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SEC Modernizes and Codifies Disclosure Requirements for Banking Registrants

On September 11, 2020, the US Securities and Exchange Commission (SEC or Commission) issued a final rule modernizing and codifying disclosure requirements for banking registrants. The new rules replace Industry Guide 3, Statistical Disclosure by Bank Holding Companies, with a new Subpart 1400 of Regulation S-K. The updated disclosure requirements apply to domestic and foreign bank holding companies, banks, savings and loan holding companies, and savings and loan associations (banking registrants).

The changes eliminate overlap with US generally accepted accounting principles (GAAP), streamline disclosures, and add or modify disclosure requirements. Among the new or modified disclosure requirements, the rules:

  • Require, if material, a disaggregated presentation of federal funds sold, securities purchased with agreements to resell, federal funds purchased, securities sold under agreements to repurchase, and commercial paper.

  • Adopt a modified presentation regarding investments in debt securities.

  • Align loan categories with those in the financial statements for purposes of reporting loan maturities, and split the “after five years” maturity category into two categories: (1) after five years through 15 years and (2) after 15 years.

  • Require the ratio of net charge-offs during the period to average loans outstanding during the period to be provided for each loan category for which disclosure is required in the financial statements, instead of on a consolidated basis as called for by Guide 3.

  • Adopt disclosure requirements for three new credit ratios and require disaggregated disclosure of the ratio of net charge-offs to average loans by each loan category presented in the financial statements, along with a discussion of the factors that drove material changes in the ratios or related components of the ratios.

  • Change the disclosure regarding time deposits, to include the addition of a requirement to disclose separately the amount of uninsured deposits as of the end of each reported period.

Banking registrants will be required to apply the final rules for the first fiscal year ending on or after December 15, 2021; however, voluntary early compliance is permitted, provided that the rules are applied in their entirety from the date of early compliance.

Background

The Industry Guides, including Industry Guide 3, Statistical Disclosure by Bank Holding Companies, do not represent Commission rules; rather, they represent policies and practices followed by the Commission’s Division of Corporation Finance in administering the disclosure requirements of the federal securities laws. Although Guide 3 is addressed to bank holding companies, the disclosures called for by Guide 3 have also been routinely provided by other registrants with material lending and deposit activities. Guide 3 calls for disclosure in seven areas: (1) distribution of assets, liabilities, and stockholders’ equity; interest rates; and interest differential, (2) investment portfolios, (3) loan portfolios, (4) summary of loan loss experience, (5) deposits, (6) return on equity and assets, and (7) short-term borrowings. Typically, the disclosures called for by Guide 3 have been made within the Management’s Discussion & Analysis (MD&A) section, the Business section, or the notes to the financial statements of banking registrants’ SEC filings.

In the 30 years since the SEC last substantively amended Guide 3, there have been significant financial reporting changes which have created some overlap between Guide 3 disclosures and GAAP. In March 2017, the SEC published a request for comments on Guide 3, and in September 2019, the SEC proposed new rules addressing the disclosures called for by Guide 3.

This Client Alert highlights the major changes made as a result of the SEC’s final rule, focusing on domestic banking registrants.

Entities Covered; Codification

The new rules apply to domestic and foreign bank holding companies, banks, savings and loan holding companies, and savings and loan associations. The disclosure guidelines in Guide 3 will be replaced by new Subpart 1400 of Regulation S-K, and thus compliance will be mandatory. It is noteworthy that the new rules also apply to Regulation A issuers.

Location of Disclosure Requirements and XBRL

The new rules provide issuers with flexibility regarding where to provide the disclosures. Consistent with Guide 3, the new rules do not require the disclosures to be presented in the notes to the financial statements. If the disclosures are provided outside the financial statements, they are not required to be audited and they are not required to be filed in a machine-readable format using XBRL.

Reporting Periods

The new rules align the annual reporting periods for which the disclosures are required, including the required credit ratio disclosures, with the relevant annual periods for which the SEC rules require the banking registrant to provide financial statements. These revisions generally shorten the reporting periods for which issuers currently must provide the relevant information.

Information is also required to be disclosed for interim periods if a material change in the information or the trend evidenced thereby has occurred.

Regulation S-K Item 1402, Distribution of Assets, Liabilities, and Stockholders’ Equity; Interest Rates and Interest Differential

Item I of Guide 3 requires disclosures regarding average balance sheets, interest and yield/rate analysis, and rate/volume analysis. The SEC codified these existing requirements in new Regulation S-K Item 1402, but further disaggregated the categories of interest-earning assets and interest-earning liabilities required for disclosure. The new rules require, if material, a separate presentation of federal funds sold, securities purchased with agreements to resell, federal funds purchased, securities sold under agreements to repurchase, and commercial paper.

