FDIC, NCUA Recap Q1 ’19; OCC Issues “Semiannual Risk Perspective”

Current financial reporting, governance, and risk management topics

From the federal financial institution regulators

FDIC issues “Quarterly Banking Profile” for first-quarter 2019

The Federal Deposit Insurance Corp. (FDIC) issued, on May 29, 2019, its “Quarterly Banking Profile,” covering the first quarter of 2019. According to the report, FDIC-insured banks and savings associations reported $60.7 billion in net income, up $4.9 billion (8.7%) from a year ago. The increase in net income was attributable primarily to a $7.9 billion (6%) increase in net interest income, which totaled $139.3 billion for the industry.

The report provides these additional statistics:

• The average net interest margin increased by 10 basis points from a year ago to 3.42%.
• Community banks earned $6.5 billion during the first quarter, up 10.1% from the same period last year.
• Total loans and leases increased 4.1% from first-quarter 2018.
• Net charge-offs increased by $667.8 million (5.5%) from a year ago; however, the average net charge-off rate remained unchanged (0.50%). Noncurrent loans (those 90 days or more past due) remained unchanged at 0.99%.

The total number of FDIC-insured commercial banks and savings associations declined to 5,362 from 5,406 the previous quarter. The number of institutions on the problem bank list fell to 59, one new bank was chartered, and no banks failed.

NCUA issues first-quarter 2019 performance data

On June 6, 2019, 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 2019. Highlights include:

• The number of federally insured credit unions declined from 5,530 in the first quarter of 2018 to 5,335 in the same quarter of 2019 (3,350 federal credit unions and 1,985 federally insured, state-chartered credit unions).
• Total assets in federally insured credit unions rose by $90 billion (6.3%) over the year to $1.51 trillion.
• Net income at an annual rate was $14.1 billion, up $1.5 billion, or 11.9% from the previous year.
• The return on average assets increased from 90 to 95 basis points compared to a year ago.
• The credit union system’s net worth ratio increased from 10.98% last year to 11.14%.

FinCEN issues guidance on virtual currencies

On May 9, 2019, the Financial Crimes Enforcement Network (FinCEN) issued guidance on the application of FinCEN regulations to convertible virtual currencies (CVCs). The guidance was issued in response to questions from financial institutions and others on the regulatory treatment of businesses dealing with CVCs. In the same release, FinCEN also issued an advisory on money transmission involving convertible virtual currencies, noting that the guidance does not create new regulatory requirements; rather, it consolidates existing regulations, administrative rulings, and guidance. The guidance is intended to help financial institutions comply with existing regulations under the Bank Secrecy Act (BSA) as they relate to emerging business models involving CVCs.

The guidance covers the application of FinCEN’s money transmission regulations to multiple business models involving CVCs, including peer-to-peer exchangers, CVC wallets, CVC kiosks, payment processors, and internet casinos.

FinCEN also outlines business models involving CVCs that may be exempt from the definition of money transmission. Some of the exempt models include currency trading platforms, decentralized exchanges, initial coin offerings, virtual currency miners conducting transactions with their own currency, and transmission by mining pools and cloud miners.

OCC’s “Semiannual Risk Perspective” sees elevated credit, operational, and liquidity risks

On May 20, 2019, the Office of the Comptroller of the Currency (OCC) released its “Semiannual Risk Perspective” for spring 2019. While overall credit quality generally remains strong in the industry, the OCC noted heightened risk in bank loan portfolios associated with successive years of growth coupled with gradual easing in underwriting, risk layering, and increasing credit concentrations. In the report, the OCC recognizes the rapid growth in financial technology and regulatory technology, which touch each of the highlighted risk themes that the OCC is monitoring and acting to address.

The report notes elevated operational risk as banks adapt to an increasingly complex operating environment. The OCC identified some drivers for operational risk, including cybersecurity threats, financial product and service innovations, and increasing use of third parties to provide and support operations.

In addition, the report highlights continued compliance risk related to BSA/anti-money laundering as banks must effectively manage money laundering risks in a complex global operating and regulatory environment. Interest-rate risk and related liquidity risk implications are noted as posing potential challenges to earnings given the uncertain interest-rate environment and untested depositor behavior.

From the Consumer Financial Protection Bureau (CFPB)

CFPB issues TRID frequently asked questions

The CFPB, on May 31, 2019, issued a set of FAQs on the Truth in Lending Act and the Real Estate Settlement Procedures Act Integrated Disclosures (TRID). The FAQs address corrected closing disclosures and the three-business-day waiting period before consummation, model forms, and construction loans.

