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 Feb. 23, 2016, issued its “Quarterly Banking Profile
” covering the fourth quarter of 2015. According to the report, FDIC-insured banks and savings institutions earned $40.8 billion in the fourth quarter, up 11.9 percent from the industry’s earnings a year before. The earnings growth can be attributed primarily to an increase of $6.8 billion in net operating revenue and a decrease of $2.7 billion in noninterest expenses.
The report provides these additional statistics:
- Nearly 64 percent of banks reported higher net income in 2015 compared to 2014. The industry’s net income increased to $163.7 billion (7.5 percent) from 2014. For the year, average industrywide return on assets rose slightly from 1.01 percent in 2014 to 1.04 percent.
- Community banks’ earnings were $5.1 billion in the fourth quarter, up 4 percent from the same period in 2014.
- Net operating revenue increased 4.1 percent to $174.3 billion as compared to a year ago – a result of increases in net interest income and noninterest income.
- Full-year loan-loss provisions increased for the first time in six years, rising $7.2 billion (24.1 percent). Full-year net charge-offs decreased $2.4 billion (6.1 percent) compared to 2014.
- The number of institutions on the problem bank list continued to decline from 203 at the end of the third quarter to 183 at the end of the fourth quarter.
- The Deposit Insurance Fund balance rose to $72.6 billion from $70.1 billion last quarter.
Fourth-Quarter 2015 Data on Credit Union Performance Released
On March 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 fourth quarter of 2015. These are highlights:
- The number of federally insured credit unions dropped by 69 from the third quarter to 6,021 at the end of the fourth quarter. The number decreased 252 (4 percent) from the fourth quarter of 2014.
- Total assets were $1.2 trillion, which represents growth of $82.2 billion, or 7.3 percent, from the end of 2014.
- Return on average assets was 75 basis points for year-end 2015, 5 basis points below 2014.
- Outstanding loan balances increased 10.5 percent year over year, to $787 billion, and net member business lending rose 3.6 percent for the quarter and 12.2 percent year over year.
- The delinquency rate rose slightly in the fourth quarter to 0.81 percent from 0.78 percent in the third quarter of 2015; however, the ratio declined from 0.85 percent in the fourth quarter of 2014. The net charge-off ratio was 48 basis points, down from 2014’s 50 basis points.
- Deposits (shares) grew 6.9 percent year over year, to $1.016 trillion.
Publication Issued on Cybersecurity and Lending Topics
The FDIC released its winter 2015 issue of “Supervisory Insights
” on Feb. 1, 2016. The report focuses on how banks can enhance their information security programs to address evolving cybersecurity threats. It provides an overview of the regulatory response by the FDIC and others to the recent rise in cybercrime. The publication also highlights marketplace lending, results from an FDIC study on credit and consumer products and services, and an overview of recent regulations and supervisory guidance.
New Issue of “Community Banking Connections” Released, Including Credit Losses Article
The Board of Governors of the Federal Reserve System (Fed) has released its latest issue of “Community Banking Connections
,” a quarterly publication that focuses on safety and soundness issues affecting community banks. Articles in this edition include:
- “Community Bank Research Conference Looks at the Changing Nature of Competition”
- “The U.S. EMV Chip Card Migration: Considerations for Card Issuers”
- “New Rules on Accounting for Credit Losses Coming Soon”
- “The Community Depository Institutions Advisory Council’s Impact After Five Years”
Response Procedure for BSA Compliance Violations Outlined
On Feb. 29, 2016, the Office of the Comptroller of the Currency (OCC) issued a bulletin
providing guidance on the procedure by which banks may respond to potential noncompliance with Bank Secrecy Act
(BSA) compliance program requirements, including repeat or uncorrected BSA compliance problems.
The OCC is required to issue a cease-and-desist order when citing BSA compliance violations. According to this bulletin, when potential noncompliance or an uncorrected issue is identified, the OCC’s process includes providing bank management with written notice about the violation and allowing an opportunity to respond prior to the final decision to issue a cease-and-desist order.
