USA Loan Loss Provision Charge In CECL Accounting

[YelloJacket]

I come from non-financial background, so please bear with me. I wanted to under how exactly the CECL loan provision is recorded on balance sheet.

Background:
Assume a Bankcorp has 100 Million $ of loans on Jan 2020. Due to Covid related economic contraction say it estimates a CECL of 20 Million $USD. Now the bank in Q1 10Q takes it as a charge (provision for loan loss) and sets aside the sum in loan loss account.

So:
Net interest income Q1 : 18Million $
Provision for loan loss: 20 Million $
------
Net income: (2) Million $


My question now is:
Will the same provision for loan loss charge be taken in Q2, Q3, Q4 as well? Like-

Net Interest income Q2, Q3, Q4: 18Million, 19 Million, 21 Million $
Provision for loan loss: 20 Million, 20 Million, 20 Million
------
Net income: (2) million, (1) million, 1 million


Or is it taken only once and the further charges will just be increase/decrease in provision for loan loss?


Or is it even more convoluted with the provisional loss charge being taken each quarter (as in first question) - Thereby likely causing net income in each quarters to be negative and only annual net income to be a positive number.

 

[kirby]

You are correct : taken only once and the further charges will just be increase/decrease in provision for loan loss

 

[YelloJacket]

Interesting! Thanks Kirby.

That makes me think, wont that motivate the banks to under-estimate credit loss estimates? I mean who would want to show bad earnings by taking larger loss provisions? What part of GAAP prevents the "speading out" of CECL?

 

[kirby]

Answers:
Yes
No one
GAAP itself. But further- a bank will have independent CPA's to audit its books as well as bank regulators. Both will review the loss provision to see that it is appropriate.