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SEC Modernizes Disclosure for Banking Registrants

October 4, 2020 By CFO Consulting Partners

Announcement of Final Rule

On September 11, 2020, the Securities and Exchange Commission announced that it has adopted rules to update and expand the statistical disclosures that bank and savings and loan registrants provide to investors, in light of changes in this sector over the past 30 years. The rules also eliminate certain disclosure items that are duplicative of other Commission rules and requirements of U.S. GAAP or IFRS. The rules replace Industry Guide 3, Statistical Disclosure by Bank Holding Companies (Guide 3), with updated disclosure requirements in a new Subpart 1400 of Regulation S-K (Subpart 1400). SEC Chairman Jay Clayton said “Guide 3 has not been substantively updated for more than 30 years. The changes we are adopting today are designed to elicit better disclosures for investors and add efficiencies to the compliance efforts of registrants.”  (https://www.sec.gov/news/press-release/2020-205)

Modernization of Statistical Disclosures for Bank and Savings and Loan Registrants

The rules update the disclosures that investors receive and eliminate overlap with Commission rules, U.S. GAAP or IFRS. The updated statistical disclosure requirements are codified as a new Subpart 1400 of Regulation S-K and Industry Guide 3, Statistical Disclosure by Bank Holding Companies is rescinded.

Disclosure Requirements

The Commission’s rules require disclosure about the following:

  • Distribution of assets, liabilities and stockholders’ equity, the related interest income and expense, and interest rates and interest differential (Average Balance, Interest and Yield/Rate Analysis and Rate/Volume Analysis)
  • Weighted average yield of investments in debt securities by maturity
  • Maturity analysis of the loan portfolio including the amounts that have predetermined interest rates and floating or adjustable interest rates
  • Certain credit ratios and the discussion of the factors which explain material changes in the ratios, or their related components during the periods presented
  • The allowance for credit losses by loan category
  • Bank deposits including average amounts and rate paid and amounts that are uninsured

A detailed discussion of the changes to each of the disclosure requirements follows in Appendix A.

Applicability

The new rules apply to bank and savings and loan registrants. Guide 3, by its terms, applied to bank holding companies but was widely adopted by savings and loan holding companies and other registrants with material lending and deposit gathering activities.

The rules apply to domestic registrants, including Regulation A issuers, and to foreign registrants. The disclosure requirements are linked to categories or classes of financial instruments disclosed in the registrant’s U.S. GAAP or IFRS financial statements, aligning the reporting period statistical disclosure requirements with those required to be presented in the financial statements, and explicitly exempting IFRS registrants from certain of the disclosure requirements that are not applicable under IFRS.

Impact of Changes

Significant new disclosures include weighted average yield of debt investment securities by maturity, maturity analysis of loan portfolios, expanded credit ratios and factors explaining changes in those ratios and uninsured time deposits including a breakdown by maturity. Certain ratios required in Guide 3 (return on assets, return on equity, dividend payout, and equity to assets) are eliminated from Subpart 1400 but are likely to continue. These ratios are not unique to bank and savings and loan registrants, and the Commission’s guidance on MD&A already requires registrants to identify and discuss key performance measures when they are used to manage the business and would be material to investors.

Location of Disclosure Requirements and XBRL

Consistent with existing Guide 3, the disclosures of new Subpart 1400 are not required to be presented in the notes to the financial statements. Therefore, if disclosures are provided outside the financial statements, for instance in the MD&A sections, the disclosures would not be required to be audited, nor would they be subject to the Commission’s requirement to file financial statements in a machine-readable format using XBRL.

What’s Next?

The rules will be effective 30 days after publication in the Federal Register and will apply to fiscal years ending on or after December 15, 2021. Voluntary compliance with the new rules will be accepted in advance of the mandatory compliance date however the new rules must be adopted in their entirety. Guide 3 will be rescinded effective January 1, 2023.

Notice to Readers

This publication has been carefully prepared, but it necessarily contains information in summary form and is therefore intended for general guidance only; it is not intended to be a substitute for detailed research or the exercise of professional judgment. The information presented in this publication should not be construed as legal, tax, accounting, or any other professional advice or service. CFO Consulting Partners LLC can accept no responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication. You should consult with professional advisors familiar with your factual situation for advice concerning specific audit, tax or other matters before making any decisions.

