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) issued, on Aug. 30, 2016, its “Quarterly Banking Profile
” covering the second quarter of 2016. According to the report, FDIC-insured banks and savings institutions earned $43.6 billion in the second quarter, up 1.4 percent from the industry’s earnings a year before. The increase in net earnings resulted primarily from an increase of $5.2 billion in net interest income and a $981 million decrease in litigation reserves.
The report provides these additional second-quarter statistics:
- Community banks’ earnings were $5.5 billion in the second quarter, up 9 percent from the same period in 2015.
- Total loans increased in the second quarter to more than $9 trillion, with total loan balances increasing by $181.9 billion for the quarter, up 6.7 percent from a year prior.
- During the second quarter of 2016, loans and leases that were 90 days or more past due or in nonaccrual status decreased $4.8 billion (3.4 percent) as compared to the prior quarter.
- The proportion of banks that were unprofitable in the second quarter fell from 5.8 percent in 2015 to 4.5 percent for 2016 – the lowest level since the first quarter of 1998.
- Capital rose to $1.87 trillion, a 5 percent increase over 2015.
Additionally, the number of institutions on the problem bank list continued to decline from 165 at the end of the first quarter of 2016 to 147 at the end of the second quarter of 2016, and the Deposit Insurance Fund balance rose to $77.9 billion from $75.1 billion in the previous quarter.
Second-Quarter 2016 Data on Credit Union Performance Released
On Sept. 6, 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 second quarter of 2016. These are highlights:
- The number of federally insured credit unions continued to drop – from 5,954 at the end of the first quarter 2016 to 5,887 at the end of the second quarter. This represents a decrease by 272 from a year earlier.
- Annualized net income was $9.5 billion for the first half of 2016, a 3.1 percent increase over the first half of 2015.
- Total assets were $1.25 trillion, which represents growth of 7.4 percent for the six months ended June 30, 2016.
- Return on average assets increased slightly to 77 basis points for the second quarter of 2016 from 75 basis points at the end of the first quarter and is down from 81 basis points a year earlier.
- Outstanding loan balances increased 10.5 percent year over year, to $823.4 billion, and net member business lending rose 13.6 percent year over year.
- The delinquency rate rose in the second quarter to 0.75 percent as compared to 0.70 percent in the second quarter of 2015. The net charge-off ratio was 51 basis points for the six months ended June 30, 2016, up from 46 basis points in the first half of 2015.
- Deposits (shares) grew 7.3 percent year over year, to nearly $1.1 trillion.
Fact Sheet on AML and Sanctions Enforcement Issued
On Aug. 30, 2016, the U.S. Department of the Treasury, Board of Governors of the Federal Reserve System (Fed), FDIC, NCUA, and Office of the Comptroller of the Currency (OCC) jointly issued a fact sheet
to provide expectations about anti-money laundering (AML) and sanctions enforcement. The document also summarizes significant features of federal supervisory and enforcement strategy and practices, AML supervision and exam processes, enforcement actions, and the roles of the regulatory agencies and Treasury Department.
Update on “Matters Requiring Board Attention” Published
In the summer 2016 issue of “Supervisory Insights
,” released on Aug. 22, 2016, the FDIC, in an article on Matters Requiring Board Attention (MRBA), notes that there are fewer write-ups of MRBAs; however, corporate governance-related MRBAs are on the rise. The article highlights that FDIC exams at satisfactorily rated banks that result in MRBAs have decreased from 55 percent in 2011 to 36 percent in 2015.
The article also lists the MRBA categories noted most often in 2015 and 2014 and describes trends in these categories, including descriptions of developing risks within the industry. Although MRBAs are down substantially for lending-related issues, they have increased substantially for board and management issues, including those addressing policies specifically related to audit and strategic planning. MRBAs also have risen for liquidity and Bank Secrecy Act
The issue also focuses on the lack of de novo activity in the banking industry and includes a description of how the FDIC has handled de novo charter applications in recent years, as well as a regulatory and supervisory roundup.
Simplified Call Report for Smaller Banks Proposed
The Treasury, OCC, Fed, and FDIC, on Aug. 17, 2016, proposed
a new, shorter call report with simplified instructions for eligible small institutions, defined as banks with less than $1 billion in assets and domestic offices only. The new call report form would be reduced from 85 pages to 61 as a result of removing 950 data items, or approximately 40 percent of data items on the current call report. The revised call report also would streamline how banks report on their complex activities, with existing schedules on complex or specialized activities, such as derivatives, trading, or credit card lending, being replaced with simple questions that ask whether banks engage in the activities and would indicate specific data items to fill out if they do. Certain schedules also would be filed only on an annual or semiannual basis for these eligible small institutions.
If adopted, the new call report would take effect with the March 31, 2017, report date.
Comments are due Oct. 14, 2016.
Videos on NCUA Exam Procedures Released
The NCUA, on July 28, 2016, released
a new four-part video series offering credit union board members information about the purpose, process, and components of an NCUA examination.