From the Financial Accounting Standards Board (FASB)

FASB to discuss effective dates

The board typically provides additional time – generally an additional year – for non-public business entities (PBEs) to adopt standards. At the June 5, 2019, board meeting, the FASB staff indicated it is doing research to determine whether and when effective dates should be different for public companies, small public companies, and non-PBEs. To perform the analysis, the staff is using a cross-functional team, including members of its credit losses, hedging, insurance, and leasing teams.

In addition, the staff intends to engage with members of the Financial Accounting Standards Advisory Council (FASAC), the Private Company Council (PCC), the Small Business Advisory Committee (SBAC), and the American Institute of CPAs’ Technical Issues Committee (TIC).
 
The staff plans to provide its results at the July 17 board meeting, after which the board will consider whether to make changes to the effective dates for standards that are not yet effective as well as in future standard-setting activities.

FASB discusses financial instruments – credit losses implementation

At its June 5, 2019, board meeting, the FASB discussed several topics related to implementation of Accounting Standards Update (ASU) No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The tentative decisions by the FASB included allowing entities to recognize negative allowances on purchased credit deteriorated (PCD) assets if they do not exceed the assets’ amortized cost basis. The board decided to retain existing guidance that prohibits entities from recognizing a negative allowance on available-for-sale debt securities. Other technical improvements included:

• For troubled debt restructurings, allow entities to calculate the prepayment-adjusted effective interest rate using prepayment assumptions as of the date of adoption.
• As a practical expedient, allow entities to exclude the accrued interest receivables component of amortized cost basis from certain disclosures, when the accrued interest receivables are measured and presented separately from the other components of amortized cost basis.
• For the collateral maintenance practical expedient, clarify the scope and methodology for estimating credit losses when applying the collateral maintenance practical expedient in paragraph 326-20-35-6.

The FASB expects to issue a proposed ASU addressing these items and the other technical improvements with a 30-day comment period.

FASB provides use of the fair value option upon adoption of the new credit losses standard

On May 15, 2019, the FASB issued ASU 2019-05, “Financial Instruments – Credit Losses (Topic 326): Targeted Transition Relief.” Upon adoption of the new credit losses standard, this ASU allows entities to make an irrevocable one-time election to use the fair value option to measure financial assets measured at amortized cost (except for held-to-maturity securities). The election is to be applied on an instrument-by-instrument basis.

For entities that have not yet adopted the credit losses standard, the new ASU will be effective upon adoption. For entities that have already adopted the credit losses standard, the ASU is effective for fiscal years beginning after Dec. 15, 2019, including interim periods within those fiscal years. Early adoption is permitted.

FASB proposes simplifications to income taxes accounting

As part of its simplification initiative, the FASB issued, on May 14, 2019, a proposed ASU titled “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes,” which is designed to decrease cost and complexity for the accounting for income taxes.

The proposed ASU would remove the following exceptions from Topic 740:

• Exception to the incremental approach for intraperiod tax allocation
• Exceptions to accounting for basis differences when there are ownership changes in foreign investments
• Exception in interim period income tax accounting for year-to-date losses that exceed anticipated losses

Simplifications included in the proposed ASU relate to:

• Franchise taxes that are partially based on income
• Transactions with a government that result in a step up in the tax basis of goodwill
• Separate financial statements of legal entities that are not subject to tax
• Reflecting enacted changes in tax laws in interim periods
• Employee stock ownership plans and investments in qualified affordable housing projects when using the equity method

Comments are due June 28, 2019.

From the Securities and Exchange Commission (SEC)

SEC announces Bricker to leave, Teotia named acting chief

On May 30, 2019, the SEC announced that Chief Accountant Wesley Bricker, who has been chief accountant since 2016 and with the SEC for more than six years, is leaving the agency in June. On the same day, the SEC named Sagar Teotia its acting chief accountant as of Bricker’s departure.

According to the SEC, Teotia has served as deputy chief accountant, leading the accounting group since 2017. As acting chief, Teotia will serve as the principal adviser to the SEC on accounting and auditing matters and will lead the SEC’s Office of the Chief Accountant. Teotia will be responsible for assisting the SEC with its oversight of the FASB and the Public Company Accounting Oversight Board.

Acting chief accountant focuses on implementation of new standards

At the 38th annual SEC and Financial Reporting Institute Conference in Los Angeles on June 6, 2019, acting Chief Accountant Sagar Teotia stressed the SEC’s commitment to transparent financial disclosures and the importance of being proactive and preventive. He said that the SEC’s biggest focus continues to be on the implementation of new standards. Teotia acknowledged that the increased number of new standards in recent years has increased pressure on the industry, but the profession has stepped up, and the benefits to investors are numerous. He also addressed the London Interbank Offered Rate (LIBOR), an upcoming exposure draft related to the simplification of the debt equity standard, and the accounting consultation process.

