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 Corp. (FDIC) on June 1, 2016, issued its “Quarterly Banking Profile
” covering the first quarter of 2016. According to the report, FDIC-insured banks and savings institutions earned $39.1 billion in the first quarter, down 1.9 percent from the industry’s earnings a year before. The earnings decline can be attributed primarily to a decrease of $2.2 billion in noninterest income and an increase in provisions for loan losses of $4.2 billion.
The report provides these additional first-quarter statistics:
- Approximately 61.4 percent of banks reported higher net income in first-quarter 2016 compared to 2015.
- Community banks’ earnings were $5.2 billion in the first quarter, up 7.4 percent from the same period in 2015.
- Net operating revenue increased 2.7 percent to $173 billion as compared to a year ago, primarily as a result of loan growth, which included net interest income rising 6.4 percent as compared to the first quarter of 2015. The increase in net interest income was offset by lower noninterest income and trading income.
- Loan-loss provisions were $12.5 billion in the first quarter of 2016, an increase of almost 50 percent from the first quarter of 2015.
- During the first quarter of 2016, for the first time in six years, loans and leases that were 90 days or more past due or in nonaccrual status increased $3.3 billion (2.4 percent) as compared to the prior quarter.
- Loans and leases for the 12 months ended March 31, 2016, increased $577.1 billion, or 6.9 percent, when compared to the prior 12-month period – the highest growth rate since the second quarter of 2008.
Additionally, the number of institutions on the problem bank list continued to decline from 183 at the end of the fourth quarter of 2015 to 165 at the end of the first quarter of 2016, and the Deposit Insurance Fund balance rose to $75.1 billion from $72.6 billion in the previous quarter.
First-Quarter 2016 Data on Credit Union Performance Released
On June 3, 2016, the National Credit Union Administration (NCUA) reported
quarterly figures for federally insured credit unions based on call report data submitted to and compiled by the agency for the first quarter of 2016. These are highlights:
- The number of federally insured credit unions dropped by 67 from the fourth quarter of 2015 to 5,954 at the end of the first quarter of 2016. The number decreased by 252 from the first quarter of 2015.
- Total assets were $1.2 trillion, which represents growth of 7.1 percent from the first quarter of 2015.
- Return on average assets remained at 75 basis points for the first quarter of 2016, consistent with year-end 2015 and 3 basis points below the first quarter of 2015.
- Outstanding loan balances increased 10.7 percent year over year, to $799.5 billion, and net member business lending rose 13 percent year over year.
- The delinquency rate rose slightly in the first quarter to 0.71 percent as compared to 0.69 percent in the first quarter of 2015; however, the ratio declined from 0.81 percent in the fourth quarter of 2015. The net charge-off ratio was 52 basis points, up from 47 basis points at fourth-quarter 2015.
- Deposits (shares) grew 6.8 percent year over year, to nearly $1.1 trillion.
Joint Statement Issued on the New Accounting Standard on Financial Instruments – Credit Losses
On June 17, 2016, the four federal financial institution regulatory agencies (FDIC, Board of Governors of the Federal Reserve System (Fed), NCUA, and Office of the Comptroller of the Currency (OCC)) issued a joint statement
after the Financial Accounting Standards Board (FASB) released Accounting Standards Update (ASU) No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” on June 16. As discussed later, this standard introduces the current expected credit loss (CECL) model and replaces the incurred loss model. The most significant impact for financial institutions will be to the allowance for loan and lease losses (ALLL).
The joint statement provides initial supervisory views on implementation. The standard allows for various expected credit loss estimation methods and is scalable. Financial institutions are encouraged to begin planning implementation. The agencies suggest appropriate institution staff should work closely with senior executives and boards of directors during this transition. Because of the potential impact on capital, institutions are encouraged to plan implementation in advance of the effective date.
More information appears under “From the Financial Accounting Standards Board (FASB).”
Statement Issued on Cybersecurity of Interbank Messaging and Wholesale Payment Networks
The Federal Financial Institutions Examination Council (FFIEC) members on June 7, 2016, issued a joint statement, “Cybersecurity of Interbank Messaging and Wholesale Payment Networks
.” The statement includes no new regulatory expectations but notes that recent cyberattacks have attempted to originate unauthorized transactions targeted at interbank messaging and wholesale payment functions. Such unauthorized transactions may subject a bank that originates them to losses and compliance risk.
The FFIEC reminds banks and other financial services companies to actively manage the cybersecurity risks associated with these functions. In addition, the statement emphasizes that entities should review risk management practices and controls related to information technology systems and wholesale payment networks, including these:
- Risk assessment
- Authentication, authorization, and access controls
- Monitoring and mitigation
- Fraud detection
- Incident response
Additional information on risk management and cybersecurity threat management can be found on the FFIEC’s website
Public Forum on Responsible Innovation Scheduled
The OCC is hosting a forum on “Supporting Responsible Innovation in the Federal Banking System
” on June 23, 2016, in Washington, D.C. Representatives from the banking industry and financial technology (fintech) companies, community and consumer groups, and regulators will discuss current trends in innovation and how innovation affects risk management processes, strategic planning, financial inclusion, and consumer protection.
