December 2024 Financial Reporting, Governance, and Risk Management 

FDIC releases third quarter banking profile

On Dec. 12, 2024, the Federal Deposit Insurance Corp. (FDIC) released the quarterly banking profile covering the third quarter of 2024. FDIC-insured banks and savings institutions reported $65.4 billion third quarter net income, a decrease of $6.2 billion (8.6%) from the prior quarter. The decrease in net income was driven primarily by nonrecurring items – in particular, $10 billion in one-time gains on equity security transactions in the prior quarter, partially offset by strong net interest income in the third quarter.

In an accompanying statement FDIC Chair Martin Gruenberg observed that the banking industry demonstrated continued resilience, highlighting increased net interest income and net interest margin, and generally favorable asset quality despite modest deterioration and persisting weakness in the credit card, auto, commercial real estate (CRE), and multifamily housing portfolios.

The report provides these additional statistics:

• Net interest income totaled $176.2 billion in the third quarter of 2024, an increase of 2.6% compared to $171.7 billion in the prior quarter, and an increase of 0.6% compared to $175.2 billion in the third quarter of 2023. Net interest margin increased 7 basis points in the third quarter to 3.23%.
• Aggregate annualized return-on-assets ratio was 1.09% in the third quarter, compared to 1.17% in the third quarter of the prior year.
• Total loans and lease balances increased $76.9 billion (0.6%) from the prior quarter, and $275.5 billion (2.2%) from the prior year. All major loan categories except for construction and development and commercial and industrial loans experienced quarter-over-quarter growth, notably consumer loans, one- to four-family residential loans, nonfarm residential CRE loans, and multifamily CRE loans.
• Domestic deposits increased $194.6 billion (1.1%) from the prior quarter. Savings and transaction deposits increased from the prior quarter, while small time deposits and brokered deposits both declined. The overall change was driven by an increase in estimated uninsured deposits, which went up $197.3 billion, or 2.7%.
• Unrealized losses on securities totaled $364 billion in the third quarter, a decrease of $148.9 billion (29%) from the prior quarter. This decrease was primarily driven by a significant decline in longer-term interest rates, resulting in an increase in the value of securities on banks’ books.
• Community banks’ third quarter net income totaled $6.9 billion, an increase of $436.3 million, or 6.7%, from the prior quarter. Net interest and noninterest income increased by $574.5 million (2.7%) and $48.1 million (0.9%) respectively, partially offset by increases in noninterest expense of $141.6 million (0.8%) and provision expense of $128.5 million (13.9%).

The total number of FDIC-insured commercial banks and savings institutions that filed call reports declined by a net of 21 to 4,517 at the end of the third quarter. During the quarter, three banks were sold to credit unions, one bank closed voluntarily, and 18 institutions merged with other banks. One bank opened, and no banks failed. The number of banks on the FDIC’s problem bank list increased by 2 to 68 at quarter-end, representing 1.5% of all banks. Total assets held by problem banks increased to $87.3 billion, an increase of $3.9 billion from prior quarter.

Credit unions issue third quarter performance data

On Dec. 5, 2024, the National Credit Union Administration (NCUA) released its quarterly performance data summary for federally insured credit unions based on call report data submitted for the third quarter of 2024. Highlights include the following statistics:

• The number of federally insured credit unions declined to 4,499, compared to 4,533 in the prior quarter and 4,644 in the third quarter of the prior year, reflecting long-running industry consolidation trends. Also in the third quarter, 2,820 federal credit unions and 1,679 federally insured, state-chartered credit unions existed.
• Total assets reported for federally insured credit unions totaled $2.31 trillion, an increase of $82 billion (3.7%) over the year ending in the third quarter 2024.
• Annualized net income totaled $15.8 billion, a decrease of $0.8 billion (4.7%) compared to the first three quarters of the prior year.
• Annualized return on average assets was 69 basis points, compared to 76 basis points in the first three quarters of the prior year.

The credit union system’s net worth totaled $252.9 billion, an increase of $14 billion (5.8%) over the year. Aggregate net worth ratio increased to 10.94% from 10.72% in the third quarter of the prior year. The NCUA noted that these metrics exclude the current expected credit loss (CECL) transition provision beginning in the first quarter of 2023.

