FDIC, NCUA recap Q2 ’18; FASB addresses hosting arrangement accounting

| 9/25/2018

From the federal financial institution regulators

FDIC issues “Quarterly Banking Profile” for second-quarter 2018

The Federal Deposit Insurance Corp. (FDIC) issued, on Aug. 23, 2018, its “Quarterly Banking Profile,” covering the second quarter of 2018. According to the report, FDIC-insured commercial banks and savings institutions earned $60.2 billion, an increase of $12.1 billion (25.1 percent) from the previous year. The increase was due to higher net interest income and a lower effective tax rate.

The report provides these additional second-quarter statistics:

  • Net interest income was $134.1 billion, up $10.7 billion (8.7 percent) from the previous year, the largest annual dollar increase ever reported by the industry.
  • Loan and lease balances increased by $104.3 billion (1.1 percent) from the first quarter; all major loan categories experienced growth. From the second quarter of 2017, loan and lease balances increased by 4.2 percent, showing a small drop from the 4.9 percent annual growth reported for the first quarter of 2018.
  • The average noncurrent loan rate dropped to 1.06 from 1.15 percent in the first quarter of 2018. Net charge-offs increased by $446.4 million (4 percent) from the previous year, led by an increase of $918.9 million (12.8 percent) in net charge-offs for credit cards. The average net charge-off rate of 0.48 percent remained consistent with the previous year.
  • Community banks earned $6.5 billion in net income, which is an increase of 21.1 percent from the previous year.
At the end of the second quarter, there were 5,542 FDIC-insured commercial banks and savings institutions, a decline from 5,787 the year before. During the quarter, 64 institutions were acquired, two new charters were added, and there were no failures. The number of institutions on the FDIC’s problem bank list declined from 92 to 82.

NCUA releases second-quarter 2018 performance data

On Sept. 6, 2018, 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 2018. Here are some highlights:
  • The number of federally insured credit unions continues to decline – from 5,530 at the end of the first quarter of 2018 to 5,480 at the end of the second quarter of 2018.
  • Net income at an annual rate was $12.7 billion, up 24.8 percent or $2.5 billion from 2017.
  • Total assets were $1.43 trillion, 5.8 percent greater than a year ago.
  • Compared to one year earlier, the return on average assets increased from 77 to 90 basis points for the second quarter of 2018.
  • Outstanding loan balances increased 9.8 percent year over year, to $1 trillion.
  • Insured deposits (shares) grew $56 billion (5.2 percent) year over year, to $1.13 trillion.

Agencies clarify the difference between supervisory or staff guidance and law

The Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System (the Fed), the NCUA, and the Consumer Financial Protection Bureau (CFPB) on Sept. 11, 2018, released an interagency statement clarifying the role of supervisory guidance. The statement reminds the public of the difference between supervisory guidance and laws or regulations: The former does not have the force and effect of law.

Securities and Exchange Commission (SEC) Chairman Jay Clayton issued a similar public statement on Sept. 13, 2018, as a reminder that SEC staff statements (which come in a variety of forms) are nonbinding and create no enforceable legal rights or obligations for any party. SEC rules and regulations, however, have the force and effect of law from their enacting statutes.

Agencies extend exam cycle for banks with less than $3 billion in assets

On Aug. 23, 2018, the FDIC, the OCC, and the Fed jointly issued interim final rules that make qualifying banks with up to $3 billion in assets eligible for an 18-month on-site exam cycle. These final rules will implement Section 210 of the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA), which raised the threshold from $1 billion in assets.

The interim final rules generally would allow qualifying banks with less than $3 billion in total assets to benefit from the extended 18-month examination schedule if they have “outstanding” or “good” composite exam ratings. In addition, the interim final rules make parallel changes to the federal banking agencies’ regulations governing the on-site examination cycle.

The interim final rules became effective on Aug. 29, 2018, the date of publication in the Federal Register, and comments are due Oct. 29, 2018.

