December 2022 financial reporting, governance, and risk management

FDIC issues quarterly banking profile for third quarter 2022

The Federal Deposit Insurance Corp. (FDIC) released on Dec. 1, 2022, the quarterly banking profile covering the third quarter of 2022. According to the report, FDIC-insured banks and savings institutions reported $71.7 billion quarterly net income, an increase of $2.2 billion or 3.2% from a year ago. The increase in net income was largely driven by higher net interest income, which more than offset an increase in provisions for loan losses.

The report provides these additional third quarter statistics:

• Net interest income totaled $168.6 billion. From the previous year, the average net interest margin increased 58 basis points to 3.14%.
• The aggregate return on average assets (ROAA) ratio was 1.21%, up 13 basis points from the ROAA ratio reported in second quarter 2022 but unchanged from the same quarter last year.
• Total loans and leases increased $229.7 billion (2%) from the previous quarter.
• Total deposits declined $206 billion (1.1%) between second quarter 2022 and third quarter 2022.
• From the previous quarter, the noncurrent loan rate declined by three basis points to 0.72%. This is the lowest noncurrent rate for total loans since the second quarter of 2006.
• Community banks’ net income totaled $8.5 billion in the third quarter of 2022, an increase of $317.5 million or 3.9% year over year.

The total number of FDIC-insured commercial banks and savings institutions declined to 4,746 from 4,771 the previous quarter. During the third quarter, three new banks opened, 26 banks were absorbed by mergers, and no banks failed. The number of institutions on the FDIC’s problem bank list increased by two from the second quarter to 42. Total assets of problem banks declined $5.7 billion to $163.8 billion.

NCUA issues third quarter 2022 performance data

The National Credit Union Administration (NCUA) reported on Dec. 8, 2022, quarterly figures for federally insured credit unions based on call report data submitted to and compiled by the agency for the third quarter of 2022. Highlights include:

• The number of federally insured credit unions declined to 4,813 from 4,990 in the third quarter of 2021. In the third quarter of 2022, 3,015 federal credit unions and 1,798 federally insured, state-chartered credit unions existed.
• Total assets reported for federally insured credit unions rose by 6.6% to $2.15 trillion, up $132 billion from a year ago.
• Net income at an annual rate totaled $18.5 billion for the first three quarters of 2022, down $3 billion (14.1%) from the same period a year ago.
• The return on average assets decreased from 112 to 88 basis points compared to a year ago.
• The credit union system’s net worth increased by $21.3 billion, or 10.3%, over the year to $227.8 billion. The aggregate net worth ratio was 10.59% in the third quarter of 2022, up from 10.23% in the third quarter of 2021.

OCC releases fall 2022 semiannual risk report

The Office of the Comptroller of the Currency (OCC) on Dec 8, 2022, published its fall 2022 “Semiannual Risk Perspective,” which reports that while banks remain well capitalized with ample liquidity and sound credit quality, regulators are concerned with macroeconomic headwinds. The OCC notes that economic growth slowed sharply in 2022, but high employment rates supported consumer spending, which helped maintain overall bank performance.

The report highlights key interest-rate, operational, compliance, and credit risks. With regard to interest-rate risk, the report notes that bank investment portfolios have been adversely affected by the rising rate environment, resulting in portfolio depreciation. Deposits and liquid assets remain high, but they declined for the first time since the end of 2019. In addition, operational risk remains elevated as cyberthreats continue to evolve with “threat actors” targeting the financial services industry with ransomware and other attacks.

Compliance risk also remains elevated as banks continue to operate in an increasingly complex environment. According to the report, banks are expanding the use of technology for product and service delivery and expanding partnerships with third parties, such as fintechs, elevating implementation risk and the importance of risk management for potential unfair or deceptive acts or practices.

Key indexes for credit risk have started to show stress, especially in retail and commercial real estate, and the OCC notes that “loan portfolio performance has been resilient, but signs of potential weakening in some segments warrant careful monitoring.”