Major categories of interest-earning assets must include the following, if material:

  • Loans

  • Taxable investment securities

  • Nontaxable investment securities

  • Interest-bearing deposits in other banks

  • Federal funds sold

  • Securities purchased with agreements to resell

  • Other short-term investments

Major categories of interest-bearing liabilities must include the following, if material:

  • Savings deposits

  • Other time deposits

  • Federal funds purchased

  • Securities sold under agreements to repurchase

  • Commercial paper

  • Other short-term debt

  • Long-term debt

In contrast to the proposed rules, the SEC added a materiality qualifier to the requirements for disaggregated information, in order to decrease the burden of additional disclosure while providing investors with material information.

Regulation S-K Item 1403, Investments in Debt Securities

With respect to Item II of Guide 3 (Investment Portfolio), in new Regulation S-K Item 1403, the SEC eliminated provisions that substantially overlap with GAAP and included a modified requirement to disclose weighted average yield by category of debt securities required to be disclosed in the financial statements, for each specified range of maturities. The new rules apply only to debt securities that are not carried at fair value through earnings. Banking registrants must also:

  • Disclose how the weighted average yield has been calculated.

  • State whether yields on tax-exempt obligations have been computed on a tax-equivalent basis.

  • Discuss any major changes in the tax-exempt portfolio.

Regulation S-K Item 1404, Loan Portfolio

The final rules codify Item III.B. of Guide 3 (Maturities and Sensitivities of Loans to Changes in Interest Rates), with modifications. New Regulation S-K Item 1404 requires that banking registrants present separately, as of the end of the latest reported period, the amount of loans in each category for which disclosure is required in the financial statements (instead of in the loan categories currently specified in Guide 3), within specified maturity categories: (1) in one year or less, (2) after one year through five years, (3) after five years through 15 years, and (4) after 15 years. Under new Item 1404, the “after five years” maturity category in Guide 3 has been split into two categories as indicated above: (1) after five years through 15 years and (2) after 15 years. The SEC believes these additional maturity categories 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, and by providing additional information about the risk profile of the loan portfolio.

The new rules codify and clarify an existing instruction with respect to how maturities are determined. Under the new rules, while determinations of maturities must be based on contractual terms, to the extent that noncontractual rollovers or extensions are included for purposes of measuring the allowance for credit losses under GAAP, issuers must include such noncontractual rollovers or extensions for purposes of the maturities classification and briefly discuss this methodology.

New Regulation S-K Item 1404 does not include Guide 3 Items III.A. (Types of Loans), III.C. (Risk Elements), and III.D. (Other Interest Bearing Assets), as they are similar to disclosures required by GAAP.

Regulation S-K Item 1405, Allowance for Credit Losses

Item IV.A. of Guide 3 (analysis of loss experience) requires the disclosure of one credit ratio: net charge-offs during the period to average loans outstanding during the period. The SEC codified the requirement to disclose this ratio for each reported period as part of new Regulation S-K Item 1405. However, under the new rules, the ratio must be provided for each loan category for which disclosure is required in the financial statements, instead of on a consolidated basis as called for by Guide 3. The new rules do not codify the rest of Item IV.A., as this overlaps with GAAP.

In addition, the SEC introduced disclosure requirements for three additional credit ratios for each reported period:

  • Allowance for credit losses to total loans at each period end

  • Nonaccrual loans to total loans at each period end

  • Allowance for credit losses to nonaccrual loans at each period end

As the SEC noted, these credit ratios are already commonly disclosed. New Regulation S-K Item 1405 also requires disclosure of the components used in the calculation of these ratios, and a discussion of factors that led to material changes in the ratios or related components.

New Regulation S-K Item 1405 codifies the requirement in Item IV.B. of Guide 3 to provide — in a specified tabular format, at the end of each reported period — a breakdown of the allowances for credit losses by loan category, but ties the loan categories for this disclosure to the loan categories presented in the GAAP financial statements, instead of categories currently called for by Guide 3.

Regulation S-K Item 1406, Deposits

New Regulation S-K Item 1406 codifies the majority of the deposit disclosure items in Item V of Guide 3, with some revisions, particularly to Items V.D. and V.E. Under the new rules, banking registrants will be required to present separately the amount of uninsured deposits as of the end of each reported period.

