March 2024 financial reporting, governance, and risk management

Message from John Epperson, Managing Principal, Financial Services

After a relatively quiet January and February, March brought several developments. The most anticipated and notable was the Securities and Exchange Commission (SEC) final rule on climate, which was passed on March 6 by a vote of 3 to 2. We are continuing to digest the rule and look forward to offering a deeper dive. I hope you can join us for two webinars: “April 2024 Financial Services Audit Committee Overview” on Thursday, April 4, at 2 p.m. Eastern, and “The New SEC Climate Rules: What You Need to Know” on Tuesday, April 9, at noon Eastern.

Also on March 6, the Public Company Accounting Oversight Board (PCAOB) held a six-hour public roundtable to discuss its proposed changes to standards on a company’s noncompliance with laws and regulations. On the accounting front, the Financial Accounting Standards Board decided to proceed with its project on purchased financial assets, which is of high interest for acquisitive institutions.

On a lighter note, it is March, which brings the NCAA tournaments and other festivities such as last Sunday’s St. Patrick’s Day. For those of you participating, we wish you luck with your brackets and enjoyment of all things green.

I wish you well as we wrap up this financial reporting season and look forward to keeping you informed.

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From the federal financial institution regulators

FDIC issues banking profile for fourth quarter 2023

On March 7, 2024, the Federal Deposit Insurance Corp. (FDIC) issued the quarterly banking profile covering the fourth quarter of 2023. FDIC Chair Martin Gruenberg remarked on the sustained resilience of the banking industry, highlighting strong performance in full-year earnings, net operating revenue, and net interest margin. However, Gruenberg also noted “significant downside risks,” including potential “credit quality, earnings, and liquidity challenges” and the continued deterioration of commercial real estate loans and consumer credit.

According to the report, FDIC-insured banks and savings institutions reported $256.9 billion full-year net income, a decrease of $6 billion or 2.3% from 2022. The decrease in net income was driven largely by higher provision expense and lower noninterest income.

The report provides these additional full-year statistics:

Net interest income totaled $698.2 billion for full-year 2023, up from $633.3 billion (10.3%) in 2022. From the previous year, the average net interest margin increased 35 basis points to 3.30%.
Return-on-assets ratio was 1.10%, a decrease of one basis point from the prior year.
Total loans and leases increased $225.1 billion (1.8%) from the prior year.
Total deposits declined $401.3 billion (2.1%) between 2022 and 2023.
From the previous quarter, the noncurrent loan rate increased four basis points to 0.86%.
Community banks’ annual net income totaled $26.6 billion for 2023, a decrease of $2 billion, or 7.1%, from the prior year.
Unrealized losses on securities totaled $477.6 billion in the fourth quarter, a decrease of $206.3 billion, or 30.2%, from the prior quarter. The decline was driven primarily by lower unrealized losses on residential mortgage-backed securities.
The Deposit Insurance Fund balance totaled $121.8 billion, an increase of $2.4 billion from the prior quarter, driven by increased assessment revenue.

The total number of FDIC-insured commercial banks and savings institutions that filed call reports declined from 4,614 in the third quarter to 4,587 in the fourth quarter. The number of banks at the end of 2022 totaled 4,706. During the fourth quarter, one new bank opened, 23 banks were absorbed by mergers, one bank failed, and four banks did not file a call report after selling a majority of their assets. The number of institutions on the FDIC’s problem bank list increased by eight from the third quarter to 52. Total assets of problem banks increased $12.8 billion from the previous quarter to $66.3 billion.

NCUA issues fourth quarter 2023 performance data

On March 12, 2024, 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 fourth quarter of 2023. Highlights include the following statistics:

The number of federally insured credit unions declined to 4,604 in the fourth quarter of 2023, from 4,760 in the previous year. Also in the fourth quarter, 2,880 federal credit unions and 1,724 federally insured, state-chartered credit unions existed.
Total assets reported for federally insured credit unions rose by 4.1% to $2.26 trillion, up $88.1 billion from a year before.
Net income totaled $15.2 billion in 2023, down $3.5 billion (18.8%) from 2022.
The return on average assets was 69 basis points in 2023, down from 88 basis points in 2022.

The credit union system’s net worth increased by $8.7 billion (3.8%) over the year to $241.5 billion. The aggregate net worth ratio as of the fourth quarter of 2023 was 10.7%, up from 10.74% a year prior.

