.0 billion, a decline of $3.3 billion (23.2 percent) from a year ago. This is the lowest quarterly loss provision since first-quarter 2007. More than half of all institutions – 53.1 percent – reported lower loss provisions than they had a year earlier.
The combined positive effects of reduced loss provisions, higher noninterest income, and lower noninterest expense were offset somewhat by a 2.2 percent year-over-year decline in net interest income. This is the third time in the past four quarters that net interest income has been lower than in the year-earlier quarter. The industry’s net interest margin (NIM) fell to 3.27 percent from 3.35 percent in fourth-quarter 2012 and 3.51 percent in first-quarter 2012. This is the lowest average NIM for the industry since fourth-quarter 2006.
Summer 2013 Issue of Supervisory Insights Issued by FDIC
On June 6, 2013, the FDIC published the summer 2013 issue of Supervisory Insights, which features articles of interest to examiners, bankers, and supervisors but is not intended to be supervisory guidance. Articles in this issue include an overview of the new creditworthiness standards for investment securities, the heightened importance of bank information technology examinations, and the importance of ensuring compliance with consumer protection rules and regulations during the planning process for mergers and acquisitions.
The article “Credit Risk Assessment of Bank Investment Portfolios" looks at how new creditworthiness standards for investment securities reinforce the importance of proper due diligence by financial institutions. It discusses supervisory expectations for credit risk due diligence of the investment portfolio, provides examples of how to conduct due diligence, and lists questions examiners might consider when assessing an institution's credit risk management practices.
OCC Expectations for Banks “Heightened”
The Office of the Comptroller of the Currency (OCC) has “heightened expectations” for risk management, governance, and reporting on the part of the banks it supervises, Comptroller Thomas Curry said in a May 9, 2013, speech at the annual Conference on Bank Structure and Competition. “All OCC examiners will benefit with the addition of more refined analytical tools and more granular reporting from banks,” he explained. “We expect greater diligence from our banks in managing their risks. To that end, we have also clarified – and raised – our expectations for corporate governance for the largest and most complex institutions.”
The OCC also expects independent directors to “present a credible challenge to management and to have a thorough knowledge of the risks their institution is taking on,” Curry said. “Our expectation now is that large institutions will meet the standard of ‘strong’ for audit and risk management functions and that independent directors will take a strong hand in ensuring compliance,” Curry explained.
Midyear Stress Test for Large Firms Scheduled by Fed
The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) requires that firms designated as systemically significant by the Financial Stability Oversight Council must undergo two stress tests each year, one conducted by the Federal Reserve (Fed) using the Fed’s scenario and a midyear self-test using its own baseline, adverse, and severely adverse scenarios.
The Fed announced on May 13, 2013, that 18 large bank holding companies must conduct midyear stress tests and submit the results by July 5. In the midyear test, which is being required this year for the first time, each firm will develop its own baseline, adverse, and severely adverse scenarios to best reflect its individual operations and risks. Each of the 18 firms in the midyear test is required to release public summaries of the stress-test results produced under its severely adverse scenario between Sept. 15 and Sept. 30, 2013.
From the Consumer Financial Protection Bureau (CFPB)
Framework for Coordinated Supervision Issued
The CFPB and the Conference of State Bank Supervisors (CSBS) announced on May 21, 2013, a framework for coordinated supervision and enforcement. Following a Dodd-Frank mandate requiring the CFPB to coordinate supervisory activities with state bank regulators, the framework is intended to govern situations in which the CFPB and state bank supervisors share jurisdiction. It applies to all nondepository institutions and depository institutions with more than $10 billion in assets.
Video Guide to Mortgage Rules Posted
The CFPB has posted seven video presentations on YouTube about its new mortgage rules finalized in January. These new rules address a wide variety of mortgage operations, including originations, appraisals, and servicing. The videos, which include a one-hour overview video of all the rules as well as shorter videos focusing on each rule, are part of the CFPB’s efforts to provide plain-language information that is accessible to a broad array of industry constituents, especially smaller businesses with limited legal and compliance staff.
From the Committee of Sponsoring Organizations of the Treadway Commission (COSO)
Updated Internal Control Framework Issued
On May 14, 2013, COSO announced the release of its updated “Internal Control – Integrated Framework” and related illustrative documents. The COSO framework is the main internal control framework used by U.S. banks to assess internal control systems, and this is the first official update since its release in 1992. The updated framework expands on the five components of internal control already defined in the current framework by identifying 17 internal control principles, supported by 81 “points of focus” that can be used in the assessments.
The COSO board members believe users should make the transition to the updated framework as soon as feasible, but continued use of the original framework during the transition period (May 14, 2013, to Dec. 15, 2014) is appropriate. During this period, according to the COSO board, organizations reporting externally should clearly disclose whether the original framework or the 2013 framework was used.
On June 11, 2013, COSO published an article to help public companies make the transition to the revised framework while complying with Section 404 of the Sarbanes-Oxley Act of 2002.
An executive summary and a frequently asked questions document describing the updated framework can be downloaded free of charge. The 2013 framework and related illustrative documents can be purchased at the COSO website.