OCC publishes semiannual risk perspective for fall 2024

On Dec. 16, 2024, the Office of the Comptroller of the Currency (OCC) released its semiannual risk perspective, summarizing the foremost issues facing the federal banking system. The report denotes credit, market, operational, and compliance risks as key risk themes and focuses on the increasing trend in external fraud activity targeting consumers and the federal banking system.

Fed publishes semiannual supervision and regulation report

On Nov. 21, 2024, the Federal Reserve (Fed) issued its semiannual report on the stability and vulnerabilities of the U.S. financial system, based on data collected through Oct. 2, 2024. It noted the continued resilience of the banking system as a whole, citing sound asset quality, stable liquidity and funding conditions relative to prior year, and strong capital levels above regulatory requirements for most banks.

However, the report also highlighted continued vulnerabilities arising from commercial real estate (CRE) lending and certain consumer lending sectors. While the total loan delinquency rate remained under 1% in the reported period, the CRE delinquency rate rose to the highest rate observed since 2014, with particular stress observed for multifamily loans. CRE deterioration was concentrated at large banks, but smaller banks that generally hold a larger share of their assets in CRE loans also experienced higher delinquencies. Consumer loan delinquencies decreased in the second quarter of 2024, but rose across the first half of 2024 overall, and remained elevated relative to the same period in the prior year.

The report included an overview of the Fed’s current supervisory priorities, among them credit risk, liquidity risk management preparedness and testing, and cybersecurity. Fed examiners will continue to assess bank cybersecurity risk management, governance, and controls, and monitor services performed by third party service providers. The report also includes further details on the Fed’s supervisory approach for large financial institutions, and community and regional banking organizations.

FDIC extends comment period on bank-fintech recordkeeping proposal

On Nov. 18, 2024, the FDIC announced that it is extending the comment period for its proposed rule on recordkeeping for custodial deposit accounts by 45 days. Public comments, initially requested by Dec. 2, 2024, are now due by Jan. 16, 2025.

Citing the risks associated with arrangements between FDIC-insured depository institutions (IDIs) and nonbank third parties to provide IDI deposit products and services, the proposal would impose new recordkeeping requirements for custodial deposit accounts with transactional features. The proposal would require IDIs to maintain records of beneficial ownership, balance attributable to each beneficial owner, and ownership category. IDIs would also be required to implement internal controls over the accuracy of account balances, including account reconciliations at least daily.

Agencies issue third request for input on reducing regulatory burden

On Dec. 3, 2024, the Fed, FDIC, and OCC announced the third of four planned notices requesting public comment on reducing regulatory burden for supervised financial institutions in accordance with the Economic Growth and Regulatory Paperwork Reduction Act of 1996. In this latest notice, the agencies request comments in the following three categories: rules of procedure, safety and soundness, and securities.

Comments are due Jan. 27, 2025.

CFPB issues final rule to supervise certain large payment providers

On Nov. 21, 2024, the Consumer Financial Protection Bureau (CFPB) issued a final rule that subjects certain large nonbank entities that engage in digital consumer payment applications to CFPB supervision. Newly covered entities under the final rule will be subject to the same standards as other financial institutions and entities under the CFPB’s purview.

The final rule establishes a volume threshold of at least 50 million covered consumer payment transactions annually to define a covered large nonbank, which represents an increase from the proposed rule which set forth a 5 million transaction volume threshold. Covered transactions include consumer financial products and services such as “digital wallets,” payment and funds transfer apps, “person-to-person” or “peer-to-peer” payment apps, and other funds transfer and “payment wallet” functionalities designed to allow consumers make payments to other individuals for “personal, family, or household purposes.”

The final rule is effective Jan. 9, 2025.

CFPB proposes rule for data brokers

On Dec. 3, 2024, the CFPB issued a proposal that would qualify data brokers selling certain sensitive consumer information as “consumer reporting agencies.” This designation would subject these data brokers to accuracy requirements, consumer access requirements, and safeguarding requirements under the Fair Credit Reporting Act (FCRA). If enacted, the proposal would subject data brokers to limits on data sharing and permissible use of consumer reports, require data brokers to provide consumers with “clear and conspicuous disclosure” on how their report will be used, and allow consumers to revoke their consent.

Comments are due March 3, 2025.

