The Financial Institutions Executive Briefing offers updates on financial reporting, governance, and risk management topics from Crowe. In each issue of this electronic newsletter, you will find abstracts of recent standard-setting activities and regulatory developments affecting financial institutions.
FDIC “Quarterly Banking Profile” Issued
The Federal Deposit Insurance Corp. (FDIC) on Nov. 24, 2015, issued its “Quarterly Banking Profile” covering the third quarter of 2015. According to the report, FDIC-insured banks and savings institutions earned $40.4 billion in the third quarter, up 5.1 percent from the industry’s earnings a year before. The growth in earnings is attributed primarily to a $2.7 billion decrease in litigation expenses at large banks.
- Approximately 59 percent of the insured institutions reported improved earnings year over year.
- Community banks’ earnings were $5.2 billion in the third quarter, up 7.5 percent from the same period in 2014.
- Average industrywide return on assets rose slightly from 1.01 percent in 2014 to 1.02 percent.
- Net operating revenue increased marginally by 0.3 percent year over year as a result of a 1.7 percent increase in net interest income offset by a 2 percent drop in noninterest income.
- Net interest margin was 3.08 percent, nearly unchanged from the 3.07 percent in the second quarter.
- To lessen the effect of the low interest rates, banks have continued to lengthen asset maturities as evidenced by the percentage of assets with maturities beyond three years, which has increased to 34.6 percent in the third quarter, a record high.
- Asset quality continued to improve as troubled loans and leases decreased, and charge-offs were down 6.2 percent from a year earlier at $8.7 billion for the third quarter.
On Dec. 4, 2015, the National Credit Union Administration (NCUA) reported quarterly figures based on call report data submitted to and compiled by the agency for the third quarter of 2015. Highlights for federally insured credit unions for the quarter ended Sept. 30, 2015, include:
Third-Quarter 2015 Data on Credit Union Performance Released
- The number of federally insured credit unions reporting fell by 69 from the second quarter to 6,090 at the end of the third quarter. This was a decline of 4.1 percent from the third quarter of 2014.
- Total assets were $1.18 trillion, which represents growth by $72.6 billion, or 6.6 percent, from the third quarter of 2014.
- Return on average assets was 80 basis points, a slight decrease from 81 basis points in the previous quarter and 83 basis points in the third quarter of 2014.
- Outstanding loan balances increased 10.7 percent year over year, to $769.5 billion, and member business lending rose by 3.0 percent for the quarter and 11.4 percent year over year.
- The delinquency ratio rose slightly to 0.78 percent from 0.74 percent in the second quarter of 2015; however, the ratio declined from 0.85 percent in the third quarter of 2014. The net charge-off ratio was 46 basis points, identical to the second quarter of 2015.
- Deposits (shares) grew by 5.7 percent year over year, to $992.5 billion.
Revised Management Booklet ReleasedOn Nov. 10, 2015, the Federal Financial Institutions Examination Council (FFIEC) issued a substantially revised “Management Booklet,” which is part of the “FFIEC Information Technology Examination Handbook.” The booklet summarizes sound overall governance principles, specifically those related to information technology governance, and describes the relationship between IT and enterprisewide risk management and governance.
The revised examination procedures in the booklet are designed to assist examiners of financial institutions in evaluating IT governance as part of overall governance and IT risk management as part of enterprisewide risk management.
Other significant updates to the booklet include:
- Inclusion of cybersecurity concepts as part of information security
- Inclusion of management-related concepts from other areas of the handbook
- Expansion and additional description of the identification, measurement, mitigation, monitoring, and reporting stages of the IT risk management process
Guidance Issued to Reconcile Volcker and Basel III Capital DeductionsThe Office of the Comptroller of the Currency (OCC), Board of Governors of the Federal Reserve System (Fed), and FDIC issued on Nov. 6, 2015, guidance on the method banks can use to deduct investments from Tier 1 capital under the Volcker rule and the Basel III regulatory capital rule. The guidance provides a step-by-step deduction method designed to clarify the requirements under each rule and is intended to avoid double deductions.
