It seems like the bottom-line boost from improved credit quality should have ended by now. Instead, it is the gift that keeps on giving.

Nonperforming assets at banks with $40 billion or less in assets fell by 22% at Dec. 31 compared to a year earlier, based on American Banker's analysis of 252 banks that have reported quarterly results. NPAs made up 1.08% of assets at those banks, compared to 1.46% at the end of 2012.

Several banks booked loan-loss reversals in the fourth quarter, including BOK Financial (BOKF) in Tulsa, Okla.; Horizon Bancorp (HBNC) in Michigan City, Ind., and Heritage Commerce (HTBK) in San Jose, Calif. Many banks had improved credit quality, even if they were unable to draw down their loan-loss reserves.

The continued resolution of nonperforming assets has some people wondering how much longer it can last, including Dave Kaye, chief financial officer at the $6.4 billion-asset Boston Private Financial Holdings (BPFH).

"I wouldn't expect the same magnitude [of improvement in 2014] that we had" last year, Kaye said during the company's quarterly conference call last month. Boston Private recorded a $2 million negative provision in the fourth quarter.

The average size of loan-loss provisions has been falling dramatically for several quarters, leading some industry experts to warn that reserves will soon be depleted, negating the industry's ability to lower credit costs.

Other observers believe banks will have an ability to keep releasing reserves. Due to the drawn-out nature of the foreclosure process, there are plenty of banks that hold significant nonpeforming assets, says Ron Riggins, managing director of RP Financial in Arlington, Va.

"There are still a lot of losses out there," Riggins says. "It's like moving through a pipeline."

Banks must reappraise foreclosed properties annually, as long as they are still held on the books, Riggins says. If a bank is unable to sell a property, some devaluation of the loan is required.

About a tenth of all banks are operating with enforcement actions, with many of those actions tied to foreclosed properties, Riggins says. That means those banks still have a large amount of nonperforming assets that need to be disposed.

The $14.4 billion-asset Washington Federal (WAFD) in Seattle, recorded a $5 million loan-loss reversal in the fourth quarter and a $6 million net recovery of loan chargeoffs. The recovery was its highest total since the financial crisis.

The positive trend "seems likely to continue at least through the end of this year," Joseph Fenech, an analyst at Sandler O'Neill, wrote in a Jan. 14 note to clients.

The same could be true at the $6.7 billion-asset CVB Financial (CVBF) in Ontario, Calif., which recorded a $6.8 million negative provision in the fourth quarter.

Aaron James Deer, an analyst at Sandler O'Neill, said during a Jan. 23 conference call that he estimates CVB will record $5 million to $10 million of negative provisions this year, asking management if they agreed with his forecast.

"Hard for me to answer that question," Chris Myers, CVB's president and chief executive, responded, noting that the company had recorded a negative provision for three straight quarters. "We have seen that trend, but it is hard to forecast."

Banks in states where judges must approve foreclosures may continue to benefit from improving credit quality.

In New York and New Jersey, it "takes a very long time to go through the judicial process," meaning a bank can see delays purging nonperforming assets, Monte Redman, president and CEO of Astoria Financial (AF), said in a recent interview.

The $15.8 billion-asset Astoria's loan-loss provision fell by 68% from a year earlier, to $3.4 million, and net loan chargeoffs fell 47%, to $7.4 million.

Astoria should benefit this year from better credit quality, Redman says. As "the dam bursts" and judges approve more foreclosures, "we expect to see more" improvement, he says.

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