Panel addresses current financial reporting matters

A group of industry professionals, including SEC Deputy Chief Accountant Pat Gilmore, spoke on a panel at the 38th annual SEC and Financial Reporting Institute Conference on June 6, 2019, and addressed the following current financial reporting matters:

• The upcoming proposal related to purchase accounting disclosures. The panel said the main drivers of the proposal are the continued improvement in the quality of information disclosed to shareholders and the simplification of the requirements to try to reduce the cost of compliance.
• The continued emphasis on non-GAAP disclosures. These include ensuring that management has processes and controls in place over the appropriateness of any non-GAAP disclosures included in public filings.
• Areas of disclosure to consider for 2019, including Brexit, LIBOR, and cybersecurity. The panel acknowledged that while these issues may not affect all companies, it is important for companies to tell investors whether or not they are concerned about these matters and why.

SEC names senior adviser to the chairman for cybersecurity policy

On June 3, 2019, the SEC announced that Kevin A. Zerrusen will serve as senior adviser for cybersecurity policy to Chairman Jay Clayton. The SEC noted that in this role “Zerrusen will coordinate efforts across the agency to address cybersecurity policy, engage with external stakeholders, and help enhance the SEC’s mechanisms for assessing cyber-related risks.”

Currently, Zerrusen serves as chair of the Intelligence National Security Alliance’s Cyber Council, which is focused on effective public-private sector collaboration on cybersecurity issues. He also has 30 years of experience with the Central Intelligence Agency, where his responsibilities included directing the agency’s cyber center, which analyzes, evaluates, and counters foreign cyberthreats.

SEC approves Regulation Best Interest

On June 5, 2019, the SEC approved Regulation Best Interest, which clarifies that when making recommendations, a broker-dealer may not put its financial interests ahead of the interests of a retail customer.

At the same time, the SEC also approved a final rule on new Form CRS relationship summary and Form ADV amendments as well as two interpretations. The interpretations address investment advisers’ standard of conduct and broker-dealer exclusion.

The SEC indicated, “these actions are designed to enhance and clarify the standards of conduct applicable to broker-dealers and investment advisers, help retail investors better understand and compare the services offered and make an informed choice of the relationship best suited to their needs and circumstances, and foster greater consistency in the level of protections provided by each regime, particularly at the point in time that a recommendation is made.”

From the Public Company Accounting Oversight Board (PCAOB)

Panel discusses current auditing matters

On June 6, 2019, at the 38th annual SEC and Financial Reporting Institute Conference, a group of industry professionals, including SEC Deputy Chief Accountant Marc Panucci and PCAOB Director George Botic, addressed current auditing matters as part of a panel discussion including the following topics:

• Critical audit matters (CAMs). The panel discussed the importance of identifying tailored CAMs that are specific to the client and based on consideration of both risk assessment and the amount of auditor effort. One panelist shared how his entity’s involvement in its audit firm’s CAMs pilot resulted in rich, interactive dialogue among the auditors, management, and the audit committee.
• The new standard related to auditing estimates and the use of specialists. The panel noted that the new standard emphasizes increased professional skepticism, model validation, data completeness and accuracy, and specific requirements over the supervision of specialists.
• The new PCAOB inspection process expected to roll out within the year. Botic stressed that the new process is centered on prevention and that some of the changes include audit committee chair interviews for all engagements inspected and the identification of good practices during the inspection process, including audit approaches and testing that lead to high audit quality.

PCAOB issues additional staff guidance on CAMs

The PCAOB, on May 22, 2019, released “Implementation of Critical Audit Matters: A Deeper Dive on the Communication of CAMs” to answer frequently asked questions about how to communicate CAMs. This guidance was developed based on discussions with auditors about their experiences conducting dry runs of CAMs with their audit clients, the staff’s review of methodologies submitted by 10 U.S. audit firms that collectively audit approximately 85% of large accelerated filers, and other outreach efforts.

The guidance supplements previously released “Implementation of Critical Audit Matters,” documents that address following:

• “The Basics,” which provides a high-level overview of the CAMs requirements
• “Staff Observations From Review of Audit Methodologies,” which includes observations from the PCAOB’s chief auditor’s review of audit firm methodologies
• “A Deeper Dive on the Determination of CAMs,” which includes answers to frequently asked questions for determining CAMs

PCAOB announces new liaison for investors, audit committees, and preparers

On May 29, 2019, the PCAOB named Erin Dwyer as deputy director of the Office of External Affairs, a newly created role. In this position, she will be the direct point of contact for and liaison to investors, audit committees, and preparers. She will be responsible for expanding outreach to and events for these groups.

Dwyer most recently served as managing director of stakeholder engagement and communications at the Center for Audit Quality (CAQ). In that role, she led strategic initiatives to build and strengthen relationships with capital markets participants.