The fall 2022 report also includes an update on the OCC’s climate risk management initiatives including the newly formed Office of Climate Risk. Lastly, in a special section on emerging risks related to crypto assets, the OCC says crypto industry risk management practices “lack maturity” and are not yet robust. Institutions are reminded that they should take a careful and incremental approach when considering engaging in crypto asset activities and should notify their primary regulator, and OCC-supervised banks might need a supervisory nonobjection as required under OCC Interpretive Letter 1179.

Fed issues proposed climate risk principles for public comment

On Dec. 2, 2022, the Board of Governors of the Federal Reserve (Fed) released for comment a set of draft principles that would provide a high-level framework for the safe and sound management of climate-related financial risk exposures for banks and BHCs with more than $100 billion in total consolidated assets.

The principles, which are effectively identical to the principles proposed by the OCC in December 2021 and the FDIC in March 2022, address governance; polices, procedures, and limits; strategic planning; risk management; data, risk measurement, and reporting; and scenario analysis. Comments are due Feb. 6, 2023.

In related news, the Basel Committee on Bank Supervision (BCBS) on Dec. 8, 2022, issued a series of 19 frequently asked questions regarding climate-related financial risk. The FAQs, which are consistent with principles previously released by the BCBS and the U.S. regulators, are intended “to facilitate consistent interpretation of existing standards given the unique features of climate-related financial risks and should not be interpreted as changes to the standards.” The FAQs address the calculation of risk-weighted assets for credit risk, operational risk, and market risk.

FDIC nominees advance in Senate

The Senate banking committee on Dec. 13, 2022, voted to advance the slate of nominees to the FDIC board. These include Martin Gruenberg to serve as FDIC chair for the second time, along with Travis Hill for vice chair and Jonathan McKernan as a board member. The nominations now move to the full Senate for a vote. All are expected to be confirmed, which will mean a full FDIC board for the first time in years.

CFPB issues fall 2022 supervisory highlights

The Consumer Financial Protection Bureau (CFPB) on Nov. 16, 2022, released its fall 2022 “Supervisory Highlights” report focusing on recent examiner observations of several consumer financial products. As outlined in the report, examiners identified issues related to auto servicing, consumer reporting, credit card account management, debt collection, deposits and mortgage origination, mortgage servicing, and payday lending. The CFPB points out instances of some repeat violations by multiple institutions for the same issues identified in previous editions of the report.

CFPB examiners also reported issues with institutions’ deposit account practices for programs related to COVID-19. These include instances where consumers often lost access to pandemic relief benefits due to banks’ garnishment practices or other setoff practices. In response to these findings, CFPB supervisory teams directed some institutions to refund any protected economic impact payment funds and related garnishment fees and to review and update policies to ensure compliance. Issues related to COVID-19 also were observed in mortgage servicing pertaining to the charging of illegal fees during the CARES Act forbearance period and failure to process CARES Act forbearance requests.

With regard to credit card account management, CFPB examiners cited unfair or deceptive acts or practices related to the marketing, sale, and servicing of credit card add-on products to consumers, as well as deceptive representations regarding the fixed payment option for automatic withdrawal of the minimum payment due.

CFPB proposes registry of nonbank repeat offenders

On Dec. 12, 2022, the CFPB issued a 200-plus page proposal that would require certain nonbank financial firms to register with the CFPB when they become subject to certain state, local, or federal protection agency or court orders. According to the CFPB, the repository “will allow the CFPB to track and mitigate the risks posed by repeat offenders, while also being able to monitor all lawbreakers subject to agency and court orders.” The CFPB would share information on the database with other regulators and law enforcement agencies and would make the registry public.

Larger companies subject to the CFPB’s supervisory authority also would be required to designate an individual to attest whether the firm is adhering to registered law enforcement orders that are reported on the registry. The CFPB indicated that it would consider extending this registry to insured banks and credit unions at a later date.

Comments are due 60 days after publication in the Federal Register.

