Hancock Holding Company — Q2 2010 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2010; unaudited. The filing identifies the registrant as Hancock Holding Company.
Business context
The Gulf Coast banking and financial services company operated in Mississippi, Louisiana, Alabama and Florida. It reported $8.5 billion in assets and 2,278 full-time-equivalent employees. Results include the December 2009 acquisition of Peoples First Community Bank and the effects of the related stock offering.
Financial results and condition
- Q2 earnings: Net income was $6.5 million, down 52.7% from $13.7 million; diluted EPS was $0.17 versus $0.43. Return on average assets was 0.31% versus 0.78%.
- First-half earnings: Net income was $20.3 million versus $27.8 million; diluted EPS was $0.55 versus $0.87.
- Interest income and margins: Q2 net interest income rose 19.7% to $67.9 million; tax-equivalent net interest margin was 3.87%, up from 3.78%. For the first half, net interest income was $134.5 million versus $110.1 million and tax-equivalent margin was 3.81% versus 3.64%.
- Noninterest income and expenses: Q2 noninterest income was $35.3 million, up 2.3%. Noninterest expense rose 23.9% to $72.1 million, including higher personnel, occupancy, data-processing and other real-estate-owned costs. The provision for loan losses increased to $24.5 million from $16.9 million.
- Loans and credit quality: Period-end loans were $4.97 billion, down 3.0% from year-end 2009 but up 16.1% year over year, primarily reflecting Peoples First. Nonaccrual loans were $138.8 million versus $34.2 million a year earlier; nonperforming assets were $183.7 million, or 3.66% of loans and foreclosed assets, versus 1.01%. The allowance for loan losses was $77.2 million, or 1.55% of loans. Q2 net charge-offs were $13.9 million (1.11% of average loans), down from $16.0 million (1.50%).
- Balance sheet and funding: Assets were $8.50 billion, down 2.3% from December 31, 2009. Deposits totaled $6.96 billion, down 3.3% from year-end; borrowings were approximately $533.7 million. Stockholders’ equity was $861.3 million. Regulatory capital ratios were 16.09% total capital, 14.84% Tier 1 risk-based capital and 9.06% leverage.
- Cash flow and liquidity: For the first half, operating cash flow was $111.6 million, investing cash flow was $86.6 million and financing cash flow was negative $233.5 million; cash and due from banks declined $35.4 million to $169.3 million. The company reported $701.7 million of approved FHLB line capacity and more than $148.5 million of Federal Reserve discount-window capacity.
Material changes, outlook and risks
- Management attributed the sharp earnings decline principally to higher credit-loss provisioning and increased expenses following the Peoples First acquisition. Acquired-loan discount accretion contributed approximately $15.5 million to Q2 results.
- The Gulf of Mexico oil spill prompted a $5.2 million specific loan-loss reserve. The company identified $136.1 million of potentially exposed legacy loans and estimated $26.1 million could be negatively affected. Management cautioned that the spill’s lasting economic impact, including any deepwater drilling moratorium, remained uncertain.
- Management said the allowance was adequate, but noted continued economic and commercial-real-estate stress. It also identified allowance estimates, deferred taxes and goodwill as estimates potentially subject to material near-term change.
- The company reported no material change in contractual obligations since year-end. No earnings guidance was provided in the supplied filing text. It described itself as well capitalized; the filing also discussed possible business and compliance impacts from the Dodd-Frank Act, signed July 21, 2010.
- Interest-rate simulations indicated liability sensitivity: estimated net interest income impact was negative 4.99% for a 100-basis-point rate decline and positive 1.59% for a 100-basis-point increase.
Important facts for investors to verify
- Whether nonaccrual loans, foreclosed assets and net charge-offs continue to rise, and how much reflects acquired versus legacy loans.
- Whether the $77.2 million allowance adequately covers credit deterioration and potential Gulf spill-related losses.
- How much ongoing Peoples First integration expense remains and whether acquired-loan accretion persists.
- Trends in deposits, liquidity, capital ratios and exposure to interest-rate changes.
- The eventual economic and regulatory effects of the Gulf oil spill and Dodd-Frank implementation.