Revisions to “Comptroller's Handbook” Issued
The OCC issued an update to the “Installment Lending” section of its “Comptroller’s Handbook
” on Feb. 12, 2016. The revisions include updated administrative and assessment guidance associated with installment lending activities and risk management. The booklet also rescinds an earlier OCC bulletin on retail lending interim examination procedures.
Interest-Rate Risk Video Resources Updated
On Feb. 3, 2016, the FDIC released updated videos
targeted at bank directors, management, and staff to assist them in better understanding and managing interest-rate risk. The videos cover topics such as current industry trends, responsibilities of the bank’s board and management teams, types of interest-rate risk, different risk measurement systems, key modeling assumptions, internal controls, and independent review.
Deposit Account Recordkeeping Rule Proposed
The FDIC issued, on Feb. 17, 2016, a proposed rule, “Recordkeeping for Timely Deposit Insurance Determination
,” that would require banks with more than 2 million deposit accounts to enhance their deposit recordkeeping systems so that the amount of FDIC-insured deposits could be calculated within 24 hours of a bank failure using the failing bank’s systems, data, and staff to determine the insured and uninsured amounts for each depositor and place holds on portions of uninsured deposits.
Affecting 36 of the nation’s largest institutions, the proposal requires the banks to collect and maintain more depositor information and make changes to information systems so that quick and accurate determinations could be made about FDIC insurance.
Comments are due 90 days after publication in the Federal Register.
February Issue of “The NCUA Report” Published
The NCUA posted the February 2016 issue of “The NCUA Report
” on Feb. 16, 2016. This latest issue includes a column from the NCUA board chair, articles from various NCUA offices on NCUA initiatives, and information on supervisory, regulatory, and compliance issues that are relevant to all federally insured credit unions.
Articles in this month’s report include:
- “Office of National Examinations and Supervision Report: Are Card-Free ATMs Around the Corner?”
- “Chairman’s Corner: You’ve Got to Be in It to Win It!”
- Board Member J. Mark McWatters’ perspective: “Creating a Fair and Balanced Approach to Regulation”
- “Board Actions: NCUA Invites Comments on Methodologies for Overhead Transfer Rate, Operating Fee”
- “What to Know If Your Credit Union Holds MSB Accounts”
- “2016 Examinations Will Focus on Greatest Potential Risks”
- “2016 Regulatory Review List Now Available on NCUA.gov”
From the Consumer Financial Protection Bureau (CFPB)
CFPB Policy Priorities for Next Two Years Issued
The CFPB released, on Feb. 25, 2016, details of its policy priorities
for the next two years. Focus areas will include arbitration, consumer reporting, debt collection, demand-side consumer behavior, household balance sheets, mortgages, open-use credit, small-business lending, and student lending. In addition, the CFPB will continue to work toward fulfilling its mandate under the Dodd-Frank Wall Street Reform and Consumer Protection Act
, overseeing fair lending by indirect auto lenders and rulemaking on prepaid cards.
From the New York State Department of Financial Services
AML Monitoring Requirements Proposed
The New York State Department of Financial Services announced
, on Dec. 1, 2015, a proposed new anti-money laundering (AML) regulation that would apply to all financial institutions chartered in New York. The proposal, which was posted in the Dec. 16, 2015, New York State Register (page 9)
, provides a set of specific mandates intended to detect suspicious activities, and require a “certifying senior officer” of a New York financial institution to file an annual certification verifying compliance with the mandate as part of the institution’s transaction monitoring and filtering program requirements.
The department said the proposal is necessary to correct BSA and AML program deficiencies caused by “a lack of robust governance, oversight, and accountability at senior levels of these institutions.” If adopted, this could set an example for other states.
The original comment period has been extended
, and comments are due March 31.
From the Financial Accounting Standards Board (FASB)
Transition Resource Group for Credit Losses Meeting Announced
On March 22, 2016, the FASB announced
that the first public meeting of the Transition Resource Group (TRG) for Credit Losses will be held on Friday, April 1. The TRG was formed to solicit, analyze, and discuss implementation issues that could arise when the upcoming credit losses standard is implemented. The TRG is chaired by Larry Smith, a FASB member, and comprises industry experts including preparers, auditors, and regulators. The TRG meeting, slated for 8:30-12:30 Eastern, will be available by webcast. There is no need to register in advance; simply visit the Meetings
page on the FASB website and click on “Live Webcast” to listen.