On Nov. 4, 2015, the OCC released its revised “Credit Card Lending” booklet included within the “Comptroller’s Handbook.” The revised booklet excludes outdated guidance, updates the guidance to include thrifts, updates guidance for examiners on assessing credit card risk management, and addresses the Credit Card Accountability Responsibility and Disclosure Act of 2009.
Credit Card Guidance Updated
The OCC released its “2015 Survey of Credit Underwriting Practices” on Dec. 9, 2015. The survey includes information from 95 of the largest OCC-supervised banks and federal savings associations and covers loans totaling $5.1 trillion, approximately 94 percent of all loans in the federal banking system for the fiscal year ended June 30, 2015. The results of the survey indicate that underwriting among such institutions eased for the third year in a row, and such trends are comparable to those present in 2005 through 2007, just before the most recent financial crisis.
Report on Underwriting Practices Survey Released
In addition to the underwriting standards, the survey reveals higher levels of credit risk and increasing exceptions to banks’ loan policies, mostly in commercial products but also in retail products. The OCC warns that the combination of increased policy exceptions and eased underwriting standards may result in excessive levels of portfolio risk and less resilient portfolios during times of stress. Furthermore, the OCC highlights that boards of directors and senior management should consider the effect of the eased underwriting standards on the performance quality and volatility in their loan portfolios, specifically for leveraged lending, commercial real estate loans, indirect consumer lending, and credit cards, which have experienced continued easing over the past few years.
The FDIC issued a Financial Institution Letter on Nov. 6, 2015, “Advisory on Effective Risk Management Practices for Purchased Loans and Purchased Loan Participations,” to provide guidance on risk management practices for purchases and participations, reiterate previous FDIC guidance, and remind banks to treat loan purchases and participations as if they were the originating institution.
Purchased Loans and Participations Guidance Issued
Additionally the advisory says that purchases and participations should be subject to the bank’s internal policy guidelines, independent credit and collateral analyses, profitability analyses, written purchase or participation agreements, and due diligence.
On Nov. 23, 2015, the FDIC announced that it is adding to its cybersecurity awareness resources with new online educational tools to assist bank executives and directors in addressing the threat of cybercrime. Included in the updated resources is a cybersecurity awareness video aimed at bank directors; the video provides an overview of the current threat environment and information on how banks can effectively adapt information security programs to respond to cyberthreats while using the available Cybersecurity Assessment Tool.
Additional Cybersecurity Resources Offered
Additionally, the FDIC added three new sample scenarios – ransomware, ATM malware, and distributed denial of service as a smokescreen – to its online “Cyber Challenge,” which is a voluntary tool designed to encourage bank management to think about operational risk by offering hypothetical scenarios to discuss.
On Nov. 24, 2015, the Fed proposed a new rule addressing quarterly public disclosure requirements for liquidity coverage ratios (LCRs) for large banking organizations and certain smaller banking organizations.
New Rule on Liquidity Reporting Proposed
Under the proposed rule, institutions subject to the LCR rule would be required to disclose their consolidated LCR calculations based on averages over the prior quarter and would be required to post them on their public websites or via another public reporting method. Additionally, institutions would be required to disclose the amount of their high-quality liquid assets and information about their projected net cash outflow, including inflows and outflows from retail and derivatives. Institutions also would be required to provide a discussion of their LCR results including factors behind them and significant changes.
The proposed compliance date for the disclosures is July 1, 2016, for the largest institutions and July 1, 2017, for all others.
Comments are due Feb. 2, 2016.
The Fed, on Nov. 25, 2015, issued a final rule, “Amendments to the Capital Plan and Stress Test Rules,” covering changes to the stress tests mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act. The final rule is substantially the same as that proposed in July 2015.