The videos provide information on the NCUA examination process, the seven risk categories and factors that affect a credit union’s ratings within the NCUA exam, how CAMEL (capital adequacy, asset quality, management, earnings, and liquidity and asset-liability management) ratings are determined, and how a credit union can prepare for an exam.
In addition, the videos cover the ongoing monitoring components that credit unions should implement to improve results of examinations.
Bank Accounting Advisory Series (BAAS) Updated by OCC
The OCC released, on Aug. 18, 2016, an update to the Bank Accounting Advisory Series
, a publication that includes the OCC’s interpretations of generally accepted accounting principles (GAAP) and regulatory guidance based on facts and circumstances presented for national banks and federal savings associations. The update includes new answers to frequently asked questions about contingencies and fair value accounting.
From the Consumer Financial Protection Bureau (CFPB)
Final Rule Amending Mortgage Servicing Rule Issued
The CFPB issued, on Aug. 4, 2016, a final rule
amending its mortgage servicing rules. The rule clarifies the definition of “delinquency,” adds a provision stating that banks that have charged off mortgage loans are not required to send periodic statements if certain requirements are met, and exempts certain seller-financed transactions from being counted toward the 5,000-loan limit for small servicers.
The rule broadens the definition of “successor in interest” and extends the protections of the servicing rule to those individuals who fall under the definition even though they are not obligated on the mortgage loan. The rule also requires servicers to provide periodic statements to borrowers in bankruptcy.
The majority of the rule will be effective one year after publication in the Federal Register; however, the provisions regarding periodic statements in the event of bankruptcy and successors in interest will take effect 18 months after publication. Along with issuing the rule, the CFPB also updated the implementation page of its website with information about the changes.
Resources on HMDA Final Rule Published
On Aug. 16, 2016, the CFPB updated its website
to provide additional resources to help bankers comply with the Home Mortgage Disclosure Act
(HMDA) final rule. The website now includes a webinar and other resources to address institutional and transactional coverage, the data disclosure and submission process, and significant dates. The webinar, which provides an overview of the HMDA final rule, can be accessed through the CFPB’s website.
From the Financial Crimes Enforcement Network (FinCen)
Proposed Rule on CIP, AML, and Beneficial Ownership Requirements for Banks Without a Federal Regulator Issued
On Aug. 25, 2016, FinCen issued a proposed rule
that would eliminate the anti-money laundering (AML) exemption for banks that lack a federal regulator. Among other entities, these include state-chartered nondepository trust companies, private banks, nonfederally insured credit unions, and international banking entities in U.S. Caribbean territories. The proposal would require such institutions to establish AML programs and would subject them to customer identification program (CIP) and beneficial ownership requirements, if not already applicable.
The proposed rule also would provide minimum standards for the AML programs.
Comments are due Oct. 24, 2016.
From the Financial Accounting Standards Board (FASB)
Changes to Hedge Accounting Guidance Proposed
The FASB issued a proposed Accounting Standards Update (ASU), “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities
,” on Sept. 8, 2016. The proposed ASU is aimed at improving the hedge accounting model for financial instruments and nonfinancial items, and simplifying hedge accounting to align it with a company’s risk management practices.
Among other changes, the ASU proposes to:
- Increase the time period for the completion of initial quantitative assessments of hedge effectiveness. The assessment could be performed as late as the end of the three-month effectiveness testing period rather than at inception.
- Allow subsequent assessments of hedge effectiveness on a qualitative basis when an initial quantitative test is required.
- Permit entities that originally elect to apply the shortcut method to subsequently revert to a long-haul method if: 1) a long-haul method was specified in the designation documentation at inception; and 2) using the method specified, the hedge would have been highly effective from the inception of the hedging relationship.
- Permit partial-term fair value hedges. For example, a 10-year fixed-rate instrument could be hedged using a two-year interest-rate swap.
- Eliminate the concept of benchmark rates for hedges of variable-rate financial instruments and instead permit hedges of any contractually specified index. This change would be particularly useful in hedging instruments tied to prime interest rates.
- Expand the benchmark rates for fair value hedges to include the Securities Industry and Financial Markets Association (SIFMA) Municipal Swap Index.
- Eliminate the separate measurement and reporting of hedge ineffectiveness by requiring that derivative gains and losses be recorded in the same income statement line item as the earnings effect of the hedged item.
The FASB has tentatively scheduled two public roundtable meetings on Dec. 2, 2016. Those interested in participating in the roundtables should submit comments by Nov. 4, 2016.
Otherwise, comments are due Nov. 22, 2016.
Cash Flow Statement Classification Guidance Issued
The FASB, on Aug. 26, 2016, issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments
,” which is designed to address the diversity in how certain cash receipts and cash payments are presented and classified in the statement of cash flows.
The ASU provides guidance on how to classify cash flows:
- Debt prepayment or debt extinguishment cost payments will be classified in financing activities.
- Settlement payments for zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant relative to the effective interest rate will be classified as follows:
- Accreted interest will be classified in operating activities.