Fed vice chair for supervision speaks on counterparty credit risk management

On Feb. 27, 2024, Federal Reserve (Fed) Vice Chair for Supervision Michael Barr spoke on counterparty credit risk management, emphasizing the heightened risks and noting the importance of international cooperation in a “more complex, diverse, and interconnected” financial environment. Barr highlighted three critical areas of focus, stating that banks should:

Maintain a comprehensive and evolving understanding of counterparty positions and risk profile
Continuously measure counterparty risk, manage risk aggregation, and maintain appropriate margins to mitigate the impact of potential losses
Set and enforce limits for acceptable counterparty credit risk, maintain multiple measures to evaluate counterparty risk, and take timely action to address elevated risk

According to Barr, banks should prioritize these risk management practices to proactively monitor accumulation and avoid an excessive buildup of risk.

Barr also stated that the Fed will publish, alongside its stress-test results, exploratory analyses on the resilience of systemically important banks to hypothetical counterparty default scenarios.

Federal banking agencies publish Shared National Credit report

On Feb. 16, 2024, the Fed, FDIC, and Office of the Comptroller of the Currency jointly issued the 2023 Shared National Credit (SNC) Program report, providing an overview of borrowers with aggregate loan commitments totaling $100 million or more.

The agencies reported that credit risk remains moderate, but they noted increased risk due to the impact of “higher interest rates on leveraged borrowers and compressed operating margins in some industry sectors.” The report observed declining credit quality in the technology, telecom, and media; healthcare and pharmaceuticals; and transportation sectors as well as some components of the real estate and construction sectors.

This year’s findings are based on a review of 6,589 borrowers totaling $6.4 trillion in commitments, representing an 8.7% increase from prior year. The agencies reported that the percentage of loans labeled as needing “management’s close attention” increased from 7% to 8.9% year over year.

FinCEN publishes BOI access guide for small financial institutions

On Feb. 21, 2024, the Financial Crimes Enforcement Network (FinCEN) published a small-entity compliance guide on the Beneficial Ownership Information (BOI) Access and Safeguards Rule’s requirements. The guide includes information on allowable BOI use and re-disclosure, security and confidentiality requirements, FinCEN’s processes for administering BOI requests, and civil and criminal penalties for violations.

The guide will assist financial institutions with understanding FinCEN’s expectations when those institutions are accessing the BOI database, once they have been approved to do so. Financial institutions will be given access to the BOI database in phases, as reported in the January 2024 Financial Institutions Executive Briefing.

CFPB issues final rule to limit permissible late fees on credit card statements

On March 5, 2024, the Consumer Financial Protection Bureau (CFPB) issued a final rule amending Regulation Z and its accompanying commentary related to credit card penalty fees. The final rule applies to credit card issuers that together with their affiliates have one million or more open accounts. The final amendments lower the safe harbor threshold for allowable credit card late fees to $8, prohibit higher fees for additional violations of the same nature within a single billing cycle, and exclude the new safe harbor dollar threshold from annual inflation-based adjustments under Regulation Z.

From the Financial Accounting Standards Board (FASB)

FASB discusses purchased financial assets

At its board meeting on Feb. 28, 2024, the FASB discussed the June 2023 proposed Accounting Standards Update (ASU), “Financial Instruments – Credit Losses (Topic 326): Purchased Financial Assets,” which addresses how entities would initially record an allowance for expected credit losses on purchased financial assets. The board decided to affirm the scope of its proposed update to require all financial assets, with certain exceptions, to be accounted for using the gross-up approach when acquired through business combinations and asset acquisitions. The board also directed the staff to perform additional research and analysis on feedback; it plans to continue deliberations at a future meeting.

FASB moves forward on profits interest awards

The FASB at its Feb. 28, 2024, board meeting, discussed changes made to the illustrative example in the proposed ASU “Compensation – Stock Compensation (Topic 718): Scope Application of Profits Interest Awards.” The changes were made as a result of re-deliberations in November 2023 and address “how an entity would evaluate whether it is ‘issuing (or offering to issue) its shares, share options, or other equity instruments’ in applying paragraph 718-10-15-3(a).” The board decided to proceed with issuing the final ASU.

From the Securities and Exchange Commission (SEC)

SEC adopts final rules on climate-related disclosures

On March 6, 2024, the SEC voted 3-2 to adopt its long-awaited final rules on climate-related disclosures. The final rules include qualitative and quantitative disclosure requirements within and outside of the financial statements. New requirements outside of the financial statements (Regulation S-K) include disclosures of:

Material climate-related risks, including physical and transition risks, which are those that have had or are likely to have a material impact on the registrant’s business, financial condition, or results of operations
Details on a registrant’s climate-related governance, and material climate-related mitigation activities, targets, and goals
For large accelerated filers and accelerated filers, material Scope 1 and Scope 2 greenhouse gas emissions metrics, with an accompanying attestation requirement
Information on a registrant’s transition plans or scenario analysis, if any, to address climate-related risks

Requirements within the financial statements (Regulation S-X) include disclosures of:

Expenditures incurred as a result of severe weather and other natural conditions, including expenses, capitalized costs, charges, and losses, as well as separate disclosure of any recoveries
Disaggregated information on expenditures incurred related to carbon offsets or renewable energy credits, if their use is material to reaching a climate-related goal
Qualitative information on the impact of severe weather or other natural conditions on estimates or assumptions, if material

For more information on the final rules, including details on the phased-in transition timeline, see the Crowe article “The Wait Is Over: SEC Issues Final Climate-Related Disclosure Rules.”