Dodd-Frank Stress-Test Changes Finalized
Starting with the 2016 testing cycle, the rule removes the requirement to calculate a Tier 1 common capital ratio for bank holding companies that have total consolidated assets of equal to or greater than $50 billion. For banks and savings and loan holding companies with assets between $10 billion and $50 billion, the rule removes fixed assumptions about dividend payments for company-run stress tests and also provides a delay in the application of stress testing for savings and loan holding companies until 2017. For banks subject to the advanced approaches capital framework and bank holding companies with greater than $50 billion in assets, the rule delays the incorporation of the supplementary leverage ratio until 2017 and indefinitely defers the use of the advanced approaches risk-weighted assets in stress testing.
The effective date is Jan. 1, 2016.
The NCUA posted the November 2015 issue of “The NCUA Report” on Nov. 16, 2015. This latest issue includes a column from the NCUA board chairman as well as articles from various NCUA offices on the NCUA’s initiatives and information on supervisory, regulatory, and compliance issues.
November Issue of “The NCUA Report” Published
Articles in this month’s report include:
- “Targeted Risk-Based Capital Rule Will Better Protect Credit Unions”
- “Chairman’s Corner: Risk-Based Capital: The Final Chapter”
- “Board Member McWatters’ Perspective: A New Approach to Credit Union Regulation”
- “Board Actions: Revisions to Delegations of Authority Will Streamline Community Charter Changes”
- “Risks in the Shadows: Understanding NCUA’s Need for Vendor Authority – Part 2”
- “Understanding the New Process for Handling Consumer Complaints”
- “New Video Helps Credit Unions Use the FFIEC’s Cybersecurity Assessment Tool”
2015-2016 Rulemaking Agenda Updated
The CFPB released, on Nov. 20, 2015, its updated rulemaking agenda for the remainder of 2015 and 2016. As detailed in the agenda, the CFPB expects during 2016 to issue final rules on consumer protections for prepaid cards and on mortgage servicing. The CFPB also plans to issue proposed rules to address lending and collection practices for payday, auto title, and similar lending products during the first quarter of 2016.
From the Financial Accounting Standards Board (FASB)
Credit Losses Update Presented at AICPA Conference on Current SEC and PCAOB Developments
In a Dec. 10, 2015, speech at the American Institute of Certified Public Accountants (AICPA) Conference on Securities and Exchange Commission and Public Company Accounting Oversight Board (PCAOB) Developments, FASB Chairman Russell Golden opened and closed on the topic of maintaining the independence of standard setters from political and special-interest influence. He focused the majority of his remarks on standard setting, including the FASB’s forthcoming standard on credit losses. The board already has created a transition resource group ahead of issuing the final standard to assist in identifying implementation issues.
- “The new standard will require businesses to develop and install costly, complex new systems,” which he believes is not true.
- “Bank examiners will take a more conservative view,” which he believes is not true.
- “The credit crisis involved only large banks,” which he believes is not true.
- “The standard takes an unrealistic view of the economics of loan financing,” which he believes is not true.
On Dec. 3, 2015, the FASB issued a proposed Accounting Standards Update (ASU), “Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement.” Among the proposed amendments to remove certain disclosure requirements and clarify others, the proposal adds the following disclosure requirements, which are not required for private companies:
Improvements to Fair Value Measurement Disclosure Requirements Proposed
- “Changes in unrealized gains and losses for the period included in other comprehensive income and earnings (or changes in net assets) for recurring Level 1, Level 2, and Level 3 fair value measurements held at the end of the reporting period, disaggregated by level of the fair value hierarchy”
- The range, weighted average, and time period used to develop significant unobservable inputs for Level 3 fair value measurements
Comments are due Feb. 29, 2016.
The FASB issued on Nov. 23, 2015, a proposed ASU, “Business Combinations (Topic 805): Clarifying the Definition of a Business,” to provide guidance to help organizations as they evaluate whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses.
Clarifications to the Definition of a Business Proposed
The proposed guidance addresses concerns over the current definition of a business – which is seen as too broad and often results in transactions being treated as businesses when they should be treated as assets – by suggesting a more detailed framework for determining when a set of assets and activities is a business. The clarified definition is targeted to make application of the guidance more consistent and less costly.
