Holding a Winning Hand

A little more than two years ago, Hurricane Katrina slammed ashore on the U.S. Gulf Coast, crippling the operations of Hancock Holding Co., whose main footprint lay right in the stormu00e2u20acu2122s path. The bank and its employees woke up to complete devastation the next day. Many employees lost their homes, including two branch managers, and 22 branches either suffered significant damage or were destroyed. Nevertheless, Hancock opened for business that morning at several locations, setting up generators and handing out money at card tables to customers and noncustomers alike. By being the first to open for business in its markets, Hancock generated so much goodwill that its account growth swelled 13,000 in the quarter after the storm, up from a typical pace of 4,000.

In terms of prosperity, it was just the beginning. Despite the expenses of rebuilding and reopening branches, the bank has benefited from a rise in deposits, thanks to an expanded customer base and a large inflow of insurance and government aid proceeds. Loan growth is brisk, up 13% in the second quarter this year, and the bank is poised to benefit from a housing boom when real estate almost everywhere else nationwide is in a bear market.

Notwithstanding the storm and its aftermath, $5.9 billion Hancock has climbed the rankings in Bank Directoru00e2u20acu2122s 2007 Bank Performance Scorecard, vaulting to third place, up from 72nd place last year. The holding company footprint spans communities dotting the Interstate I-10 corridor in Mississippi, Louisiana, Alabama, and Florida, with nearly 100 branches and another 45 offices under its subsidiary Harrison Finance Co. The banku00e2u20acu2122s efficiency has generated high scores in profitability, capital adequacy, and asset quality over the four quarters ending June 30. For example, Hancocku00e2u20acu2122s return on assets was 1.66% over the time period; its return on equity was 17.83%. Moreover, Hancocku00e2u20acu2122s profitability is helped by its reliance on its own deposits for funding.

The bank aims to be in the top quartile among its peersu00e2u20ac”generally regional banks with $3 billion to $10 billion in assetsu00e2u20ac”not an easy task considering the bank shuns riskier forms of lending, sticking with a mix of consumer loans, standard mortgages, and commercial small-business lending. u00e2u20acu0153We have an unrelenting commitment to performance,u00e2u20ac says John M. Hairston, co-chief executive officer. u00e2u20acu0153Year in and year out, we try to stay in the top quartile. A lot of banks can say they do that. But very few of them can say they do that with a conservative risk profile.u00e2u20ac

Few banks can also say they share power as well as the co-leaders at Hancock. Last December, the board appointed two of the banku00e2u20acu2122s veterans as co-CEOs: Hairston, 44, who was its chief operating officer; and Carl J. Chaney, 46, the banku00e2u20acu2122s former chief financial officer. While co-chief executive arrangements have often derailed organizationally, Hancock has long steeped itself in a teamwork mentality, appointing key posts from within, and when hiring from outside, finding talent from the communities it serves. The tandem approach mirrors the 50-year management partnership between Chairman of the Board George A. Schloegel, 67, and Leo W. Seal Jr., 83, Hancock Banku00e2u20acu2122s president and the holding companyu00e2u20acu2122s largest individual shareholder.

u00e2u20acu0153Weu00e2u20acu2122re a team,u00e2u20ac Schloegel says. u00e2u20acu0153We act as a team. We complement each other. We have our disagreements, but as a team, we donu00e2u20acu2122t have to have somebody at the pinnacle and say, u00e2u20acu02dcThatu00e2u20acu2122s the boss.u00e2u20acu2122 In fact, we donu00e2u20acu2122t like that term around here. u00e2u20acu02dcBossu00e2u20acu2122 is not a good word at Hancock Bank.u00e2u20ac