- Principal (or original proceeds) will be classified in financing activities.
- Contingent consideration payments made soon after (for example, within 90 days) a business combination will be classified in investing activities. After that, the contingent consideration payments will be separately classified as financing activities for the amounts at or below fair value, and as operating activities for the amounts in excess of fair value.
- Proceeds from the settlement of insurance claims should be based on the nature of the insured loss, with the exception of bank-owned life insurance (BOLI) policies.
- Proceeds from the settlement of BOLI policies will be handled as follows:
- Premiums paid and proceeds received related to BOLI policies will be permitted but not required to be classified in the same cash flow category. Therefore, premiums paid may be classified in operating, investing, or a combination of those two classes.
- Cash proceeds received from the settlement of BOLI policies should be classified as cash inflows from investing activities.
- Distributions received from equity method investees will be classified based on one of two approved approaches: cumulative earnings or distribution.
- Beneficial interests in securitization transactions will be handled as follows:
- The transferor’s beneficial interest obtained in a securitization will be disclosed as a noncash activity.
- Cash receipts from payments on a transferor’s beneficial interests in securitized trade receivables will be classified as cash inflows from investing activities.
The standard also provides guidance on when an entity should separate cash flows and classify them into more than one class and when an entity should classify the aggregate of those cash flows into a single class based on the predominance principle.
The amendments are effective for public business entities (PBEs) for fiscal years beginning after Dec. 15, 2017, and interim periods within those fiscal years, which first applies to March 31, 2018, interim financial statements for calendar year-end PBEs. For all other entities, the amendments are effective for fiscal years beginning after Dec. 15, 2018, and interim periods within fiscal years beginning after Dec.15, 2019. Early adoption is permitted. All amendments should be applied on a retrospective basis, and all applicable amendments should be adopted in the same period.
Invitation to Comment on Agenda Issued
On Aug. 4, 2016, the FASB issued an Invitation to Comment
to request ideas about potential financial accounting and reporting topics that the FASB should consider including in its agenda.
As identified in a survey of FASB advisory groups, potential issues and possible solutions included in the Invitation to Comment include:
- Intangible assets, including research and development
- Pensions and other postretirement benefit plans
- Distinguishing liabilities from equity
- Reporting performance and cash flows, including income statement, segment reporting, other comprehensive income, and statement of cash flows
In the document, the FASB poses several questions regarding these topics and requests input about other areas that it should consider.
Comments are due Oct. 17, 2016.
From the Securities and Exchange Commission (SEC)
Highlights of CAQ SEC Regulations Committee Joint Meeting With the SEC Staff Released
On Sept. 15, 2016, the Center for Audit Quality (CAQ) released highlights
of the CAQ SEC Regulations Committee joint meeting with the SEC staff that was held on June 14, 2016. The highlights summarize the following topics discussed, among others:
- Non-GAAP financial measures, given the SEC’s renewed focus on the measures
- Differing thresholds in the disclosure requirements for time deposits in the SEC’s Industry Guide 3 and the FASB’s recently amended guidance (ASC 942-405-50-1)
- Disclosure of changes in internal control over financial reporting in preparation for the adoption of a new accounting standard
- Transition questions related to the date of initial application in the new leasing standard
The highlights do not represent authoritative SEC guidance.
Public Comment on Disclosure Requirements Relating to Management, Security Holders, and Corporate Governance Matters Sought
As part of its Disclosure Effectiveness Initiative, the SEC announced
, on Aug. 25, 2016, that it is seeking public comment on disclosure requirements in Subpart 400 of Regulation S-K. Disclosures required by Subpart 400 include corporate governance, executive compensation, security ownership, and transactions with related persons, among others, that currently are required in periodic filings and registration statements filed with the SEC.
Comments are due Oct. 31, 2016.
Amendments to Require Hyperlinks to Exhibits in Filings Proposed
The SEC issued, on Aug. 31, 2016, a proposed rule
and form amendments that would require registrants to include a hyperlink to exhibits in their filings and require that registrants submit all of these filings in HyperText Markup Language (HTML) format. For registrants that file registration statements and periodic and current reports, the proposed rule would require the registrants to include a hyperlink to each exhibit listed in the exhibit index of the filings.
Comments are due 45 days after publication in the Federal Register.
From the Public Company Accounting Oversight Board (PCAOB)
Annual Report on Inspections of Broker-Dealer Auditors Issued
The PCAOB, on Aug. 18, 2016, issued the fifth annual report
on its interim inspection program for auditors of brokers and dealers covering results of inspections performed in 2015. These audits are the first in which all inspected engagements were governed by the SEC’s 2013 amendments to Exchange Act
Rule 17a-5. Additionally, these engagements were to be performed in accordance with PCAOB standards.
The report – on inspections of 75 firms and portions of 115 audits and the related attestation engagements – revealed high levels of deficiencies similar to the results in previous years’ inspections. PCAOB inspectors identified deficiencies in the work of 96 percent of the audit firms inspected.