What's a banker to say when charge-offs are microscopic?

• Key insight: Banks with very low charge-off rates are calibrating the message they send to the investing public, warning that there will be a return to more normal levels of bad credit.
  
• Expert quote: "When there's a reversion to the mean, we don't want to freak out." — BOK Financial CEO Stacy Kymes
  
• Forward look: Analysts expect most banks to build their reserves amid economic choppiness.

Among the most important jobs bank CEOs have is shaping the investing public's expectations, trying to limit the possibility of a downside surprise. These days, for BOK Financial President and CEO Stacy Kymes, that means preparing the $53.8 billion-asset company's stakeholders for the likelihood of an uptick in problem loans.

That's not because credit is deteriorating. It's because the portfolio can't stay this strong forever, Kymes said.

"When there's a reversion to the mean, we don't want to freak out," Kymes told American Banker.

"There will be a reversion to the mean," Kymes added. 

The normalization of credit quality after a period of strength was a major theme during the recent first-quarter earnings season. Some analysts highlighted asset-quality issues that arose at individual lenders. Others worried about the potential future impact of negative economic trends.

Those concerns are manifesting in the form of larger loan-loss provisions, as lenders gird for higher levels of problem loans and charge-offs. Brean Capital analyst Daniel Cardenas recently reviewed estimates for more than 200 banks with at least $1 billion of assets and determined that analysts expect virtually all of them to upsize their provisions.

The rising concerns follow several years of benign asset quality, where the levels of nonperforming loans and charge-offs fell below historic averages. For some institutions, the positive trend has been exceptionally strong. The $37.3 billion-asset Atlantic Union Bankshares reported a first-quarter net charge-off ratio of 0.02% of annualized average loans held for investment. 

John Asbury, chairman and CEO of Richmond, Virginia-based Atlantic Union, told analysts last month that "we're not going to run on two basis points of annualized net charge-offs." 

At BOK, net charge-offs totaled 0.03% of annualized average loans on March 31. The following month, New York-based Fitch Ratings affirmed BOK's long-term bond rating at an investment-grade A level.

Kymes is pleased with the company's results, but he is still working to manage expectations.

"We've guided folks by saying, 'Look, this is not sustainable,'" the CEO said. "I've been teased about that because I've been saying it for a couple of years, so at what point does it change?"

Much of the recent anxiety surrounding banks' asset quality is being driven by economic data. Though April employment numbers were better than expected, the news was tempered by increases in inflation and the prospect of higher-for-longer interest rates.

But so far, there are no signs of widespread problems on bank balance sheets.  

"Credit quality was a bright spot basically across-the-board for the large banks," Piper Sandler analyst Scott Siefers wrote in a report about banks' first-quarter results. He noted that net charge-offs came in a bit better than had been hoped, and that provisions outperformed expectations by an even bigger margin.

To be sure, a number of banks — including FirstSun Capital Bancorp, Bank OZK and Washington Trust Bancorp — reported bigger asset-quality issues in the first quarter. At Little Rock, Ark.-based Bank OZK and Westerly, R.I.-based Washington Trust, the problems were largely related to office loans, which have been an isolated trouble spot for a number of years.

Certain other institutions, including the $4.8 billion-asset Carter Bankshares in Martinsville, Virginia and, more recently, the $5.3 billion-asset Alerus Financial Group in Minneapolis, have reported significant progress in cleaning up problem loans on their books.

Alerus reported Tuesday that it sold three nonaccrual loans totaling $33.6 million, in a deal that shrank its nonperforming-loan total by nearly two-thirds without any accompanying charge-offs.

For his part, Kymes doesn't see any impending weakening of BOK's asset quality. "The next six months I think it's going to stay pretty good," Kymes said. 

Analysts appear to anticipate a similar outcome for the industry at large. "We continue to think that the sector is on sound footing, despite expectations that credit quality is normalizing to pre-pandemic levels," Brean Capital's Cardenas wrote.