Hancock Holding Company (now Hancock Whitney Corp.) — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011; filed August 9, 2011. The filing registrant is Hancock Holding Company. The Whitney acquisition closed June 4, so reported results include Whitney only from that date, making comparisons with 2010 and prior periods materially affected by the acquisition.
Business context and financial performance
The company operated community banking and financial services businesses across Mississippi, Louisiana, Florida, Alabama, and Texas. It completed its acquisition of Whitney Holding Corporation on June 4, 2011 and reported nearly 300 offices, almost 400 ATMs, and 4,892 full-time-equivalent employees at quarter-end.
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Net interest income | $99.1 million | $67.9 million | $165.8 million | $134.5 million |
| Net interest margin, taxable-equivalent | 4.11% | 3.87% | 4.05% | 3.81% |
| Noninterest income | $46.7 million | $35.3 million | $80.8 million | $66.7 million |
| Provision for loan losses | $9.1 million | $24.5 million | $18.0 million | $38.3 million |
| Noninterest expense | $121.4 million | $72.1 million | $194.4 million | $139.9 million |
| Net income | $12.1 million | $6.5 million | $27.4 million | $20.3 million |
| Diluted earnings per share | $0.22 | $0.17 | $0.59 | $0.55 |
Management’s non-GAAP operating income, excluding after-tax merger costs and securities gains or losses, was $26.6 million for Q2 and $42.9 million for the first half. The company paid dividends of $0.24 per share in Q2 and $0.48 per share for the first half.
Six-month operating cash flow was $288.3 million, investing cash flow was $5.5 million, and financing cash flow was negative $52.1 million. Cash and due from banks rose to $381.3 million from $139.7 million at year-end 2010.
Balance sheet, debt, and liquidity
- At June 30, total assets were $19.76 billion, loans net of allowance and unearned income were $11.14 billion, and available-for-sale securities were $4.57 billion. Total deposits were $15.59 billion and stockholders’ equity was $2.39 billion.
- Loans, deposits, and assets expanded substantially from year-end primarily because of Whitney. The loan-to-deposit ratio was 72.17%; securities were 29.34% of deposits. Management described liquidity as adequate and cited a $1.1 billion approved FHLB line and more than $114 million of Federal Reserve discount-window borrowing capacity.
- Total borrowings were approximately $1.31 billion, including $888.8 million of repurchase-agreement liabilities and $360.1 million of long-term debt. Long-term debt included $150 million of assumed 5.875% subordinated notes due 2017, a new $140 million term loan due June 2013 at LIBOR plus 2%, and assumed subordinated debentures. The company reported compliance with the term-loan covenants at June 30.
- Capital measures included an 8.09% tangible common equity ratio, 11.15% total capital to risk-weighted assets, 10.56% Tier 1 capital to risk-weighted assets, and a 13.69% leverage capital ratio. The tangible common equity ratio fell from 11.94% at March 31, primarily reflecting the acquisition.
Material changes and asset quality
- Whitney was acquired for approximately $1.6 billion of consideration, principally Hancock shares plus $307.7 million paid for Whitney’s TARP preferred stock and warrant. Hancock issued 40.8 million shares to Whitney shareholders. Preliminary purchase accounting recorded $514 million of goodwill; acquired assets were valued at $11.2 billion and liabilities at $10.1 billion. Fair values remained subject to refinement for up to one year.
- Whitney contributed $37.7 million of revenue, net of interest expense, and $4.4 million of net income during the 26 days included in reported results. The unaudited pro forma presentation, assuming the merger occurred at the beginning of the periods, showed Q2 2011 revenue net of interest expense of $197 million and net income of $20 million; the company cautioned these illustrative figures are not indicative of actual or future results.
- Q2 noninterest expense included $22.2 million of merger-related costs. Personnel expense increased by $22.2 million year over year; legal and professional expense increased by $18.4 million, largely due to integration work. Management cited conversion, systems, staffing, and other integration costs.
- Net interest margin increased year over year and quarter over quarter. Management attributed the sequential improvement mainly to lower funding costs and a favorable funding mix, partly offset by lower securities yields and a less favorable earning-asset mix. Q2 taxable-equivalent earning-asset yield was 4.77%, and total cost of funds was 0.66%.
- The allowance for loan losses was $112.4 million, or 1.00% of period-end loans; the lower ratio versus year-end reflected the acquired Whitney portfolio, for which no prior allowance carried forward under acquisition accounting. Net charge-offs were $8.2 million in Q2, or 0.49% of average loans, versus $13.9 million and 1.11% a year earlier. The company reported $258.2 million of nonperforming assets, 2.27% of loans plus foreclosed assets; acquired and covered loans are treated differently under purchase accounting and FDIC loss-share arrangements, limiting direct comparability.
- Foreclosed assets were $130.3 million, including $81.2 million acquired from Whitney. The filing also cited ongoing recessionary conditions and weakness in residential development as factors affecting foreclosed assets.
Outlook, risks, and contingencies
- No quantitative earnings guidance was provided. Management expected further cost savings and business synergies from combining the companies, but these were not reflected in pro forma results. The filing does not quantify anticipated savings or provide a timetable.
- Management identified purchase accounting, the loan-loss allowance, deferred taxes, goodwill, and contingent liabilities as estimates subject to uncertainty and potentially material change. It noted that economic weakness, illiquid credit markets, volatile equity markets, unemployment, and consumer spending could affect estimates and results.
- The company was slightly asset-sensitive in its interest-rate simulations: a 100-basis-point increase was estimated to raise net interest income by 1.14%; the effect of a 100-basis-point decrease was reported as not available. Securities portfolio effective duration was 2.7 years.
- Whitney had pending legal actions and governmental or self-regulatory matters. Several shareholder lawsuits concerning the merger had reached settlements in principle. The filing stated that fair value for certain acquired legal contingencies could not be reasonably estimated. Acquisition accounting also recorded a $59.6 million liability for certain employee contingent payments and a $14.0 million contractual systems-conversion contingency; substantially all were expected to be paid within one year.
- Off-balance-sheet exposures included $995.7 million in unused loan commitments and $61.1 million in letters of credit. The filing states commitments may not be fully drawn and that letters-of-credit liability was not material.
Key facts for investors to verify
- Track integration costs, actual synergy realization, and the effect of the acquisition on recurring expenses and earnings per share.
- Review final purchase-accounting adjustments, including acquired-loan marks, goodwill, intangible amortization, and contingent liabilities.
- Assess asset quality by separating legacy, acquired, and FDIC-covered portfolios; reconcile the filing’s different nonaccrual-loan measures and understand their definitions.
- Monitor capital ratios and tangible common equity after the acquisition, as well as compliance with the term-loan covenants and debt repayment requirements.
- Evaluate deposit stability, liquidity, securities duration and interest-rate sensitivity, and potential draws on loan commitments.