Financial Institutions Executive Briefing – June 17, 2015
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
On May 27, 2015, the Federal Deposit Insurance Corp. (FDIC) issued its “Quarterly Banking Profile” covering the first quarter of 2015. According to the report, FDIC-insured banks and savings institutions earned $39.8 billion in the first quarter of 2015, up 6.9 percent from a year before. Furthermore, earnings improved as net operating revenue increased, driven primarily by 4.6 percent growth in noninterest income and a 1.5 percent increase in net interest income.
The report provided the following statistics for community banks:
- Earnings were $4.9 billion during the first quarter, up 16.4 percent from the same period in 2014.
- Approximately 63 percent of community banks saw improved earnings.
- Net interest income, accounting for almost 80 percent of net operating revenue, increased 6.5 percent.
- Noninterest income increased 17.7 percent year-on-year.
- Noninterest expenses rose by 5.9 percent.
The average industrywide return on assets increased slightly to 1.02 percent from 1.01 percent. The report also found that asset quality continued to improve; charge-offs were $9 billion in the first quarter, down 13.2 percent from a year earlier, and for the 20th consecutive quarter noncurrent loan balances declined. Additionally, the number of institutions on the problem bank list dropped for the 16th straight quarter from 291 to 253, and the Deposit Insurance Fund balance rose to $65.3 billion.
March 2015 Data on Credit Union Performance Released
On June 2, 2015, the National Credit Union Administration (NCUA) reported March 2015 figures based on call report data submitted to and compiled by the agency for the quarter. These are highlights for federally insured credit unions for the quarter:
- The number of federally insured credit unions fell by 67 from the fourth quarter to 6,206 at the end of the first quarter. This was a decline of 4.4 percent from the first quarter of 2014.
- Total assets were $1.16 trillion, which represents growth by $60.6 billion, or 5.5 percent, from the first quarter of 2014.
- Return on average assets was 78 basis points, a slight decline from the previous quarter but the same level as the first quarter of 2014.
- Outstanding loan balances reached $721.9 billion, which represents growth of 1.3 percent from the previous quarter.
- The delinquency ratio fell to 0.69 percent from 0.81 percent from the first quarter of 2014. The net charge-off ratio declined to 47 basis points, a decline of three basis points from the first quarter of 2014.
- The aggregate net worth ratio declined by 15 basis points from the end of 2014 to 10.81 percent at the end of the first quarter.
Comments Sought in Third Phase of EGRPRA Review
On May 29, 2015, the Federal Reserve (Fed), FDIC, and Office of the Comptroller of the Currency (OCC) launched a request for comments in the Economic Growth and Regulatory Paperwork Reduction Act (EGRPRA) review cycle, as mandated by Congress, to identify bank regulations that are outdated, unnecessary, or burdensome. This third phase targets regulations related to consumer protection, money laundering, and directors, officers, and trustees.
The request reiterated the agencies’ intention to seek comments on newly issued rules, such as those issued under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) and the Basel III capital rules, which previously had been excluded from the EGRPRA review. The agencies revealed that they would seek comments on these newly listed rules by the end of the year.
Comments on the identified regulations are due 90 days after publication in the Federal Register.
Joint Diversity Assessment Standards Finalized
On June 9, 2015, the OCC, Fed, FDIC, NCUA, Consumer Financial Protection Bureau, and Securities and Exchange Commission (SEC) jointly issued final guidelines for assessing diversity policies and practices for their regulated entities. Section 342 of the Dodd-Frank Act required these six agencies to establish an Office of Minority and Women Inclusion (OMWI) at each agency that is responsible for all diversity in management, employment, and business activities matters. In addition, each OMWI director is required to develop standards to assess the diversity policies and practices of the institutions they oversee.
Guidelines for regulated entities to establish and reinforce their diversity policies and practices, including their organizational commitment to diversity; workforce, employment, procurement, and business practices; and practices to promote transparency of organizational diversity and inclusion within the entities’ U.S. operations are provided by the final interagency policy.
The final interagency policy statement is effective upon publication in the Federal Register.
Context Provided for Midsized Bank Stress-Test Results
The Fed, FDIC, and OCC issued on June 2, 2015, a statement intended to go over the disclosure requirements resulting from stress tests mandated by the Dodd-Frank Act for banks with $10 billion to $50 billion in assets. The results are scheduled to be publicly disclosed between June 15 and 30, 2015.
The statement provides clarification that the stress tests for midsized banks are different from those performed by banks with more than $50 billion as part of the Comprehensive Capital Assessment and Review as midsized banks are not required to submit annual capital plans subject to approval based on their stress-test results.