Enforcement director remarks on ESG disclosures and enforcement

On Feb. 23, 2024, Division of Enforcement Director Gurbir Grewal spoke to the Ohio State Law Journal’s annual symposium about the SEC’s role in encouraging public trust in institutions and markets by administering consistent and meaningful enforcement actions and by promoting proactive compliance. Highlighting investor interest in environmental, social, and governance (ESG) matters, Grewal emphasized that the SEC is “merit neutral” and applies the same principles to all information disclosures, charging companies that mislead investors or that downplay or fail to disclose information that is important to investors. Grewal cited recent examples of SEC charges, including charges against materially misleading and false ESG disclosures and misleading marketing claims for ESG-branded investment products.

SEC issues final rules on order execution information disclosure

On March 6, 2024, the SEC adopted final rule amendments to Rule 605, updating the rule’s disclosure requirements for executions of covered orders in national market system stocks. Among other changes, the final amendments:

Update the scope of reporting entities to include broker-dealers that introduce or carry 100,000 or more customer accounts, and require broker-dealers to provide separate reports for any single-dealer platforms they operate
Include certain orders submitted outside of regular trading hours, certain orders submitted with stop prices, and certain short sale orders in the definition of a “covered order”
Modify order size, order type, and time-to-execution categories, and require average time to execution to be reported in increments of a millisecond or finer and calculated on a share-weighted basis
Require reporting of additional statistical measures of execution quality
Require all reporting entities to make a summary report publicly available

The amendments become effective 60 days after publication in the Federal Register. Entities will have 18 months thereafter to comply with its provisions.

SEC proposes adjustment to definition of qualifying venture capital funds

On Feb. 14, 2024, the SEC issued a proposal to increase the dollar threshold used in the statutory definition of a “qualifying venture capital fund” from $10 million to $12 million in aggregate capital contributions. The increased threshold would affect the scope of the Investment Company Act of 1940, because qualifying venture capital funds are exempt from the act’s requirements for investment companies. The proposal also would establish a formal process for the SEC to set inflation-based adjustments indexed to the Personal Consumption Expenditures Chain-Type Price Index every five years.

Comments are due March 22, 2024.

SEC adopts final amendments to SEC employee ethical conduct standards

On Feb. 22, 2024, the SEC and the Office of Government Ethics jointly adopted final amendments to the standards governing ethical conduct of SEC employees. The final amendments:

Prohibit employees from investing in financial industry sector funds, which concentrate investments in entities regulated by the SEC
Allow employees to permit financial institutions to automatically transmit information on their transactions and holdings directly to the SEC
Provide an exemption to pre-clearance, reporting, and holding period requirements for diversified mutual funds that do not concentrate investments in any specific sector, business, industry, state, or foreign country
Clarify that in addition to traditional IPOs, employees are prohibited from purchasing securities directly listed on an exchange for seven calendar days after the listing effective date

The final rule is effective March 29, 2024.

From the Public Company Accounting Oversight Board (PCAOB)

PCAOB holds NOCLAR roundtable

On March 6, 2024, the PCAOB held a public roundtable discussion covering the proposed amendments to PCAOB auditing standards related to a company’s noncompliance with laws and regulations (NOCLAR). Participants in the six-hour discussion comprised a cross-section of stakeholders including auditors, investors, lawyers, and academics. Three different panel discussions addressed the following topics:

Panel I: Identification
- Threshold for identification of laws and regulations
- Direct illegal acts versus indirect illegal acts
Panel II: Considerations for an auditor’s assessment of noncompliance and other legal considerations
- Competence to assess relevant noncompliance with laws and regulations
- Concerns regarding potential waiver of attorney-client privilege
Panel III: Economic impacts
- Benefits and costs of proposal

Panelists did not reach a consensus during the roundtable, and the comment period on the proposal was reopened through March 18, 2024.

FASB publications excerpted in this Financial Institutions Executive Briefing were reprinted with permission. Copyright 2024 by Financial Accounting Foundation, Norwalk, Connecticut. Copyright 1974-1980 by American Institute of Certified Public Accountants.