Fed expands applicability of small-bank holding company policy statement

On Aug. 28, 2018, the Fed issued an interim final rule expanding the applicability of its small-bank holding company policy statement, as required by EGRRCPA. The small-bank holding company statement’s total consolidated assets threshold increases from $1 billion to $3 billion. The policy statement also applies to savings and loan holding companies with total consolidated assets of less than $3 billion.

The small-bank holding company policy statement eases the transfer of ownership of small community banks by allowing their holding companies to operate with higher levels of debt than normally would be permitted. Additionally, holding companies that meet the conditions of the policy statement are excluded from consolidated capital requirements and related regulatory report filings.

The interim final rule was effective on Aug. 30, 2018, when it was published in the Federal Register, and comments are due Oct. 29, 2018.

OCC updates Bank Accounting Advisory Series

The OCC released, on Aug. 15, 2018, an update to the Bank Accounting Advisory Series (BAAS). The BAAS, which is updated annually, provides accounting guidance and interpretations specific to OCC-regulated financial institutions in a question-and-answer format. The updates relate to credit loss, hedge, and lease accounting. A table in the “Message From the Chief Accountant” within the updated BAAS summarizes changes.

OCC updates OREO booklet of the Comptroller’s Handbook

The OCC issued an updated “Other Real Estate Owned” (OREO) booklet of the Comptroller’s Handbook on Aug. 31, 2018. The updated OREO booklet incorporates accounting changes in accordance with Accounting Standards Codification (ASC) topics 360-20, 610-20, and 606 for foreclosed property under contract. Among other updates and clarifications, the booklet also includes changes for accounting for sales of OREO and guidance on the OREO holding period for federal savings associations.

OCC solicits input for modernizing CRA

On Aug. 28, 2018, the OCC issued an advance notice of proposed rulemaking (ANPR) to solicit ideas for building a new framework for the regulations that implement the Community Reinvestment Act (CRA). Comments received may assist in the development of more specific policy proposals or future rulemakings.

The ANPR requests comment on various areas of improvements to the CRA regulations including:

  • Expanding lending and services to people that need it most, specifically in low- and moderate-income areas
  • Increasing types of activities eligible for consideration under the CRA
  • Updating definitions of assessment areas
  • Implementing metric-based thresholds for CRA ratings
  • Enhancing transparency of bank CRA performance
  • Addressing timeliness of CRA regulatory decisions
  • Decreasing the cost and burden of CRA-performance evaluation
Comments are due Nov. 19, 2018.

OCC updates CRA policies and procedures

The OCC, on Aug. 15, 2018, updated its Policies and Procedures Manual, which details the framework for determining how evidence of discriminatory or other illegal credit practices affects the CRA evaluation and assigned rating of national banks, federal branches, and federal savings associations.

The updated manual clarifies that in assigning a CRA rating, the OCC examines a bank’s CRA performance for a given time period and then makes necessary adjustments based on evidence of discriminatory or other illegal credit practices. Guidance is provided for examiners on determining the adverse effects of the evidence on a bank’s CRA evaluation, including whether a composite rating and/or component performance test rating downgrade is appropriate.

According to the OCC, its policy is “generally not to penalize a bank by lowering its CRA rating when examiners have determined the bank has taken appropriate remedial actions because penalties in such cases can unnecessarily distract and divert the bank’s resources from lending, investing, or serving the relevant communities and thereby frustrate the CRA’s purposes.”

From the Financial Accounting Standards Board (FASB)

