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 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 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 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.