 

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Appendix A: SEC Modernizes Disclosure for Banking Registrants 

– Outline of Requirements of Subpart 1400 of Regulation S-K

 

Distribution of Assets, Liabilities and Stockholders’ Equity; Interest Rate and Interest Differential (Average Balance, Interest and Yield/Rate Analysis and Rate/Volume Analysis)

Item 1402 of Regulation S-K:

  • Codifies all of the average balance sheet, interest and yield/rate analysis and rate/volume analysis disclosure items currently in Item I of Guide 3
  • Requires segregation of domestic and foreign activities, if applicable
  • The categories enumerated in Item 1402(a) must be included, if material
  • Additionally, registrants are required to separate (1) federal funds sold from securities purchased with agreements to resell and (2) federal funds purchased from securities sold under agreements to repurchase and to disaggregate commercial paper, if material.

Investment Portfolio

Item 1403 of Regulation S-K:

  • Codifies the requirement to disclose weighted average yield for each range of maturities by category of debt securities required to be disclosed in the registrant’s U.S. GAAP or IFRS financial statements
  • Applies to debt securities that are not carried at fair value through earnings.
  • Eliminates requirement for certain disclosure items in Item II of Guide 3 as these items substantially overlap with U.S. GAAP and IFRS disclosure requirements:
    • book value information
    • the maturity analysis of book value information
    • the disclosures  related to investments exceeding 10% of stockholders’ equity

Loan Portfolio

Item 1404 of Regulation S-K:

  • Item 1404(a):
    • Codifies the requirement to disclose the maturity by loan category disclosure currently called for by Item III.B of Guide 3, with the loan categories based on the categories required by U.S. GAAP or IFRS in the financial statements
    • Requires additional maturity categories to provide investors with sufficient information on the potential interest rate risk associated with the loans in the portfolio
    • Codifies the existing Guide 3 instruction stating the determination of maturities should be based on contractual terms
    • Also codifies the language, as proposed, regarding the “rollover policy” for these disclosures
    • To the extent non-contractual rollovers or extensions are included for purposes of measuring the allowance for credit losses under U.S. GAAP or IFRS, such non-contractual rollovers or extensions should be included for purposes of the maturities classification and the policy should be briefly disclosed
  • Item 1404(b):
    • Codifies the disclosure items in Item III.B of Guide 3 regarding the total amount of loans due after one year that have (a) predetermined interest rates or (b) floating or adjustable interest rates
    • Specifies that this disclosure should also be disaggregated by the loan categories disclosed in the registrant’s U.S. GAAP or IFRS financial statements to promote consistency of loan portfolio disclosures throughout a registrant’s filing, and elicit trend information about interest income and potential interest rate risk
    • The final rules require additional maturity categories (1) after five years through 15 years, and (2) after 15 years
    • The additional maturity categories
      • o    will elicit more decision-relevant information for investors by capturing the maturity periods of commonly offered residential mortgage loan products, such as 15-year and 30-year residential mortgages
      • o   residential mortgage loans would no longer be classified in a single maturity category
      • o   the loans would move through the maturity categories until they are paid off or sold, such that over time, even 30-year residential mortgage loans would migrate into different maturity categories
      • Eliminates the loan category disclosure items in Item III.A of Guide 3, the loan portfolio risk element disclosure items in Item III.C, or the other interest bearing asset disclosure items in Item III.D

Allowance for Credit Losses

Item 1405 of Regulation S-X:

  • Disclosure of the ratio of net charge-offs during the period to average loans outstanding based on the loan categories required to be disclosed in the registrant’s U.S. GAAP or IFRS financial statements, instead of on a consolidated basis as called for by Guide 3
  • Requires disclosure of the following new credit ratios on a consolidated basis, along with each of the components used in their calculation:
    • (1) Allowance for Credit Losses to Total Loans
    • (2) Nonaccrual Loans to Total Loans
    • (3) Allowance for Credit Losses to Nonaccrual Loans.
    • (4) Discussion of the factors that drove material changes in the ratios, or related components, during the periods presented
  • IFRS registrants are not required to disclose the ratio of nonaccrual loans to total loans or the allowance for credit losses to nonaccrual loans, as there is no concept of nonaccrual loans in IFRS
  • Requires registrants to provide the tabular allocation of the allowance disclosure called for by Item IV.B of Guide 3, except that the allocation would be based on the loan categories presented in the U.S. GAAP financial statements, instead of the loan categories specified in Item IV.B of Guide 3

Deposits

Item 1406 of Regulation S-X:

  • Codifies the majority of the disclosure items in Item V of Guide 3, with some revisions
  • Defines uninsured deposits for bank and savings and loan registrants that are U.S. federally insured depository institutions as the portion of deposit accounts in U.S. offices that exceed the FDIC insurance limit or similar state deposit insurance regimes and amounts in any other uninsured investment or deposit accounts that are classified as deposits and not subject to any federal or state deposit insurance regimes
  • Requires foreign bank and savings and loan registrants to disclose the definition of uninsured deposits appropriate for their country of domicile
  • The rules require disclosure of:
    • (1) U.S. time deposits in excess of the FDIC insurance limit
    • (2) time deposits that are otherwise uninsured by time remaining until maturity of: (A) three months or less; (B) over three through six 57 months; (C) over six through 12 months; and (D) over 12 months

Certain Existing Guide 3 Disclosures That Are Not Codified in Subpart 1400 of Regulation S-K

  1. A. Return on Equity and Assets – Item VI of Guide 3 calls for disclosure of four specific ratios for each reported period, including return on assets, return on equity, a dividend payout ratio, and an equity to assets ratio. The requirement to disclose these ratios is not included in Subpart 1400 as these ratios are not unique to bank and savings and loan registrants, and the Commission’s guidance on MD&A already requires registrants to identify and discuss key performance measures when they are used to manage the business and would be material to investors.
  2. B. Short Term Borrowings The new rules do not codify the short-term borrowing disclosure items in Item VII of Guide 3 in their current form. Instead, Item 1402 of Regulation S-K codifies the average balance and related average rate paid for each major category of interest-bearing liability disclosures currently called for by Item I.B.1 and I.B.3 of Guide 3, and requires disaggregation of the major categories of interest-bearing liabilities to include those referenced in Item VII of Guide 3 and Article 9 of Regulation S-X. Other existing disclosure items in Item VII are not included as they are substantially covered by existing Commission rules and the financial statement requirements.

Written by CFOCP Director, Larry Davis (ldavis@cfoconsultingpartners.com)

Filed Under: Featured, Larry Davis, Newsletters

Webinar: Leadership Opportunities Through The COVID-19 Pandemic

June 30, 2020 By CFO Consulting Partners

On June 18th, 2020  CFO Consulting Partners Director Larry Davis and Managing Director Eric Segal presented a webinar with Northern New Jersey Community Bankers on Leadership Opportunities Through The COVID-19 pandemic. Crown Bank Vice-Chairman Paul Fitzgerald moderated the discussion and Jill Freeman of Employment Practices Group, LLC ( https://www.epgstrategy.com/ ) provided thoughts and advice on Organizational and Leadership Opportunities.

Click here for the Webinar Presentation

Filed Under: Eric Segal, Events, Featured, Larry Davis, News & Events

Thoughts About Your Accounting Close and Financial Reporting with a Remote Workforce