The recently released white paper “Supporting Responsible Innovation in the Federal Banking System: An OCC Perspective
” and comments that the OCC received about the white paper will be discussed at the forum. The white paper outlines the OCC’s approach to addressing the rapid increase in technology in the financial services industry by banks and fintech companies.
The event will be streamed live via the OCC website
on June 23.
Guidance on Deposit Reconciliations Issued
The Fed, Consumer Financial Protection Bureau, FDIC, OCC, and NCUA jointly issued
, on May 18, 2016, “Interagency Guidance Regarding Deposit Reconciliation Practices,” containing information about how deposit discrepancies should be addressed. According to the guidance, financial institutions should adopt deposit reconciliation policies and procedures designed to avoid discrepancies or should design policies and procedures to resolve discrepancies in a timely manner in accordance with applicable laws and regulations so that “customers are not disadvantaged.” The guidance also advises financial institutions to implement effective compliance management systems that include integration of deposit reconciliations.
Program on Internal Controls and Accounting Held
The NCUA conducted a webinar, “Internal Controls and Accounting Tips for Small Credit Unions, Part II
,” on June 22, 2016, to discuss how strong internal controls and accurate accounting are essential to safe and sound credit union operations.
The 90-minute panel discussion followed up on topics discussed during part one of this series, including:
- Anticipated changes to the allowance for loan losses
- Internal control best practices for small credit unions
- Grant accounting
- The NCUA call report
From the Consumer Financial Protection Bureau (CFPB)
2016 Rulemaking Agenda Updated
On May 18, 2016, the CFPB posted its updated rulemaking agenda
for the remainder of 2016. According to the agenda, this summer the CFPB expects to issue final rules on consumer protections for prepaid cards and on mortgage servicing.
As described in the agenda, in early June the CFPB released a proposed rule
on small-dollar loans – including payday loans, auto title loans, and similar credit products. The proposed rule would identify that it is “an abusive and unfair practice for a lender to make a covered loan without reasonably determining that the consumer has the ability to repay the loan.”
Additionally, the CFPB issued proposed rules related to arbitration and is working on proposed rules to provide clarity on the Truth in Lending Act
and the Real Estate Settlement Procedures Act
integrated disclosures. It also is continuing with its early-stage rulemaking activities on overdrafts, debt collection, and lending to small businesses.
From the Financial Crimes Enforcement Network (FinCen)
Final Customer Due Diligence Rule Issued
On May 11, 2016, FinCen published a final rule, “Customer Due Diligence Requirements for Financial Institutions
,” in the Federal Register. The final rule requires banks to collect information on beneficial owners when an account is opened, using the provided model form or by other means. A beneficial owner is an individual who owns more than 25 percent of the equity interests in a company or is the single individual who exercises control. In accordance with the final rule, the bank must use customer identification program procedures to verify the identity of beneficial owners; however, the bank can rely on copies for documentation, and the rule allows banks to rely on information provided by the customer.
The rule is effective July 11, 2016; however, compliance is not mandatory until May 11, 2018.
As a companion to the rule, the U.S. Department of the Treasury also sent a letter to House Speaker Paul Ryan encouraging the adoption of legislation that would require companies to disclose beneficial ownership information to the states at the time the company is created.
From the Financial Accounting Standards Board (FASB)
Current Expected Credit Loss (CECL) Standard Issued
On June 16, 2016, the FASB issued the final CECL standard, ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
,” which will significantly change the way companies estimate credit losses related to financial assets measured at amortized cost, including held-to-maturity (HTM) debt securities and loans, as well as certain financial guarantee contracts. The FASB is replacing the incurred credit loss model with an expected credit loss model, which means losses will be recognized earlier than under existing generally accepted accounting principles (GAAP). Of course, for financial institutions, the greatest impact will be on the ALLL.
Public business entities (PBEs) that meet the definition of a Securities and Exchange Commission (SEC) filer must apply the standard in fiscal years beginning after Dec. 15, 2019, including interim periods within, which will apply to March 31, 2020, interim financial statements for calendar year-ends. Other entities, including PBEs that are not SEC filers, have later effective dates.
For more information, see the Crowe article, “Here’s CECL: FASB Issues Final Standard for Credit Losses
,” published when the FASB issued the final standard.
As previously noted, the four federal financial institution regulatory agencies issued a statement, “Joint Statement on the New Accounting Standard on Financial Instruments – Credit Losses
,” on June 17, to provide initial supervisory views on implementation.
