Bank: Hancock Bank
Problem: Dodd-Frank and loan growth called for stronger commercial loan risk software.
Solution: New risk software takes a sterner look at commercial loans, including performing stress tests on the entire portfolio.

Hancock Bank of Gulfport, Miss., knew it needed to deploy stronger methods for credit-scoring its corporate lending clients and stress-testing its commercial loan portfolios. The 112-year-old institution was anticipating growing again, after methodically adding branches in Alabama and acquiring banks in Florida in the middle of the last decade, following its first expansion outside Mississippi into Louisiana in the 1990s.

But few within the bank could have known when the search for credit assessment solutions began in May 2010, just how large the bank would grow, or how discerning those loan analyses would have to be.

Known for its prudent approach to growth, Hancock more than doubled its asset size in late 2010 to nearly $20 billion when it swooped in to outbid a Gulf South rival to acquire Whitney Bank, a New Orleans institution whose poorly timed bets on Florida real estate, and resulting Troubled Asset Relief Program bailout debt, had turned it into takeover fodder. Hancock completed its acquisition of Whitney in a $1.5 billion stock deal on June 4.

But now the credit assessment tools Hancock ended up choosing - SunGard's Ambit Credit Assessment and Ambit Credit Portfolio Monitoring - were truly put to the test, analyzing the $5.2 billion in commercial loans Hancock acquired in the transaction.

Ambit Credit Assessment, deployed at Hancock since mid-August, is meant to help the bank calculate the cost and risk of providing a certain loan to an individual corporate client. Ambit Credit Portfolio Monitoring, which was being installed at press time, aims to aid the bank in determining lending costs portfoliowide.

SunGard acquired the solutions that help power Ambit Credit Assessment and Ambit Credit Portfolio Monitoring - software formerly known as Optimist and Portfolio Strategist - from its Jan. 29, 2010, purchase of Inmatrix of Melbourne, Australia.

Hancock is using Ambit Credit Assessment in the preloan approval process to do everything from determine pass/fail creditworthiness for a company on a certain loan to cross-selling corporate customers on lines of credit so they can, for instance, tap discounts from paying early bills owed on accounts payable, says Mike Dickerson, senior vice president and senior credit administration officer at Hancock.

Credit Assessment aids Hancock in credit-grading a company based on the company's financials. It does this by quantifying the cost of providing credit to a company by enabling the bank to input whichever credit-grading scorecards and analytics it wants into the system. Hancock uses its own proprietary scorecards in Ambit, Dickerson says. Although SunGard offers its own analytics, Ambit Credit Assessment is "agnostic" to building in those of others, says Kevin Studders, SunGard's director of credit risk solutions for North America.

The bank then converts the credit grade into a probability of default: Ambit uses company data to calculate expected loss and recovery percentages for the bank if a company were to default on a loan, based on credit structure, collateral, guarantor support and other factors. So projected profit margin and expected cost for providing the loan can be quantified. Hancock produces a risk-weighted return on loans by using the tool to calculate a risk-adjusted cost of credit, Dickerson says.

Credit Portfolio Monitoring would be used, for instance, to stress test all of Hancock's customers that are wholesale suppliers to the oil and gas industry. Using filters that produce a scenario that supposes a 10% decline in revenues or real estate - or both - for the sector, the software supplies a new credit grade for each company after running the revenue and property dips through all the companies' financial statements, Dickerson says. So the bank can project risk-adjusted credit cost upticks and therefore determine how much its profitability may decrease from its exposure to fuel wholesalers.

Such portfolio monitoring will play an important role at Hancock. Premerger, the bank had just $8.3 billion of assets. But commercial loans alone now total $8.1 billion. And the bank's $19.8 billion in post-merger assets means Hancock must conduct stress tests at least annually to meet Dodd-Frank requirements for financial firms with over $10 billion of total consolidated assets.

"Some of this is just good common sense," Dickerson says. "We've grown pretty rapidly in the last three years. [But] what's expected for a bank has increased exponentially." Hancock expects to install automated loan origination by June 2012. "We are currently evaluating vendors," Dickerson adds.