Furthermore, the agencies warn against comparing results among banks as these stress-test results may reflect markedly different geographic markets, exposures, activities, methods, and assumptions across entities. Additionally, they caution that the hypothetical results produced by these stress tests are not intended to be forecasts of expected or most likely outcomes.
Revisions to Liquidity Rule Proposed
On May 21, 2015, the Fed proposed a rule that would allow banking organizations subject to the liquidity coverage ratio requirement to include investment-grade, general obligation state and municipal bonds as high-quality liquid assets up to certain levels as long as they meet the same liquidity criteria that apply to corporate debt securities.
Comments are due July 24, 2015.
Community Bank Impact Minimized by Regulation Tailoring
In a speech at the annual Community Bankers Conference held in New York on May 14, 2015, Fed Governor Jerome Powell said, “Community banks face significant challenges today,” and “although not aimed at community banks, new post-crisis regulations meant to strengthen the financial system are coming into place that require additional management attention.”
Powell indicated that the Fed seeks to tailor its regulations to fit the banks’ size and risk profiles. He and other top regulators support legislative changes that would exempt banks with less than $10 billion in assets from the Volcker rule and the Dodd-Frank incentive compensation rules. He also said that the Fed has received “mostly positive” feedback about recent examination changes to expand off-site exams and conduct risk assessments in advance.
May Issue of “The NCUA Report” Published
On May 20, 2015, the NCUA posted the May 2015 issue of “The NCUA Report.” This latest issue includes columns from the NCUA board chairman, the vice chairman, and other board members. Consistent with prior months, the report also contains articles from several NCUA offices on the NCUA’s initiatives and information on supervisory, regulatory, and compliance issues.
Articles in this month’s report include:
- “Membership Requirements Eased With Associational Common-Bond Final Rule”
- “Chairman’s Corner: Beauty Is in the Eye of the Beholder”
- “Board Member McWatters’ Perspective: Room for Improvement”
- “Board Actions: New Share Insurance Coverage Proposed for Certain Escrow Accounts”
- “NCUA-SBA Partnership Builds Credit Union Small Business Lending”
- “NCUA Resources Support Credit Union Efforts to Protect Older Members”
Secondary Capital Working Group Formed by NCUA
As part of its continuous efforts to increase access to secondary capital for low-income credit unions and provide appropriate regulatory relief to all credit unions, the NCUA created the Secondary Capital Working Group as a resource for stakeholders interested in participating in this process. A Web page made available May 6, 2015, provides a comprehensive overview of its efforts, resources, and a forum for suggestions.
The main objectives of the working group are:
- To increase opportunities to access secondary capital for low-income designated credit unions
- To examine how supplemental capital may be used to satisfy NCUA’s proposed risk-based capital rule
- To explore possible legislative means to increase access to supplemental capital for all credit unions
In April 2015, the working group achieved its first goal by completing updates to NCUA’s “National Supervision Policy Manual,” making secondary capital more attractive to investors and streamlining the approval process for both federally chartered and state-chartered low-income credit unions.
From the Financial Crimes Enforcement Network (FinCEN)
Successes in Bank Secrecy Act Reporting Recognized
The Financial Crimes Enforcement Network (FinCEN) of the U.S. Department of Treasury presented its inaugural Law Enforcement Awards in a ceremony on May 12, 2015, to six law enforcement agencies for cases that used Bank Secrecy Act (BSA) data effectively to achieve successful prosecution.
FinCEN created the Law Enforcement Awards as a way to show financial institutions that their reports are not “going into a black hole,” the group’s director, Jennifer Shasky Calvery, said at the ceremony. “Institutions spend a great deal of money and time to comply with their regulatory requirements, and so it is understandable that they want to know that their efforts are paying off.”
These six cases were recognized at the awards ceremony:
- A Ponzi scheme in Boston identified by suspicious activity reports (SARs)
- A transnational money laundering ring identified by reports on multiple businesses writing checks to each other
- International drug trafficking activity flagged by reports of structured deposits
- A digital currency provider identified as a money launderer based on reports of suspicious funds transfers
- A government bribery case identified by a single BSA report on one subject of investigation
- A Pakistani Taliban supporter flagged by SARs on suspicious transfers
From the Consumer Financial Protection Bureau (CFPB)
Exam Procedures Updated for TILA-RESPA Integration
On May 4, 2015, the CFPB issued an update to the Supervision and Examination Manual, examination procedures to provide guidance on how it will conduct compliance exams for the Truth in Lending Act (TILA) and the Real Estate Settlement Procedures Act (RESPA) integrated disclosures. These most recent updates are to the mortgage origination exam procedures.
The new integrated disclosures are effective Aug. 1, 2015..
