Financial Institutions Executive Briefing 9-30-2015

| 9/30/2015

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.

From the Federal Financial Institution Regulators

FDIC “Quarterly Banking Profile” Issued

The Federal Deposit Insurance Corp. (FDIC) on Sept. 2, 2015, issued its “Quarterly Banking Profile” covering the second quarter of 2015. According to the report, FDIC-insured banks and savings institutions earned $43 billion in the second quarter, up 7.3 percent from the industry’s earnings a year before. The growth in earnings can be attributed to a $3.6 billion increase in net operating revenue, resulting from a 2.3 percent increase in net interest income and a 1.9 percent increase in noninterest income.

The report provides the following statistics for community banks:

  • Earnings were $5.3 billion during the second quarter, up 12 percent from the same period in 2014.
  • Approximately 60 percent saw improved earnings.
  • Net interest income increased 6.2 percent, as compared to second-quarter 2014.
  • Noninterest income increased 14.2 percent, and noninterest expenses rose by 7.1 percent year over year.
  • Loan balances grew 2.7 percent during the quarter and were up 8.8 percent from a year earlier.

The average industrywide return on assets increased slightly, to 1.09 percent from 1.07 percent in 2014. The profile also reports that asset quality continued to improve; charge-offs were $1.1 billion in the second quarter, down 11.2 percent from a year earlier, and for the 21st consecutive quarter noncurrent loan balances declined. Additionally, the number of institutions on the problem bank list dropped to 228, the lowest in seven years, and the Deposit Insurance Fund balance rose to $67.6 billion.

Second-Quarter 2015 Data on Credit Union Performance Released

On Sept. 3, 2015, the National Credit Union Administration (NCUA) reported quarterly figures based on call report data submitted to and compiled by the agency for the second quarter of 2015. Highlights for federally insured credit unions for the quarter ended June 30, 2015, include:

  • The number of federally insured credit unions fell by 47 from the first quarter to 6,159 at the end of the second quarter. This was a decline of 4.2 percent from the second quarter of 2014.
  • Total assets were $1.17 trillion, which represents growth by $64.9 billion, or 5.9 percent, from the first quarter of 2014.
  • Return on average assets was 81 basis points, a slight increase from the previous quarter but the same level as the second quarter of 2014.
  • Outstanding loan balances increased 10.6 percent year over year, to $745.2 billion, and member business lending rose by 2.9 percent for the quarter and 11.2 percent year over year.
  • The delinquency ratio rose slightly to 0.74 percent from 0.69 percent from the first quarter of 2015; however, the ratio declined from 0.85 percent in the second quarter of 2014. The net charge-off ratio fell to 46 basis points, a decline of one basis point from the first quarter of 2015.
  • Deposits (shares) grew by 4.9 percent year over year, to $986.8 billion.

Strategic Planning Challenges and Regulatory Landscape Articles Published

The FDIC on Aug. 24, 2015, released its summer 2015 issue of “Supervisory Insights,” with articles addressing strategic planning in an evolving earnings environment and the regulatory landscape for bank investments in securitizations. The report also offers an overview of recent regulations and supervisory guidance.

August Issue of “The NCUA Report” Published

The NCUA posted the August 2015 issue of “The NCUA Report” on Aug. 20, 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.

Articles in this month’s report include:

  • “New FFIEC Assessment Tool Can Strengthen a Credit Union’s Cyber Defenses”
  • “Chairman’s Corner: Behind-the-Scenes View of Regulatory Relief Deliberations”
  • “A Strong Verification Process Protects Apple Pay Users”
  • “Vice Chairman Rick Metsger’s Perspective: Never Underestimate the Power of a Compliment”
  • “Board Member McWatters’ Perspective: New MBL Proposal: Are Further Changes in Order?”
  • “Board Actions: Fixed-Asset Rule Provides Relief to More Than 3,800 Federal Credit Unions”
  • “How the Overhead Transfer Rate and Operating Fee Work”
  • “What to Consider When Reviewing Privileged Access”
  • “Severe Weather Can Destroy a Consumer’s Financial Stability”

From the Consumer Financial Protection Bureau (CFPB)

Monthly Report on Consumer Complaints Issued

The CFPB released its second “Monthly Complaint Report” on Aug. 25, 2015. This report details consumer complaint volume by product, state, and company; highlights credit reporting in its product spotlight section; and presents a geographically focused section on complaints in Los Angeles.