The new rules define “uninsured deposits.” For US federally insured depository institutions, uninsured deposits are the portion of deposit accounts in US offices that exceed the Federal Deposit Insurance Corporation (FDIC) insurance limit (or similar state deposit insurance regime) 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 regime. The rule states that banking registrants should consider the methodologies and assumptions used for regulatory reporting of uninsured deposits, to the extent applicable. To the extent it is not reasonably practicable to provide a precise measure of uninsured deposits at the end of the reported period, the issuer must disclose that the amounts are based on estimates, and the estimates must be based on the same methodologies and assumptions used for regulatory reporting requirements.

The new rules also require banking registrants to state the amount outstanding, as of the end of the latest reported period, of the following:

  • The portion of US time deposits, by account, that are in excess of FDIC insurance limits (or similar state deposit insurance regime)

  • Time deposits that are otherwise uninsured, by time remaining until maturity in specified maturity categories

Return on Equity and Assets

The SEC did not codify Item VI of Guide 3, which calls for disclosure of four ratios: return on assets, return on equity, dividend payout, and equity to assets. The SEC stated that it chose not to codify a requirement to disclose these ratios because they are not unique to banking registrants. The SEC also noted that its MD&A guidance already requires registrants to identify and discuss key performance measures when such measures are used to manage the business and would be material to investors.

Short-Term Borrowings

The SEC also did not codify Item VII of Guide 3, which calls for disclosures regarding short-term borrowings, although some of these disclosures are incorporated into new Regulation S-K Item 1402, discussed above.

Changes to Article 9 of Regulation S-X

Article 9 of Regulation S-X, which sets forth requirements for financial statements for bank holding companies and banks included in filings with the SEC, was amended to align its scope with the entities covered by new Subpart 1400 of Regulation S-K (i.e., to include savings and loan associations and savings and loan holding companies).

Compliance Date

The new rules become effective 30 days after publication in the Federal Register. Banking registrants will be required to apply the final rules for the first fiscal year ending on or after December 15, 2021; however, voluntary early compliance is permitted in advance of the mandatory compliance date, provided that the rules are applied in their entirety from the date of early compliance. Banking registrants filing initial registration statements are not required to apply the final rules until an initial registration statement is first filed containing financial statements for a period on or after the mandatory compliance date.

Conclusion

Whether or not banking registrants choose voluntary early compliance, they should begin considering the effect these changes, now codified into Regulation S-K, will have on their future filings, and what steps they should take to collect, organize, and present the disclosures in the future. Although the new requirements may streamline future disclosures, they may also cause banking registrants to incur near-term costs in order to modify their practices and procedures to track and report the newly required information.

© 2020 Jones Walker LLPNational Law Review, Volume X, Number 273
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About this Author

Michael Waters, Jones Walker,  partner, Banking and Financial Services Practice Group, corporate and securities law, financial institutions

Michael Waters is a partner in the firm's Banking & Financial Services Practice Group, and has practiced corporate and securities law, primarily in the financial institutions area, for more than 30 years. He also serves as a member of the firm's board of directors. Mr. Waters routinely represents banks, bank holding companies, and other financial entities in acquisitions, capital raising transactions, shareholder issues, new bank formations, and board fiduciary duty issues. He has advised both buyers and sellers in approximately 80 bank mergers and acquisitions,...

205-244-5210
Dionne M. Rousseau, Jones Walker, acquisitions transactions lawyer, public private companies attorney
Partner

Dionne Rousseau has served as the lead outside corporate and securities counsel for 12 public companies, and as boardroom lawyer for three of those companies. She has more than 25 years of experience handling corporate finance and mergers and acquisitions transactions for public and private companies. Representative transactions handled as lead counsel include two $1-billion at-the-market common stock offerings for a Fortune 500® Company; a $1-billion debt refinancing, including $300 million in senior subordinated notes and a $200-million debt tender offer; a $250-million senior convertible note offering (Rule 144A); a $1.4 billion public company cash-for-stock merger; initial public offerings (IPOs); taking a private company client public in an $80-million reverse merger transaction; a $40-million acquisition by a public company of private company assets; a $45-million sale of a division of a public company; and a management leveraged buyout of a publicly traded company through a negotiated cash tender offer.

Ms. Rousseau is ranked in the first band (top tier) in the area of Corporate/M&A in the 2015 edition of "Chambers USA - America's Leading Lawyers for Business."  

225-248-2026
Katherine Herbert Corporate Attorney Jones Walker Baton Rouge
Associate

Katherine Herbert is an associate in the Corporate Practice Group. She focuses on economic development and public finance.

Katie assists in public finance transactions. Her practice also includes working with the firm’s economic development consulting arm, Jones Walker Consulting, LLC, and assisting public and private entities in economic development projects.

While in law school, Katie clerked at Jones Walker for two summers. 

225-248-2194
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