Correction: This story has been updated to reflect the proper title for Nancy Bush. She is a contributing analyst for SNL Financial, not a banking analyst at NAB Research.

Cutting reserves is not nefarious, bankers say. If a bank has fewer bad loans, it makes sense to have less money set aside to cover them. (Justin Sullivan/GETTY IMAGES)

Megabanks made a bundle this earnings season, with the top five firms alone pulling in $19.5 billion in profits. But a closer look at the books shows they have been moving money out of rainy-day funds to boost earnings.

Many on Wall Street consider it standard practice. With interest rates low, banks have struggled to grow revenue and have tapped their reserves to pad earnings. But the pace in which they are cutting back on reserves has regulators concerned.

The top five banks released $5 billion from reserves in the first quarter, which comprised roughly a quarter of their total profits, according to an analysis by SNL Financial. By comparison, JPMorgan Chase, Bank of America, Citigroup, Wells Fargo and U.S. Bancorp moved $3.7 billion in the fourth quarter.

Comptroller of the Currency Thomas Curry spent much of last year cautioning banks against draining their reserves amid a fragile economic recovery. He worried that lenders would not be prepared to incur more losses from home-equity loans and commercial loans taken out in 2004 to 2008.

Still, the big five released a total of $22.5 billion last year, down from $27.5 billion in 2011. But the year before, those banks had added about $8.7 billion to their reserves.

“As asset quality improves, we understand that reserve levels will walk their way down,” said Darrin Benhart, OCC deputy comptroller for credit and market risk, but the agency is keeping a watchful eye to ensure that reserves don’t recede too quickly and to inappropriate levels.

Cutting reserves is not nefarious, bankers say. If a bank has fewer bad loans, it makes sense to have less money set aside to cover them. And with the housing market on the mend and consumer defaults on the decline, it is a good time to draw down on the fund, bankers say.

On a conference call with analysts last week, Timothy Sloan, chief financial officer at Wells Fargo, attributed the bank’s release of $200 million in reserves to a “significant improvement” across its commercial and consumer portfolios. The amount of defaulted loans that Wells Fargo had to write off declined to the lowest level since the second quarter of 2006, according to the bank.

“These portfolios should continue to benefit from our underwriting and the continued improvement in the housing market,” Sloan said. “Absent a significant deterioration in the economy, we continue to expect future reserve releases in 2013.”

JPMorgan chief executive Jamie Dimon also told analysts that his bank will probably release more of its reserves in the coming quarters as the health of its loan portfolio continues to improve. The bank reduced its allowance for loan losses by $1.2 billion in the first three months of 2013 — helping boost its $6 billion quarterly profit.

“The large banks always have a degree of a black-box element, so it’s tough to ever know for sure if the drawdown of reserves is entirely appropriate,” said Mike Mayo, a banking analyst at CLSA.

Nevertheless, he said, reserve releases tend to be cyclical. Banks often draw down on rainy-day funds in times of recovery, whereas they squirrel away money in the face of a downturn.

Regulators, however, would prefer banks to build up loss reserves in good times rather than wait for a crisis. The problem is that banks have to adhere to accounting rules that bar them from holding huge sums of reserves on their books.

“People keep saying these are not high-quality earnings — and they’re not, but this is not up to the banks,” said Nancy Bush, a SNL Financial contributing analyst.

The Financial Accounting Standards Board, the panel that sets bookkeeping rules for U.S. companies, ruled 15 years ago that banks should show evidence of a loss before writing down the asset to prevent companies from overstating their loss reserves.

In the run up to the financial crisis, banks wrote off few bad loans but had risky assets building on their balance sheets, regulators say. Since borrowers were not defaulting en masse, there were no losses being incurred to warrant an increase in reserves. The economic meltdown exposed shortfalls in reserves that had banks scrambling to cover bad loans.

In the aftermath, the accounting board has issued five proposals to change the model. Two of those proposals are up for review. If enacted, the rules would force banks to hold more capital in reserves, which could lessen the amount of money they return to shareholders.

Still, changing the reserve model “would give banks the ability to build reserves earlier and look at the risks that might be building up on the balance sheet,” said Benhart of the OCC. “They could do a better job of thinking about the underwriting, what’s happening with asset values they’re using as collateral.”