According to the report, the CFPB has handled about 677,200 complaints since July 2011. Complaints for July 2015 increased approximately 14 percent over the previous month to 26,704 complaints. Consistent with June 2015 data, the most-complained-about financial product or service was debt collection, representing about 31 percent of complaints submitted for July 2015. The second most-complained-about financial product or service was credit reporting, accounting for approximately 25 percent of complaints, and the third most-complained-about financial product or service was mortgages, accounting for approximately 17 percent of complaints.

In a year-to-year comparison, consumer loan complaints, including pawn, title, and installment loans, showed the largest percentage increase, 61 percent. Bank account or services complaints showed the greatest percentage decrease over the same time period, 4 percent

From the Financial Accounting Standards Board (FASB)

Guidance on the Accounting for Line-of-Credit Agreement Costs Issued

The FASB issued Accounting Standards Update (ASU) No. 2015-15, “Interest – Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated With Line-of-Credit Arrangements – Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting,” on Aug. 18, 2015. This ASU adds text about the presentation and subsequent measurement of debt issuance costs associated with line-of-credit arrangements, which were not addressed in ASU 2015-03, “Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs,” issued in April 2015.

According to the new guidance, the Securities and Exchange Commission staff would not object if an entity defers debt issuance costs, presents them as an asset, and subsequently amortizes the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether it has any outstanding borrowings on the line of credit.

Guidance on Principal Versus Agent Considerations Proposed

On Aug. 31, 2015, the FASB issued a proposed ASU, “Revenue From Contracts With Customers (Topic 606): Principal Versus Agent Considerations (Reporting Revenue Gross Versus Net),” to improve understanding of the implementation guidance for the principal versus agent considerations in the new revenue recognition standard. The proposed amendments clarify the following:

  • The determination of whether an entity is principal or agent for each specified good or service, which is a distinct good or service or distinct bundle of goods or services, promised to the customer is made by the entity. A contract with a customer may include more than one specified good or service, and an entity may be a principal for some specified goods or services and an agent for others.
  • Whether a specified good or service is a good, a service, or a right to a good or service is determined by the entity.
  • When there is another party involved in providing a customer with goods or services, an entity that is a principal controls: (a) a good or another asset from the other party that it then transfers to the customer; (b) a right to a service that another party will perform, which allows the entity to direct that party to provide the service to the customer on the entity’s behalf; or (c) a good or service from the other party that it combines with other goods or services to provide the specified good or service to the customer.
  • Indicators in ASC paragraph 606-10-55-39 are designed to support or assist in the assessment of control. The proposed amendments in ASC paragraph 606-10-55-39A provide guidance that facts and circumstances affect whether the indicators may be more or less relevant to the control assessment and that one or more indicators may be more or less persuasive to the control assessment.

Comments are due Oct. 15, 2015.

From the Securities and Exchange Commission (SEC)

Fee Advisory Issued

The SEC on Aug. 27, 2015, released a fee rate advisory announcing that fees will be set at $100.70 per million dollars for public companies and other issuers to register their securities with the SEC in fiscal year 2016.

These fees paid under Section 6(b) of the Securities Act of 1933 and Sections 13(e) and 14(g) of the Securities Exchange Act of 1934 are adjusted by the SEC on an annual basis. The SEC sets rates for the fees paid to levels that will generate collections equal to annual statutory target amounts. The statutory target amount for fiscal year 2016 is $550 million.

Compliance and Disclosure Interpretations Updates Published

The staff in the Division of Corporation Finance (Corp Fin) of the SEC on Aug. 6, 2015, issued updates to the following Compliance and Disclosure Interpretations:

These updates provide additional guidance on Rule 506 of Regulation D and Form D, including guidance on the general conditions to be met under provisions of Rule 506.

Financial Reporting Manual Updated

Corp Fin staff released its updated “Financial Reporting Manual,” reflecting changes through Aug. 25, 2015. This manual represents informal guidance prepared by and for the Corp Fin staff and is made available to readers, who may find the guidance useful in preparing SEC filings.

Sections 1320.3 and 1320.4 of the manual have been updated to provide additional guidance on issues related to when Corp Fin does not issue comments asking a delinquent registrant to file separately all of its delinquent filings if the registrant files a comprehensive annual report on Form 10-K that includes all material information that would have been included in those filings.

From the Public Company Accounting Oversight Board (PCAOB) 

Brief on Inspections Program for Auditors of Brokers and Dealers Published

On Sept. 1, 2015, the PCAOB published its first edition of “Staff Inspection Brief: Information About 2015 Inspections of Auditors of Brokers and Dealers.” The inspection brief describes the objectives, focus, and scope of the PCAOB’s ongoing inspections of auditors of brokers and dealers in 2015. During the 2015 inspection cycle, the PCAOB expects a 14 percent increase in inspections over 2014; it plans to inspect 75 firms that audit brokers and dealers, covering portions of 115 audit and attestation engagements of brokers and dealers.