FASB finalizes ASU on reference rate reform

On Dec. 21, 2022, the FASB issued Accounting Standards Update (ASU) 2022-06, “Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848.” The ASU extends the period of time preparers can use the reference rate reform relief guidance under Accounting Standards Codification (ASC) Topic 848 from Dec. 31, 2022, to Dec. 31, 2024, to address the fact that all London Interbank Offered Rate (LIBOR) tenors were not discontinued as of Dec. 31, 2021, and some tenors will be published until June 2023.

The amendments are effective immediately for all entities and applied prospectively.

FASB proposes guidance on common control arrangements in leases

On Nov. 30, 2022, the FASB issued a proposed ASU, “Leases (Topic 842): Common Control Arrangements,” to respond to feedback received from the post-implementation review process of Topic 842 from private company stakeholders regarding related-party arrangements between entities under common control. Private company stakeholders observed that language contained in Topic 842 could be interpreted to require a legal opinion to support legally enforceable terms and conditions when accounting for the lease between entities under common control on the same basis with an unrelated party. Stakeholders also observed that the requirement to amortize leasehold improvements with leases between entities under common control over a period shorter than the economic life of such improvements could result in financial reporting not faithfully representing the economics of such arrangements. The amendments in the ASU address the following two issues:

• A practical expedient would be provided for private companies and not-for-profit entities that are not conduit bond obligors to use written terms and conditions of a common control arrangement to determine whether a lease exists and the underlying classification and accounting for that lease. Employee benefit plans that file or furnish financial statements with or to the SEC are not eligible for this practical expedient.
• Leasehold improvements associated with leases under common control would be required to be amortized over the economic life of the leasehold improvement as long as the lessee controls the use of the asset through the lease and accounted for as a transfer between entities under common control through an adjustment to equity if, and when, the lessee no longer controls the underlying asset.

The proposed ASU does not yet include an effective date. Comments are due on Jan. 16, 2023.

SEC adopts new insider trading rules

On Dec. 14, 2022, the SEC held an open meeting where it discussed insider trading arrangements and related disclosures. As a result of the meeting, the SEC adopted amendments to Rule 10b5-1 under the Securities Exchange Act, new disclosures regarding Rule 10b5-1 trading arrangements and insider trading policies and procedures, and amendments regarding the disclosure of the timing of certain equity compensation awards and reporting of gifts on Form 4. Resulting from the same meeting, the SEC proposed rules and amendments related to disclosure of order execution information; Regulation National Market System (NMS) rules on minimum pricing increments, access fees, and transparency of better priced orders; an order competition rule; and Regulation Best Execution.

SEC issues sample letter on crypto assets

On Dec. 8, 2022, the Corp Fin released a sample comment letter to companies reminding them of their disclosure obligations under federal securities laws. The focus of the sample comment letter is on how recent crypto asset market events might have affected – either directly or indirectly – a company’s business. Corp Fin encourages companies to evaluate their existing disclosures to determine if updates are warranted. Companies should consider the sample letter comments and determine what, if any, changes to disclosures are needed to adequately address the impact of recent crypto asset market developments in their filings.

For additional information, see the Crowe article “SEC Staff Releases Crypto Asset Sample Comment Letter.”

SEC reopens comment period for share repurchase proposal

To allow for the consideration of a newly enacted law, the SEC on Dec. 7, 2022, reopened the comment period on proposed amendments to modernize the required disclosure about an issuer’s repurchases of its equity securities, commonly referred to as buybacks.

After the proposed amendments originally were published for public comment, the Inflation Reduction Act of 2022 was enacted, which imposes on certain corporations a nondeductible excise tax equal to 1% of the fair market value of any stock of the corporation repurchased by that corporation during the taxable year. To consider this new law, the SEC staff prepared a memorandum on potential economic effects of the new excise tax that might be helpful in evaluating the proposed amendments.

Comments are due Jan. 11, 2023.

