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Banks Giving Disparate Estimates on Loan Loss Accounting Impact

Oct. 21, 2019, 8:45 AM

The impact of a major change in accounting for loan losses is all over the map based on the latest batch of estimates released by a smattering of banks.

More than a dozen banks on Oct. 16 and Oct. 17 gave analysts insights into how their much-watched loan loss reserve figure could change once they implement the current expected credit losses (CECL) accounting standard in 2020.

Many of them said it was still too soon to tell. But estimates among the others are a study in extremes—from KeyCorp Inc. saying it expected barely any change to its reserves to Atlantic Union Bankshares Corp. of Richmond, Va., predicting it would have to double its loan loss provision.

The takeaway: less than three months before the biggest change to bank accounting goes live, there’s no pervading assessment of how the Financial Accounting Standards Board’s new rule will affect financial institutions.

There are a few constants, however. Banks with large portfolios of long-term loans such as mortgages expect to beef up—in some cases, significantly—the reserves they have to set aside to cover losses on souring loans. That’s because the accounting standard requires banks to look to the foreseeable future to estimate expected losses. It stands to reason that the longer they have to look ahead, the more potential losses they could experience.

“The expected increase is primarily driven by the company’s acquired loan portfolio and the consumer loan portfolio due to the portfolios longer average life,” Atlantic Union CFO Robert Michael Gorman told analysts on Oct. 16.

In contrast, the shorter the loan, the less time for things to go bad. Banks with a lot of short-term commercial loans are telling investors they won’t see their reserves increase as much as those banks with longer-term loans.

KeyCorp. Inc. CFO Don Kimble told analysts on Oct. 16 that the new accounting’s effect on its reserves would be “modest.” That’s because 85 percent of its loans are short-term commercial products. The rest are long-term consumer loans. The reserves on its consumer loans could triple, but the increase is more than offset by its large portfolio of short-term loans.

“So the relative impact to us should be fairly modest compared to some of the early indications we’ve seen from some of the other companies,” Kimble said.

Post-crisis rules

FASB published the sweeping new rules in 2016 and big banks must start following them in 2020. Developed in the aftermath of the 2008 financial crisis, the rules require banks and businesses to look to the future, take into account past experience, and consider current economic conditions to calculate losses on loans and set aside corresponding reserves. If a bank sees signs of the economy going south, that needs to be taken into account. The new accounting contrasts with much-criticized existing rules, which allow banks to tally losses only after they have happened.

Investors care when banks increase their loan loss reserves because it affects bank earnings. Banks care because when they boost reserves, it affects the capital they must set aside to meet regulatory requirements. This could mean less money to spend and invest.

Banks that shared estimates with analysts on earnings calls this week include:

  • People’s United Financial Inc., which said it expected to increase its reserves as much as 15% to 25%.
  • Citizens Financial Group Inc. said it expected an increase of about 30% to 35%.
  • M&T Bank Corp. projected its loan loss reserves would rise between 5% to 15%.
  • BB&T Corp., which in February announced that it would merge with SunTrust Banks Inc., said on an Oct. 16 call that reserves would increase about 30% to 50% if the merger does not go through by 2020. SunTrust executives on a separate earnings call said the bank would not issue CECL estimates on a standalone basis because the merger was likely to happen before 2020.

At least eight other banks told analysts that they simply weren’t ready to share what they expected would happen once they adopted the new accounting. Sandy Spring Bancorp Inc., Home BancShares Inc., Wintrust Financial Corp., First Financial Bancorp, Ameris Bancorp, Independent Bank Corp., Mercantile Bank Corp., and Glacier Bancorp Inc. said they were either still firming up numbers, waiting for their auditors to sign off, or that they’d give more details in the fourth quarter.

“There will be an increase in the reserve from where we project our reserve to be at year end. How big that is, is still a soft number,” said Barry Johnston, chief credit administrator at Glacier Bancorp Inc. in Kalispell, Mont., on Oct. 17. “So we’re just kind of keeping that in our hip pocket until we get closer to year-end when we run the last incurred loss model.”

To contact the reporter on this story: Nicola M. White in Washington at

To contact the editors responsible for this story: Jeff Harrington at; Vandana Mathur at

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