It's been a bumpy ride in recent quarters, but loan-loss provisions have gradually tapered off and early signs from first-quarter reports suggest that lower provisions may be here to stay.
Provisions plummeted in the first quarter at many community banks, in some cases falling by more than 50% from a quarter earlier. Some provisions fell more than analysts expected, allowing a number of companies to beat Wall Street estimates.
These are signs that credit quality is becoming less of a concern in the banking industry, said Damon DelMonte, an analyst at KBW's Keefe, Bruyette & Woods.
"Banks had spent a lot of quarters building up their provision levels in anticipation of softening credit trends," DelMonte says. "Now we're seeing credit trends improve, so we don't need such higher levels of reserves."
Several banking companies reported significant improvement with provision expenses, compared to the fourth quarter, including West Coast Bancorp (WCBO) in Lake Oswego, Ore. The company's provision fell 94% from a quarter earlier, to $89,000.
The $2.4 billion-asset company's loan-loss provision reached its lowest level in seven years, says Jeff Rulis, an analyst at D.A. Davidson & Co. It helped West Coast report first quarter net income of $5.4 million, or 27 cents a share, beating Rulis' estimate by two cents.
Simmons First National (SFNC) in Pine Bluff, Ark., reported a similar improvement in credit-related costs. The $3.3 billion-asset company's provision decreased 73% from the fourth quarter, to $771,000.
"We benefited significantly from continued pristine asset quality which has resulted in a reduction in our provision for loan losses," Thomas May, Simmons First's chairman and chief executive, said in an April 19 press release discussing quarterly results. May did not return calls seeking additional comment.
Other banking companies reported declines in the first quarter, but many have also seen the provision rise and fall in prior quarters.
The provision for loan losses at MetroCorp Bancshares (MCBI) in Houston fell 69% from a quarter earlier, to $400,000. The $1.5 billion-asset company said in a press release that the first quarter improvement was a result of "lower net chargeoffs and a reduction in nonperforming assets." Still, the quarter's decline followed a spike in the fourth quarter.
"We've reached a point where, from a nonperforming assets standpoint, the generation of new [nonperforming assets] has slowed considerably relative to two years ago," says Matthew Schultheis, an analyst at Boenning & Scattergood. "The pace of improvement is probably going to slow somewhat."
At some banking companies, a lower loan-loss provision has reflected an overall decline in nonperforming assets. For instance, Simmons First's nonperforming assets as a percentage of total assets fell to 1.14% in the first quarter, compared to 1.18% a quarter earlier.
Other banking companies still have a ways to go to fully address problematic assets, leaving some industry observers to wonder whether provisions will shrink further.
MetroCorp said last Friday that its nonperforming assets made up about 3.83% of total assets at the end of the first quarter, compared to 4.27% in the fourth quarter. Nonperforming assets made up roughly 2.9% of the assets at West Coast Bancorp at March 31, remaining relatively unchanged from the end of last year.
With loan-loss provision levels falling, some banks will begin to release reserves, DelMonte says. Doing so should provide a much needed boost to quarterly results.
"Banks have built up such strong and healthy reserves that it only makes sense for them to release the reserves as problem credits go off your books," DelMonte says.
As the economy slowly improves and banks see sustainable loan growth, industry observers expect loan-loss provisions to eventually edge back up.
That's what happened in the first quarter at Eagle Bancorp in Bethesda, Md.
Eagle (EGBN) said Monday that its first-quarter provision rose 44% from a quarter earlier, to $4 million, because of loan growth. The $2.8 billion-asset company's loan portfolio grew 3% from the end of 2011, to $2.1 billion, as it taps into opportunities around Washington, D.C.
"The increases in provisions [for loan losses] that we're seeing this quarter tend to be primarily for growth and not for negative migration in the existing loan book," Schultheis says.