The board also plays a strong role in helping guide the bank in its long-term strategy. u00e2u20acu0153Our board is really a board of directors,u00e2u20ac Schloegel says. u00e2u20acu0153Itu00e2u20acu2122s not a window-dressing group.u00e2u20ac The board is well received by management, and vice-versa. While its members are involved in working with management, they donu00e2u20acu2122t manage. For instance, director Christine Pickering, chair of the audit committee and an accountant with her own private practice, has offered input on controls and processes over the years and meets with various committees, the board, and managers four to six times a month. u00e2u20acu0153Management is very open and wants us involved,u00e2u20ac Pickering says. u00e2u20acu0153It makes us want to be involved. Our opinions matter.u00e2u20ac

Hurricane Katrina slammed right into the Gulfport, Mississippi-based companyu00e2u20acu2122s footprint on Monday, Aug. 29, 2005, devastating neighboring towns such as Bay St. Louis, Pass Christian, Long Beach, Biloxi, and Ocean Springs. But the banku00e2u20acu2122s preparedness paid off, and it set up for business at key locations the very next morning. Even at branches that were virtually destroyedu00e2u20ac”its Bay St. Louis branch along the Mississippi coast was reduced to three standing wallsu00e2u20ac”Hancock towed trailers out of its repossession lot, hooked them up to batteries and generators, and used them as de facto offices. Hancock became a lender of first resort for those that who had lost everything: homes, jobs, and personal belongings. In a market suddenly without electricity, cash became king.

u00e2u20acu0153As devastating as the storm was, one of the most important things you can do for the general public is to let them know they have access to money,u00e2u20ac Chaney says. u00e2u20acu0153With no electricity, you can have all the credit cards and debit cards in the world, but they are [essentially] worthless. Itu00e2u20acu2122s a cash economy.u00e2u20ac The banku00e2u20acu2122s decision to lend $200 to customers and $100 to noncustomers helped generate invaluable goodwill. New customers flocked to the bank, sending new deposits soaring 31% in 2005 to $5 billion. Hancock did what analysts thought was impossible: increasing its market share where it already dominated. The bank now holds a 75% market share in Hancock County, Mississippi, and upward of 50% in its other Mississippi markets.

The bank also made other initiatives to jump-start the local economy. In the first weeks after the storm, it lobbied the Mississippi legislature to pass a law allowing for the areau00e2u20acu2122s floating casinosu00e2u20ac”which had been destroyedu00e2u20ac”to be built on land within 800 feet of the shoreline. That gave insurance companies and investors the confidence to start rebuilding. It also later lobbied the legislature to unify a Byzantine system of 100 separate water and sewer systems in six counties, with the help of government grants of $1 billion. Several of the banku00e2u20acu2122s executives sat on the governoru00e2u20acu2122s rebuilding commission.

u00e2u20acu0153The public rewards you for doing the right thing,u00e2u20ac Schloegel says. u00e2u20acu0153Our base is broader because of the way we handle the bank. Itu00e2u20acu2122s not just because of the storm, but in all times.u00e2u20ac

Because of the influx of customersu00e2u20acu2122 insurance proceeds and Mississippi homeowner grants, deposits shot up in 2006, boosting earnings 88%, to $102 million. Some of those deposits have flowed back out to the community, helping to fund rebuilding and repair of properties. While these are positive developments, this activity has also crimped earnings for the first two quarters of 2007, meaning earnings will likely decline to $2.48 a share in 2007, down from $3.06 last year, estimates James Schutz, an analyst at Sterne, Agee & Leach Inc.

But these numbers belie a bank that is poised for strong growth, according to Schutz, who estimates a boost in earnings of around $2.86 a share in 2008. Meanwhile, loan production is robust this year, with a 13% jump in the second quarter over the same period a year earlier. And Hancock is in the midst of the early stages of a building boom occurring throughout Mississippi, which lost 70,000 homes as a result of the storm.

Peyton Green, an analyst at FTN Midwest Securities, expects loan growth to be above 10% for the next five to six yearsu00e2u20ac”barring another stormu00e2u20ac”with the pace approaching 15% over the next two years. u00e2u20acu0153At a time when the rest of the country is slowing down, that will be a standout number,u00e2u20ac Green says.

