A&A Update – SEC Proposes Overhaul of Guide 3 Disclosures for Banks and Savings and Loans Institutions

By October 9, 2019Industry Updates

On September 17, 2019, the Securities and Exchange Commission (SEC) issued a proposal to revise the disclosures currently required under Guide 3, Statistical Disclosure by Bank Holding Companies.  This proposal is driven by a need to modernize, based on changes in the industry as well as updates from the Financial Accounting Standards Board and other rule-makers since the original Guide 3 requirements were first published in 1976 and subsequently amended in 1986.  If finalized, Guide 3 would no longer be applicable, and the requirements of the proposed rule would be codified into a new Subpart 1400 of Regulation S-K.

Currently under Guide 3, there are seven areas of disclosures, including: (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.  Some of the most relevant changes under this proposal that impact these areas of disclosure are as follows:

Reporting periods:  The SEC has proposed defining the term “reported period” for purposes of the new Subpart 1400 of Regulation S-K to mean each annual period required by SEC rules for a registrant’s financial statements, excluding some credit ratio disclosures, which will be required for five years.

Distribution of assets, liabilities, and stockholders’ equity; interest rates; and interest differential:  The proposal would require all of the disclosures currently called for by this item of Guide 3 and further disaggregate the categories of interest-earning assets and interest-bearing liabilities required for disclosure.

Investment portfolios: The proposal would require the weighted-average yield disclosure for each range of maturities by category of debt securities, with a change to the categories presented to align with the U.S. generally accepted accounting principles (U.S. GAAP) financial statements.  Other requirements for this section in Guide 3 are proposed for removal.

Loan portfolios: The proposal would require the maturity analysis of the loan portfolio, including the amounts that have predetermined interest rates and floating or adjustable interest rates while removing several of the previous Guide 3 requirements in this section, including the loan category disclosure (Item III.A), the loan portfolio risk (Item III.C), and the other interest-bearing assets disclosure (Item III.D).

Summary of loan loss experience: The proposal would remove the analysis of loss experience disclosure (Item IV.A) but would require the ratio of net charge-offs during the period to average loans outstanding as the SEC believes that this disclosure does not overlap with existing SEC, U.S. GAAP, or International Financial Reporting Standards requirements.

Credit ratios:  The proposal would require, for a five-year period, disclosure of the following credit ratios, 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; and (4) net charge-offs to average loans, by loan category disclosed in the financial statements.  The proposal would also require discussion of the factors that drove material changes in the ratios, or related components, during the periods presented.

Deposits: The proposal would require the majority of the requirements under this section of Guide 3, with a few minor additions and modifications.

Return on equity and assets: The proposal would generally remove the requirements of this section (Item VI).

Short-term borrowings: The proposal would generally remove the requirements of this section (Item VII).

Overall, we expect preparers to see the recommendations in this proposal as a welcome change as they will remove much of the redundancy with U.S. GAAP disclosures.  The comment period is 60 days from the date of publication in the Federal Register.