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    CECL Q2 Results Amid COVID-19

    August 2020

    CECL Q2 Results Amid COVID-19

    As US financial institutions have filed their CECL estimates in Q2 2020, we have compiled results from banks that have adopted CECL to inform you of the various impacts primarily due to the continued economic deterioration from COVID-19.

    We track each institution’s allowance for loan loss estimates and amortized cost as reported in the FDIC Call Report (RI-C schedule) that have adopted CECL. Off-balance sheet exposures and reserves for unfunded commitments are excluded from this analysis. The ratio of the allowance for loan losses and amortized cost is the allowance percentage and is computed for Q1 and Q2 2020 with the percent difference being the allowance percentage build (or release) in Q2. The majority of institutions continued to build their allowance in Q2 and in many cases more substantially than in Q1. The increase in Q2 allowance was frequently cited as largely driven by economic conditions that have worsened compared to the prior quarter’s outlook.

    We summarize the banks’ weighted average allowance results by the following categories based on total asset size as of June 30, 2020 (Figure 1). 

    • More than $250B—12 banks with total assets greater than $250 billion
    • $50B to $250B—27 banks with total assets between $50 billion and $250 billion
    • $20B to $50B—35 banks with total assets between $20 billion and $50 billion
    • $10B to $20B—35 banks with total assets between $10 billion and $20 billion
    • $1B to $10B—85 banks with total assets between $1 billion and $10 billion
    cecl-q2-results-amid-covid-19_figure 1

    In total, banks increased their allowance for loan losses from 1.99% in Q1 to 2.55% in Q2 for a 28% increase (Figure 1). This can be broken down by the bank category, where the More than $250B banks had the highest percentage build at 39%, and the $50B to $250B banks had the highest Q2 ending allowance at 2.86%. The allowance build was more modest for the smaller to mid-size institutions.

    Distribution of allowance rates 
    The allowance ranges across institutions due to a multitude of factors, including but not limited to portfolio composition, asset quality, loan contractual terms, scenario assumptions, mean reversion methodology, and management judgment. We further break down the allowance into the six reported product types: construction, commercial real estate, commercial, residential real estate, credit cards, and other consumer loans. 

    We depict the distribution of allowance for loan loss rates by product type for all banks (Figure 2). Product types that are considered as riskier – for example, credit cards, other consumer loans, and construction loans – have a wider range or dispersion of allowance estimates across institutions. 

    cecl-q2-results-amid-covid-19_figure 2
    Construction loans 
    The banks in our assessment increased their construction (Constr) allowance from 1.28% in Q1 to 2.22% in Q2 for a 73% gain (Figure 3). The More than $250B bank category had the highest percentage build at 144%, followed by $50B to $250B banks at 77%, $10B to $20B banks at 45%, $1B to $10B banks at 25%, and $20B to $50B banks at 23%. 
    cecl-q2-results-amid-covid-19_figure 3
    Commercial real estate loans 
    For non-construction or permanent commercial real estate (CRE) lending, the allowance jumped from 1.12% to 1.66% in Q2 for a 48% increase (Figure 4). The More than $250B bank category had the highest percentage build at 74%, followed by $20B to $50B banks at 36%, $50B to $250B banks at 34%, $10B to $20B banks at 33%, and $1B to $10B banks at 23%. 
    cecl-q2-results-amid-covid-19_figure 4
    Commercial loans 
    Commercial (C&I) allowance grew from 1.16% to 1.71% in Q2 for a 48% increase (Figure 5). The institutions in the groups below $50 billion had decreases in commercial allowance. Lower utilization rates for commercial loans in Q2 was cited by smaller-sized institutions that contributed to a decline in reserves. 
    cecl-q2-results-amid-covid-19_figure 5
    Residential real estate loans 
    Residential real estate (Resi) allowance went from 0.69% to 0.88% in Q2, for a 28% increase (Figure 6). The More than $250B bank category had the highest percentage build at 46%, followed by $10B to $20B banks at 24%, $20B to $50B banks at 13%, $1B to $10B banks at 9%, and $50B to $250B banks at 6%. 
    cecl-q2-results-amid-covid-19_figure 6
    Credit cards 
    Credit card (CC) allowance saw a 23% increase from 8.85% to 10.89% in Q2 (Figure 7). The More than $250B bank category had the highest percentage build at 25%, followed by $50B to $250B banks at 20%, $20B to $50B banks at 19%, $1B to $10B banks at 14%, and $10B to $20B banks at 5%. 
    cecl-q2-results-amid-covid-19_figure 7
    Other consumer loans 
    Other consumer lending (Othr) allowance grew from 2.85% to 3.27% in Q2 for a 15% increase (Figure 8). The More than $250B bank category had the highest percentage build at 23%, followed by $20B to $50B banks at 15%, $10B to $20B banks at 7%, and $50B to $250B banks at 5%. However, the $1B to $10B bank category saw a decrease of 4%. 
    cecl-q2-results-amid-covid-19_figure 8
    Bank results 
    Individual financial institution results are available. Contact Phillip Lai (Phillip.Lai@moodys.com) or Jeff Young (Jeff.Young@moodys.com) for detailed breakouts of the bank-level results.