Banks Hurt By Higher Loan Loss Provisions

By Eric Fox | April 25, 2011 AAA

One common theme of the banking industry's recent earnings season is that many reported lower loan loss provisions relative to previous quarters, as these institutions continued to work through troubled loan portfolios. This lower provisioning provides a benefit to earnings that helped many banks show strong profit growth for the quarter.

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Banks Showing Profitability

However, not all banks benefited from this trend as several reported higher loan loss provisions in the first quarter of 2011. Notwithstanding this higher provisioning, these institutions were profitable, and some even showed growth in net income relative to last year.

Southwest Bancorp (Nasdaq:OKSB) reported a $9.1 million provision for loan losses in Q1 2011, an increase from the $7.3 million reported in Q4 2010 and $8.5 million in Q1 2010.

Despite this headwind to earnings, the bank was still profitable in the quarter, although net income was down sharply compared to last year. The bank reported net income of $1.4 million, or 7 cents per diluted share in Q1 2011, compared to $3.3 million, or 17 cents per diluted share in Q4 2010.

New York Community Bancorp (NYSE:NYB) reported a $26 million provision for loan losses in Q1 2011, up from $20 million in Q1 2010. This increase was related to a reappraisal to collateral that secured some of its loans. NYB reported net income of $123 million, or 28 cents per diluted share in Q1 2011, just about flat with the comparable quarter in 2010.

CNB Financial (Nasdaq:CCNE) reported a 33% increase in its loan loss provision in Q1 2011, and it still managed to grow net income by 52% over the same quarter in 2010. Part of this growth was achieved through an 11.4% increase in total loans over Q1 2010.

Even though the bank's loan loss provisioning was higher in the quarter, it did not expect any actual losses from the newly impaired loans. If CNB Financial is correct, then the bank may have lower loan loss provisioning in subsequent quarters and an earnings benefit.

Certain Business Segments Affected Most

Some banks reported a higher loan loss provision only in certain business segments. PNC Financial Services Group (NYSE:PNC) reported a total loan loss provision of $421 million in Q1 2011, down both sequentially and on a year-over-year basis.

One area of the bank that saw a higher loan loss provision was the retail banking segment, where PNC reported a $276 million provision for credit losses, up from $157 million in Q4 2010. The bank cited weakness in its home equity portfolio, including increased bankruptcies, loan modifications and restructurings.

Bottom Line

Some banks defied the industry trend of lower loan loss provisions in Q1 2011 and increased their loss provisions relative to last year. Although this caused a decline in earnings for these institutions, they still reported a profit for the quarter. (For related reading, see Analyzing A Bank's Financial Statements.)

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