The proposed amendments would be applied prospectively to any transaction that occurs on or after the effective date with no disclosures required at transition.
Comments are due Jan. 22, 2016.
On Nov. 12, 2015, the FASB issued a proposed ASU, “Government Assistance (Topic 832): Disclosures by Business Entities About Government Assistance,” to increase transparency about government assistance arrangements that businesses enter into. The proposed guidance would give users more information about government assistance agreements so they can better understand the nature of the assistance and the significant terms and conditions of the agreements. The proposal would require disclosures about arrangement types, the accounting for government assistance, and the agreements’ effect on the companies’ financial statements.
Improvements to Disclosures by Businesses About Government Assistance Proposed
The proposed guidance would not apply to transactions in which the government is “(1) legally required to provide a nondiscretionary level of assistance to an entity simply because the entity meets applicable eligibility requirements that are broadly available without specific agreement between the entity and the government or (2) solely a customer.”
Comments are due Feb. 10, 2016.
From the Securities and Exchange Commission (SEC)
SEC Speeches Highlighted at AICPA Conference on Current SEC and PCAOB DevelopmentsThe AICPA held its annual conference on SEC and PCAOB developments Dec. 9-11, 2015, in Washington, D.C. In the keynote address, SEC Chair Mary Jo White discussed the responsibilities of preparers, auditors, audit committees, standard setters, and regulators. Following White, Chief Accountant James Schnurr discussed his views on the state of the accounting profession, disclosure effectiveness, the role of audit committees, and the PCAOB’s work. SEC Deputy Chief Accountant Wesley Bricker discussed implementation activities for the new revenue recognition standard, other standard-setting projects, recent accounting consultations, and restatement activity. Deputy Chief Accountant Brian Croteau discussed internal control over financial reporting (ICFR), audit committee reporting, auditor independence, and PCAOB-related matters.
Of particular importance to financial institutions is the information on the allowance for loan and lease losses (ALLL) in the speech by Christopher M. Rickli, where he covers:
- Staff Accounting Bulletin No. 102 reminders including data reliability and documentation of adjustments
- Consolidation of certain securitization vehicles and consideration of risk retention
- Kris Shirley speech:
- Identifying the principal or most advantageous market for fair value measurement
- Use of cost basis as fair value
- ICFR for fair value measurements for illiquid assets and liabilities
- Michael W. Husich speech:
- Office of the Chief Accountant auditor independence consultation process
- Shared responsibility of auditor independence
- Partner rotation
- Bookkeeping and financial statement preparation
- Ashley Wright speech:
- Sponsor's accounting for a single-employer defined benefit pension plan, including changes in key assumptions to certain pension accounting measurements and selection of market interest information
- Implementation of the new revenue recognition standard
- Christopher D. Semesky speech:
- Customer incentives (gross versus net)
- New consolidation guidance including whether a decision-maker’s fee is a variable interest
- Impact of foreign exchange restrictions on control and consolidation
- Courtney D. Sachtleben speech:
- Segment reporting
From the Center for Audit Quality (CAQ)
Positive Disclosure Trends in Audit Oversight Revealed in ReportThe CAQ and Audit Analytics released their second annual “Audit Committee Transparency Barometer,” identifying positive trends in 2015 in voluntary, enhanced disclosures regarding external auditor oversight. Starting in 2014, the CAQ and Audit Analytics began to measure proxy disclosure robustness among companies in the Standard & Poor’s Composite 1500 to determine how public company audit committees publicly communicate their oversight activities. This report provides a comparison of 2015 results to 2014 results.
The report reveals that audit committees are providing useful information about their roles and responsibilities in external auditor oversight in response to increased interest by investors, regulators, and other stakeholders. In addition, the report provides examples of disclosure practices that indicate audit committees are tailoring these expanded disclosures specifically to the company.