FASB discusses CECL implementation questions

As a follow-up to the June 11, 2018, Transition Resource Group (TRG) for Credit Losses meeting, the FASB met on Aug. 29, 2018, to consider the TRG’s discussion on the following topics related to current expected credit loss (CECL) implementation:
  • Topic 1A: Capitalized interest. The FASB decided no amendments to Accounting Standards Update (ASU) No. 2016-13, “Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” are necessary.
  • Topic 1B: Refinancing and loan prepayments. The FASB decided no amendments are necessary.
  • Topic 2A: Inclusion of accrued interest in defining amortized cost basis. The FASB decided that accrued interest receivable (AIR) should be measured separately. The board also decided to provide an accounting policy election to present AIR separately and to provide a practical expedient for presentation of AIR in the vintage disclosures.
  • Topic 2B: Reversal of accrued interest on nonaccrual loans. The FASB decided to provide accounting policy elections to 1) either reverse AIR through interest income or the allowance for credit losses (ACL) and 2) exclude AIR from ACL.
  • Topic 3: Transfers of loans and debt securities between categories. The board decided that upon transfer, entities should reverse the existing allowance prior to a loan transfer and subsequently establish an allowance. The board also decided to make its existing write-off guidance applicable to all transfers and to require presentation of all transfers on a gross basis in the income statement.
  • Topic 4: Recoveries. The board decided to amend the guidance to 1) require entities to consider expected recoveries when measuring the ACL and 2) limit the scope of expected recoveries to include only amounts collected from the borrower. Also, the FASB decided an entity should not include fair value amounts greater than the amortized cost basis of financial assets for purposes of measuring the ACL.
In addition, on Sept. 5, 2018, the FASB decided to amend the guidance in ASU 2016-13 for the following issues:
  • Effective interest rate (EIR) for variable rate loans
  • EIR adjustment for prepayment expectations
  • Consideration of costs to sell when foreclosure becomes probable
  • Clarification that reinsurance receivables are within the scope of Subtopic 326-20
  • Reference error in paragraph 310-40-55-14
  • Cross-references in the guidance for equity method losses
The FASB plans to issue an exposure draft in the fourth quarter. 

FASB addresses accounting for costs to implement cloud computing arrangements

In 2015, the FASB issued ASU 2015-05, “Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement,” to provide guidance for fees paid in a cloud computing arrangement (CCA), also known as a hosting arrangement. The most common example of a CCA is software as a service (SaaS), which uses internet-based application software hosted by a service provider or third party.

Under ASU 2015-05, an entity evaluates a CCA to determine whether the arrangement includes a license (in which case, an intangible is recorded for the license) or whether the arrangement is a service contract (in which case, fees paid are expensed).

To address diversity in practice and simplify accounting for implementation costs associated with CCAs, on Aug. 29, 2018, the FASB issued ASU 2018-15, “Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.” This ASU aligns the guidance for CCAs regardless of whether they include a license.

Implementation costs for CCAs that are service contracts will be capitalized during the application development stage, and costs incurred before and after that stage will be expensed as incurred. The capitalized implementation costs will be amortized over the term of the arrangement, which is consistent with existing accounting guidance for CCAs that include a license.

The amortization of the capitalized implementation costs will be presented in the same income statement line as the CCA fees. Similarly, capitalized implementation costs will be presented in the same line on the balance sheet as any prepaid CCA fees, and cash flows from capitalized implementation costs will be presented on the cash flow statement in the same line as the CCA fees.

An entity can choose between prospective and retrospective transition. For public business entities (PBEs), ASU 2018-15 will be effective for fiscal years beginning after Dec. 15, 2019, and interim periods within, which is first effective for calendar year PBEs in the March 31, 2020, interim financial statements. For all other entities, it is effective for annual reporting periods beginning after Dec. 15, 2020, and interim periods within annual periods beginning after Dec. 15, 2021. Early adoption is permitted, including in an interim period.

FASB revises disclosures for sponsors of defined benefit plans

On Aug. 28, 2018, the FASB released ASU 2018-14, “Compensation – Retirement Benefits – Defined Benefit Plans – General (Topic 715-20): Disclosure Framework – Changes to the Disclosure Requirements for Defined Benefit Plans,” to change disclosures for sponsors of defined benefit plans.

