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Hancock's provision a red flag for banks with energy SNCs, analyst says

Banking Essentials Newsletter December Edition Part 2

Banking Essentials Newsletter - November Edition

University Essentials | COVID-19 Economic Outlook in Banking: Rates and Long-Term Expectations: Q&A with the Experts

Estimating Credit Losses Under COVID-19 and the Post-Crisis Recovery

Hancock's provision a red flag for banks with energy SNCs, analyst says

Analystsbelieve that Gulfport, Miss.-based HancockHolding Co.'s additional $45 million in credit loss provisions willnearly wipe out the bank's first-quarter earnings, and they say the news has broaderimplications for peer banks where shared national credits make up a sizable portionof energy loans.

Hancockannounced that it increasedits expected provision for credit losses for the first quarter by $45 million; thetotal provision for credit losses for the first quarter is expected to be around$58 million to $62 million. It is the second quarter in a row that Hancock has warnedof an elevated loan loss provision. The bank attributed the increase to risk ratingsdowngrades on more than $300 million in outstanding energy credits and results fromthe shared national credit review, according to a March 28 company press release.

The sizeof the provision has broader ramifications for the bank. It will eliminate "themajority" of first-quarter profits, wrote FIG Partners director of researchChristopher Marinac in a March 29 report. The charge of 48 cents per share madeup most of his previous estimate for first-quarter EPS; he now puts EPS for thequarter at 2 cents.

"Thisreduces our 2016 EPS estimate to $1.60 and this is the second straight quarter where[Hancock's] dividend is greater than reported EPS," he wrote.

The provisionincrease puts the bank's total loan loss reserve at around 1.5% of loans, wrotePiper Jaffray analyst Peyton Green in a March 29 report. The analyst's report loweredfirst-quarter EPS to 3 cents a share. The bank's energy loan portfolio makes upabout 10% of loans, with 5.8% of those loans concentrated in the higher-risk servicecompanies. The 2015 energy loan loss reserve, excluding net charge-offs, included4.88% of non-drilling service loans, 12.83% of drilling-related service loans, 0.67%of midstream loans and 2.24% of upstream loans.

But evenas reserves increase at Hancock, Evercore ISI analyst Stephen Moss wrote in a March29 report that he does not expect its criticized energy loan ratio to increase bya similar amount, because it was "likely" that some of the credit downgradeswere already included in the bank's criticized loans. Criticized loans at the banktotaled 28.6% of total energy loans at the end of 2015. Marinac disagreed in hisreport and wrote that he believes criticized loans should increase to 48% at theend of the first quarter.

Hancockjoins a number of banks that have announced increased provisions in the first quarter,including JPMorgan Chase & Co.and Regions Financial Corp.Energy reserves at Hancock will now total about 7.8%, compared to 4.95% at the endof 2015, Moss wrote, bringing the reserve ratio closer to that of banks like and BB&T it expects to increase its loan lossprovision between $30 million and $40 million, implying a reserve ratio of about7% to 8%; Comerica estimatedan additional reserve build of $75 million to $125 million, which implies an energyreserve of about 6% to 7.5%, Moss wrote.

Mosspointed out that the disclosure that some provisioning was driven by the energy-centricSNC review highlights the risk to first-quarter earnings for banks with energy concentrations.Regulators conducted an SNC review in the first quarter for the first time thisyear, in addition to the review and report issued in the latter half of the year.SNCs made up almost two-thirds of Hancock's energy loans at the end of 2015, Mosswrote. Other banks where SNCs make up a sizable proportion of their energy creditsinclude Associated Banc-Corp,Comerica, IBERIABANK Corp.,Zions Bancorp. and , henoted.