From the Financial Accounting Standards Board (FASB)
Three Proposals for Private Companies Forthcoming
At its June 10, 2013, meeting, the FASB voted to propose three alternatives within U.S. generally accepted accounting principles (GAAP) for private companies. The FASB expects to issue the proposed Accounting Standards Updates (ASUs) for comment before the end of June.
The proposals, developed by the Private Company Council (PCC), are:
- PCC Issue No. 13-01A, “Accounting for Identifiable Intangible Assets in a Business Combination” – The proposal would provide private companies relief from having to recognize separately certain intangible assets acquired in a business combination.
- PCC Issue No. 13-01B, “Accounting for Goodwill Subsequent to a Business Combination” – The proposal would allow amortization of goodwill and a simplified goodwill impairment model.
- PCC Issue No. 13-03, “Accounting for Certain Receive-Variable, Pay-Fixed Interest Rate Swaps” – Two simpler approaches would be allowed for certain types of interest-rate swaps when a private company enters into the swap only for the purpose of economically converting its variable-rate borrowing to fixed-rate borrowing. The two approaches would not be available for financial institutions.
Comments on the proposed ASUs will be due Aug. 23, 2013.
From the Financial Accounting Foundation (FAF)
Post-Implementation Review of Business Combination Standard Completed
The post-implementation review of the FASB’s accounting standards for business combinations, Statement No. 141(R), “Business Combinations” (now Accounting Standards Codification (ASC) Topic 805), has been completed, and the FASB has responded to it.
The Statement No. 141(R) requirements that stakeholders had the most difficulty applying relate to measuring assets acquired and liabilities assumed using the fair value requirements in Statement No. 157, “Fair Value Measurements”; measuring the fair value of contingent consideration; and determining whether a transaction is a business combination or an asset purchase.
In the post-implementation review report, released May 22, 2013, the review team concluded that Statement 141(R) resolved some of the issues associated with the purchase method of accounting for business combinations, that its principles and requirements generally are understandable and can be applied as intended, and that investors generally find the resulting information to be useful. However, the team also determined that some investors question the reliability of reported information related to assets and liabilities that are difficult to measure at fair value, result in a bargain purchase, or may be in substance asset purchases.
The team also found that the standard in certain areas introduced more costs and complexity to business-combination accounting than the FASB had anticipated. Much of the complexity relates to the application of the measurement requirements of Statement No.157. The costs relate to the extensive external valuation expertise sought by both preparers and auditors.
In a lengthy letter dated May 30, 2013, the FASB responded to the FAF’s report. Specifically, the FASB will consider findings relating to the definition of a business, accounting for purchased loans, and reporting some intangibles and goodwill as they relate to other projects that are currently underway. The FASB also committed to reviewing the findings of the forthcoming post-implementation review on Statement No. 157 and determining whether to take standard-setting action. The FASB will report back to the FAF as progress is made.
From the American Institute of Certified Public Accountants (AICPA)
Financial Reporting Alternative Provided by New SME Framework
On June 10, 2013, the AICPA released the new Financial Reporting Framework for Small and Medium-Sized Entities (SMEs). The framework is designed for smaller privately owned enterprises that are not required to produce financial statements in accordance with U.S. GAAP. Commonly referred to as an “other comprehensive basis of accounting” (OCBOA), the AICPA framework draws on a blend of traditional methods of accounting and accrual income tax accounting. Historical cost is the primary basis of measurement.
This framework is not available to use in preparing financial statements for financial institutions. However, financial institutions might be interested in understanding the framework in order to assess the acceptability for financial statement requirements in lending arrangements.
Guide Published on Valuation of Privately Held Company Securities Issued as Compensation
The AICPA recently published an Accounting and Valuation Guide, “Valuation of Privately-Held-Company Equity Securities Issued as Compensation.” The new publication provides nonauthoritative guidance and illustrations about the accounting for, valuation of, and disclosures related to privately held company equity securities issued as compensation. It is intended to assist financial statement preparers, independent auditors, and valuation specialists with applying the provisions of ASC 718 and 505-50. It is instructive in the methods of valuing closely held stock that banks encounter with employee stock ownership plans (ESOPs), KSOPs , stock transfers, and gifting.
From the Securities and Exchange Commission (SEC)
Compliance and Disclosure Interpretations Updated
The SEC’s Division of Corporate Finance (Corp Fin) recently has updated several Compliance and Disclosure Interpretations (C&DIs). C&DIs, which are published in a question-and-answer format, reflect the views of the Corp Fin staff on various SEC rules and regulations. They are intended as general guidance and should not be relied on as definitive; they are not binding due to their highly informal nature.
Updated C&DIs include:
Updated EDGAR Filer Manual Adopted
The SEC has published a final rule, “Adoption of Updated EDGAR Filer Manual.” The final rule addresses revisions to the Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system Filer Manual and related rules to reflect updates to the EDGAR system. The revisions are being made primarily to implement the new Form 13F online application and to support the “2013 US GAAP Financial Reporting Taxonomy.”
For More Information
Sydney K. Garmong
Dennis M. Hild