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This exclusive 3-part deep-dive into accounting for financial institutions continues to be the gold standard in accounting training for bankers!

Accounting 101: Unique Depository Accounting Principles for Financial Institutions

Although there are a number of unique accounting issues for depository institutions this 3-part series focuses on the following four (4) topics.

1. Accounting for Marketable Securities
2. Accounting for Non-Refundable Loan Origination Fees and Costs
3. Recording OREO on the Books and Removing OREO From the Books
4. Off-Balance Sheet (OBS) Disclosures

(1) Accounting for Marketable Securities

Accounting 101, the first installment in the 3-part bootcamp, provides realistic examples of how to account for transactions within the three (3) accounting “buckets” of securities – held-to-maturity, trading and available-for-sale securities.

The examples show the accounting for securities “sold” within each bucket; the recording of mark-to-market holding gains or losses on all securities; the intricacies of accounting for “rare” transfers of securities from “bucket” to bucket; and what values are used to carry securities not sold on the balance sheets and where unrealized gains and losses are presented on the balance sheet or on the income statement.

The accounting examples presented also show that the balance-sheet approach to accounting for marketable securities often can distort the reported net income.

As lending slows down, more securities are acquired by depository institutions. Securities have become the second largest asset on the balance sheet of depository institutions and security balances are growing. As securities become more relevant, this section becomes more important for serious boot camp attendees.

(2) Accounting for Non-Refundable Loan Origination Fees and Costs

This section illustrates how the “up front” non-refundable fees and origination costs (e.g. attorney fees, appraisal costs, insurance premiums, broker’s fees) are netted and then displayed with the loan amount and accounted for (deferred) over the life of the loans. Actual journal entries are provided to show accounting for the transactions and the avoidance of recording the net amounts immediately into income.

Also illustrated is the effective yield method for transferring the net deferred origination fees and costs from the balance sheet to the income statement over the life of the loan using the “real” or effective rate of interest.

Specific examples of the types of direct origination costs are also presented along with the related amortization methods used for the various loan types (e.g. negative amortizing loans; bi-weekly mortgages; revolving lines of credit arrangements; overdraft protection loans, home equity loans, ADC (acquisition, development and construction) loans.

This important part of loan accounting is an excellent introduction or review on how to properly use SFAS No. 91 (ASC 310) and is a “must” for all bootcamp attendees.

(3) Recording OREO on the Books and Removing OREO From the Books

This section explains how a loan could “morph” into a foreclosed asset (OREO) and eventually be sold or otherwise disposed of. The accounting for putting OREO on the books and the methods used to remove OREO from the books (full accrual, cost recovery, deposit method) are illustrated in detail. How to use SFAS No. 66 (ASC 360) and how to apply the lower of cost or market (LOCM) rule is covered.

During slow, recessionary economic periods of time more and more loans become uncollectible. Depository institutions become forced to seize the loan collateral (usually real estate). When the bank takes title to the real estate collateral it is called “OREO.” During such recessionary periods the asset called OREO become a larger share or percent of the total assets (after loan and security balances).

(4) Off-Balance Sheet (OBS) Disclosures

OBS disclosures refer to footnote information, particularly about financial instruments with risks not on the basic financial statements, and concentrations of credit risk.

In recent years, more and more financial activities can not be recorded in the traditional manner on the balance sheet or income statement. Instead, information about such transactions (e.g. derivative transactions, future commitments, contingencies) are simply disclosed in the footnotes to the financial statements.

Bank Accounting 101 also includes a brief analysis of SFAS 105 (ASC 825- 50) and what it is attempting to accomplish. Illustrations of disclosure footnotes including fair value issues addressed in SFAS 107 (ASC 825-10) are also carefully analyzed.

Often, a bank’s largest dollar amounts are included in the OBS footnote disclosures. This section’s coverage is an excellent display of the disclosures and is needed information for all bootcamp attendees.

Accounting 201: Illustrative Bank GAAP Financial Statements for Financial Institutions

Accounting 201 provides attendees with a concise overview of GAAP financial statements [Balance Sheets, Income Statements, Statements of Cash Flows, Statements of Changes in Stockholders’ Equity and Statements of Accumulated Other Comprehensive Income or Loss (AOCI) as well as the related notes to the GAAP financial statements].

It also displays the recently revised auditor’s report, (including the recently required “critical audit matters” section of the report), Other Supplemental Data, and Management’s Discussion and Analysis (MD&A).

Illustrative examples of the essential GAAP presentation data (Statements and notes) are explained. An overview of the Balance Sheet, Income Statement and notes provides attendees with an essential basic knowledge of typical GAAP financial statement display for all depository institutions.

This overview-type, “big picture” presentation is an excellent preview for Bootcamp Part 3, which focuses on the elements (captions) of the financial statements in detail. It also pinpoints in the financial statements and notes the accounting issues addressed in Part 1 of this 3-part series.

Accounting 301: In-Depth Financial Statement Elements (Assets, Liabilities, Income, Equity)

Bank Accounting 301 of this series is a natural, logical follow-up to Accounting 201.

Accounting 301 covers the details behind the financial statement items presented in the previous 201 material. It uses illustrations of the Accounting 201 financial statements and provides explanations of items such as:

• Composition of Cash and Due from Banks
• The Right of Setoff for Receivables and Payables
• Money Market Investments: Interest Bearing Deposits; Fed Funds Sold; Securities
• Purchased Under Agreement to Re-Sell (“Reverse Repos”)
• Investments (HTM, AFS and Trading Securities)
• Investments Purchased at Discounts or Premiums
• Security Gains and Losses – Realized and Unrealized
• Loans and Loan Accounting Issues
• Overview of Loan Reserve Activity (Allowance for Credit Losses)
• Property Plant Equipment (PP&E)
• Accrued Interest Receivable
• Other Assets
• Deposits – Demand and Time
• Official Checks
• Fed Funds Purchased and Securities Sold Under Agreement to Re-Purchase (“Repos”)
• Accrued Interest Payable
• Other Liabilities
• Equity Accounts
• Income Statement Items

Newcomers to GAAP financial statements and related notes of depository institutions will take away a wealth of knowledge relating to depository institution accounting.

Experienced banking personnel (accounting, finance, treasury, auditing, and others) will be provided with a valuable update and refresher.

The takeaways from this 3-part Bank Accounting webinar bootcamp will give the attendees a solid foundation for dealing with GAAP financial statements and the unique portions related to their own depository institution.