The bank is also poised for continued market growth. In Louisiana, Hancock has only a 10% market share, and in Florida and Alabama, its share is 2% or less, offering plenty of opportunity for growth. The bank recently opened another branch in New Orleans. And Hancock is accelerating expansion in Alabama: After Katrina, it received a temporary charter from the Alabama Banking Department to serve residents that work in Mississippi and received approval for a full charter last year. The bank responded by opening a branch in Mobile in the second quarter, with three more branches planned in the state in the fourth quarter, and up to another four next year. In Florida, Hancock plans to add up to three more branches in Pensacola by the end of next year.

As it grows, it is snapping up experienced outsiders to provide key staffing resources. Hancock Bank of Alabama this year hired veteran bankers in retail and commercial lending, and added three business and civic leaders to its board. u00e2u20acu0153It has been a very focused and deliberate expansion plan,u00e2u20ac says Schutz. u00e2u20acu0153They donu00e2u20acu2122t go all over the place, and they are doing it on a de novo basis with little acquisition.u00e2u20ac

Back in the beginning, Hancocku00e2u20acu2122s executives have kept the bank centered on a strong, stable foundation, a tradition it carries on today. Opening its doors under the name Hancock County Bank in 1899 in the Mississippi coastal town of Bay St. Louis, it quickly built up a following, helped by industries such as lumber, cotton, wool, poultry, produce, and tourism. Since then, its conservative approach and commitment to values have helped it survive. When the Great Depression hit, all the banks in nearby Gulfport failed. Soon after, local businessmen reached out to Hancock to open a downtown branch; later the company moved its headquarters from Bay St. Louis to Gulfport. Over the rest of the 20th century, the bank remained a hallmark of stability as its community presence grew through de novo expansion and acquisitions.

In the 1990s, Schloegel, with Sealu00e2u20acu2122s blessing, set about turning a sleepy southern bank into a regional force. Several executives retired, and Schloegel filled the ranks with outsiders. Key hires along the way include Hairston in 1994 from Accenture, previously Andersen Consulting, who quickly rose through the ranks of Hancocku00e2u20acu2122s operations. In 1998 the company hired Chaney, who had served as legal counsel to the bank for 12 years as a partner at Watkins, Ludlam, Winter & Stennis, to take over legal and financial matters for the bank. Clifton Saik, senior trust officer, joined the bank in 1998 to run to its wealth management division. Richard Hill, now chief retail officer, also came on board in that year; Joy Phillips, senior vice president and general counsel, was hired in 1999; and Michael Achary, hired in 2000, now serves as chief financial officer. Green of FTN says this influx of broad experience helped solidify the banku00e2u20acu2122s management and performance. u00e2u20acu0153Even though one of the strongest attributes is Hancocku00e2u20acu2122s great culture inside the company, all companies need influence from outside going forward,u00e2u20ac he says.

The company then started making changes in order to remain competitive with its bigger peers, improving its incentive compensation system companywide in 1999. For management, the new pay system took into account performance measures such as return on assets and equity, earnings per share, and loan and deposit growth. For other employees, performance metrics were tailored to their particular departments. u00e2u20acu0153The new system was a huge change,u00e2u20ac Green says. New staff hired from area banks that had merged or had been sold u00e2u20acu0153were all used to being paid in an incentive-based manner. It was important to do that to improve the profitability of the company and for them to want to work there.u00e2u20ac

New talent brought new ways of doing things. Achary, who engineered a profitability measurement system at his prior employer First Commerce, spearheaded a revamp of Hancocku00e2u20acu2122s platform, which dated back to 1970. u00e2u20acu0153When Mike joined us, he basically took that system to a new level,u00e2u20ac Chaney says. u00e2u20acu0153So we can measure profitability all the way down through the organization.u00e2u20ac

Similarly, the bank reengineered its credit management process early this decade. Its credit quality used to be weaker than that of its peers four or five years ago, Green says. Now its performance is in the top quartile: Hancock ranked 27th among the top 150 banks on the scorecard, with nonperforming assets to loans and other real estate at 0.25%, and reserves to loans, 1.34%, ranking it 32nd.

