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The regulators' annual Shared National Credits review found nearly 10% of large, syndicated credits demonstrated some form of weakness, most of which were leveraged loans. But renewed concerns about energy loans also cropped up.
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Prosperity has built itself into one of Texas' largest banks over the past decade and now it's beginning to reap the benefits that come with scale.
October 23
Energy lenders had been mostly silent in the last month about the state of their portfolios, even as oil prices plunged below $40 a barrel.
That changed Thursday, when Hancock Holding in Gulfport, Miss.,
For Hancock, the moves show that management wants to get ahead of anticipated issues in a portfolio that has been under stress since oil prices began a free fall more than a year ago. But it could also signal that other banks will need to make similar moves in the weeks ahead.
"The big takeaway is that, in the past month, we've seen oil prices decline meaningfully further," said Kevin Fitzsimmons, an analyst at Hovde Group. Hancock is "choosing to be proactive, as opposed to letting it bleed out."
Other banks that could meaningfully increase allowances include Cullen/Frost Bankers in San Antonio; LegacyTexas in Plano, Texas; Green Bancorp in Houston; BOK Financial in Tulsa, Okla.; and MidSouth Bancorp in Lafayette, La., Brady Gailey, an analyst at Keefe, Bruyette & Woods, wrote in a note to clients. He noted that those banks, at Sept. 30, had reserves to cover 1.4% to 2.4% of their energy loans.
A BOK Financial spokesman said the company will provide an update on its energy reserves when it reports fourth-quarter earnings on Jan. 27. The other companies did not immediately respond to requests for comment.
Concerns over spiraling oil prices — some analysts expect barrel prices to fall as low as $20 — are hurting more than just the banking sector. The Dow Jones industrial average fell 2.1% on Friday, largely fueled by concerns tied to oil.
Hancock's disclosure also comes as federal regulators increasingly
It's unclear if Hancock's disclosures were associated with shared national credits, Jefferson Harralson, another analyst at Keefe Bruyette, wrote in a Thursday note to clients. He added that it is also unclear if the adjustments had anything to do with redetermination, a period when banks assess the status of certain loan segments.
The higher allowance, however, does make it clear that credit quality is deteriorating much faster than the company's management anticipated. During a third-quarter investor call, Hancock's executives said they doubted the allowance would creep above 4%.
"A pervasive energy cycle through 2016 would likely create some credit losses, but we do not expect them to be significant," John Hairston, Hancock's chief executive,
Hancock said in Thursday's disclosure that its total loan-loss allowance would total $77.5 million on Dec. 31, compared to $35.2 million a quarter earlier. The company also said it expects to record $50 million to $75 million in energy-related chargeoffs during the rest of the cycle, including about $3.5 million in the fourth quarter.
"The depth and duration of the current energy cycle is now deeper and longer than what we and many others originally expected," Hairston said in a press release disclosing the higher allowance.
A spokesman said Hairston would not be available for further comment.
Though a higher allowance raises concerns, it also shows that Hancock is taking steps to minimize volatility in its energy book over the coming year, industry observers said.
"It reduces some of the uncertainty about what the quarter-to-quarter hit is going to be," Fitzsimmons said.
The higher allowance brings Hancock in line with some of its competitors, particularly those that lend to oil servicers, which make up a "riskier part of the energy sector," said Brad Milsaps, an analyst at Sandler O'Neill.
"For Hancock, specifically, their reserve was lower than their peers," Milsaps said, noting that the increase "gets them in line" with Zions Bancorp. in Salt Lake City and Regions Financial in Birmingham, Ala., which increased their allowances during the third quarter.
Looking ahead, the industry will likely see an uptick in classified loans, and provisions are expected to stay elevated, Milsaps said.
"It's going to be very company dependent," he said.