New Guidance on Accounting for Leases Issued
On Feb. 25, 2016, the FASB issued its new lease accounting guidance in Accounting Standards Update (ASU) No. 2016-02, “Leases (Topic 842).” ASU 2016-02 is composed of three sections: “Section A – Leases: Amendments to the FASB Accounting Standards Codification
,” “Section B – Conforming Amendments Related to Leases: Amendments to the FASB Accounting Standards Codification
,” and “Section C – Background Information and Basis for Conclusions
.” Under the new guidance, lessees will be required to recognize on the balance sheet the following for all leases (with the exception of short-term leases) at the commencement date:
- A right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term
- A lease liability measured on a discounted basis representing the lessee’s obligation to make lease payments arising from a lease
Under the new guidance, lessor accounting is largely unchanged except for certain changes that align lessor accounting with the lessee accounting model and Topic 606, “Revenue From Contracts With Customers.” The new guidance also addresses the accounting for sale and leaseback transactions. Lessees will recognize lease assets and liabilities on the balance sheet and, therefore, no longer will be provided with a source of off-balance-sheet financing. Additionally, qualitative and quantitative disclosure requirements to provide information about the amounts recorded in the financial statements are included in the new guidance.
The ASU is effective for public business entities, certain not-for-profit entities, and certain employee benefit plans for fiscal years beginning after Dec. 15, 2018, including interim periods within those fiscal years. For calendar year-end entities, this applies to March 31, 2019, financial statements. All other entities should apply the amendments for fiscal years beginning after Dec. 15, 2019, and interim periods within fiscal years beginning after Dec. 15, 2020. For calendar year-end entities, this applies to Dec. 31, 2020, financial statements. Early application is permitted for all entities upon issuance.
For more information, read “Bigger Balance Sheets on the Horizon: FASB Issues New Leases Accounting Standard
On March 29, 2016, the FASB will host a live webcast titled “IN FOCUS: FASB Accounting Standards Update on Leases
” at 1 p.m. Eastern to discuss the ASU and answer questions.
Simplifications in Equity Method Transition Finalized
The FASB issued ASU 2016-07, “Investments – Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting
,” on March 15, 2016, to remove the requirement to retroactively adopt the equity method upon an increase in 1) the level of ownership interest or 2) the degree of influence. Upon an increase in either the ownership or degree of influence, an entity will add the cost basis of acquiring the additional interest in the investee to the current basis and adopt the equity method. For such increases in interests that are held as available-for-sale equity securities, until the adoption of ASU 2016-01, entities will recognize the unrecognized holding gains or losses in accumulated other comprehensive income (AOCI) when the investment becomes qualified for the equity method.
The ASU is effective for all entities for both interim periods and fiscal years beginning after Dec. 15, 2016, with early adoption permitted.
Revenue Recognition Guidance on Principal Versus Agent Finalized
The FASB issued ASU 2016-08, “Revenue From Contracts With Customers (Topic 606): Principal Versus Agent Considerations (Reporting Revenue Gross Versus Net)
,” on March 17, 2016. Under ASU 2014-09, “Revenue From Contracts With Customers (Topic 606),” when another party, along with the entity, is involved in providing a good or service to a customer, the entity must determine if the nature of its obligation is to provide a good or service to a customer (that is, to be a principal) or is to arrange for the good or service to be provided to the customer (that is, to act as an agent).
The FASB-International Accounting Standards Board (IASB) Joint Transition Resource Group for Revenue Recognition discussed the analysis, and, as a result, the FASB took on a project to improve the guidance. Some of the amendments include:
- Addressing the unit of account (that is, level) at which an entity should assess whether it is a principal or an agent
- Identifying the nature of the good or the service provided to the customer (for example, whether it is a good, a service, or a right to a good or service)
- Applying the control principle to certain types of transactions, such as service arrangements
- Providing indicators to assist in the evaluation
Furthermore, the amendments modify specific illustrative examples from ASU 2014-09 and offer additional examples to help in the application of the guidance.