Revenue Recognition Narrow-Scope Improvements Issued
The FASB, on May 9, 2016, issued ASU 2016-12, “Revenue From Contracts With Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients
,” to address implementation issues related to the collectability criterion in ASU 2014-09, “Revenue From Contracts With Customers (Topic 606),” such as the presentation of sales taxes, noncash consideration, contract modifications at transition, and completed contracts at transition.
This standard also provides a technical correction for transition: An entity that retrospectively applies the new revenue recognition standard to each prior reporting period is required to disclose only the effect of the changes on any prior periods retrospectively adjusted and not the effect for the period of adoption. Without this change, transition costs would have been significantly increased as contracts would have had to be accounted for under former GAAP and Topic 606 for one additional year.
The effective dates are aligned with ASU 2014-09 (Topic 606). For PBEs, the ASU is effective for annual reporting periods beginning after Dec. 15, 2017, including interim periods within (that is, Jan. 1, 2018, for a calendar year-ends). For non-PBEs, Topic 606 is effective beginning after Dec. 15, 2018, and interim reporting periods therein beginning after Dec. 15, 2019. Earlier adoption is permitted.
Technical Corrections and Improvements to Revenue Recognition Proposed
The FASB issued a proposed ASU, “Technical Corrections and Improvements to Update 2014-09, ‘Revenue From Contracts With Customers (Topic 606),’
” on May 18, 2016, to address narrow aspects of ASU 2014-09. The proposal addresses nine issues, including issues that relate to measuring impairment on the capitalized costs to obtain or fulfill a revenue contract; exclusion of all contracts within the scope of Accounting Standards Codification (ASC) Topic 944, “Financial Services – Insurance,” from the scope of the new revenue recognition standard; and a practical expedient that would allow entities to not disclose the required information for the remaining performance obligations subject to variable consideration in specific situations.
Comments are due July 2, 2016.
From the Securities and Exchange Commission (SEC)
Amendment Permitting Summary of Business and Financial Information in Form 10-K Approved
The SEC, on June 1, 2016, announced its approval of an interim final rule
allowing Form 10-K filers to summarize business and financial information contained in annual reports, implementing a provision of the Fixing America’s Surface Transportation Act
The interim final rule offers filers options for preparing the summary, and those choosing to provide such a summary must include hyperlinks to the more detailed disclosures included the Form 10-K. The SEC also is requesting comment on whether the rule should include specific requirements or guidance for the form and content of the summary and if it should also include other annual reporting forms.
The rule will be effective when published in the Federal Register, and the comment period will remain open for 30 days from the publication date.
Guidance on Crowdfunding Published
On May 13, 2016, the staff in the SEC’s Division of Corporation Finance (Corp Fin) issued Compliance and Disclosure Interpretations (C&DIs), “Regulation Crowdfunding
,” to provide guidance on the SEC’s final rule that permits certain companies to offer and sell securities through crowdfunding. Title III of the Jumpstart Our Business Startups Act
created a federal exemption under the securities laws so that crowdfunding can be used to offer and sell securities.
Additionally, the SEC published “Regulation Crowdfunding: A Small Entity Compliance Guide for Issuers
.” This guide summarizes and explains requirements of regulation crowdfunding, disclosure by issuers, limits on advertising and promoters, and restrictions on resales.
From the Public Company Accounting Oversight Board (PCAOB)
Non-GAAP Measures Discussed by Standing Advisory Group
On May 18 and 19, 2016, the PCAOB’s Standing Advisory Group (SAG) met
in Washington, D.C., to discuss the auditor’s role with respect to non-GAAP and other company performance measures, the auditor’s reporting model, and how lead auditors supervise other auditors.
The topic of non-GAAP and other company performance measures included a discussion of the audit committee’s involvement with that information in addition to the auditor’s role. Discussion points included audit committee views, whether internal controls cover non-GAAP measures, and the need for consistency in non-GAAP measures from period to period and with a company’s peers.
For an additional discussion of recent SEC developments on the topic of non-GAAP measures, see the Crowe article “Non-GAAP Measures: What’s All the Fuss About?
From the Institute of Internal Auditors (IIA)
June Edition of “Tone at the Top” Issued
The IIA issued, on May 27, 2016, the June 2016 edition of “Tone at the Top,” “Unlocking the Value: How Audit Committees Can Leverage Internal Audit
The article’s underlying premise is that audit committees’ responsibilities go further than financial reporting oversight, to also cover other aspects of their company’s performance including responsibilities for “risk management, compliance, reliability and integrity of internal data, cyber risk, and the effectiveness of internal control over operations.”
The article highlights that the scope of the responsibilities of internal audit groups also has expanded along the same lines, and the internal audit function can “enhance and protect organizational value by providing risk-based and objective assurance, advice, and insight” that goes beyond their historic role of evaluating strategic and business risks.