According to the brief, the PCAOB will be focusing on the following for 2015:

  • Compliance and exemption reports under PCAOB standards
  • Financial statement audit areas that in past inspections had deficiencies identified, including revenue recognition and use of information produced or used by brokers and dealers
  • Audit procedures on financial statement supplemental schedules
  • Engagement quality
  • Auditor independence

Furthermore, PCAOB staff is working toward a rule proposal for a permanent inspection program for the PCAOB to consider in 2016.  

Annual Report on Inspections of Broker and Dealer Auditors Issued

The PCAOB on Aug. 18, 2015, issued the 2015 annual report on its interim inspection program for auditors of brokers and dealers registered with the SEC. The report covers inspections performed in 2014 of audits for fiscal years ending on or before May 31, 2014, prior to the requirement that audits be conducted in accordance with PCAOB standards. Similar to prior years’ results, the report identified high levels of independence findings and audit deficiencies.

The inspections staff identified audit deficiencies in the following areas:

  • Procedures performed related to the customer protection rule where the broker-dealer held customer assets
  • Revenue recognition
  • Reliance on records and reports
  • Fair value accounting estimates
  • Financial statement presentation and disclosure

Although inspectors identified findings and deficiencies in all types of audit firms, firms that did not also audit issuers had a higher percentage of findings and deficiencies than firms that did also audit issuers. Also, audits of brokers and dealers with the highest amounts of reported net capital had significantly lower percentages of audits and areas with findings and deficiencies.

From the Institute of Internal Auditors (IIA)

Expansion of Global Demands on Financial Services Auditing Report Released

The IIA Research Foundation (IIARF) issued “A Global View of Financial Services Auditing: Challenges, Opportunities, and the Future” on Sept. 15, 2015. The report, the most recent in a series on the IIARF’s Common Body of Knowledge (CBOK) survey, explores the global demands and challenges facing financial services internal auditors and identifies three of the biggest threats as regulatory requirements, heightened expectations, and increased technology risks.

Eighty-three percent of respondents to the CBOK survey, completed earlier this year, listed compliance and regulatory risks as a top risk. The newly released report indicates that regulatory compliance is a top issue due to the ever-increasing regulations that strain resources through spending on additional staff, new technologies, and revised processes; regulations that reduce fees and revenues; and challenges with new regulatory bodies.

Heightened expectations is another challenge, with financial services internal auditors facing growing demands from every direction – management, directors, regulators, and external auditors. According to the CBOK survey, financial services auditors spent the most time supporting external auditors, with 34 percent reporting spending more than four weeks every year.

The survey also identified technology as a primary source of new and persistent risk for organizations and their internal audit functions. It revealed that the financial sector ranked the highest when it comes to time spent providing security for IT-related risks; 47 percent of financial services respondents described the amount of time spent as extensive. Likewise, 43 percent of financial services internal auditors said they view the risk of a data breach as extensive compared to their peers in other sectors, with an average of 34 percent.

Paper on Internal Audit Use of Technology Published

The IIARF on Aug. 18, 2015, published “Staying a Step Ahead: Internal Audit’s Use of Technology,” reporting on how internal audit is embracing technology. The report offers insight into where the internal audit profession needs to go and the role it plays in helping organizations keep up with constantly changing technology and the risks it creates.

The report identifies these actions for internal auditors:

  • Automate audit processes with technology.
  • Use technology tools.
  • Use data mining and data analytics.
  • Employ continuous auditing routines.
  • Increase use of technology education and certifications.
  • Expand technological skills among internal audit staff.

Report on Internal Audit and Cybersecurity Published

On Aug. 17, 2015, the IIA released the report “Internal Audit’s Role in Cyber Preparedness: The Importance of a Holistic Approach,” which discusses how the internal audit function is critical to cybersecurity, from prevention to recovery. The report highlights how organizations must anticipate, withstand, and recover from cyberattacks to be truly prepared and that entities must understand the available tools and resources when designing cybersecurity strategies, policies, and protocols.

Five areas of cybersecurity preparedness are addressed in the report:

  • Protection
  • Detection
  • Business continuity
  • Crisis management and communications
  • Continuous improvement

The report concludes with a warning that “Only organizations that develop the skills to cope with these threats at strategic and tactical levels will survive and grow.”


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