The effective date and transition aligns with ASU 2014-09.
Concerns for Adoption of Private Company Council (PCC) Alternatives After Their Original Effective Date Addressed by PCC
The FASB issued ASU 2016-03, “Intangibles – Goodwill and Other (Topic 350), Business Combinations (Topic 805), Consolidation (Topic 810), Derivatives and Hedging (Topic 815): Effective Date and Transition Guidance (a Consensus of the Private Company Council)
,” on March 7, 2016, to address concerns raised by private company stakeholders about the adoption of PCC alternatives after their original effective dates. To alleviate these concerns, the FASB removed the effective dates in ASUs 2014-02, 2014-03, 2014-07, and 2014-18 and made those updates effective immediately. Additionally, the amendments include transition provisions that allow private companies to forgo a preferability assessment the first time they elect the accounting alternatives. However, any subsequent change to an accounting policy election still must be preferable under Topic 250, “Accounting Changes and Error Corrections.”
Guidance on Assessment of Call and Put Options Clarified
The FASB issued, on March 14, 2016, ASU 2016-06, “Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments
.” All entities that issue or invest in debt instruments (or hybrid financial instruments that are determined to have a debt host) with embedded call (put) options are affected by the amendments. Current guidance provides specifics for determining whether call (put) options that can accelerate the repayment of principal on a debt instrument meet the clearly-and-closely-related criterion for bifurcating an embedded derivative. It states that for contingent call (put) options to be considered clearly and closely related, they can be indexed only to interest rates or credit risk.
The amendments clarify the required steps when assessing whether the economic characteristics and risks of call (put) options are clearly and closely related to their debt hosts’ economic characteristics and risks. Accordingly, when a call (put) option is contingently exercisable, there is no requirement that an entity must assess whether the event that triggers the ability to exercise a call (put) option is related to interest rates or credit risks.
The amendments are effective for public business entities for fiscal years beginning after Dec. 15, 2016, and interim periods within those fiscal years. All other entities must apply the new requirements for fiscal years beginning after Dec. 15, 2017, and interim periods within fiscal years beginning after Dec. 15, 2018. All entities have the option of adopting the new requirements early.
Accounting Guidance for Derivative Instrument Novations Issued
The FASB issued ASU 2016-05, “Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships
,” on March 10, 2016. This ASU applies to all reporting entities for which there is a change in the counterparty to a derivative instrument that has been designated as a hedging instrument. The term “novation,” as it relates to derivative instruments, refers to replacing one of the parties to a derivative instrument with a new party.
Under the ASU, a change in the counterparty to a derivative instrument designated as the hedging instrument does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge accounting criteria continue to be met.
The ASU, which may be applied either on a prospective basis or a modified retrospective basis, is effective for public business entities for financial statements issued for fiscal years beginning after Dec. 15, 2016, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after Dec. 15, 2017, and interim periods within fiscal years beginning after Dec. 15, 2018. Early adoption is permitted.
Accounting Guidance for Recognition of Breakage From Prepaid Stored-Value Products Issued
On March 8, 2016, the FASB issued ASU 2016-04, “Liabilities – Extinguishments of Liabilities (Subtopic 405-20): Recognition of Breakage for Certain Prepaid Stored-Value Products
.” The ASU narrowly addresses breakage (that is, the monetary amount of the card that ultimately is not redeemed) for prepaid stored-value products that are redeemable for monetary values of goods or services but also may be redeemable for cash.
The scope of this guidance does not include the following:
- Prepaid stored-value products that are redeemable only for cash
- Prepaid stored-value products for which breakage is subject to escheatment in accordance with unclaimed property laws
- Prepaid stored-value products that are attached to a segregated bank account
- Customer loyalty programs or transactions in the scope of other topics (for example, Accounting Standards Codification (ASC) 606 on revenue from contracts with customers or ASC 924-405 on gaming chips for casinos)
Examples of prepaid stored-value products that are in scope include prepaid telecommunication cards, traveler’s checks, and prepaid gift cards issued by specific payment networks and redeemable at network-accepting merchant locations.
