On September 17, 2019, the SEC issued a proposed rule to update the statistical disclosures that bank and savings and loan registrants provide to investors and to eliminate disclosures that overlap with SEC rules, US generally accepted accounting principles (GAAP), or international financial reporting standards (IFRS).
Comments are due on or before December 2, 2019.
Background
Industry Guide 3 (Guide 3), Statistical Disclosure by Bank Holding Companies, was originally published to provide a convenient reference to the statistical disclosures to be included in registration statements and other documents filed by bank holding companies. Guide 3 requires disclosure in seven areas:
- Item I–Distribution of assets, liabilities, and stockholders’ equity; interest rates and interest differential
- Item II–Investment portfolios
- Item III–Loan portfolios
- Item IV–Summary of loan loss experience
- Item V–Deposits
- Item VI–Return on equity and assets
- Item VII–Short-term borrowings
Guide 3 was published in 1976, with the last substantive revision in 1986. Since that time, the financial services industry has evolved–the SEC has issued updated disclosure requirements and the Financial Accounting Standards Board (FASB) has issued accounting standards updates that changed the reporting requirements.
As a result, some of the disclosures called for by Guide 3 are now duplicative or overlap with subsequently adopted SEC rules, GAAP, and IFRS. On March 1, 2017, the SEC published a request for comment to obtain public input about how and to what extent the Guide 3 disclosures could be improved and whether or not they should be codified as SEC rules. This proposed rule takes into account those comments received.
Key Provisions
Consistent with the SEC’s recent efforts to streamline its disclosure requirements, the SEC’s proposal—Subpart 1400 of Regulation S-K—would rescind Guide 3 and update and codify certain Guide 3 disclosures that don’t overlap with current SEC rules, GAAP, or IFRS. The proposed rule is intended to improve the disclosure requirements for both investors and registrants and to mitigate uncertainty of required disclosures in SEC filings.
The proposed Subpart 1400 of Regulation S-K, Disclosure by Bank and Savings and Loan Registrants, would be organized in a similar manner as Guide 3 as follows:
- Item 1401–General instructions
- Item 1402–Distribution of assets, liabilities, and stockholders’ equity; interest rates and interest differential
- Item 1403–Investments in debt securities
- Item 1404–Loan portfolio
- Item 1405–Allowance for credit losses
- Item 1406–Deposits
Scope
The proposed rule would apply to banks, bank holding companies, savings and loan associations, and savings and loan holding companies. The proposed rule would also apply to both domestic and foreign registrants.
Guide 3 currently calls for five years of loan portfolio and loan loss experience data and three years of all other information–registrants with less than $200 million of assets or $10 million of net worth are allowed to only present two years of the information. Under the proposed rule, the reporting periods called for by Guide 3 would be modified to be consistent with the registrant’s financial statements annual reporting requirements under Regulation S-X requirements, which are generally two years of balance sheets and three years of income statements. As an exception, Item 1405 Disclosures–Allowance for Credit Losses would still require each of the last five fiscal years for initial public offering registration statements.
Distribution of Assets, Liabilities, and Stockholders’ Equity; Interest Rate and Interest Differential
To provide investors with useful information in regard to the change in net interest earnings and the sources of funding, the proposed rule would codify all of the assets, liabilities, and stockholders’ equity; interest rate and interest differential disclosures called for by Item I of Guide 3. The proposed rule would require further disaggregation of the categories of interest-earnings assets and interest-bearing liabilities.
Investment Portfolio
The proposed rule would codify the weighted average yield disclosure for each range of maturities by category of debt securities called for by Item II of Guide 3. The proposed rule would only apply to debt securities that aren’t carried at fair value through earnings.
The Guide 3 disclosure requirements to disclose book value information, the maturity analysis of book value information, and the disclosures related to investments exceeding 10% of stockholders’ equity wouldn’t be codified by the proposed rule. The SEC has proposed not to codify these disclosure requirements because they substantially overlap with current GAAP and IFRS disclosure requirements.
Loan Portfolio
The proposed rule would codify the maturity by loan category disclosure called for by Item III of Guide 3, but would require the disclosed categories to match the loan categories disclosed in the registrants’ GAAP or IFRS financial statements. The proposed rule would also codify the Guide 3 instruction stating that the determination of maturities should be based on contractual terms.
The proposed rule wouldn’t codify the remaining loan category disclosures called for by Item III of Guide 3, including disclosure of potential problem loans, because they overlap with, or are reasonably similar to, other disclosures already required by SEC rules, GAAP, or IFRS.
Allowance for Credit Losses
The proposed rule would codify the ratio of net charge-offs during the period to average loans outstanding and the breakdown of the allowance disclosures called for by Item IV of Guide 3. Under the proposed rule, the disclosure of the net charge-off ratio would be disaggregated based on the loan categories required to be disclosed in the registrant’s GAAP or IFRS financial statements. A tabular breakdown of the allowance would be required for registrants applying or reconciling to GAAP.
The proposed rule would also require the disclosure of the following credit ratios, along with each component used in the calculation:
- Allowance for credit losses to total loans
- Nonaccrual loans to total loans
- Allowance for credit losses to nonaccrual loans
- Net charge-offs to average loans
The proposed rule wouldn’t codify the analysis of loss experience disclosure or any other disclosures called for by Item IV of Guide 3 as they overlap with, or are reasonably similar to, other disclosures already required by SEC rules, GAAP, or IFRS.
Deposits
To provide transparency into a registrant’s source of funding and liquidity risk profile, the proposed rule would codify the majority of the deposit disclosures called for by Item V of Guide 3 with some revisions. The proposed rule would require a disclosure of the amount of time deposits in uninsured accounts and require bank and savings and loan registrants to quantify the amount of uninsured deposits as of the end of each reported period.
Return on Equity and Assets and Short-Term Borrowings
The proposed rule wouldn’t codify the ratios called for by Item VI of Guide 3 or the short-term borrowing disclosures called for by Item VII of Guide 3.
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For more information on how these proposed rules, if adopted, may affect your disclosures, contact your Moss Adams professional.