2017 Call Reporting Bootcamp International ACH Transaction

Transcription

1 2017 Call Reporting Bootcamp International ACH Transaction Session III: RC-R and other Schedules (IAT) Exception Handling Presented by Michael Gordon, CPA, Kris Trainor, CPA, CFE and Alison Wester, CPA Mauldin & Jenkins, LLC Presented by Michele Barlow, AAP, NCP Fall 2017

2 Audio Handouts Questions

3 Michael Gordon, CPA Director, Mauldin & Jenkins, LLC Joined in 2005 with focus on audits for Financial Institutions Internal and external audits for both public and private companies, mortgage companies and credit unions Experience includes assisting clients with FDICIA and SOX 404 testing, HUD compliance, loss-share accounting and compliance, and regulatory reporting Member of the American Institute of Certified Public Accountants and the Georgia Society of Certified Public Accountants 3

4 Alison Wester, CPA Partner, Mauldin & Jenkins, LLC Joined in 1996 with focus on audits for Financial Institutions Internal and external audits for both public and private companies, mortgage companies and credit unions Member of the American Institute of Certified Public Accountants, the Florida Institute of Certified Public Accountants and the Georgia Society of Certified Public Accountants She is active with a variety of banking organizations in the southeast including the Florida Bankers Association

5 Presented by:

6 Agenda Brief Overview of Sessions I & II Schedule RC-R (Regulatory Capital) Errors in Reporting of RC-R Additional Schedules RC-M RC-O RC-P and RC-Q Questions

7 Sessions I & II Session I covered Call Report basics, Schedules RC and RI Schedules RI-E, RC-A, RC-B, RC-D, RC-E, RC-F & RC-G Session II covered Call Report Schedule RC-C Also related schedules RC-L, RC-N, RI-B, RI-C Schedules RI-A and RC-K Session III will start with RC-R Also include schedules RC-M, RC-O among other schedules

8 Summary of Call Report Schedule RC-R Part I Regulatory Capital Components and Ratios Calculation of common equity Tier 1 capital, Tier 1 capital, Tier 2 capital Calculation of total assets for leverage ratio Calculation of the capital ratios themselves Starting in 2016 capital buffer Part II Risk-Weighted Assets Calculation of risk-weighted assets 8

9 RC-R, Part I Summary of 2015 changes to RC-R, Part I: Introduction of Common Equity Tier 1 Capital and common equity Tier 1 risk-based capital ratio Only common stock, surplus and retained earnings included in common equity Tier 1, not preferred stock or other forms of capital One-time opt-out election for AOCI (including unrealized gains/losses on AFS securities) Opting out would be consistent with prior practice, which was to remove these items from Tier 1 capital 9

10 RC-R, Part I Summary of key changes to RC-R, Part I: Deferred tax assets arising solely from net operating loss and tax credit carryforwards are 100% excluded from Tier 1 capital (previously the rules essentially allowed for the inclusion of one year s projection of NOLs to be used) Three types of assets are limited to 10% of common equity Tier 1 capital: Investments in common stock of other financial institutions Mortgage servicing rights Deferred tax assets arising from temporary differences not realized through net operating loss carrybacks Also, the sum of those 3 types is limited to 15% of common equity Tier 1 capital 10

11 RC-R, Part I 2016 brought new capital buffer Represents additional capital the institution will be required to maintain in order to have no limitations on distributions to shareholders and discretionary bonus payments Will be phased in over 4 years, starting in 2016 For 2017, item 46.a must exceed 1.250% For September 2017, eligible retained income would be net income (prior to distributions) from previous 4 quarters (July 2016 June 2017) 11

12 RC-R, Part I Capital buffer, new for 2016: 12

13 Common Mistakes in RC-R, Part I Improper usage of transition period Many items in RC-R are subject to a transition period, including: Item 7 Intangible Assets Item 8 DTAs arising from NOL carryforwards Item 14 Mortgage servicing assets Item 15 DTAs arising from temporary differences The transition period can affect both how much a Bank must deduct and where the deduction is reported 80% for

14 Common Mistakes in RC-R, Part I How to report a $1 million NOL DTA disallowed deduction in the September 2017 Call Report: 80% in item 8 and 20% in item 24 And if the Bank does not report additional tier 1 capital in item 20, then you would also report: 14