The ASU removes the following disclosures:
  • The amounts in accumulated other comprehensive income that the entity expects to recognize in net periodic benefit cost during the next fiscal year
  • The amount and timing of plan assets expected to be returned to the employer
  • Information about the June 2001 amendments to the Japanese Welfare Pension Insurance Law
  • Certain related-party disclosures
  • For nonpublic entities, the roll forward of plan assets measured on a recurring basis in Level 3 of the fair value hierarchy (but requires disclosures of amounts of transfers in and out of Level 3 as well as Level 3 plan asset purchases)
  • For public entities, the effects of a 1 percent point change in assumed healthcare cost trend rates on the net periodic benefit costs and the benefit obligation for postretirement healthcare
The ASU clarifies that the following disclosures are required:
  • The projected benefit obligation (PBO) and fair value of plan assets for plans with PBOs in excess of plan assets
  • The accumulated benefit obligation (ABO) and fair value of plan assets for plans with ABOs in excess of plan assets
The ASU adds the following disclosure requirements:
  • The weighted-average interest crediting rates for cash balance plans and other plans with promised interest crediting rates
  • An account of the reasoning for significant gains and losses related to changes in the benefit obligation for the period
The ASU is effective for PBEs in fiscal years ending after Dec. 15, 2020, and for non-PBEs in fiscal years ending after Dec. 15, 2021. Early adoption is permitted.

FASB changes fair value measurement disclosure requirements

The FASB issued, on Aug. 28, 2018, ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement,” also part of the disclosure framework project, to remove from, modify, and add to existing fair value measurement disclosures requirements.

The disclosure requirements that are removed include the following:
  • Transfers between Level 1 and Level 2 of the fair value hierarchy
  • The policy for determining when transfers between any of the three levels have occurred
  • The valuation processes used for Level 3 measurements
  • For nonpublic entities, the changes in unrealized gains or losses presented in earnings for Level 3 instruments held at the balance sheet date
The following disclosure requirements are modified:
  • The Level 3 roll forward is eliminated for nonpublic entities, but disclosure of transfers in and out of Level 3 as well as purchases and issuances are required
  • For certain investments in entities that calculate the net asset value, requires disclosures about timing of liquidation and redemption restrictions lapsing if the latter has been communicated to the reporting entity
  • Clarifies that the Level 3 measurement uncertainty disclosure should communicate information about the uncertainty at the balance sheet date
The following are additional or new disclosure requirements:
  • For public entities, the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 instruments held at the balance sheet date
  • For public entities, the range and weighted average of significant unobservable inputs used for Level 3 measurements, but, for certain unobservable inputs, adds an option to disclose other quantitative information in place of the weighted average to the extent that it would be a more reasonable and rational method to reflect the distribution of unobservable inputs
  • For nonpublic entities, some form of quantitative information about significant unobservable inputs used in Level 3 fair value measurements
The ASU is effective for all entities in fiscal years beginning after Dec. 15, 2019, including interim periods, which is first effective for calendar year entities in the March 31, 2020, interim financial statements. Early adoption is permitted. In addition, an entity may early adopt any of the removed or modified disclosures immediately and delay adoption of the new disclosures until the effective date.

From the Public Company Accounting Oversight Board (PCAOB)

PCAOB updates staff guidance on auditor report changes

The PCAOB updated, on Aug. 23, 2018, its staff guidance on changes to the auditor’s report that took effect for calendar year-end audits of Dec. 31, 2017, annual financial statements. The updates to the guidance relate to the following topics:

  • Voluntary disclosure of certain audit participants
  • Auditor tenure
  • Auditor reporting on internal control over financial reporting
  • Explanatory and emphasis paragraphs
  • Auditor reporting on supplemental information, interim financial information, and special reports

PCAOB issues annual broker-dealer inspection report

On Aug. 20, 2018, the PCAOB released its report on 2017 inspections of broker-dealer auditors. The executive highlights accompanying the report include the following important points:
  • “Auditors should focus on improving their quality control systems to perform high quality audits and attestation engagements.
  • “Overall deficiencies remained high, although inspectors found fewer independence violations than in past years.
  • “Broker-dealer owners and audit committees (or equivalent) are encouraged to discuss these results with their auditors.”

From the Securities and Exchange Commission (SEC)

Chief Accountant addresses AICPA banking conference

On Sept. 17, 2018, SEC Chief Accountant Wesley Bricker addressed the American Institute of Certified Public Accountants (AICPA) National Conference on Banks and Saving Institutions. He covered CECL standard implementation, technology innovations in digital assets, and changes to the auditor’s report.

