DBRS Comments on Hancock Holding Company 3Q12 Results- Senior at A (low); Negative Trend

DBRS, Inc. (DBRS) today has commented on the 3Q12 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 some noise, Hancock reported net income of $47.0 million for 3Q12, up from $39.3 million for 2Q12.

Over the last two quarters, Hancock reported several non-core items. During 3Q12, the Company reported $5.3 million (pre-tax) in costs associated with its tender offer for a portion of Whitney National Bank’s subordinated debt and $0.9 million (pre-tax) in securities related gains. Meanwhile, for 2Q12, Hancock reported merger-related expenses of $11.9 million (pre-tax). Excluding these items, Hancock reported operating earnings of $49.8 million for 3Q12, up from $47.0 million for 2Q12. Specifically, improved operating earnings were attributable to a 2.2% decline in operating expenses, partially offset by a 0.4% decrease in operating revenues (TE basis). DBRS notes that provisions for loan loss reserves were relatively flat QoQ.

Lower operating expenses (excludes merger-related costs and subordinated debt repurchase expense) mostly reflected a $1.1 million, or 1.3%, decrease in personnel expense and a $914,000, or 15.4%, decline in equipment costs. The contraction in personnel expense was attributable to the reduction in staff after the completion of the Company’s systems conversion and branch consolidations. DBRS notes that Hancock retained a number of employees to assist in the conversion instead of letting them go upon the close of the Whitney transaction. Going forward, DBRS expects the Company will continue to rationalize its expense base. Indeed, in 4Q12, Hancock expects to close several branches, as well as close or consolidate seven additional branches in 1Q13. Overall, Hancock expects 4Q12 operating expenses (excluding amortization of intangibles) to be between $149 million and $153 million.

On a linked-quarter basis, lower QoQ operating revenues were driven by a moderate $710,000, or 1.1%, decrease in noninterest income (excluding securities transactions) and a modest $171,000, or 0.09%, decline in net interest income. Lower noninterest income reflected moderate declines across most fee items. Nonetheless, mortgage operation fees were up, QoQ. DBRS notes that the Durbin interchange restrictions, which impacted Hancock Bank, beginning July 1, 2012, resulted in a $2.0 million decline in bankcard fees, and $0.5 million decrease in ATM fees linked-quarter. Somewhat offsetting the impact of the Durbin amendment was a $1.4 million increase in merchant fees, driven by the reacquisition of the Company’s merchant business.

Meanwhile, the QoQ decline in spread income was attributable to a 2.0% decrease in average earning assets, partially offset by a 6 basis point (bps) widening of net interest margin (NIM) to a high 4.54% (TE basis). Lower average earning assets reflected a 5.9% decrease in securities. Positively, average loans increased 1.1%, mostly reflecting higher levels of commercial & industrial loans, a sizable component of which was energy related. Importantly, Hancock’s loan pipeline remains solid.

Excluding net purchase accounting adjustments, Hancock’s core NIM narrowed by roughly five bps, as declining earning asset yields outpaced decreasing funding costs. Management expects continued pressure on margin, given that funding costs have approached a floor.

Hancock’s asset quality remains pressured by the difficult business environment. Specifically, nonperforming assets (NPA) moderately increased QoQ and represented 2.58% of loans and OREO at September 30, 2012, from 2.42% at June 30, 2012. Higher nonaccrual loans mostly reflected a small component of Whitney’s acquired portfolio that was performing at acquisition, yet subsequently moved into nonaccrual status. DBRS notes that if covered and acquired loans are excluded, Hancock’s NPAs represented 3.45% of loans at September 30, 2012, down from 3.61% at June 30, 2012. Although up slightly, non-FDIC covered net charge-offs (NCO) remain low at 0.34% of average loans for 3Q12, down from 0.37% for 2Q12. DBRS notes that, Hancock’s reserve coverage remains adequate at 1.19% of loans.

Hancock’s solid liquidity profile is underpinned by an ample core deposit base. During 3Q12, period-end deposits contracted 1.0%, reflecting declines across most deposit types, except for noninterest bearing deposits, which increased by 2.2%. Hancock’s securities portfolio and short-term investments, which, in aggregate, represent 24% 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, especially at current loss rates. At September 30, 2012, the Company’s tangible common equity ratio was a high 9.09%, estimated Tier 1 risk-based capital ratio was 12.30% and estimated Total risk-based capital ratio was 13.92%.

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: Alan G. Reid
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.