DBRS Confirms Hancock Holding Company’s Senior Debt at A (low); Changes Trend To Stable

On February 27, 2013, DBRS Inc. (DBRS) confirmed the ratings of Hancock Holding Company (Hancock or the Company), including its Issuer & Senior debt rating of A (low). At the same time, DBRS placed most of the Company’s ratings on Stable from Negative trend. The trend for its bank subsidiaries’ Short-Term Instruments ratings remain Stable. The rating actions follow a detailed review of the Company’s operating results, financial fundamentals, and future prospects.

The change in trend to Stable from Negative reflects Hancock’s successful integration of its Whitney Holding Corporation (Whitney) transaction, its improved core earnings generation, and its stronger capital position. The confirmation of ratings reflects the Company’s top-tier Gulf coast region banking franchise, its relatively sound asset quality, and strong liquidity position. The confirmation also considers Hancock’s decreasing, yet still sizable, commercial real estate (CRE) concentration and moderate sized fee income contribution to revenue.

Hancock operates a deeply entrenched Gulf coast franchise in five states, with strong deposit market shares in southern Louisiana and coastal Mississippi. Importantly, and reflecting a defensible deposit franchise, the Company has the top deposit position (MSA basis) in Gulfport, Mississippi (46% market share), the number two position in New Orleans, Louisiana (16% deposit market share) and the number three deposit position in Baton Rouge, Louisiana (12% of the deposits).

The successful integration of the Whitney acquisition reflects the completed core systems integration, no significant loss of customers and the attainment of targeted merger-related expense saves in 4Q12. Furthermore, the Whitney loan portfolio has performed better than the Company had originally expected. With a common operating platform, leaner expense base and integration behind them, Hancock management and employees can now fully focus on the banking business.

Providing solid capital generation, Hancock’s earnings capability improved during 2012. The Company’s DBRS calculated income before provisions and taxes (IBPT) was $89.2 million for 4Q12, up from $78.5 million for 3Q12, and from $76.5 million for 4Q11. The QoQ increase in IBPT was attributable to a 4.0% decline in adjusted expenses and a 1.7% increase in adjusted revenues. Lower linked-quarter expenses reflected targeted cost saves related to the Whitney acquisition and benefits related to recent branch rationalizations, which continue into 1Q13.

The Company’s improved linked-quarter revenues reflected higher levels of spread and mortgage banking income. Despite the Company’s net interest margin narrowing by 6 bps to 4.48%, sequentially, solid loan growth drove higher spread income. Meanwhile, the Company’s fee income contribution still falls below those of many of its similarly rated peers (26% of total revenues for 4Q12). Nonetheless, adjusted fee income improved modestly (excluding securities gains), sequentially, due to improved mortgage banking income driven by continued high levels of re-financings.

In light of the continued sluggish economy and margin pressure, DBRS expects considerable earnings headwinds going forward. Nonetheless, with the Company now fully focused on offense, DBRS anticipates continued loan growth (excluding construction run-off), improved levels of cross sales opportunities, and well managed expenses to offset these headwinds.

In 2012, loan growth of 3.6% was broad based and reflected higher levels of commercial & industrial (C&I) loans, residential mortgages and consumer loans, partially offset by the managed decline in construction and land development exposure. Although the Company’s CRE (including construction) portfolio continues to contract, it remains a concentration, at approximately 2.4 times tangible common equity and is a rating consideration.

Despite the difficult business environment, Hancock’s credit metrics improved during 2012 and asset quality is sound. Indeed, the Company continues to manage down its non-performing assets (NPAs), and the acquired Whitney portfolio has performed better than expected. Specifically, NPAs (excluding covered assets and acquired loans) represented an elevated, yet manageable 2.66% of loans and OREO at December 31, 2012, down from 3.45% at September 30, 2012 and from 4.26% at December 31, 2011. Lower linked-quarter NPAs primarily reflected the 4Q12 sale of $40 million in troubled loans and a reduction in OREO. Meanwhile, net charge-offs (NCOs: excluding covered loans) represented a fairly high 0.97% of average loans in 4Q12. Excluding the impact of the loan sale, NCOs represented 0.41% of average loans. Finally, Hancock’s reserve coverage is satisfactory, representing 1.18% of loans and 81.4% of non-performing loans and accruing loans 90 days past due.

In DBRS’s view, Hancock’s liquidity and capital profile is strong. The Company’s ample liquidity position is evidenced by its loan to deposit ratio of 74%. Meanwhile its strong capital position is underpinned by its high tangible common equity ratio of 8.8% at December 31, 2012 (8.0% at December 31, 2011), estimated Tier 1 risk-based capital ratio of 12.61% (11.48% at December 31, 2011) and estimated Total risk-based capital ratio of 14.23% (13.59% at December 31, 2011).

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 applicable methodologies include the DBRS Criteria: Intrinsic and Support Assessments and DBRS Criteria: Rating Bank Subordinated Debt & Hybrid Instruments with Discretionary Payments. These can be found at: http://www.dbrs.com/about/methodologies

[Amended on June 19, 2014, to reflect actual methodologies used]

The sources of information used for this rating include the company documents, the Federal Reserve, 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.