Banks Have Started Recording Goodwill Impairments, Is More to Come?

A growing number of banks may need to record goodwill impairment charges once the coronavirus crisis finally shows up in their credit quality.

A handful of banks have already announced impairment charges, doing so in the first and second quarter of this year. Some have written off as much as $1 billion of goodwill, dragging down their earnings and, in some cases, dividends. Volatility in the stock market could make this worse in the second half of the year.

“It was a very hot topic for all of our financial institutions,” says Ashley Ensley, a partner in DHG’s financial services practice. “Everyone was talking about it. Everybody was looking at it. Whether you determined you did … or didn’t have a triggering event, I expect that everyone that had goodwill on their books likely took a hard look at that amount this quarter.”

Goodwill at U.S. banks totaled $342 billion in the first quarter, up from $283 billion a decade ago, according to the Federal Deposit Insurance Corp.

Goodwill is an intangible asset that reconciles the premium paid for acquired assets and liabilities to their fair value. It’s recorded after an acquisition, and can only be written down if the subsequent carrying value of the deal exceeds its book value. Although goodwill is an intangible asset excluded from tangible common equity, the non-cash charge can have tangible consequences for acquisitive banks. It immediately hits the bottom line, reducing income and, potentially, even capital.

Several banks have announced charges this year. PacWest Bancorp, a $27.4 billion bank based in Beverly Hills, California, took a charge of $1.47 billion. Great Western, a $12.9 billion bank based in Sioux Falls, South Dakota, took a charge of $741 million. And Cadence Bancorp., an $18.9 billion bank based in Houston, Texas, recorded an after-tax impairment charge of $413 million.

Boston-based Berkshire Hills Bancorp announced a $554 million charge during its second-quarter earnings that wiped out all its goodwill. The charge, combined with higher loan loss provisions, led to a loss of $10.93 a share. Without the goodwill charge, the bank would’ve reported a loss of only 13 cents a share.

The primary causes of the goodwill impairment were economic and industry conditions resulting from the COVID-19 pandemic that caused volatility and reductions in the market capitalization of the Company and its peer banks, increased loan provision estimates, increased discount rates and other changes in variables driven by the uncertain macro-environment,” the bank said in its quarterly filing.

Goodwill impairment assessments begin by evaluating qualitative factors for positive and negative evidence — both internally and in the macroeconomic environment — that could cause a bank’s fair value to diverge from its book value.

“It really is not a one-size-fits-all analysis,” says Robert Bondy, a partner in Plante Moran’s financial services group. “Just because a bank — even in the same marketplace — has an impairment, it’s hard to cast that shadow over everybody.”

One reason banks may need to consider impairing their goodwill is that bank stock prices are meaningfully down for the year. The KBW Regional Banking Index, a collection of 50 banks with between $9 billion and $63 billion in assets, is off by 33%. This is especially important given the deceleration in bank deals, which makes it hard to evaluate what premiums banks could fetch in a sale.

“[It’s been] one or two quarters and overall markets have rebounded but bank stocks haven’t,” says Jay Wilson, Jr., vice president at Mercer Capital. “You can certainly presume that the annual impairment test, when it comes up in 2020, is going to be a more robust exercise than it was previously.”

Banks could also write off more goodwill if asset quality declines. That has yet to happen, despite higher loan loss provisions — and in some cases, banks saw credit quality improve in the second quarter.

The calendar could influence this as well. Wilson says the budgeting process and cyclical cadence of accounting means that annual tests often occur near year-end — though, if a triggering event happens before then, a company can conduct an interim test.

That’s why more banks could record impairment charges if bank stocks don’t rally before the end of the year, Wilson says. In this way, goodwill accumulation and impairment mirror the broader economy.

“Whenever the cycle turns, banks are inevitably in the middle of it,” he says. “There’s no way, if you’re a bank to escape the economic or the business cycle.”

Banks Are Sunny In the Southwest


Shareholders at banks headquartered in the Southwestern United States have good cause to be happy. According to data provided by Seattle-based investment firm McAdams Wright Ragen, which has a research focus on community banks, the price to tangible book value (PTBV) for Southwestern banks averaged 128.83 percent—a full 22 percentage points higher than the next best performing region—the Northeast, as of the first quarter.

Data courtesy of McAdams Wright Ragen’s Q1 2013 Community Bank Report. The report includes quarterly averages by region based on data from more than 1,100 publicly traded banks.

The region also boasts the lowest Texas ratio, at 13.83 percent, and non-performing assets to total assets of just 1.57 percent.

One-third of these banks are based in Texas, which serves as home to many highly valued community banks and boasts the highest PTBV in the nation, at 169.59 percent. Why are banks rated so highly in the Lone Star State?

According to John Heasley, executive vice president and general counsel at the Texas Bankers Association, the state of the Texas economy is key to the success of its banks. In addition to a boom in energy production, Texas benefits from the relocation of businesses from other parts of the U.S. that aim to take advantage of low taxes and regulations. That economic growth translates into increased loan growth and profitability. “Our typical community bank in most areas of the state [is] doing very well,” Heasley says.

Prosperity Bancshares Inc., based in Houston, and First Financial Bankshares Inc., based in Abilene, are two of the highest valued banks in the U.S., with both hovering around 350 percent PTBV. “Both are very focused on business lending,” says Heasley, leading both institutions to greater profitability. Prosperity has also been actively growing through acquisition. The holding company has made six acquisitions in the last year and a half, and recently announced plans to purchase FVNB Corp. and its subsidiary, First Victoria National Bank.

In contrast, the Southeastern United States continues to perform poorly compared to the rest of the country. While price per tangible book value on average is the lowest at 92.66 percent, book value has grown by 24 percent over the past year. So while pricing remains low, the Southeast seems to be working its way back up.