SEC commissioner remarks on ESG

On Dec. 7, 2022, before the American Enterprise Institute, Commissioner Peirce presented a speech addressing the SEC’s proposed climate change disclosure rule for public companies. She noted that the proposed rule has received thousands of comment letters with a wide variety of perspectives; however, the commenters seem to agree that if the rule is adopted it will greatly expand public company disclosure. She also noted that the recently updated cost assumptions indicate that the proposal would almost quadruple the external costs of preparing Form S-1 and Form 10-K. Peirce pointed out that the rule proposes many requirements, which could be extremely challenging from a compliance perspective and of limited or negative value to investors. Throughout her speech she highlighted concerns and potential pitfalls of the proposal.

She said that some aspects of the climate proposal, rather than simply discovering information about what companies are doing with regard to climate, might end up interfering with corporate decision-making and might do so in an inflexible way that does not take into consideration differences across companies. Specific to this, she touched on the mandated disclosure about board oversight of climate-related risks and the corresponding set of disclosures related to management. She said these requirements will affect the substance of what companies do and might lead to undesirable effects on boards.

She said that in contrast to principles-based mandates, which enable companies to present information about risks and opportunities that are material to them and omit information that is not financially material, the climate proposal encompasses numerous specific disclosure mandates and could produce granular, immaterial information. Peirce added that the required disclosures would be significant in every company’s filings and might overemphasize climate issues and obscure differences across companies. Additionally, she said designing the systems to collect and categorize the voluminous information likely will be difficult for most entities. Lastly, she stated, “the proposal, much of which is rooted in conjecture,” might produce investor confusion and the requirements could create unreliable, speculative disclosures.

SEC releases new CD&Is on proxy rules and Schedules 14A/14C

On Dec. 6, 2022, the SEC issued three new C&DIs. The matters addressed in the new guidance include:

• A registrant does not need to include the names of a dissident shareholder’s nominees on its proxy card pursuant to Rule 14a-19(e)(1) when the registrant receives director nominations from a dissident shareholder purporting to nominate candidates for election to the registrant’s board of directors at an upcoming annual meeting and the registrant determines that the nominations are invalid due to the dissident shareholder’s failure to comply with its advance notice bylaw requirements. (Question 139.04)
• A registrant has certain disclosure obligations with respect to its proxy statement disclosures and solicitation efforts when the registrant determines that a dissident shareholder’s director nominations do not comply with its advance notice bylaw requirements and excludes the dissident shareholder’s nominees from its proxy card and the dissident shareholder then initiates litigation challenging the registrant’s determination regarding the validity of the director nominations. (Question 139.05)
• A dissident shareholder conducting a nonexempt solicitation in support of its own director nominees cannot simply file a proxy statement on the Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system; avoid providing its own proxy card; and instead rely exclusively on the registrant’s proxy card to seek to have its director nominees elected. (Question 139.06)

SEC publishes 2022-2026 strategic plan

The SEC published on Nov. 23, 2022, its strategic plan for fiscal years 2022 to 2026. The plan details the SEC’s objectives to “fight against fraud, maintain a robust and relevant regulatory framework, and sustain a skilled and diverse workforce to serve America’s investors and capital-raising entrepreneurs alike.” The SEC's new strategic plan establishes three primary goals:

• “Protect the investing public against fraud, manipulation, and misconduct
• “Develop and implement a robust regulatory framework that keeps pace with evolving markets, business models, and technologies
• “Support a skilled workforce that is diverse, equitable, and inclusive and is fully equipped to advance agency objectives.”

PCAOB issues post-implementation report on estimates and specialists requirements

The PCAOB released on Dec. 8, 2022, an interim post-implementation review report addressing the initial impact of estimates and specialists requirements on key stakeholders. In addition to the report, “Interim Analysis Report: Evidence on the Initial Impact of New Requirements for Auditing Accounting Estimates and the Auditor’s Use of the Work of Specialists,” the PCAOB released two staff white papers that provide additional technical information:

• “Stakeholder Outreach on the Initial Implementation of Estimates and Specialists Audit Requirements”
• “Econometric Analysis on the Initial Implementation of the New Specialists Requirements”

The staff findings suggest that the new requirements improved auditing practices in some instances and did not result in significant increases in audit hours or audit fees. Additionally, the staff did not uncover evidence of unintended consequences from auditors’ initial implementation of the new requirements. The PCAOB plans to continue to monitor the implementation of the new requirements and their impact on the quality of audit services as well as on audit committees, preparers, and audit firms.

