Community Banks Can Adopt The New Short Form Call Report — But Will They?
On January 9, 2017, the federal banking regulators issued a joint notice for the final implementation of the new short form call report (FFIEC Form 051), which will be available to most banks with under $1 billion in total assets beginning March 31, 2017.
Adopting the Form 051 is optional and can be done at any quarter this year, if desired.
Regulators have estimated that the new form reduces the regulatory burden of preparing the quarterly call report to fewer than 45 hours, compared to the nearly 75 hours the report takes under the current Form 041. But, as I have previously discussed, the actual time saved by most community banks is expected to fall far short of this projection, leaving many bankers wondering whether it is worth the effort to adopt the form.
Short form call report eligibility requirements
To be eligible for Form 051, an institution must only have domestic offices, and its total assets must be less than $1 billion. The measurement date for determining whether a bank has met the $1 billion threshold is June 30 of each year, and is effective starting March 31 of the following year.
However, the guidelines give federal and state bank regulators broad authority to require banks below $1 billion to file the traditional Form 041 in lieu of the new short form based on supervisory needs, particularly when banks are engaged in practices that are considered to be complex, specialized, or high risk. These exceptions are supposed to be infrequent, but without specific criteria in place to guide the determinations, some banks may be left wondering how their regulators will interpret the new filing option.
New form may ease call report reviews and reduce the Schedule RC-C, Part II burden
Though the amount of time preparers spend drafting the call report is not likely to dramatically decrease, the Form 051 may make it easier for board members and upper management to complete their required reviews prior to filing, since many of the superfluous schedules and line items will have been eliminated. New preparers learning to complete the call report for the first time may also have an easier time completing schedules and referencing the new, shorter call report instructions.
In addition, the much loathed Schedule RC-C, Part II, which reports loans made to small businesses and small farms, has been reduced from quarterly filing to semi-annual filing on Form 051. This is good news for many banks, as there have been frequent complaints that preparing this schedule is particularly tedious, as it often requires manual grouping loan data.
Banks may initially require assistance for New Schedule SU
In place of many of the schedules in the Form 041, regulators have created a new Schedule SU – Supplemental Information for the Form 051 that contains a series of yes and no questions that banks will be required to answer every quarter. Unfortunately, several of the topics covered in this schedule are often misunderstood, and therefore underreported by community banks today.
For example, the Form 051 asks if the institution has any derivative contracts. Many community banks would quickly assume that the answer is no. But for banks that sell residential loans to the secondary market, the commitment to sell those loans could be considered a derivative contract, and so may the interest rate lock entered into with the customer prior to closing.
In my observation, the Schedule SU is already leading to confusion in interpreting the new form, and banks may initially need assistance answering the new supplemental questions related to derivatives, mortgage banking, and loan servicing.
Other considerations before converting
Banks have expressed concerns over the time and cost needed to convert to the new form, as many remain unsure how their call report preparation software will handle this change and what additional fees may apply. Fortunately, since the Form 051 is based on Form 041, most of the line numbers and instructions remain unchanged. This should help to mitigate the time and cost needed to begin preparing the new form.
Banks that are close to the $1 billion cutoff threshold, and banks that are planning for an upcoming merger or acquisition that could push them over the threshold, may want to forego implementation in order to avoid having to reconvert to the Form 041 down the road. Consolidated entities with more than $1 billion in total assets will complete the Federal Reserve Form FRY-9C, which is largely based on the data contained in the Form 041. So banks that are part of multi-bank holding companies should consult with their parent companies to determine whether to file Form 051 or Form 041.
Conversion to Form 051 is not required
For banks that want additional time to review the Form 051, there is no rush to convert on March 31. Adopting the Form 051 is optional and can be done at any quarter this year, if desired. Starting in 2018, banks will continue to have the option to file Form 051 or Form 041 and should make the determination annually when they file their March 31 call report. If your institution has any concerns about the conversion process, a “wait and see” approach may be your best course of action.
It’s unclear if banks will rush to adopt the new Form 051; it does little to address the areas of the call report that I have seen banks consistently struggle to prepare, such as the complexity of calculating regulatory capital on Schedule RC-R. It will also likely save preparers very little time per quarter.
For those that choose to implement the new form, I urge you to carefully review the instructions for Schedule SU. If you have questions about the new reporting requirements or implementation, CliftonLarsonAllen is here to help.