From the Electronic Payments Association (NACHA)
Same-Day ACH Settlement Rule Finalized
The members of NACHA have adopted a new rule that will accelerate Automated Clearing House (ACH) settlement and allow for same-day payment by introducing two extra windows during weekdays, morning and afternoon. The rule also provides for fees so that receiving financial institutions can recover costs associated with handling same-day ACH payments.
The new rules will not affect existing ACH schedules and capabilities; however, they will provide a faster payments system, speeding up invoice payments, payroll, bill payments, and funds transfers for businesses and consumers.
The two new same-day clearing windows provided in the rule are:
- A morning submission deadline at 10:30 a.m. Eastern, with settlement occurring at 1 p.m.
- An afternoon submission deadline at 3 p.m. Eastern, with settlement occurring at 5 p.m.
The rule is mandatory for all financial institutions that use ACH transactions. Same-day credit transactions will begin phasing in during September 2016, with debits following a year later.
From the Financial Accounting Standards Board (FASB)
Guidance Published on Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)
On May 1, 2015, the FASB issued Accounting Standards Update (ASU) No. 2015-07, “Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent),” which is applicable to reporting entities that elect to measure the fair value of an investment using the net asset value per share (or its equivalent) practical expedient.
This guidance removes these requirements:
- Categorize within the fair value hierarchy all investments that use the net asset value per share practical expedient to measure fair value.
- Provide specific disclosures for all investments that are eligible to be measured at fair value using the net asset value per share practical expedient; rather, those disclosures are now limited to investments for which the entity has chosen to measure the fair value using that practical expedient.
For public business entities, the amendments are effective for fiscal years beginning after Dec. 15, 2015, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after Dec. 15, 2016, and interim periods within those fiscal years. A reporting entity should apply the amendments retrospectively. Earlier application is permitted.
Short-Duration Insurance Contract Disclosures
On May 21, 2015, the FASB issued ASU 2015-09, “Financial Services – Insurance (Topic 944): Disclosures About Short-Duration Contracts.” Applying only to insurance entities that issue short-duration contracts, the amendments focus on providing additional information about insurance liabilities to help financial statement users understand the nature, amount, timing, and uncertainty of future cash flows related to insurance liabilities as well as the effect of those cash flows on the statement of comprehensive income.
The amendments require extensive additional disclosures about the liability for unpaid claims and claim adjustment expenses, including, but not limited to:
- Detail of incurred and paid claims development information by accident year
- Reconciliation of incurred and paid claims development information to the aggregate carrying amount of the liability as well as disclosure of reinsurance recoverable on unpaid claims for each period
- The total of incurred but not reported liabilities plus expected development on reported claims included in the liability for unpaid claims and claim adjustment expenses for each accident year presented
- Quantitative information regarding frequency of claims
- The average annual percentage payout of incurred claims by age for claims other than health insurance claims
- Roll-forward of the liability
- For liabilities reported at present value, the aggregate amount of discount for the time value of money, amount of recognized interest accretion, and where in the statements such accretion is classified
The ASU also requires disclosure of the methodologies and significant changes in methodologies and assumptions used, including reasons for the changes and their effects on the financial statements, to calculate the liability for unpaid claims and claim adjustment expenses, to calculate reserves, and to determine claim frequency information.
For public business entities, the amendments are effective for annual periods beginning after Dec. 15, 2015, and interim periods within annual periods beginning after Dec. 15, 2016. For all other entities, the amendments are effective for annual periods beginning after Dec. 15, 2016, and interim periods within annual periods beginning after Dec. 15, 2017. Early application is permitted.
Equity Method Accounting Simplification Proposed
On June 5, 2015, the FASB issued a proposed ASU, “Investments – Equity Method and Joint Ventures (Topic 323): Simplifying the Equity Method of Accounting.”
Currently, an equity method investor must account for the basis difference, which is the difference between the cost of an investment and the investor’s proportionate share of the net assets of the investee. Under the proposed amendments, an entity would recognize its equity method investment at its cost and would not be required to determine the fair value of the investee’s identifiable assets and liabilities assumed at the acquisition date and would no longer be required to account for the basis difference. In addition, when an investment qualifies for use of the equity method as a result of an increase in the ownership interest level, the investor would no longer be required to retroactively make adjustments to the investment, results of operations, and retained earnings on a step-by-step basis as if the equity method had been in effect during all previous periods in which the investment was held.
The proposed amendments would be applied on a modified prospective basis.
Comments are due Aug. 4, 2015.
Changes to Measurement-Period Accounting Proposed
The FASB issued for public comment a proposed ASU, “Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments,” on May 21, 2015. Under the proposed amendments, an acquirer would recognize adjustments to provisional amounts identified during the measurement period in the reporting period in which the adjustment amount is determined. In the same period’s financial statements, the acquirer would record the effect on earnings of changes in depreciation, amortization, or other income effects, if any, that were the result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date.
