On the Horizon: Disclosure Updates for Banking SEC Registrants

On Sept. 17, 2019, the Securities and Exchange Commission (SEC) issued a proposed rule to update required statistical disclosures for bank holding companies, banks, saving and loan holding companies and saving and loan associations (banks and savings & loans) in their filings. In addition to modernizing the disclosure requirements, the proposed rule also would eliminate many disclosures that overlap with other authoritative sources such as U.S. Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS).

Currently, the disclosure requirements for bank holding companies can be found in the SEC’s Industry Guide 3, Statistical Disclosure by Bank Holding Companies (Guide 3), which has not been significantly updated in more than 30 years. Under the proposed rule, Guide 3 would be rescinded and replaced by a new subpart of the SEC’s Regulation S-K.

The proposal has a 60-day comment period, which began on Oct. 3, 2019, when the proposed rule was published in the Federal Register.

To whom does the proposed rule apply?

The disclosure requirements of the proposed rule will apply to banks and savings & loans. Consideration was given by the SEC to expand the disclosure requirements to registrants who engage in one or more business activities covered by the proposed rule, such as lending, where such activity is material to the registrant’s business.

What changes are proposed?

The most notable changes to disclosure requirements are summarized in the following table.

Reporting Periods Currently, Guide 3 requires five years’ worth of data for loan portfolio and summary of loan loss data and three years’ worth of data for all other requirements, including those for investments and deposits. Under the proposed rule, the reporting period will be aligned to the periods required for the registrant’s financial statements in the SEC filing. In most cases, except if the registrant is a smaller reporting company (SRC), this will mean two years for end-of-period disclosures and three periods for activity disclosures.
Distribution of Assets, Liabilities and Stockholders’ Equity, Interest Rate and Interest Rate Differential (Average Balance, Interest Rate Yield/Rate Analysis and Rate/Volume Analysis) The proposed rule will codify all the disclosures currently required in Guide 3 and with a new requirement to further disaggregate the categories of interest earning assets and interest-bearing liabilities.
Investment Portfolio Under the proposed rule, the following current disclosure requirements will be eliminated: book value information, maturity analysis of book value information and disclosures related to investments exceeding 10 percent of stockholders’ equity, since they are substantially similar to those disclosures required by GAAP. The requirement for disclosure of the weighted average yield for each range of maturities by category of debt securities will remain but will now be required by the investment categories disclosed in the notes to the financial statements. The proposed rules will only apply to debt securities not recorded at fair value through earnings.
Loan Portfolio The proposed rule does not retain the requirement for the loan category disclosure that currently is included in Guide 3. In addition, the requirements in Guide 3 for nonaccrual, past due and restructured loans, potential problem loans, foreign outstandings, loan concentrations and other interest-bearing assets are also not required in the proposed rule. The current requirement for disclosure of loan maturities will remain but will now be required by the loan categories disclosed in the notes to the financial statements.
Allowance for Credit Losses

The current requirement for an analysis of the allowance for loan losses by loan type (commonly referred to as a roll forward) is not required in the proposed rule. The proposed rule, however, does keep the requirement for the ratio of net charge offs during the period to average loans outstanding, but it requires this disclosure to be made by the loan categories disclosed in the footnotes to the financial statements.

The proposed rule also retains the disclosure requirement of the allocation of the allowance for loan losses by loan categories included in the footnotes to the financial statements.

The proposed rule will require new disclosure of certain ratios: the allowance for loan loss to loans outstanding by loan category, nonaccrual loans to period end by loan category and the allowance for loan loss to nonaccrual loans by loan category.

The proposed rule does not include any disclosures related to the new credit loss standard, ASC Topic 326, Financial Instruments – Credit Losses, commonly referred to as CECL.

Deposits Disclosures currently required for time deposit accounts greater than $100,000 will simply be required for time deposits “in excess of the FDIC insurance limit” to provide flexibility in the disclosure requirements if the FDIC insurance limit is changed in the future. Therefore, the disclosure of outstanding time certificates of deposit and other time deposits equal to or in excess of $100,000 by maturity will be replaced by uninsured outstanding certificates of deposit and time deposits by maturity. The amount of uninsured deposits at period end will be required also.
Return on Equity and Assets, Short-Term Borrowings The current disclosure requirements in Guide 3 for return on equity, return on assets, dividend payout ratio and the equity to asset ratio will not be required. Similarly, the disclosure requirements for short-term borrowings will no longer be required.
How to prepare if the proposed rule is adopted

Many registrants likely will see this proposed rule as advantageous, as it eliminates duplicative disclosures in management’s discussion and analysis and in the footnotes to the financial statements. Overall, there will be less disclosures required in the new subpart to Regulation S-K. However, there is a theme of disaggregation throughout the proposed rule where several existing disclosures will now be required at a more granular level (e.g., by loan category rather than in total). Registrants should plan to develop processes and controls for gathering and disclosing certain data at a more detailed level.

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Dave Niles
Partner, DHG Financial Services
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