US banks' credit quality outlooks dimmed in first quarter earnings calls after President Donald Trump's tariffs on US trading partners drove market volatility and greater economic uncertainty.
Several US banks increased their credit loss reserves during the first quarter as rising economic uncertainty and increasing recession odds coincided with softening credit quality at some companies. Simmons First National Corp., for example, increased its allowance for credit losses (ACL) by 10 basis points during the quarter, according to a company filing. President James Brogdon said during the company's first quarter earnings call that he expects the baseline economic outlook to continue to worsen in the coming quarters.
"I think it would be our expectation that, based on trends we see today, that reserves for the industry would be building throughout this year based on those dynamics," Brogdon said.
In addition to building its ACL, Simmons First moved two credit relationships to nonperforming status, including a $27 million hotel property loan and a $23 million credit relationship with a fast food franchise operator. The company's nonperforming loans jumped 89 basis points. Simmons hopes to resolve the hotel credit by the end of the year, but patience could be beneficial if seasonal trends improve the client's financial outlook, Brogdon said.
Simmons moved the fast food credit into nonaccrual status and recorded a $4.3 million fraud charge in noninterest expense after the company identified fraudulent activity in deposit accounts related to the borrower, Brogdon said. The company is now exploring its options for recovery, he said.
Executives at other banks had similar explanations for their own ACL builds. Amerant Bancorp Inc.'s stock price fell after the company announced that its credit loss provision was up $8.5 million due to specific reserves on five loans and "macroeconomic updates," Chairman, President and CEO Gerald Plush said. The company's other credit quality metrics, including nonperforming assets (NPAs) and classified loans, also worsened during the quarter.
Deteriorating macroeconomic conditions drove Peoples Bancorp Inc. to increase its ACL by nearly $2 million, President and CEO Tyler Wilcox said. And Fifth Third Bancorp increased its ACL by $38 million, CFO Bryan Preston said.
"Over the last two quarters, we've added $100 million to our reserve just attributable to the economic forecast because we are seeing and Moody's is now projecting more risk in the environment," Preston said.
Fifth Third's NPAs rose during the quarter by 10 points. The NPA increase was related to two credits in Fifth Third's asset-based lending credits in its commercial and industrial loan portfolio, which has historically had "very minimal" loss content, Chief Credit Officer Greg Schroeck said. As such, the company does not expect further NPA increases in the coming quarters, he added.
The ultimate direction of Trump's trade policies remains uncertain, however, and Fifth Third is reviewing all of its portfolios, including those most likely to feel an impact from tariffs such as construction, manufacturing and consumer spending, Schroeck said.
"The bottom line is we don't know where this is going to go yet from a tariff standpoint," Schroeck said. "We're staying very close to the customers."
Elevated economic uncertainty
First Horizon Corp. raised its ACL by $11 million, according to a company filing. The reason for the increase was elevated economic uncertainty, Chief Credit Officer Thomas Hung said.
"We felt like the prudent move was to make sure we're adequately reserved," Hung said. "We believe we are conservatively reserved and ready for a wide range of outcomes."
M&T Bank Corp. similarly built its ACL in reflection of a deteriorating macroeconomic forecast, CFO Daryl Bible said, adding that the increase was not related to changes in the company's underlying credit performance.
"Obviously, if we do go into a recession, we probably would continue to add to the reserves appropriately as needed," Bible said. "We just felt comfortable that that was the right thing to do given everything that's going on and uncertainty in the marketplace."
At Southern Missouri Bancorp Inc., net charge-offs (NCOs) rose to 11 basis points in the first quarter from 2 basis points in the previous quarter due to a large agricultural lending relationship involving suspected fraud, executives said. The company's nonperforming loans also increased, rising $14 million due to two non-owner-occupied commercial real estate properties.
First Internet Bancorp's NCOs rose to $9.7 million from $9.4 million in the previous quarter. At the same time, the company's ratio of NCOs to average loans rose to 0.92% from 0.91% in the fourth quarter of 2024 and 0.15% in the third quarter. After the company reported credit quality deterioration for the second consecutive quarter, its stock price fell 20.81% on April 24 from the previous day's close.
"With the elevated level of economic uncertainty, we felt it was prudent to take action and get in front of some potential problem loans," President and COO Nicole Lorch said. "We felt it was prudent to get in front of credits where there was no likely path to success and recognize those losses in the first quarter."