The ASU addresses diversity in practice for the recognition in breakage (income) from prepaid stored-value product liabilities by concluding that they are financial liabilities, but providing a scope exception from the derecognition guidance in ASC 405, enabling breakage recognition in a manner consistent with the model in ASC 606 as follows:
- If an entity expects to be entitled to breakage, derecognize amounts in proportion to the pattern of rights expected to be exercised by the product holder to the extent significant reversals will not subsequently occur.
- If an entity does not expect to be entitled to breakage, derecognize amounts when the likelihood of the product holder exercising its remaining rights becomes remote.
The ASU is effective for public business entities, certain not-for-profit entities, and certain employee benefit plans for fiscal years beginning after Dec. 15, 2017, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after Dec. 15, 2018, and interim periods beginning after Dec. 15, 2019. Early application is permitted.
From the Securities and Exchange Commission (SEC)
“Financial Reporting Manual” Updated
The SEC staff in the Division of Corporation Finance (Corp Fin) updated the “Financial Reporting Manual
” on March 17, 2016. The updates include revising the guidance on significance of equity method investments, conforming amendments to reflect the adoption of the changes from the Fixing America’s Surface Transportation Act
(FAST Act), and adding revenue recognition guidance due to the issuance of FASB ASU 2014-09, “Revenue From Contracts With Customers (Topic 606),” and International Financial Reporting Standards (IFRS) 15, “Revenue From Contracts With Customers.”
Notice of Comment Issued on PCAOB Rules on Naming the Engagement Partner and Firms Participating in the Audit
On Feb. 8, 2016, the SEC issued for public comment a “Notice of Filing of Proposed Rules on Improving the Transparency of Audits: Rules to Require Disclosure of Certain Audit Participants on a New PCAOB Form and Related Amendments to Auditing Standards
,” seeking feedback on newly adopted rules of the Public Company Accounting Oversight Board (PCAOB). These rules address providing information about who is participating in public company audits, including the name of the engagement partner; the names, locations, and extent of participation of other accounting firms that took part in the audit whose work constituted 5 percent or more of the total audit hours; and the number and aggregate extent of participation of all other accounting firms that took part in the audit whose individual participation was less than 5 percent of the total audit hours.
The new rules and accompanying amendments to auditing standards require audit firms to disclose such information on Form AP, “Auditor Reporting of Certain Audit Participants,” which is to be filed 35 days after the date the auditor’s report is first included in a document filed with the SEC. Or, for initial public offerings, the information is to be disclosed 10 days after the auditor’s report is first included in a document filed with the SEC.
If approved by the SEC, the disclosure requirement for the engagement partner will be effective for audit reports issued on or after Jan. 31, 2017, or three months after SEC approval of the final rules, whichever is later. For disclosure of other audit firms participating in the audit, the requirement will be effective for reports issued on or after June 30, 2017.
Comments were due on March 8, 2016.
Guidance Issued for EDGAR Filings for Asset-Backed Securities Issuers
The SEC’s Corp Fin issued “Staff Guidance for EDGAR Filings for Asset-Backed Securities Issuers
” on Feb. 9, 2016, to answer questions for issuers of asset-backed securities. The guidance addresses programming changes to the SEC's Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system that have been made to support newly adopted revisions to Regulation AB and the new Exchange Act
Rule 15Ga-2, which requires compliance for any registered offering of asset-backed securities beginning with an initial bona fide offer on or after Nov. 23, 2015.
Regional Compliance Outreach Programs for Broker-Dealers Scheduled
On Feb. 2, 2016, the SEC
and Financial Industry Regulatory Authority
(FINRA) opened registration for their nationwide 2016 Regional Compliance Outreach Program for Broker-Dealers. The first program is scheduled for April 7, 2016, in New York. There is no cost to attend these programs.
The outreach program is a partnership of the SEC and FINRA designed to provide a forum for broker-dealer firm regulators and industry professionals to examine current regulatory issues and share effective compliance practices.