April 27, 2020 By CFO Consulting Partners

Many businesses are adopting social distancing strategies, including increased use of remote workforces to adapt to and fight through the Covid-19 crisis. Completing monthly, quarterly or annual financial reporting activities can be challenging to accomplish remotely, so we share our experiences in assisting clients to do so in this article. With thoughtful management, the efficiency and effectiveness of accounting and reporting processes can be maintained as much as possible with a remote workforce.
The physical separation of remote workforces adds difficulty to all involved. While many of the tools used under “normal operations” continue to be effective, the remote nature of the workforce may change the way in which the work product is compiled and assembled. It will also change the interaction needed between team members to complete, review and perform quality control on the work products. Therefore, leaders need to make extra efforts to overcome the difficulties of operating remotely.
  • Clearly define goals and project plans, and monitor and report on status. These disciplines are more important now than ever before to enable processes to run smoothly and avoid fire drills that are even more challenging in a remote environment.
  • Communicate more than “normal” so that everyone can become comfortable with remote work and interactions.
  • Ensure that the technology and information security requirements are in place so that your team can operate effectively on a remote basis
Working remotely and meeting critical finance, accounting and reporting deadlines requires significant focus to optimize team structure and workflows.
  • Use detailed project plans, checklists, timelines and other mechanisms to define project requirements, clarify roles within the team, identify dependencies, and communicate status. Monthly and quarterly closing checklists and similar outlines are extremely helpful for all required deliverables: Board and senior management reports, press releases, SEC reporting, etc.
  • Make resources available to all who need them in real time.
    • Develop a file storage plan and use it consistently while maintaining appropriate access security over those files. Typically, companies will create a central folder for each period’s financial reports.
    • Finished work products should be stored centrally and shared according to agreed-upon nomenclature so that team members can locate and process as needed.
  • One individual should own a document and be the gatekeeper for changes proposed by internal preparers, executive management, external legal and accounting advisors, investor relations etc.
    • The gatekeeper should maintain version control so that reviewers can easily identify updates to the documents. “Track Changes” and blacklined documents help focus reviewers’ efforts.
    • Establish deadlines for comments and limit the number of drafts to minimize time spent processing successive versions. Relevant comments will always need to be considered but avoid excessive wordsmithing once you have a solid document.
Success as remote team is tied to many factors: Convenient and secure access to information. Clear project plans and access to effective project management tools, deploying team members effectively and relentless communication while supporting individual needs for job satisfaction, growth and enrichment.
Larry Davis – ldavis@cfoconsultingpartners.com
Paul Karr – pkarr@cfoconsultingpartners.com
Eric Segal – esegal@cfoconsultingpartners.com

Filed Under: Eric Segal, Featured, Larry Davis, Paul Karr, Resources

Newsletter – April 2020

April 8, 2020 By CFO Consulting Partners

Thinking Ahead – Accounting for Loan Losses During and After Covid-19

One of the many challenges posed by the current health crisis is the need for lenders to reassess their borrowers’ ability to repay their loans. While it may seem unfair, or even unseemly, to have to address this issue at this time, financial institutions will need to do exactly that in closing their books and reporting on the First Quarter of 2020 in their regulatory reports and (for SEC registrants) Forms 10-Q.

The accounting approach most community institutions are following, and on which we will focus here, is the traditional, probable incurred loss model. This model requires institutions to provide for losses that are probable to have been incurred under the GAAP literature in Accounting Standards Codification (ASC) 450, Contingencies, and 310, Receivables. In practice, this usually involves a modeled component, based on historical write-offs over a look-back period, and a qualitative component, based on the current state and trend of economic and other factors affecting the portfolio. A good summary of the factors to be considered in this qualitative analysis are the nine points summarized in an Interagency Policy Statement issued in 2006 by federal banking agencies, which can be found at this link: https://www.occ.gov/news-issuances/bulletins/2006/bulletin-2006-47a.pdf

Generally, increased loss provisions are expected but likely too few facts are available to make specific loss assumptions. Measuring specific incurred losses at the end of Q1 will be difficult and most likely will be addressed through additional qualitative factors. Reserve assumptions for those credits already under analysis should be reevaluated and likely dealt with across product and delinquency categories.

Following are the nine points from the Policy Statement, in italics, followed in each case by our comments:

1. Changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, and recovery practices not considered elsewhere in estimating credit losses. This would include loan forbearance and other regulatory relief measures enacted to assist with resolution of the crisis: https://www.fdic.gov/news/news/press/2020/pr20038a.pdf

2. Changes in international, national, regional, and local economic and business conditions and developments that affect the collectability of the portfolio, including the condition of various market segments. The effects of the current health crisis will be pervasive, as covered in the other points.

