SEC Modernizes Disclosure for Banking Registrants
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as a new Subpart 1400 of Regulation S-K and Industry Guide 3, Statistical Disclosure by Bank Holding Companies is rescinded.
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.
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.
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.
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.
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
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
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
- 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.
- 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.