Fourth Fee Rate Advisory for Fiscal Year 2016 Released
On Feb. 25, 2016, the SEC released its fourth fee rate advisory
for fiscal year 2016 pursuant to Section 31(j)(2) of the Securities Exchange Act of 1934
. The SEC determined that a midyear adjustment to the Section 31 fee rate for fiscal year 2016 is not required. As announced on Jan. 7, 2016, the rate will remain at $21.80 per million until Sept. 30, 2016, or 60 days after the enactment of a regular fiscal year 2017 appropriation, whichever is later. In addition, the Section 31 assessment on round turn transactions in security futures remains at $0.0042 per transaction.
From the International Auditing and Assurance Standards Board (IAASB)
IAASB Paper on Audit Issues Related to Expected Credit Losses Released
On March 2, 2016, the IAASB released a paper
on audit issues related to auditing expected credit losses. The IAASB assembled a task force of IAASB members and advisers, bank auditors, representatives from the Basel Committee on Banking Supervision and the International Association of Insurance Supervisors, and an observer from the PCAOB to consider audit issues related to expected credit loss frameworks (internationally IFRS 9, “Financial Instruments,” and domestically the soon-to-be-finalized FASB current expected credit loss, or CECL, model). The paper identifies challenges and provides suggestions for how these challenges might be addressed within the revision project on International Standards on Auditing 540, “Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related Disclosures.”
Although the paper is internationally focused, many of its points are indicative of potentially similar challenges for auditors, management, audit committees, and other stakeholders under domestic auditing standards applied to the FASB’s CECL model, and we encourage stakeholders to read the international observations.
From the Institute of Internal Auditors (IIA)
Financial Services Industry Job Analysis Survey Opened
The IIA recently sought responses to an online job analysis survey
for its Certified Financial Services Auditor (CFSA) designation. In the survey, participants answered questions about the “knowledge, skills, and abilities required to test financial services auditing competencies.” The IIA plans to use this information in restructuring the CFSA exam syllabus, which it plans to release later in 2016. The survey was open through March 15, 2016.
“Tone at the Top” Report on Organizational Culture Issued
The IIA released the February 2016 issue of its “Tone at the Top
” newsletter, “More Than Just Setting the Tone: A Look at Organizational Culture,” on Feb. 19, 2016. The February 2016 article covers the effect of culture on internal controls and long-term organizational success, finding that an organization’s culture at the top affects the relevance and effectiveness of its internal control processes, with a toxic organizational culture having negative effects on internal controls.
The report identifies six signs of a toxic corporate culture, including these:
- Employees walking on eggshells
- Bad behavior among employees
- Lack of development
- Information hoarding
- Lack of accountability
Along with identifying signs of a toxic corporate culture, the article also provides strategies leadership can use to create and promote a healthy culture:
- Ensuring that culture, values, and ethics appear on agendas and are discussed openly
- Creating observable metrics to evaluate culture
- Requiring frequent reporting that includes employee feedback and customer complaints
- Exercising care in selection, compensation, and termination of the CEO and senior executives to avoid rewarding short-term thinking and bad behavior
- Opening communication with employees and their management
- Providing communications to employees to reinforce ethical behavior and foster a “blame-free” environment
CBOK Report on Strengthening Audit Committee Relationships Published
The IIA published on Feb. 26, 2016, a new report
based on the Common Body of Knowledge (CBOK) 2015 Global Practitioner Survey. The report, “Interacting With Audit Committees: The Way Forward for Internal Audit,” focuses on how organizations can improve communications between audit committees and internal audit departments. It examines whether an organization’s audit committee provides appropriate support and oversight of the internal audit group and whether the latter meets the needs of the audit committee.
Included are detailed discussions of 1) the relationship between the audit committee and internal audit and the oversight provided by the audit committee over internal audit; 2) the results of the 2015 CBOK survey; and 3) significant themes regarding internal audit interaction with audit committees. Internal audit’s interaction with the audit committee, particularly how the audit committee supports the independence and objectivity of internal audit, is identified as “one of the hallmarks of good governance.”