15 Common Mistakes in RC-R, Part I Transition period for items (including DTAs arising from temporary differences) affects the amount of the deduction: For instance, if temporary DTAs total $2,000,000, in 2017 this total multiplied by 60% = $1,600,000. Compare $1,600,000 to 10% of common equity Tier 1 capital to determine if there is deduction amount. Also: Don t forget that amounts deducted in Part I should not be risk weighted in Part II Would be reported in column B of Part II (adjustments to balance sheet totals reported in column A) 15

16 Common Mistakes in RC-R, Part I Example from previous slide with $1 million disallowed DTA: 16

17 RC-R, Part II Summary of key changes to RC-R, Part II: Structure and appearance of schedule has changed significantly, but overall is largely consistent with current risk-weighting schedule Continue to report assets in Column A as they are recorded on RC, with exception of securitization exposures (won t apply to most community banks) Column B Still report items not subject to riskweighting in this column Now instead of Columns C-F (0%, 20%, 50%, 100%) there are Columns C-Q 15 different risk weights! 17

18 RC-R, Part II Summary of changes to RC-R, Part II: Loans and Loans HFS now broken into 4 categories: Residential mortgage exposures The category includes all 1-4 family loans (including junior liens) as well as multifamily loans under $1 million AND statutory multifamily mortgages > $1 million Weighting of these loans is generally going to be 50% or 100%. Rules for determining whether loan qualifies for 50% treatment are largely consistent with past practice All past due > 90 days and non-accrual loans within this category, regardless of whether they would otherwise qualify for 50% treatment, are weighted 100% 18

19 RC-R, Part II Summary of changes to RC-R, Part II: Loans and Loans HFS now broken into 4 categories: High volatility commercial real estate exposures All acquisition, development or construction loans not financing 1-4 family properties, the purchase or development of agricultural land, and commercial real estate projects that meet certain loan-to-value and borrower contributed capital criteria Maximum loan-to-value established by regulatory real estate lending standards such as 12 CFR part 365 (state non-member) Required contributed capital is generally 15% Requires looking at ADC loans on individual basis All loans that qualify as HVCRE are 150% weighted 19

20 RC-R, Part II Summary of changes to RC-R, Part II: Loans and Loans HFS now broken into 4 categories: Exposures 90 days or more past due or non-accrual Except loans reported in the previous two categories Generally a 150% risk-weight applies All other loan and lease exposures Generally are risk-weighted according to the previous treatment (no significant changes to these loan types) 20

21 RC-R, Part II Summary of changes to RC-R, Part II: Items 9 & 10 On balance sheet and off balance sheet securitization exposures Exposures arising from mortgage-backed, asset-backed and structured securities with tranching of credit risk Does not apply to securities such as traditional FNMA, FHLMC, GNMA mortgage-backed securities Three approaches for calculating risk-weight of securitization exposures: Simplified Supervisory Formula Approach (SSFA) Gross-Up Approach 1250% risk-weight approach 21

22 RC-R, Part II Summary of changes to RC-R, Part II: Unused commitments Now commitments with an original maturity of one year or less are subject to 20% conversion factor; previously only unused commitments with orig maturity > 1 year were included as the commitments < 1 year were considered 0% However, if commitments are unconditionally cancelable, these have 0% conversion factor Typically includes unused portions of home equity lines of credit (HELOCs) and unused portions of retail credit cards Note that unused commitments are weighted the same as the underlying loan (for instance, a commitment on a HVCRE loan would be weighted 150%) 22

23 Common Mistakes in RC-R, Part II Under-reporting of residential mortgage exposures in item 5.a. Should include HELOCs (1.c.1), first lien (1.c.2.a), junior lien (1.c.2.b.) and some multifamily (1.d.) loans Does not mean they are risk-weighted 50% 23

24 Common Mistakes in RC-R, Part II Reporting of HVCRE exposures in item 5.b. is all across the board Should or could include subset of loans reported as 1.a.2. in schedule RC-C Some banks are reporting none, some banks a small balance, some banks most or all of their 1.a.2. loans 24

25 Common Mistakes in RC-R, Part II Improper risk-weighting of non-accrual loans/ loans past due > 90 days in item 5.c. Almost always should be risk-weighted 150%, unless Some sort of government guarantee (ex. SBA, FHA, loss share) Qualifying collateral, with is typically financial - deposit accounts, investments (i.e., not real estate) Do not include loans that are residential mortgage exposures (5.a) or HVCRE (5.b.) 25

