Most US banks booked negative provisions in Q1 as outlook improves

As the economic outlook gets rosier, many U.S. banks are releasing some of the massive loan loss reserves they built during 2020 as they braced for economic fallout from COVID-19.

Of the 94 U.S. banks with more than $10 billion in total assets that reported first-quarter earnings between April 13 and April 30 with available data, 63 booked negative provisioning for an aggregate $12.47 billion. Nine banks reported zero provisioning, which typically translates to a reserve release, while 22 reported a positive provisioning figure.

"Each and every quarter over the past year, the economic backdrop changed considerably," South State Corp. CEO John Corbett said on the company's first-quarter earnings call. "With record levels of fiscal and monetary stimulus and a successful vaccine program, it appears clear that the banking industry dodged the bullet and will avoid a prolonged credit cycle."

South State booked a negative provisioning figure of $58.4 million for the quarter, partly due to the improved economic outlook, management said.

Each quarter, banks report a credit loss provisioning line item on their income statements. The figure contributes to the bank's loan loss reserves on its balance sheet. If the provisioning figure is higher than net charge-offs, the bank generally builds its loan loss reserves. If the figure is lower than net charge-offs, the bank releases reserves and gets a boost to its net income for the quarter.

The trend of reserve releases through negative and zero provisioning expenses will likely continue into the second quarter and maybe longer, Christopher Marinac, director of research at Janney Montgomery Scott, wrote in an April 26 note.

WesBanco Inc. CFO Robert Young said there could be more negative provisioning in store for the company, but it will likely be more modest than the company's $28 million negative provision in the first quarter.

"I certainly would not be predicting that we're going to see a $28 million reduction in the provision or the allowance here in the short run, but there could still be some negative provisioning before we get back to a zero or a slight amount of reserve allocation or provision increase per quarter," he said on the bank's first-quarter earnings call. "The pandemic kind of sets its own course."

While the vast majority of banks booked negative provisions in the first quarter, not all felt comfortable releasing reserves just yet. Cullen/Frost Bankers Inc. reported a provision of $63,000 for the first quarter.

"We continue to be concerned about what's going on in certain industries — commercial real estate, for example. And just given where we are and the expectation of what could still come, whether that be variant, whether that be issues associated with office buildings and whether employees come back to work, whether that's related to hotels and lodging," CFO Jerry Salinas said on the company's first-quarter earnings call. "We're not out of the woods."