FinCEN issues alert on deepfakes targeting financial institutions

On Nov. 13, 2024, the Financial Crimes Enforcement Network (FinCEN) issued an alert on the increased prevalence of identity fraud perpetrated using deepfake media – for example, use of altered identification documents or documents produced by generative AI to bypass a financial institution’s customer identification and verification protocols. The alert includes several indicators that could assist a financial institution to detect the use of deepfake identity documents, and indicators that could indicate a high-risk account requiring heightened due diligence, including:

• Inconsistencies among a customer’s identity documents, or between identity documents and other customer profile information.
• An identification photo that matches one in an online gallery of faces produced by generative AI, found by reverse image search or by deepfake detection software.
• Use of a third-party webcam plugin for a live verification check, or customer refusal to use multifactor verification.
• Customer access from an IP address inconsistent with the customer’s profile.
• Seemingly coordinated behavior amongst similar accounts.
• High payment volume to “potentially higher-risk payees, such as gambling websites or digital asset exchanges,” frequent chargebacks or rejected payments, or other unusual transaction or withdrawal patterns.

OFR report to Congress highlights CRE and cybersecurity as key financial stability risks

On Nov. 20, 2024, the Office of Financial Research (OFR) published its annual report to Congress identifying potential vulnerabilities that could lead to instability in the U.S. financial system, covering the fiscal year ending Sept. 30, 2024. The report observes that most vulnerabilities are “largely unchanged” from the prior year, such as credit risk in commercial real estate debt and vulnerabilities tied to rising delinquency and default rates for debt of subprime households. In addition, the report observes certain structural vulnerabilities inherent to the system, such as the potential for widespread and rapid runs disrupting the flow of credit.

The report also highlights increased or updated coverage of three elements of the risk assessment: vulnerabilities related to technology integrated throughout the report to reflect the pervasive nature of cybersecurity and technology-related risks, the designation of the design of the federal government’s debt ceiling as a vulnerability, and the risk resulting from data gaps. Specifically, the report highlights a lack of data from uninsured deposits at FDIC-insured financial institutions, activities of some nonbank financial institutions such as private lending, and visibility into dealer margining practices.

FASB issues guidance on induced conversions of convertible debt instruments

Given this guidance applies to issuers of convertible debt, we recognize that most financial institutions likely will not be affected. On Nov. 26, 2024, the FASB issued Accounting Standards Update (ASU) 2024-04, “Debt – Debt With Conversion and Other Options (Subtopic 470-20): Induced Conversions of Convertible Debt Instruments,” to clarify whether certain settlements of convertible debt instruments should be accounted for as induced conversions. Prior to the issuance of the ASU, U.S. GAAP did not address induced conversions of convertible debt that does not require the issuance of equity securities. Under the amendments, to account for a settlement as an induced conversion, an inducement offer is required to provide the debt holder with, at a minimum, the consideration (in form and amount) issuable under the conversion privileges provided in the terms of the instrument. An entity would assess the qualifying criteria as of the date of the inducement offer. The amendments do not modify the other existing criteria to account for a settlement as an induced conversion.

The amendments are effective for annual reporting periods beginning after Dec. 15, 2025, and interim reporting periods within those annual reporting periods. Early adoption is permitted for all entities that have adopted the amendments in ASU 2020-06, “Debt – Debt With Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity.” The amendments permit an entity to apply the guidance on either a prospective or a retrospective approach.

FASB proposes practical expedient for credit losses on Topic 606 receivables for private companies

We recognize this proposal generally will not be applicable for most financial institutions; however, it might be of interest for borrowers – and it is a change to the CECL model, so we feel compelled to include. The FASB on Dec. 3, 2024, issued a proposed ASU, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses for Accounts Receivable and Contract Assets for Private Companies and Certain Not-for-Profit Entities,” to address feedback received from stakeholders on the costly and complex challenges of applying the credit losses guidance to current accounts receivable and current contract assets arising from revenue transactions for private companies and not-for-profit entities. Stakeholders noted that the ability to consider collections after the balance sheet date in estimating expected credit losses would significantly reduce complexity for preparers while still providing investors and other financial statement users with decision-useful information. To address this feedback, the proposal would provide private companies and certain not-for-profit entities a practical expedient and an accounting policy election when estimating expected credit losses for current accounts receivable and current contract assets arising from transactions accounted for under Topic 606.

Comments are due Jan. 17, 2025.