3. Changes in the nature and volume of the portfolio and in the terms of loans. Institutions will need to address any shifts in new lending – in some portfolio segments, new production will have stopped, and thus not be available to offset increased non-performing loans and normal amortization within those segments. Thus, looking forward and doing the math, loss rates will increase within these portfolio segments.

4. Changes in the experience, ability, and depth of lending management and other relevant staff. Will there be sufficient staff available to effectively manage the portfolio? Will remote collection efforts be as effective as prior techniques?

5. Changes in the volume and severity of past due loans, the volume of non-accrual loans, and the volume and severity of adversely classified or graded loans. A sharp increase in delinquencies can be expected, albeit delayed by the TDR forbearance mentioned above. The ultimate losses may be mitigated by any government guarantees that are available, as well as borrowers’ ability to access business interruption insurance.

6. Changes in the quality of the institution’s loan review system.
Improvements that strengthen the process of reviewing loans could be a mitigating factor. If however, the loan review process weakens, either because of staff illness or other limitations, this factor may be another reason to strengthen reserves.

7. Changes in the value of underlying collateral for collateral-dependent loans. Real estate loans will be a challenging area, as the impact of current developments on the commercial and residential real estate markets will take some time to shake out, however declines in market values seem likely.

8. The existence and effect of any concentrations of credit, and changes in the level of such concentrations. The effect of concentrations can become more severe as conditions in certain industry sectors worsen, and the relative size of concentrations can become larger as healthier loans run off in a low origination environment.

9. The effect of other external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in the institution’s existing portfolio. These factors include forbearance that is enabled by legislation e.g., restrictions on foreclosure that lead to increased losses from deterioration in the physical condition of properties and/or in the property market.

Your portfolio consists of two types of borrowers: healthy and current borrowers who may be negatively affected by the duration and severity of the current crisis; and those already exhibiting financial stress (past due and delinquent accounts, businesses already under severe attack from a variety of sources including the lack of a viable internet strategy, lower cost of foreign competition, and many others) for which the current crisis may finalize their situation. Both may benefit from the governmental assistance and forbearance programs, however the exclusion from TDR accounting applies only to the former borrowers. You should track and maintain records of your borrowers’ status throughout the deferment and modification process in order to demonstrate those which are not TDRs.

We have discussed the challenge of first quarter reserving with senior representatives from several large accounting firms, and the following pieces of practical advice emerged:

* Now is not too soon to begin discussing reserving considerations with professional service providers, including auditors and consultants.

* Most institutions are targeting timely filings of their First Quarter reports, notwithstanding the grace periods being offered by regulators, including the FDIC and SEC. See the announcement of the grace periods at:
https://www.fdic.gov/news/news/financial/2020/fil20028.html
https://www.sec.gov/news/press-release/2020-53

* Auditors, regulators, analysts and other interested parties will be looking for a strengthening of the environmental/qualitative reserve, along with supporting evidence that identifies the impact of current events and links to any adjustments.

* Whatever process is followed, it will be necessary to step back and consider whether the result makes sense.

* Whatever answer is arrived at for First Quarter reporting, further adjustments will undoubtedly be required in the Second and Third Quarters as more information becomes available.

We are familiar with these issues and accustomed to working remotely. Please let us know if we can help in any way.

Note on CECL: Institutions that have adopted the new Current Expected Credit Loss Model in the First Quarter will have similar considerations, but with the additional challenge of adopting the new model. They should also consider the possible impact of the CARES Act on timing of adoption, and related regulatory actions, including the Federal Institutions Letter on the interaction between timing of adoption and capital relief:
https://www.fdic.gov/news/news/financial/2020/fil20032.pdf

Larry Davis – ldavis@cfoconsultingpartners.com
Paul Karr – pkarr@cfoconsultingpartners.com
Eric Segal – esegal@cfoconsultingpartners.com

Filed Under: Eric Segal, Featured, Larry Davis, Newsletters, Paul Karr, Uncategorized

“FMS Member Spotlight Featuring Larry Davis, CPA”

November 2, 2017 By CFO Consulting Partners

FMS Member Spotlight Featuring Larry Davis, CPA

Filed Under: Featured, Larry Davis, News & Events Tagged With: Larry Davis

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