Over the years, the bank also has sought to become less dependent on interest income, helping to smooth out earnings. Chaney recognized this and broached the topic at a company retreat in 2001, before most banks were beginning to feel the effects of the interest rate squeeze and inverted yield curve. Back then, noninterest income made up 18% of total revenues, excluding sales of securities and credit card receivables. The ratio hovered near 35% at the end of the second quarter, thanks in part to diminished interest income.

u00e2u20acu0153Five years ago, banks were making a killing,u00e2u20ac Hairston says. u00e2u20acu0153Our concern [was] that [the prime interest rate] wasnu00e2u20acu2122t going to be at 4.5% forever. Many of our friends focused on net-interest incomeu00e2u20ac”we focused on noninterest, and did it in a way that was sustainable. We hired some excellent talent to run the insurance, the investments, and the trust business. Those have all worked out really well.u00e2u20ac

Saik, the senior trust officer, has been instrumental in this area. Also a veteran of First Commerce, Saik has built Hancocku00e2u20acu2122s corporate trust division into the ninth-largest nationwide, last year alone doing 33 bond deals worth $2.4 billion. While Hancock Insurance Agency Inc. has been around since 1902, Saik has spearheaded a series of acquisitions this decade across the footprint. Meanwhile, Saik has also presided over the creation of three mutual funds that have Morningstar ratings ranging from three to five stars. All told, trust, insurance, investment services, and annuities account for 37% of the banku00e2u20acu2122s noninterest income.

Despite all the emphasis on growth and performance, the banku00e2u20acu2122s stock has taken some hits this year, falling 23% for the first eight months, caught in the downdraft of financial stocks. In response, Hancock has stepped up its stock buybacks, repurchasing 661,000 shares during the first six months of the year, compared with 39,000 for the same period in 2006. Itu00e2u20acu2122s a strategy its management believes in. u00e2u20acu0153The recent price levels have dipped down because of the national influences that are way out of our control,u00e2u20ac says Paul Guichet, vice president of investor relations. u00e2u20acu0153The stock repurchases represent an excellent opportunity to use our capital.u00e2u20ac

And in the wake of Katrina, the bank is also investing heavily in preparedness. It dedicated a new technology center in August on a 100-acre site 10 miles inland in Harrison County, Mississippi. The center houses critical operations equipment, network infrastructure, and customer datau00e2u20ac”which formerly had been situated in the banku00e2u20acu2122s 15-story headquarters in downtown Gulfport. The new centeru00e2u20acu2122s eight-inch thick walls of reinforced concrete are built to withstand 200 mph winds, and its generators, batteries, and 25,000-gallon fuel tank would allow the facility to run off the electricity grid for almost a month.

No doubt this level of preparedness is a costly proposition, but Hancocku00e2u20acu2122s board believes it is well worth the investment. Its backup plans for Katrina were in part built on the banku00e2u20acu2122s experience from legendary Gulf hurricanes such as Camille in 1969. u00e2u20acu0153Opening first wasnu00e2u20acu2122t just to gather market share,u00e2u20ac says Hairston, u00e2u20acu0153but because we thought it was the right thing to do.u00e2u20ac

That long-term approach has served the bank well since its beginnings more than a century ago. u00e2u20acu0153We are in this business for the long haul,u00e2u20ac Schloegel says. u00e2u20acu0153We manage this business with the idea that we have passed our 100th anniversary, and we are looking forward to our 200th. If you have that philosophy, you do things a lot differently than if you are managing it quarter to quarter.u00e2u20ac