FASB proposes effective date clarification for expense disaggregation disclosures

On Nov. 25, 2024, the FASB issued a proposed ASU, “Income Statement – Reporting Comprehensive Income – Expense Disaggregation Disclosures (Subtopic 220-40): Clarifying the Effective Date,” to provide clarification to the interim effective date for ASU 2024-03, “Income Statement – Reporting Comprehensive Income – Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses,” for public business entities that do not have an annual reporting period that ends on Dec. 31.

The proposed ASU clarifies all public business entities are required to adopt the guidance in annual reporting periods beginning after Dec. 15, 2026, and interim periods within annual reporting periods beginning after Dec. 15, 2027.

Comments were due Dec. 10, 2024

FASB proposes accounting guidance for government grants

On Nov. 19, 2024, the FASB issued a proposed ASU, “Government Grants (Topic 832): Accounting for Government Grants by Business Entities.” Readers might recall that recipients of government grants during the pandemic dealt with how to account for these grants. The FASB took on a project to address the diversity in practice. While not the most prevalent recipients, certain financial institutions do receive government grants. The proposed ASU generally conforms with the guidance in International Accounting Standard 20 with some targeted improvements to establish guidance on how to recognize, measure, and present a government grant, including grants related to an asset and grants related to income. Grants in the scope include transfers of monetary assets and tangible nonmonetary assets from a government as well as forgivable loans from a government. related to income. Grants in the scope include transfers of monetary assets and tangible nonmonetary assets from a government as well as forgivable loans from a government.

The proposed amendments would require a consistent initial recognition threshold for all government grants. A government grant would be initially recognized when it is probable that a business entity will comply with the conditions attached to the grant, and the grant will be received. Disclosure about the nature of the government grant received, the accounting policies used to account for the grant, and significant terms and conditions of the grant would also be required under the proposal.

The amendments would require a business entity to apply the guidance either prospectively to a government grant that either is not complete or is entered into after the effective date, or retrospectively. Under prospective approach, no prior period results would be restated and there would be no cumulative-effect adjustment.

Comments are due March 31, 2025.

For more information regarding the proposed ASU see the Crowe article, “FASB Proposes Guidance on Government Grants for Businesses.”

FASB issues revenue recognition post-implementation review report

On Nov. 25, 2024, the FASB issued “Post-Implementation Review – Revenue From Contracts With Customers (Topic 606).” It includes descriptions of the ten most challenging areas identified by stakeholders, activities of the Transition Resource Group, and overall conclusions. The report provides details of the post-issuance date implementation monitoring, post-effective date evaluation costs and benefits and a summary of research and reporting.

FASB requests comments on key performance indicators

As part of the FASB’s research project on Nov. 14, 2024, it issued an invitation to comment on financial key performance indicators (Financial KPIs) for business entities. The request defines a Financial KPI as “a financial measure that is calculated or derived from the financial statements and/or underlying accounting records that is not presented in the GAAP financial statements.” Responses will assist the board to decide if it will add a project on Financial KPIs to its technical agenda, and its objective and scope.

Comments are due April 30, 2025.

SEC commissioners announce resignations

In November, SEC Chair Gary Gensler and Commissioner Jaime Lizárraga announced their planned departures, with Gensler’s resignation effective Jan. 20, 2025, and Lizárraga’s on Jan. 17, 2025. President-elect Donald Trump reportedly intends to nominate former SEC Commissioner Paul Atkins to replace Gensler, subject to Senate confirmation.

SEC shares enforcement results for fiscal year 2024

On Nov. 22, 2024, the SEC released an overview of enforcement actions and results in fiscal year 2024. The agency filed 583 enforcement actions and obtained orders for $8.2 billion in financial remedies. The report includes notable cases and enforcement themes as well as statistics for the fiscal year.

IM staff releases statement on FICC registered fund margin framework

On Nov. 22, 2024, the Division of Investment Management (IM) released a statement on recently approved amendments to the Fixed Income Clearing Corporation (FICC) rules on separate calculation, collection, and holding of margin requirements for proprietary transactions of direct participants and indirect participant transactions. The IM staff states its position that the amended rules “would allow a registered fund’s margin to be posted at FICC consistent with the FICC registered fund margin framework” and notes that its “view applies equally to tri-party and bilateral repurchase agreement transactions.”

PCAOB issues staff report on 2025 inspection priorities

On Dec. 9, 2024, the PCAOB issued staff report “Spotlight: Staff Priorities for 2025 Inspections and Interactions With Audit Committees.” It shares key risks and considerations for auditors and questions for audit committees to consider in their oversight role. Questions for audit committees address internal control over financial reporting, materiality, auditor use of technology, audit evidence, and turnover on the engagement team.