The proposed amendments would be applied prospectively.
Comments are due July 6, 2015.
Revenue Recognition Clarifying Guidance Proposed
On May 12, 2015, the FASB issued a proposed ASU, “Revenue From Contracts With Customers (Topic 606): Identifying Performance Obligations and Licensing.” The proposed amendments would add guidance for identifying performance obligations by clarifying that identification in a contract of goods and services that are immaterial would not be required and providing additional guidance for evaluating the criterion of separately identifiable when determining if promised goods and services are distinct.
Additionally, the proposed amendments are intended to clarify the licensing implementation guidance by discussing whether an entity’s licensing obligations are satisfied over time or at a point in time.
Comments are due June 30, 2015.
Amendments to Business Combinations Guidance Issued
On May 8, 2015, the FASB issued ASU 2015-08, “Business Combinations (Topic 805): Pushdown Accounting – Amendments to SEC Paragraphs Pursuant to Staff Accounting Bulletin No. 115.” This ASU updates various SEC paragraphs of Topic 805 based on SEC Staff Accounting Bulletin No. 115, which was effective Nov. 21, 2014.
From the Securities and Exchange Commission (SEC)
Additional Analysis Released Related to Proposed Pay Ratio Disclosure Rules
On June 4, 2015, the SEC staff released additional analysis of its proposed rules for pay ratio disclosure. The potential effects of excluding different percentages of employees from the pay ratio calculation are considered in the additional analysis, which has been posted on the SEC’s website as part of the comment file for the proposed rules. These proposed rules would require the disclosure of the median of the annual total compensation of all of the issuer’s employees, the annual total compensation of the issuer’s CEO, and the ratio of the median of the annual total compensation of all of the issuer’s employees to the annual total compensation of the issuer’s CEO.
Comments on the proposed rules are due July 6, 2015.
Rules to Improve Information Reporting by Investment Companies and Investment Advisers Proposed
On May 20, 2015, the SEC proposed rules, forms, and amendments to improve information reporting and disclosure by investment companies and investment advisers. The new rules are intended to enhance the quality of information available to investors and to allow the SEC to more effectively collect and use data. The proposed rules would require mutual funds, exchange traded funds, and other registered investment companies to report information in a structured data format, which would allow for better analysis by the SEC and the public. The proposals also would require enhanced and standardized disclosures in financial statements and would permit investment companies to make shareholder reports accessible on a website.
Comments are due 60 days after publication in the Federal Register.
From the Public Company Accounting Oversight Board (PCAOB)
Consultation Paper Issued on Auditor’s Use of the Work of Specialists
On May 28, 2015, the PCAOB issued Staff Consultation Paper No. 2015-01, “The Auditor's Use of the Work of Specialists,” to get input from investors, accounting firms of all sizes, specialists, companies, and others on potential changes to standards for the auditor’s objectivity and oversight of specialists and the use of their work in audits. The paper discusses the growing importance of specialists in recent years that comes from the increasing complexity of business transactions reported in a company’s financial statements.
The paper questions whether PCAOB standards adequately address the auditor’s use of the work of specialists and whether more rigorous standards would help auditors respond to the risks of material misstatement in financial statements when using the work of specialists.
Comments are due July 31, 2015.
Audit Committee Dialogue Issued
The PCAOB issued “Audit Committee Dialogue” on May 7, 2015. This is first in a series offering audit committee members insights from public company auditors. The communication highlights key areas of recurring concern in PCAOB inspections of large audit firms, such as auditing internal control over financial reporting, assessing and responding to risks of material misstatement, and auditing accounting investments, including fair value measurements. It also describes certain emerging risks to the audit and provides targeted questions that committee members might ask their auditors on each topic.
From the Center for Audit Quality (CAQ)
External Auditor Assessment Tool Released
The Audit Committee Collaboration, of which the CAQ is a member, released on June 2, 2015, a new “External Auditor Assessment Tool: A Reference for Audit Committees Worldwide.” This resource is intended to help audit committees or those charged with governance to evaluate the external auditor, to assess the quality of the audit, or to select or recommend the retention of the audit firm. The tool contains questions to help assess the service quality and sufficiency of resources provided by the auditor; communication with the auditor; and the independence, objectivity, and professional skepticism of the auditor.
“Profession in Focus” Web Series Launched
The CAQ launched on May 27, 2015, an online video series to highlight issues important to the public company auditing profession and the financial markets. The series, “Profession in Focus,” is hosted by CAQ Executive Director Cindy Fornelli. It will feature interviews with thought leaders connected to the financial reporting process, including from auditing, corporate governance, investing, the regulatory arena, and the academic world.