DBRS Comments on Hancock Holding Company 2Q12 Results - Senior at A (low); Negative Trend

DBRS, Inc. (DBRS) has today commented on the 2Q12 results of Hancock Holding Company (Hancock or the Company). Hancock has an Issuer & Senior Debt rating of A (low). All ratings of Hancock have a Negative trend, with the exception of the Short-Term Instrument ratings of its bank subsidiaries, which have a Stable trend. Reflecting lower merger related expenses, a modestly wider net interest margin (NIM), improved fee income and lower credit costs, Hancock reported net income of $39.3 million for 2Q12, up from $18.5 million for 1Q12, and $12.1 million for 2Q11.

On an operating basis, excluding merger-related expenses of $11.9 million for 2Q12 and $33.9 million for 1Q12 as well as $12,000 of security gains in 1Q12, Hancock reported earnings of $47.0 million for 2Q12, up from $40.5 million for 1Q12. Specifically, improved core earnings were attributable to a 1.3% increase in core total revenues, a 20% ($2 million) decrease in provisions for loan loss reserves, and a 2.0% decrease in operating noninterest expense.

On a linked-quarter basis, Hancock’s net interest income (FTE basis) increased by 0.6% to $180.3 million due to a 5 basis point increase in NIM to a strong 4.48%, partially offset by a 0.4% decrease in average earning assets. The wider NIM was attributable to lower funding costs and additional accretion related to acquired assets, while somewhat pressured by lower securities yields. Lower average earning assets reflected a 0.5% decrease in average loans, mostly offset by a 2.3% increase in average securities. The decrease in average loans was partly attributable to the run-off of FDIC-covered loans related to Hancock’s Peoples First acquisition. Nonetheless, Hancock reported higher levels of average commercial & industrial loans (up 2.4%) and consumer loans (up 1.1%) during the quarter. Meanwhile, higher core noninterest income reflected improved levels of deposit service charges, insurance, investment & annuity, and ATM related fees. Higher deposit fees were attributable to Hancock’s new standardized product offerings. Over the near term, the Company anticipates that its NIM will remain relatively stable. Meanwhile, future fee income will be pressured by the Durbin amendment, which went into effect for Hancock Bank on July 1, 2012. The Company estimates the impact of Durbin on Hancock Bank will approximate $2.5 million in lost revenues.

Operating expenses (excluding merger related expense) declined a solid 2.0%, QoQ, due to lower personnel and occupancy costs. The decline in personnel expense reflected the non-recurrence of some seasonal payroll taxes and a decrease in headcount related to the completed systems conversion and branch consolidations. Going forward, expense saves, especially those related to recent branch closings and the anticipated closing of eight branches in 4Q12, should help mitigate future expense growth. Overall, Hancock expects operating noninterest expense to decline by approximately $7 million to $11 million over the 2H12 to a 4Q12 operating run-rate of approximately $149 million, excluding amortization of intangibles.

Hancock’s asset quality remains pressured by the difficult business environment. Specifically, nonperforming assets (NPA) moderately decreased QoQ and represented 2.42% of loans and OREO at June 30, 2012, from 2.55% at March 31, 2012. On a legacy basis if covered and acquired loans are excluded, Hancock’s NPAs represented 3.61% of loans. Although up slightly, non-FDIC covered net charge-offs (NCO) remain low at 0.37% of average loans for 2Q12, up from 0.25% for 1Q12. DBRS notes that, Hancock’s reserve coverage remains adequate at 1.27% of loans and 105% of non-performing loans and accruing loans 90 days past due.

Hancock’s solid liquidity profile is underpinned by an ample core deposit base. Overall, deposits contracted 3.2% during 2Q12. The QoQ decrease in deposits was broad-based as the Company reported lower levels of noninterest bearing, interest bearing transaction, interest bearing public funds and time deposits. Hancock’s securities portfolio and short-term investments, which, in aggregate, represent 26% of total assets, along with access to the Federal Home Loan Bank and Federal Reserve, round out its liquidity profile.

Hancock’s capital position remains ample, in DBRS’s opinion, and provides solid loss absorption capacity at current loss rates. At June 30, 2012, the Company’s tangible common equity ratio was a high 8.72%, estimated Tier 1 risk-based capital ratio was 11.98%, and Total risk-based capital ratio was 14.00%. Finally, Hancock estimates that it comfortably exceeds minimum capital requirements set out by Basel III under the recent NPR.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations. Other methodologies used include the DBRS Criteria – Intrinsic and Support Assessments. Both can be found on the DBRS website under Methodologies.

The sources of information used for this rating includes company documents, the Federal Deposit Insurance Corporation and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

Lead Analyst: Mark Nolan
Approver: Roger Lister
Initial Rating Date: 1 November 2005
Most Recent Rating Update: 6 June 2011

For additional information on this rating, please refer to the linking document under Related Research.