With nonaccrual loan ratios at most banks seemingly stuck on a slow, downward trendline, industry observers have been waiting for the other shoe to drop and for an uptick in problem credits to materialize. The watchful waiting will have to continue a little longer, as several big regional players saw their already squeaky-clean credit quality get even better in the first quarter.
Heading the list was the $100 billion-asset Huntington Bancorp, which reported a surprisingly robust 20% year-over-year drop in nonaccrual loans to $401 million on March 31— just 0.60% of total loans. Even on a linked-quarter basis, Huntington’s numbers appear solid, with nonaccrual’s dipping 5% since the end of 2016.
In a conference call Wednesday, analysts probed repeatedly for signs of incipient deterioration, but the answers they got merely confirmed the portfolio’s underlying strengths. Indeed, according to Chief Credit Officer Daniel J. Neumeyer, about two-thirds of Huntington’s nonperforming commercial loans are actually current on principal and interest payments.
“We’ve had a really extraordinary stretch" of good credit quality, Stephen Steinour, Huntington’s chairman and CEO, said Wednesday in an interview. “The industry has as well, but when you think about our combining with FirstMerit, it’s just been a really strong performance on the credit front.”
Huntington reported net chargeoffs totaling $39 million, or 0.24% of average total loans. It marked the 12th consecutive quarter net chargeoffs have come in below the company’s target range of 0.35% to 0.55%, and Steinour added he expected chargeoffs to remain below the target for the remainder of 2017.
Much the same could be said for the $26 billion-asset Wintrust Financial in Rosemont, Ill., which saw first-quarter net chargeoffs drop to $1.6 million, or 0.03% of total loans — the lowest ratio since the second quarter of 2004, according to CEO Edward J. Wehmer.
Eagle Bancorp in Bethesda, Md. also reported a nearly historic low in net chargeoffs, which totaled just $623,000 for the $7 billion-asset company. On an annual basis, net chargeoffs equaled 0.04% of average loans, “which is among the best levels the bank has ever recorded,” CEO Ronald D. Paul said Wednesday in a conference call with analysts.
Nonperforming loans were just $14.4 million, or 0.25% of total loans on March 31, prompting Paul to describe Eagle’s credit quality as “one of the absolute highlights of the quarter.”
Not surprisingly, the quarterly provision for loan losses showed substantial year-over-year declines at both Wintrust and Eagle, contributing to the record quarterly earnings both reported: $58.4 million at Wintrust and $27 million at Eagle.
Huntington more than doubled its quarterly provision to $68 million, but that was in keeping with a reported 32% increase in total loans connected to the August 2016 acquisition of FirstMerit. Even so, Huntington posted a 21% year-over-year increase in net income to $208 million.
Barclays analyst Jason M. Goldberg characterized Huntington’s credit quality as “benign” in a research note Wednesday. Joe Gladue, director of research at Merion Capital in Wayne, Pa., reached a similar conclusion about Eagle, adding the situation there and at other banks surprised him somewhat.
“The banks I follow all had lower provisions than I projected,” Gladue said Wednesday in an interview. “Someday the credit cycle will turn. Things don’t stay perfect forever. … [Still], there’s been a little more improvement than I would have projected.”
Quote“Someday the credit cycle will turn," says Joe Gladue, director of research at Merion Capital.
Banks’ credit-quality position would likely remain positive for as long as the economy expands, Gladue said, but he added he is going to err on the side of caution in his forecasting and continue calling for modest increases in credit costs.
“Whether it’s multifamily or commercial real estate, ultimately some sector is going to get overextended,” Gladue said.
At least one bank that reported its results Wednesday experienced something like the scenario Gladue outlined.
Though credit quality at U.S. Bancorp was mostly stable during the first quarter, net chargeoffs rose 6% from a year earlier, to $335 million.
The $449 billion-asset company attributed the slight increase in chargeoffs to an uptick in losses in its credit card book, which it said reflects trends. Lower commercial real estate recoveries were also a factor.