The PCAOB shared that the financial sector will be one of the industries prioritized. There will be continued emphasis on industries with specialized accounting, those that may be negatively impacted by uncertainties and volatility in the economic and geopolitical environment, those that are in sectors where inspectors have previously found a higher number of deficiencies, and those that may have a heightened going concern risk. Focus also will be on companies engaging in merger and acquisition activities or business combinations, broker-dealers that file compliance reports, and broker-dealers that provide customers with various investment opportunities.

Identified emphasis areas for 2025 include, but are not limited to:

• Prior execution challenges
• New auditing standards
• Critical audit matters
• New technology, including generative AI, at public companies and broker-dealers
• Crypto assets

PCAOB publishes reminders about audit committee communications

The PCAOB released on Dec. 4, 2024, a staff publication, “Audit Focus: Audit Committee Communications,” intended for auditors of smaller public companies, offering short and actionable items related to auditor communications with audit committees. It has reminders about certain communications, common deficiencies in required communications, and good practices observed in audit committee communications.

PCAOB spotlights auditor communications about illegal acts

The PCAOB, on Nov. 12, 2024, published “Spotlight: Auditor Responsibilities for Detecting, Evaluating, and Making Communications About Illegal Acts.” It emphasizes the importance of auditors’ procedures in identifying possible illegal acts, due to the significant impact such acts can have on financial statements. It outlines the responsibilities of auditors under federal securities laws and PCAOB standards, which include detection and risk assessment. When auditors become aware of a possible illegal act, PCAOB standards require them to understand the nature and circumstances of the act and evaluate its effect on the financial statements and relevant disclosures. This involves inquiries and management response. Auditors are required to timely communicate possible or actual illegal acts to management, the audit committee, and other parties, including the SEC in certain circumstances. Auditors would also need to consider the impact on the auditor’s report. Audit committees and management might find this document useful in understanding the scope of auditor responsibilities regarding illegal acts.

PCAOB adopts new requirements for firm and engagement metrics and firm reporting

On Nov. 21, 2024, the PCAOB adopted new requirements regarding public reporting of standardized firm and engagement metrics, and a set of amendments related to audit firm reporting. Under the new requirements, public accounting firms registered with the PCAOB that audit one or more issuers that qualify as an accelerated filer or large accelerated filer will be required to publicly report specified metrics relating to such audits and their audit practices on an annual basis. Regarding firm reporting, the amendments improve the PCAOB’s annual and special reporting requirements by providing more complete, standardized, and timely information by registered firms. The enhanced reporting covers financial information, governance information, network relationships, special reporting, cybersecurity, and quality control policies and procedures.

The amendments and new requirements incorporate changes resulting from feedback received on the April 2024 proposals. The requirements will be phased in and are subject to approval by the SEC.

CAQ releases annual transparency report

On Nov. 18, 2024, the CAQ and Ideagen Audit Analytics issued the “2024 Audit Committee Transparency Barometer,” which tracks proxy disclosures of S&P Composite 1500 companies to evaluate transparency of audit committee oversight of the external auditor and other financial reporting topics. The data gathered for this 11th annual report shows progress in disclosures over the years and reveals the continued need for audit committees to improve their disclosures each year.

The findings reveal a continued trend of increasing disclosures in key areas such as cybersecurity and environmental, social, and governance (ESG). A new question was added this year related to disclosure of a skills matrix for boards of directors. The report disclosed that 85% of S&P 500 companies and 75% of S&P Midcap companies included such disclosure. Furthermore, the publication provides highlights of the results, a summary of disclosure rates, examples of effective disclosures, a sample leading practice audit committee matters and report, and questions to consider when preparing audit committee disclosures.

CAQ issues primer on ESG reporting

In December 2024 the CAQ issued “ESG Reporting: A Primer on Key Regulatory Reporting Requirements for U.S. Based Entities,” to provide an overview of key regulatory ESG reporting requirements and standards, ongoing developments that should be monitored, and practical implementation considerations to help navigate the complex and rapidly changing ESG reporting environment. The report describes California climate laws, SEC climate rules, the European Union corporate sustainability reporting directive, and International Financial Reporting Standards (IFRS) sustainability disclosure standards.