CECL vs COVID: Q1 Data Reveals What Drove Loan Loss Reserves for Publicly Traded Banks

By Adam Mustafa and Sonny Capone, Invictus Group

Let’s face it: Publicly traded banks that implemented the new current expected credit losses (CECL) accounting standard during the COVID-19 pandemic faced a huge set of challenges. But what really drove their decisions about how much to set aside in their loan loss reserves?

We have an answer.

We meticulously analyzed every publicly traded bank we could find above $5 billion in assets that adopted CECL during the first quarter of 2020, arguably one of the most difficult banking environments in modern history. Our effort was to determine how much of the change from the previous quarter was due to CECL, and how much was driven by the coronavirus.

We’re sure the list is not perfect, and we probably did not translate every bank’s reserve perfectly. But we ended up with 128 banks, and we double-checked our analysis on a reasonable sample set.

Here’s what we found:

  • Overall, loan loss reserves increased by 60 percent in our sample.
  • CECL was responsible for 34 percent of that increase.
  • COVID-19 drove 26 percent of the increase.
  • The median Allowance for Credit Losses (ACL) was 1.38 percent of loans (excluding held for sale).

This information may help banks as they get ready to determine their loan loss reserves for the next quarter.  At the end of the day, those community banks that properly integrate stress testing into their loan loss reserve calculation, irrespective of whether they are complying with CECL or the incurred loss methodology, will be in a much stronger position to support and defend their estimates, especially with looming regulatory scrutiny.

When banks closed their books for the March quarter, little was known about the impact of the pandemic on credit risk. Since then, many banks have found that more than 20 percent of their portfolio is in principal and interest deferral for at least 90 days. Many of those borrowers have now requested an additional 90 days, so there will be significant pressure on banks to recognize this in their loan loss provisions for the June quarter, one way or another.  Expect to see increases in loan loss reserves due to COVID-19 in the second quarter that dwarfs those in the first quarter.

Having a sense of how some of the largest and most followed banks in the country handled their loan loss reserve in the first quarter under CECL can provide you with additional data points to triangulate.  We are making this analysis downloadable in case you want to ‘slice and dice’ the dataset in different ways, such as by state or asset size, or if you want to select a customized list of banks. That data is available here.