SEC approves final rule on FAST Act mandate; FDIC, NCUA recap Q4 ’18

Current financial reporting, governance, and risk management topics.

From the federal financial institution regulators

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

The Federal Deposit Insurance Corp. (FDIC) issued, on Feb. 21, 2019, its “Quarterly Banking Profile,” covering the fourth quarter. According to the report, FDIC-insured banks and savings institutions reported $59.1 billion in net income, an increase of $33.8 billion (133.4 percent) from a year ago. The increase in earnings can be attributed to lower income tax expenses and higher net operating revenue. The report also stated that after “adjusting fourth quarters of 2017 and 2018 to reflect the average effective tax rate prior to the 2017 tax law, quarterly net income would have been $50.3 billion in fourth quarter 2018, an increase of 18.5 percent from a year ago.”

The report provides these additional fourth-quarter statistics:

• Net interest income totaled $140.2 billion (which is a $10.5 billion, or an 8.1 percent, increase from a year ago), and the average net interest margin was up from 3.31 percent a year ago to 3.48 percent.
• Community banks earned $6.8 billion, up 65.1 percent from the same period last year.
• Total loans and leases rose 4.4 percent from year-end 2017 to 2018.
• Net charge-offs declined by $605.9 million (4.6 percent) from a year ago, while the number of loans that were 90 days past due lowered by $1 billion (1 percent) during the fourth quarter.

The total number of FDIC-insured commercial banks and savings institutions declined to 5,406 from 5,477 the previous quarter and from 5,670 at year-end 2017. The number of institutions on the FDIC’s problem bank list declined from 71 for the third quarter to 60 for the fourth quarter, the lowest number since 2007.

NCUA issues fourth-quarter 2018 performance data

On March 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 fourth quarter of 2018. Highlights of the fourth quarter include:

• The number of federally insured credit unions declined from 5,573 in the fourth quarter of 2017 to 5,375 in the same quarter of 2018 (3,376 federal credit unions and 1,999 federally insured, state-chartered credit unions).
• Total assets in federally insured credit unions rose by $75 billion (5.4 percent) over the year to $1.45 trillion.
• Net income at an annual rate was $13 billion, up $2.7 billion, or 25.8 percent from the previous year.
• The return on average assets increased from 78 to 92 basis points compared to a year ago.
• The credit union system’s net worth ratio increased from 10.95 to 11.30 percent from last year.

FDIC proposes changing deposit insurance calculations under CBLR

The FDIC issued, on Feb. 5, 2019, a proposal to revise the deposit insurance assessment system for banks that elect to use the community bank leverage ratio (CBLR) framework once that standard is finalized. The FDIC, the Board of Governors of the Federal Reserve System, and the Office of the Comptroller of the Currency previously issued an interagency proposal to implement the CBLR in November 2018, which was published in the Federal Register on Feb. 8, 2019. The comment period on the interagency CBLR proposal closes on April 9, 2019.

Under the FDIC’s insurance assessment proposal, CBLR banks would be assessed as small banks. The assessment regulations and call report would be revised to allow banks to choose the option of using CBLR tangible equity or tier one capital for their assessment base calculation, as well as using the CBLR or the tier one leverage ratio the FDIC uses to calculate an established small bank’s assessment rate.

The FDIC proposal also clarifies that “a CBLR bank that meets the definition of a custodial bank would have no change to its custodial bank deduction or reporting items required to calculate the deduction.” The regulations would continue to reference prompt corrective action regulations to define capital categories “used in the deposit insurance assessment system, with technical amendments to align with the CBLR” proposal.

The FDIC also provided an assessment estimation tool in order to assist banks in understanding the effects of the proposed rule on the deposit insurance assessment amounts.

Comments on the insurance assessment proposed rule are due April 22, 2019.

FFIEC revises policy on Report of Examination

On March 6, 2019, the Federal Financial Institutions Examination Council (FFIEC) issued a policy statement to promote consistency and clarity in examination reports. The policy statement is part of the FFIEC’s broader Examination Management Project that is intended to reduce regulatory burden for community banks. This policy statement replaces the federal banking agencies’ 1993 Interagency Policy Statement on the Uniform Core Report of Examination, which is now rescinded.

