Nearly every U.S. bank over $10 billion in total assets reported a year-over-year increase in provisioning during the second quarter as uncertainty surrounding the COVID-19 pandemic's economic fallout, combined with adoption of the new current expected credit loss accounting method, required reserve builds across the board.
Even the one bank with a year-over-year decline in provisioning reported an increase in reserves as a portion of loans. Sioux Falls, S.D.-based Great Western Bancorp Inc. was the outlier this quarter with provisions for loan losses that were $4.4 million lower than the 2019 second-quarter provision. Still, the bank's reserves as a percentage of gross loans, at 1.44% in the second quarter, was 66 basis points higher than the year-ago quarter.
Great Western has yet to adopt CECL but plans to implement it Oct. 1, management said on the bank's earnings call. On Day 1 adoption of CECL, the bank expects to increase reserves by 40% to 60%. Although the bank is not providing guidance for provisioning, Chief Credit Officer Stephen Yose said the bank has taken a large provision two quarters in a row and that the figure should decline in future quarters while cautioning that the economic outlook remains uncertain.
Great Western lowered its dividend to a penny per share, and its stock price dropped 8.1% the day of the news.
Winter Haven, Fla.-based South State Corp. recorded a provision of $151.5 million, up $147.8 million from the year-ago quarter. The closed merger of equals with Center State Bank Corp. accounted for $119 million of the reserve build.
"This is a result of the new CECL accounting standard that is affectionally known as the double count, whereby an acquired loan portfolio not only receives a traditional mark, but also simultaneously receives a loan loss provision that runs through the income statement in the quarter that the merger closes," said CEO John Corbett on the bank's earnings call.
Although provisions at San Antonio-based Cullen/Frost Bankers Inc. were up $25.6 million year-over-year, the bank reported much lower provisioning than the first quarter, management said on its second-quarter earnings call.
"We added a much smaller amount this quarter," said Chairman and CEO Phillip Green, who did not provide guidance for future provisioning. "The question is going to be what happens going forward. And that's going to depend on the health situation ... I wish I had a better answer, but there's just so much uncertainty right now."