For CECL, he noted certain aspects of applying the standard that companies may already have experienced – in particular, assessing expected cash flows over the life of a financial asset. He emphasized processes, controls, and adoption plans to implement accounting changes, and he reminded the audience that SEC Staff Accounting Bulletin (SAB) 102 principles will continue to be applicable and that audit committees have a vital role in implementation. Finally, he shared the following concepts regarding transition disclosures:
  • Definition of key terms
  • Description of methodology and judgments
  • Tabular presentation of economic assumptions
  • Quantified impact of moving from incurred to expected model, disaggregated by lending portfolio
He shared illustrations addressing SEC requirements that uniquely affect digital asset transactions:
  • Maintaining accurate books and records and internal controls
  • Identifying related parties in order to appropriately account for and disclose those transactions
  • Considering loss contingencies due to legal matters
  • Dealing with potential illegal acts
  • Reviewing the ability of the external auditors to carry out their professional responsibilities
About auditor’s report changes, Bricker noted that he is pleased with the dry runs for critical audit matters (CAMs) that entities are undertaking ahead of the effective date for including CAMs in the auditor’s report.

SEC adopts disclosure simplifications

On Aug. 17, 2018, the SEC voted to amend its disclosure requirements in order to simplify them and make them consistent with GAAP and other SEC guidance. In addition, the commission referred a number of topics to the FASB for further consideration.

Some of the specific changes include elimination of:
  • Ratio of earnings to fixed charges
  • Market price information – high and low trading prices
  • Dividends per share on face of income statement (instead moves required disclosure to changes in stockholders’ equity)
  • Financial information about segments and geographic area in description of business
  • Accounting policy for derivatives
In addition, the rule adds a new interim requirement for changes in stockholders’ equity in Form 10-Q, which requires registrants to disclose changes in shareholders’ equity, in the form of a reconciliation, for “the current and comparative year-to-date periods, with subtotals for each interim period.” Registrants may present the activity in a separate statement of changes in stockholders’ equity or in the notes to the interim financial statements.

The SEC’s final rule will be effective 30 days after publication in the Federal Register.

SEC swears in new commissioner

Elad Roisman was sworn in as an SEC commissioner on Sept. 11, 2018, replacing outgoing Commissioner Michael Piwowar. Roisman was nominated by President Donald Trump and confirmed by the U.S. Senate on Sept. 5, 2018. He most recently served as chief counsel to the Senate Banking Committee; prior to that, he served as counsel to former SEC Commissioner Daniel Gallagher.

From the American Institute of Certified Public Accountants (AICPA)

AICPA issues for comment two draft papers on CECL issues

The AICPA Financial Reporting Executive Committee (FinREC) issued, on Aug. 9, 2018, drafts for two CECL implementation issues for comment. Once final, they will be included in the “Depository and Lending Institutions: Banks and Savings Institutions, Credit Unions, Finance Companies, and Mortgage Companies – Audit and Accounting Guide.” The two drafts can be found on the AICPA’s Credit Loss Standard (CECL) Issues page.
  • Issue 1: Zero expected credit losses – types of assets with an expected nonpayment of zero (such as agencies). The draft expands on the guidance in ASU 2016-13, “Financial Instruments – Credit Losses,” related to financial instruments where the expected credit loss determination is zero. Specifically, it covers example eight in the ASU for U.S. Treasury securities and provides two additional examples – one for Ginnie Mae mortgage-backed securities and one for U.S. agency mortgage-backed securities.
  • Issue 22: Reversion method: estimation versus accounting policy. The draft provides FinREC’s view that the reversion method that an entity selects in applying the CECL standard is an estimation technique and not an accounting policy election.

From the Center for Audit Quality (CAQ)

CAQ releases tool for broker-dealers that use service organizations

The CAQ released a tool, on Aug. 22, 2018, for broker-dealers that use service organizations. Although the tool is addressed to auditors, it contains matters that broker-dealer management also would want to consider in assessing internal controls related to the use of service organizations.

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Sydney Garmong
Sydney Garmong
Office Managing Partner, Washington, D.C.