The Report of Examination (ROE), which documents findings and conclusions of an examination conducted by the regulatory agencies on a bank or credit union, is provided to the financial institution and includes information on the institution’s financial condition, risk profile, and risk management practices. Given the evolving financial institution supervision processes and advancing technologies, the new FFIEC policy statement is based on principles that set minimum expectations of what an ROE should include, such as:

• Conveying that the information contained in the ROE should be treated as confidential
• Presenting conclusions in order of importance
• Documenting the institution’s condition and risk profile, including assigned regulatory ratings
• Providing clear narrative and data to support assigned component and composite ratings with a level of detail consistent with the assigned rating
• Prominently documenting issues of supervisory concern and areas calling for corrective action

From the Financial Accounting Standards Board (FASB)

FASB clarifies leases implementation guidance and disclosure requirements

The FASB issued, on March 5, 2019, Accounting Standards Update (ASU) 2019-01, “Leases (Topic 842): Codification Improvements.” The ASU provides two clarifications for lessors that are not manufacturers or dealers, generally for financial institutions and captive finance companies, and clarifies that lessees and lessors are exempt from certain interim disclosure requirement upon adoption of Topic 842.

The first clarification relates to fair value of leased property and reinstates an exception, previously included in Topic 840, “Leases,” for lessors that are not manufacturers or dealers to measure the value of leased property at the underlying asset’s cost, reflecting any volume or trade discounts, instead of applying the definition of fair value in Topic 820, “Fair Value Measurement” (that is, exit price). If a significant lapse of time occurs between the asset acquisition and lease commencement, the exception would not apply, and the definition of fair value in Topic 820 would apply. The second clarified issue provides that for financial institutions, the presentation of principal payments received from leases under sales-type and direct financing leases will be presented within investing activities on the statement of cash flows. Last, the ASU provides an exception to paragraph 250-10-50-3 interim disclosure requirements in the fiscal year in which an entity adopts the new leases standard. Without this change, some entities were concerned that interim disclosures would be required that are not required for the first full annual period after the date of adoption. 

The amendments other than the interim disclosure requirements amendments are effective for public business entities for fiscal years beginning after Dec. 15, 2019, and interim periods within those fiscal years. For all other entities, the effective date is for years beginning after Dec. 15, 2019, and interim periods within years beginning after Dec. 15, 2020. The transition amendments related to interim disclosures are effective the same dates as the requirements in Topic 842.

From the Securities and Exchange Commission (SEC)

SEC approves final rule on the FAST Act mandate to simplify and modernize disclosure

On March 20, 2019, the SEC approved a final rule, “FAST Act Modernization and Simplification of Regulation S-K,” to simplify and modernize disclosure requirements for public companies, investment advisers, and investment companies. The new rule, which stems from the SEC’s mandate under the Fixing America’s Surface Transportation Act (FAST Act), is intended to improve the readability and navigability of disclosures in SEC filings and to discourage repetition and disclosure of immaterial information.

Except as noted here, the rule is effective 30 days after publication in the Federal Register. Highlights include the following:

Disclosure simplification

The final rule includes amendments that reduce administrative and disclosure burden by allowing registrants to:

• Exclude, in most cases, the earliest of three years in Management’s Discussion and Analysis (MD&A), if the discussion has appeared in a prior filing
• Provide disclosure about a physical property only to the extent that it is material to the registrant
• Omit from exhibits:
  
  • Confidential information in material contracts and certain other exhibits without submitting a confidential treatment request to the SEC, if the information a) is not material and b) would likely cause competitive harm to the registrant if publicly disclosed (effective immediately upon publication in the Federal Register)
  • Attachments to material agreements if such attachments do not contain material information or were not otherwise disclosed
  • Any document or part thereof that is incorporated by reference in a filing (Instead, the registrant will be required to provide hyperlinks to documents incorporated by reference.)
  • Material contracts entered into within two years of the applicable registration statement or report, if the registrant is not a newly reporting company

Disclosure modernization
New required revisions to filings include:

• Disclosing on the form cover page the national exchange or principal U.S. market for the registrant’s securities, the trading symbol, and the title of each class of securities
• Tagging all cover page data with Inline eXtensible Business Reporting Language (XBRL)

The final rule also includes parallel changes to several rules and forms applicable to investment companies and investment advisers, including amendments that require certain investment company filings to include a hyperlink to each exhibit listed in the exhibit index of the filings.

