Don’t You Forget About Me: The Impact of CECL on Debt Securities
Notes from the 2018 National CECL Conference session with Gordon Dobner, BKD; John Griffin, BKD; and Dale Sheller, The Baker Group
The impact of estimating credit losses for debt securities for most community financial institutions is relatively minor, certainly not as impactful as for loans. Guidance for estimating held-to maturity securities (HTM) follows the CECL standard like loans. There are fairly minor changes relative to assets-for-sale (AFS) debt securities, a modified version of today’s OTTI model. In addition for AFS and HTM securities, you’re buying after their original issuance, you have to consider whether they will fall into the PCD category.
The biggest impact is determining the rigor with which you have to approach this. Typically you wouldn’t expect any losses, but the standard says to document. You don’t have to have a loss measurement if the expectation is zero at default – anything issued by the federal government that are backed, like U.S. treasuries, has a zero loss expectation.
The expectation is that for most institutions the impact of CECL on HTM will be on municipals and corporate bonds. You could get to an expectation of zero if there is insurance or some other type of guarantee. You could also call it close to zero and immaterial, eliminating the need for a reserve. It is not as simple as just feeling you won’t have losses, you will have to document it.
Municipal defaults over 30 years are at .15 percent, very rare, much more rare than corporate defaults, which could support your documentation of zero credit loss or immateriality. If you don’t believe zero is the answer, there will be pooling considerations, and a need to pull out securities where there might be a specific identified loss issue and analyze those independently.
For AFS securities most of the principles of today’s OTTI model remain. However, the amount of credit losses for AFS securities is now limited to the amount by which fair value is below amortized cost. In addition, time is no longer a factor in the determination. These are minor changes but the intent, just like for CECL, is to earlier recognition of credit losses.
As a positive note, most institutions hold their bond portfolios in AFS securities. Impact on an individual institution will come down to classification (AFS vs HTM) and the types of securities held.
Many thanks to Gordon Dobner, BKD; John Griffin, BKD; and Dale Sheller, The Baker Group for their presentation at the National CECL Conference in May 2018.
About the Presenters
Gordon J. Dobner, CPA | Partner | BKD
A member of BKD National Financial Services Group, Gordon leads the firm’s current expected credit loss (CECL) committee and has been involved in consulting with institutions on education and implementation considerations related to CECL. He has more than 15 years of experience providing audit and assurance services to public and nonpublic financial institution clients. Gordon’s experience includes audits of financial statements and internal controls over financial reporting as well assisting in regulatory filings.
Gordon is a member of the American Institute of CPAs and Texas Society of Certified Public Accountants. He actively participates in the Texas Bankers Association and Independent Bankers Association of Texas.
He is a graduate of Eastern Illinois University, Charleston, with a B.S. degree in accounting.
John H. Griffin, CPA | Managing Director | BKD
John is a member of BKD National Financial Services Group as well as the firm’s internal CECL committee. He has more than 15 years of experience working with financial institutions and entities with total assets ranging from $100 million to more than $50 billion. Prior to joining BKD, John served as an advisor under the chief accountant for the Southern District of the Office of the Comptroller of the Currency (OCC), an inspector with the Public Company Accounting Oversight Board (PCAOB) and a senior manager at an international accounting firm.
His areas of technical proficiency include matters specific to banking and financial entities, such as internal control design and resting, fair value of financial instruments, accounting for loans and leases, mergers and acquisitions and complex finance transactions. He has presented on technical and regulatory accounting topics at various state CPA societies and provided technical trainings to both bankers and examiners.
John is a graduate of Oklahoma State University, Stillwater, with a B.S. degree in psychology, and a graduate of Texas Tech University, Lubbock, with an M.S. degree in accounting.
Dale Sheller | Vice President | The Baker Group
Dale is Vice President in the Financial Strategies Group at The Baker Group. He joined the firm in 2015 after spending six years as a bank examiner with the Federal Deposit Insurance Corporation. Sheller holds a bachelor’s degree in finance and a master’s degree in business administration from Oklahoma State University. He works with clients on interest rate risk management, liquidity risk management, and regulatory issues.