Business context and reporting period
Hancock Holding Company’s unaudited Form 10-Q covers the quarter ended March 31, 2011. The Gulf South community banking company operated in Mississippi, Louisiana, Florida and Alabama, with $8.31 billion in assets and 2,299 full-time-equivalent employees. The filing predates the proposed combination with Whitney Holding Corporation; the company said the merger was expected to close in the second quarter of 2011, subject to customary conditions and regulatory approval.
Key financial metrics
Amounts below are in millions, except per-share data and ratios. Income and cash-flow figures compare the three months ended March 31, 2011 and 2010; balance-sheet figures compare March 31, 2011 with December 31, 2010.
| Metric | Q1 2011 / March 31, 2011 | Comparable period / prior year-end |
|---|---|---|
| Net interest income | $66.8 | $66.6 in Q1 2010 |
| Noninterest income | $34.1 | $31.4 in Q1 2010 |
| Net income | $15.3 | $13.8 in Q1 2010 |
| Diluted EPS | $0.41 | $0.37 in Q1 2010 |
| Net interest margin, taxable-equivalent | 3.97% | 3.75% in Q1 2010 |
| Return on average assets | 0.75% | 0.65% in Q1 2010 |
| Provision for loan losses | $8.8 | $13.8 in Q1 2010 |
| Total assets | $8,311 | $8,138 at December 31, 2010 |
| Loans, net of allowance and unearned income | $4,747 | $4,875 at December 31, 2010 |
| Total deposits | $6,697 | $6,776 at December 31, 2010 |
| Total stockholders’ equity | $1,058 | $857 at December 31, 2010 |
| Operating cash flow | $4.0 | $85.6 in Q1 2010 |
| Investing cash flow | $(135.5) | $37.4 in Q1 2010 |
| Financing cash flow | $155.1 | $(146.6) in Q1 2010 |
Period-end cash and due from banks was $163.4 million. Borrowings included $414.7 million of securities sold under repurchase agreements, $10.1 million of FHLB borrowings and $0.4 million of long-term notes. Regulatory capital ratios were 17.18% total capital to risk-weighted assets, 15.93% Tier 1 capital to risk-weighted assets and 12.02% leverage capital. The company reported a tangible common equity ratio of 11.94%.
Material changes versus comparable periods
- Net income rose 10.8% year over year, with diluted EPS increasing from $0.37 to $0.41. Management attributed the improvement principally to lower loan-loss provision and better asset quality.
- Taxable-equivalent net interest margin widened 22 basis points year over year to 3.97%. Lower funding costs more than offset lower loan and securities yields; average earning assets declined 5.3% to $7.08 billion.
- Noninterest income increased 9%, including $3.0 million of accretion on the FDIC indemnification asset. Deposit service charges fell $1.9 million, which management linked partly to lower overdraft and returned-item activity following consumer-protection regulations.
- Noninterest expense increased 7.7% to $73.0 million. Personnel expense, legal and professional costs, advertising and foreclosed-property expense increased; legal costs included merger-related work.
- Net charge-offs fell to $6.8 million from $13.3 million, and the reported ratio of net charge-offs to average loans improved to 0.57% from 1.06%. However, nonperforming assets were $161.9 million, or 3.32% of loans and foreclosed assets, versus $123.1 million, or 2.44%, a year earlier.
- Deposits declined $78.4 million from year-end. Management said year-over-year average interest-bearing deposits were lower mainly because higher-priced Peoples First time deposits ran off.
Outlook, commentary, risks and unusual items
- The company issued no specific earnings or financial guidance. It expected the Whitney merger to close in Q2 2011. A special shareholder meeting approved the merger agreement on April 29, 2011.
- On March 25, Hancock issued 6,201,500 shares at $32.25, receiving approximately $191 million net. The underwriters exercised the overallotment option on April 26; total net proceeds from the offering and option were approximately $214 million. Proceeds were intended for general corporate purposes, including strengthening capital and repurchasing Whitney’s TARP preferred stock and warrants at merger closing.
- The company disclosed plans for up to $140 million of variable-rate term debt shortly before the merger closing, for general corporate purposes; the planned loan would mature two years after issuance.
- Credit risks included continued deterioration in legacy loans, weakness in real estate values and the recession. Nonaccrual loans were reported as $111.0 million in the loan note, while a selected-financial-data table reports $100.7 million; the filing text does not reconcile these values. Troubled debt restructurings totaled $19.8 million, and foreclosed assets were $41.4 million.
- The Q1 provision included $8.3 million for noncovered loans, partly offset by a $1.5 million reduction in the specific Gulf Oil Spill reserve. Covered-loan losses were substantially offset by the FDIC loss-share arrangement; the company reported a $343.3 million FDIC loss-share receivable on the balance sheet.
- Management described liquidity as adequate. Available borrowing capacity included a $467.8 million FHLB line and more than $135.6 million at the Federal Reserve Discount Window. The company reported $934.9 million of unused loan commitments and $65.0 million of letters of credit.
- Interest-rate risk remained a factor: management characterized the balance sheet as slightly asset-sensitive and estimated net interest income would increase 2.15% under an instantaneous 100-basis-point rate increase. A 100-basis-point decrease was shown as “N/A” in the filing’s sensitivity table.
- Management said allowance adequacy, deferred taxes and goodwill estimates could change materially in the near term as economic uncertainty persisted. Securities with $253.0 million fair value had $4.8 million of unrealized losses; management considered the losses temporary and said it did not expect to need to sell the securities before recovery.
Important facts for investors to verify
- Confirm the Whitney merger’s closing status, final terms, integration costs and any related TARP preferred-stock or warrant repurchase.
- Reconcile the filing’s $111.0 million and $100.7 million nonaccrual-loan disclosures; monitor nonperforming assets, troubled restructurings, foreclosed property and subsequent credit losses.
- Assess whether FDIC loss-share recoveries and indemnification-asset accretion are collectible and how much reported earnings depend on these items.
- Track the effects of the equity issuance and planned debt on share dilution, capital ratios, funding costs and liquidity after the merger.
- Evaluate whether margin and earnings remain resilient as asset yields, deposit pricing, loan balances and interest rates change.