PCAOB previews 2021 inspection observations

On Dec. 8, 2022, the PCAOB released “Staff Update and Preview of 2021 Inspection Observations.” The report finds an increase in the number of audits with deficiencies in 2021 versus the prior year and says the PCAOB expects almost 33% of the audits reviewed will have one or more Part I.A deficiency, an increase from 2020, which was 29%. Additionally, the PCAOB expects approximately 40% of the audits reviewed will have one or more Part I.B deficiency, an increase from 26% in 2020. The PCAOB noted that a significant portion of that Part I.B increase is related to the reporting of critical audit matters (CAMs). Commenting on the report, PCAOB Chair Williams stated, “Higher deficiency rates in 2021, coupled with the fact that the PCAOB is also seeing an increase in comment forms for 2022, are a warning signal that the audit profession needs to sharpen its focus on improving audit quality and protecting investors.”

Audit committees might benefit from the use of this report as a reference point when engaging with their auditors. This information might help investors and other stakeholders become better informed about the matters PCAOB staff finds in inspections.

PCAOB issues post-implementation report on impact of critical audit matters

On Dec. 7, 2022, the PCAOB issued its second interim post-implementation review report, "Interim Analysis Report: Further Evidence on the Initial Impact of Critical Audit Matter Requirements,” addressing the impact of the CAMs requirements on investors and other key stakeholders. According to the report, the average number of CAMs per audit report has declined over time; however, investor awareness and use of CAMs continue to develop. Also, the PCAOB has not identified significant unintended consequences from auditors’ implementation of the CAMs requirements.

The PCAOB plans to continue to monitor the implementation of CAMs requirements and evaluate the timeline for developing a more comprehensive post-implementation review. The PCAOB does not anticipate publishing the next analysis until after 2023.

PCAOB proposes a new quality control standard

The PCAOB on Nov. 18, 2022, issued for public comment a new quality control (QC) standard that was developed from the comment letters received in response to its December 2019 concept release as well as its own quantitative and qualitive economic analysis. The PCAOB says that this new standard would significantly improve QC systems at registered public accounting firms.

The proposed standard would replace the current QC standards in their entirety and would provide a framework for a firm’s QC system that is based on proactively identifying and managing risks to quality, with ongoing monitoring and remediation designed to drive continuous improvement. Among other provisions, the proposal would require a firm to annually evaluate its QC system and report the results of its evaluation on new Form QC.

Comments are due Feb. 1, 2023.

CAQ releases annual audit committee transparency report

On Nov. 30, 2022, the CAQ and Audit Analytics issued the “2022 Audit Committee Transparency Barometer,” which tracks S&P Composite 1500 proxy disclosures to evaluate transparency regarding audit committee oversight of the external auditor and other important financial reporting topics. New questions added in 2022 address disclosures over the audit committee’s consideration of the length of the auditor tenure, how the audit committee is involved in the selection of audit engagement partner, whether the board of directors has an ESG or sustainability director, and whether the audit committee is responsible for ESG oversight.

In the ninth year of analyzing disclosures of audit committee oversight in proxy statements, the findings of the report note a continued overall uptick in key areas of disclosure. The publication provides a summary of the results of the new questions, highlights of the results, a discussion of the benefits of audit committee disclosures, disclosure examples, and questions to consider when preparing audit committee disclosures.

On the same day, the CAQ also issued “Audit Committee: The Kitchen Sink of the Board,” which addresses how boards can effectively allocate oversight responsibilities to the audit committee and how audit committee members can keep up with an ever-evolving workload and improve their disclosures related to audit committee oversight responsibilities.