DBRS Comments on Hancock’s 1Q13 Results; Ratings Unchanged - Senior at A (low); Stable Trend

DBRS, Inc. (DBRS) has today commented that its ratings for Hancock Holding Company (Hancock or the Company), including it’s A (low) Issuer & Senior Debt rating, are unchanged following the release of 1Q13 financial results. All ratings of the Company have a Stable trend. Hancock reported net income of $48.6 million for 1Q13, up from $47.0 million for 4Q12. Higher sequential earnings mostly reflected lower credit costs, partially offset by lower spread income, due to a narrowing net interest margin (NIM). Specifically, the increase in earnings was attributable to an 89.3% decrease in provisions for non-covered loan loss reserves, somewhat offset by a 4.1% decrease in total revenues and a 1.1% increase in non-interest expense. DBRS notes that the material decrease in provisions for loan loss reserves reflected the non-recurrence of the 4Q12 $13.7 million provision related to that quarter’s bulk loan sale.

Importantly, Hancock exhibited sustained asset quality improvement in the quarter, as non-performing assets (excluding covered assets and acquired loans) continued to contract. Furthermore, criticized loans continued to decline, perhaps signaling continuing future improvement. Finally, the Company’s capital position remains solid and provides sound loss absorption capacity.

Overall, earnings continued to benefit from loan accretion income related to the better than expected performance of the Whitney Holding Corporation loan portfolio. Indeed, net purchase accounting adjustments are expected to represent a solid component of earnings over the next few years, albeit at declining levels.

Similar to most banks, Hancock’s spread income (TE basis) continued to be pressured by the low interest rate environment. Specifically, net interest income declined $6.1 million, or 3.3%, QoQ, driven by a 16 bps narrowing of NIM to 4.32%, despite a 1.7% increase in average earning assets. DBRS notes that on a core basis, which excludes accretion related to acquired loans, Hancock’s NIM narrowed by 20 bps to 3.41% sequentially. The narrower NIM mostly reflected two fewer days in the quarter along with lower earning asset yields. Going forward, management anticipates that reported NIM will contract 10-20 bps over the next two to three quarters, while core NIM is expected to decline by 5-10 bps.

On a linked-quarter basis, core non-interest income, excluding securities gains, declined $4.1 million, or 6.4%, reflecting a 6.0% decrease in deposit service charges and a 15.1% decrease in secondary mortgage market operation revenues. Lower deposit service charges were driven by the lower sequential day count, increased average personal deposit account balances, and the non-recurrence of 4Q12 seasonal activity. The decline in mortgage banking income was attributable to lower mortgage production volumes. Meanwhile, the Company’s non-interest expense increased by 1.1%, mostly driven by seasonality.

The slow growth economic environment continues to pressure loan growth. During 1Q13, average earning assets increased 1.7%, reflecting a 5.3% increase in securities, partially offset by a 0.1% decrease in loans. Lower average loans reflected a 5.8% decline in construction and land development loans and a 0.5% decrease in commercial real estate loans. Partially offsetting these headwinds, C&I loans increased by 2.1% and residential mortgage loans were up 0.8%. Meanwhile, period-end earning assets declined 1.1% sequentially, mostly due to a $1.0 billion decrease in short-term investments.

Despite the difficult operating environment, Hancock’s asset quality remained relatively sound and reflected sustained improvement. Specifically, non-performing assets (excluding covered assets and acquired loans) decreased $24.4 million, or 12.8%, QoQ, and represented 2.24% of loans and OREO at March 31, 2013, as compared to 2.66% at December 31, 2012. Meanwhile, non-covered net charge-offs (NCOs) decreased by $21.4 million, or 76.3%, QoQ, to $6.6 million, representing a low 0.23% of average loans for 1Q13. The sizable sequential decline in NCOs reflected the bulk loan sale, which added $16.2 million to NCOs in 4Q12. Finally, DBRS notes that Hancock’s reserve coverage (excludes allowance for covered and acquired loans) remains adequate at 1.02% of loans.

The Company’s funding profile is solid, underpinned by its low loan to deposit ratio of 75.3%. Hancock’s deposits declined 3.1% on a period-end basis, yet were up 1.2% on an average basis.

The Company’s capital position remains sound and provides solid loss absorption capacity. At March 31, 2013, Hancock’s tangible common equity ratio was a high 9.14%, its estimated Tier 1 risk-based capital ratio was 13.03% and estimated Total risk-based capital ratio was 14.69%. DBRS notes that on April 30, 2013, the Company’s board of directors authorized the repurchase of up to 5.0% of the Company’s outstanding common stock.

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

[Amended on May the 23rd, 2014 to remove unnecessary disclosures.]