SEC proposes expansion of “test-the-waters” provision

The SEC, on Feb. 19, 2019, proposed a new rule that would expand the “test-the-waters” reform by allowing all issuers to gauge market interest in registered securities offerings by permitting discussions on potential offerings with certain institutional investors prior to filing a registration statement. The test-the-waters communications are currently allowed only for emerging growth companies (EGCs), as provided for under the Jumpstart Our Business Startups Act (JOBS Act).

Under this new proposed rule, all prospective issuers, not just EGCs, would be permitted to assess market interest in a possible initial public offering or other proposed registered securities offering by allowing discussions with potential qualified investors before the filing of a registration statement. The proposed expansion of the “test-the-waters” reform is designed to provide companies more flexibility in determining whether to proceed with a registered offering before incurring the costs of preparing a registration statement.

Comments are due April 29, 2019.

CorpFin updates Regulation S-K interpretation

The staff in the SEC’s Division of Corporation Finance (CorpFin) has updated its Compliance and Disclosure Interpretations for Regulation S-K on Feb. 6, 2019. Questions 116.11 and 133.13 were added to provide guidance on preparing Item 401 disclosure relating to director qualifications specifically addressing disclosure of self-identified diversity characteristics.

From the Public Company Accounting Oversight Board (PCAOB)

PCAOB posts staff inspections outlook for audit committees

On March 14, 2019, the PCAOB posted the “2019 Staff Inspection Outlook for Audit Committees” to its website. The report includes the PCAOB’s plans to communicate with audit committees about their core activities, the key areas of focus for the 2019 inspections, and other important topics for audit committees to address with their auditors during the audit. The primary areas of focus for planned 2019 inspections include the following:

• Technological developments
• Audit firms’ actions to address past inspection findings
• Audit procedures on new accounting standards
• Audit firms’ use of audit quality indicators
• Implementation of new auditor’s reporting model requirements
• Audit firms’ quality control systems
• Auditor independence

From the Center for Audit Quality (CAQ)

CAQ to host CAMs webcast on April 1 

The CAQ recently announced a webcast titled “The Enhanced Auditor’s Report Is Here: Get the Facts on CAMs and More” to take place on April 1, 2019. The first in a five-part series, the webcast will address early lessons learned in the implementation of critical audit matters (CAMs) requirements, how audit committees and management can prepare, and how information included in CAMs communications may be used by investors. Registration is free. 

From the Institute of Internal Auditors (IIA)

IIA’s Tone at the Top covers blockchain potential

On Feb. 15, 2019, the IIA published its February 2019 issue of Tone at the Top, titled “Boards Look to Harness Blockchain Disruption.” According to the report, while “blockchain technology holds enormous promise to transform how businesses operate, it also has the potential to cause significant issues for boards and senior executives alike.” To address this, the report provides questions that boards should ask management and the internal audit function to meet the board’s legal and fiduciary responsibilities to manage risks, and to help implement blockchain. Questions include:

• To what extent should company resources be allocated to blockchain?
• Do the benefits of blockchain exceed the risks?
• Are the expected benefits of using blockchain superior to the company’s existing practices?
• How does blockchain fit relative to other trending technologies available to the company and into the company’s long- and short-term strategic planning?
• What is the best way to implement blockchain technology and to educate company staff about how blockchain works?
• How can the company use blockchain to achieve competitive advantages?
• Does internal audit have the necessary resources to assess and monitor blockchain risks?