Why some small banks are taking their CECL packages now

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Many banks were forced to make difficult choices in the first quarter when calculating loan loss provisions.

The first ruling was on the Current Expected Credit Losses standard, which requires provisions when loans are issued. While the coronavirus bailout adopted at the end of last month provided a short-term reprieve from the CECL, a large number of publicly traded banks have chosen to go ahead and comply.

For these banks, the next decision was about the size of their provision.

Predicting losses as a looming recession of uncertain duration approaches involves as much guesswork as traditional forecasting, industry watchers have said. Analysts, on the whole, said they favored banks that chose to go ahead and set aside substantial sums of money to cover potential credit problems.

“Some banks are trying to be as specific as possible for this quarter, knowing what we know now,” said Brad Milsaps, analyst at Piper Sandler.

“Others say it’s best to build up as much as possible and set it aside later if you need it,” Milsaps added. “I think the latter is what more people want to see.”

Home BancShares in Conway, Ark., Has chosen to comply with the CECL and absorb more financial pain now rather than drag it out for several quarters, relying heavily on projected national unemployment of 12.5% ​​for determine its layout.

The company set aside $ 87 million in the first quarter, including $ 72 million to deal specifically with the fallout from the coronavirus epidemic. Its allowance for loan losses rose to 2.01% of total loans, from 0.94% a quarter earlier.

“We’re going to do it behind us if we can do it behind us,” said Johnny Allison, president and CEO of Home, during the call for the company’s quarterly earnings at assets of $ 15.5 billion.

“I love our book as much as I never liked the book,” Allison said before observing that he had just gone through the “strangest” quarter of his 50-year business career.

Although Home barely made a profit, its stock is up 4% since reporting its results.

Several other banks, including Peoples Bancorp in Marietta, Ohio; Bryn Mawr Bank in Bryn Mawr, Pennsylvania; and Triumph Bancorp in Dallas, reported quarterly losses after recording large provisions related to the CECL and coronaviruses.

“We believe that moving forward with the adoption of the CECL was the most appropriate path to take,” said Chuck Sulerzyski, President and CEO of Peoples, during the appeal for the benefits of the company with assets of $ 4.4 billion. “Extending the inevitable was not something we wanted to continue to address in the coming quarters. “

Peoples set aside $ 17 million, bringing its allowance to 1.47% of total loans, from 0.75% at the end of 2019.

The decisions highlight a banker’s thought process rather than predicting specific losses will occur, industry observers have said.

“As we progress through this results season it becomes evident to us that [first-quarter] the results seem more a function of a company’s initial approach to this crisis than an early reading of… problematic exposure and possibly ultimate loss content, ”wrote Joseph Fenech, analyst at Hovde Group, in a commentary. recent customer note.

The CECL also played an important role in the way adopters approached their arrangements.

First Horizon Financial in Memphis, Tenn., Recorded a provision of $ 145 million, a peak from $ 13.4 million a year earlier, to reflect a “sudden and steep drop” in economic conditions. The provision contributed to an 85% decrease in profit from a year ago to $ 16.6 million.

CECL’s loan life requirements contributed to the higher allowance, said BJ Losch, chief financial officer of the company with $ 47 billion in assets, in an interview.

“The world has changed” in the first quarter, Losch added, although he hopes federal stimulus efforts such as the Paycheque Protection Program and the proactive efforts of bankers to help borrowers will ease the economic shock.

“We’re probably going to need another 90 days, maybe 120 days, to get a better idea of ​​how these things are working,” Losch said.

Industry experts agreed.

“We can probably be [three to six] it is only a quarter of an hour to fully understand whether the sweeping fiscal and monetary stimulus are enough to get both the consumer and the corporate borrower to the other side of this crisis, ”wrote Laurie Havener Hunsicker, analyst at Compass Point, in a recent customer note.

As a result, some banks are taking a more gradual approach to the allowance for loan losses.

While Western Alliance in Phoenix has set aside $ 51 million, more than 10 times its average quarterly allowance in 2019, its allowance covers about 1% of a loan portfolio that includes exposure to hotels, casinos and other businesses. affected by the pandemic.

Net income fell 30% from a year ago to $ 84 million, and executives warned that a prolonged shutdown in the economy could spur further reserve building in the second quarter.

The economic forecast “changes almost hour by hour,” said Dale Gibbons, vice president and chief financial officer of Western Alliance, during the company’s earnings call on $ 29 billion in assets.

Community Bank System in De Witt, NY, may also need to set aside more money after recording a $ 5.6 million provision in the first quarter, CFO Joseph Sutaris said when analysts asked why the company was not more aggressive.

“We’re going to assess the observed data in regards to delinquency and migration risk scores and those types of factors,” Sutaris said, adding that executives had made the best possible assessment at this point.

Company profit with assets of $ 11.8 billion fell 4.5% from a year earlier to $ 40.1 million.

Much of the decision-making involves subjective views of the same data, industry experts have said. Executives at Home and Western Alliance said they both reviewed Moody’s April ratings which predicted a deep recession and soaring unemployment.

Many other questions remain unclear, including the impact of federal stimulus measures and the future performance of loans that have been amended or granted abstention, said industry experts.

“Will the borrower who has benefited from a reduction or an abstention from payment eventually regain his status of fully performing or become a” net radiant? Hunsicker said.

It “may be smart” to record a large initial supply, said Damon DelMonte, analyst at Keefe, Bruyette & Woods. “But because it’s so difficult to make a reliable forecast in this environment, you run the risk of the provision being too severe. “

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