26 Common Mistakes in RC-R, Part II Improper reporting of other assets (item 8) Deducted amounts in Part I are reported in column B Separate account life insurance assets weighted in item 8.a., not included with other assets Accrued interest weighted according to underlying assets 26

27 Common Mistakes in RC-R, Part II Under-reporting of unused commitments (items 18.a, 18.b and 19) Potentially the sum of these three items would agree to total unused commitments reported in items 1.a through 1.e.(3) on Schedule RC-L Some banks are not reporting commitments with original maturity one year or less (prior to 2015 treatment) Reporting of unconditionally cancelable commitments (item 19) has been inconsistent, but does depend on the types of loans made by each institution and how the agreements are worded 27

28 Common Mistakes in RC-R, Part II Also, commitments need to be risk-weighted according to underlying loan. For instance, an unused commitment on an HVCRE loan should generally be weighted 150% (after the conversion amount is applied). b. 28

29 Proposed Regulatory Capital Changes for 2018 Proposed Regulatory Capital Transitions Rule Published in 8/24/2017 Federal Register To take effect for 3/31/2018 Call Report Done in anticipation of agencies proposing simplifications to regulatory capital Extends indefinitely the transition provisions applicable during 2017 for certain regulatory capital deductions and risk weights as well as minority interest requirements 29

30 Proposed Regulatory Capital Changes for 2018 Proposed Regulatory Capital Transitions Rule For non-advanced approaches institutions, would continue 2017 regulatory capital treatment for following items Non-significant investments in capital of unconsolidated financial institutions in form of common stock (item 11.) Significant investments in capital of unconsolidated financial institutions in form of common stock (item 13.) Investments in unconsolidated financial institutions not in form of common stock (item 10.b.) Mortgage servicing assets (item 14.) Deferred tax assets arising from temporary differences (item 15.) 30

31 Proposed Regulatory Capital Changes for 2018 Proposed Regulatory Capital Transitions Rule 2017 treatment includes: Deducting from capital 80% of the amount of any of these items not includable in regulatory capital (was supposed to increase to 100% deduction in 2018) Applying 100% risk weight to MSAs, temporary difference DTAs and significant investments in capital of other institutions (was supposed to increase to 250% risk weight in 2018) Also maintaining 2017 treatment of minority interest 31

32 Proposed Regulatory Capital Changes for 2018 Proposed Simplifications to the Capital Rule Pursuant to Economic Growth and Regulatory Paperwork Reduction Act (EGRPRA) Published on 9/27/2017 No effective date given When and if implemented, would supersede previous rule and transitions rule on previous slides Most changes would apply to all non-advanced approaches institutions 32

33 Proposed Regulatory Capital Changes for 2018 Proposed Simplifications Rule Would replace definition of HVCRE (high volatility commercial RE) with more straightforward HVADC (high volatility acquisition, development or construction) More than 50 percent of loan proceeds used for ADC activities Still exempts 1-4 family, community development, farmland, and permanent loans Clarifies that permanent loan must have clearly identified ongoing source of repayment sufficient to service amortizing principal and interest payments aside from sale of the property No longer contains 15% contributed capital exemption Thus more loans anticipated to be HVADC than were HVCRE Now will be risk-weighted 130% instead of 150% 33

34 Proposed Regulatory Capital Changes for 2018 Proposed Simplifications Rule MSAs and temporary difference DTAs: Deduct any amount that exceeds 25% of CET1 (rather than 10%) Risk-weight the non-deducted amounts at 250% Investments in capital of unconsolidated institutions Deduct any amount that exceeds 25% of CET1 (rather than 10%) Risk-weight the non-deducted amounts as follows 100% for equity exposures less than 10% of total capital 300% or 400% for equity exposures > 10% of total capital 100% for debt instruments not past due SSFA, gross-up or 1250% approach for securitization exposures Minority interest limited to 10% of parent bank s CET1, Tier 1 and total capital elements 34

35 Michael Gordon, CPA Director, Mauldin & Jenkins, LLC Alison Wester, CPA Partner, Mauldin & Jenkins, LLC