Hancock Holding Company (now identified in the request as Hancock Whitney Corp.) — Q3 2010 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2010; filed November 4, 2010. The filing registrant is Hancock Holding Company. Financial amounts below are in millions of dollars unless noted.
Business context and reporting period
The company operated community banking and financial services businesses in Mississippi, Louisiana, Florida and Alabama. It reported more than 180 offices and approximately 2,235 full-time-equivalent employees. Results included Peoples First Community Bank, acquired in Q4 2009; comparisons with 2009 are therefore affected by the acquisition.
Financial performance and position
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Net interest income | $66.8 | $57.8 | $201.3 | $167.9 |
| Provision for loan losses | $16.3 | $13.5 | $54.6 | $38.8 |
| Noninterest income | $35.2 | $30.4 | $101.9 | $94.0 |
| Noninterest expense | $68.1 | $55.7 | $208.0 | $169.8 |
| Net income | $14.9 | $15.2 | $35.2 | $43.0 |
| Diluted EPS | $0.40 | $0.47 | $0.94 | $1.34 |
| Net interest margin, tax-equivalent | 3.85% | 3.86% | 3.82% | 3.72% |
- Q3 net income rose 129% from Q2 2010, principally as loan-loss provision fell $8.3 million and noninterest expense fell $4.1 million; year-over-year Q3 net income declined 2.4%.
- For the first nine months, net interest income increased 20%, but net income declined 18% as higher credit provisions and operating costs more than offset revenue growth.
- At September 30, assets were $8.24 billion, down from $8.70 billion at year-end 2009. Loans were $4.92 billion versus $5.13 billion; deposits were $6.71 billion versus $7.20 billion. Stockholders’ equity was $865.8 million versus $837.7 million.
- Allowance for loan losses was $79.7 million, or 1.62% of period-end loans, compared with $66.1 million and 1.50% at year-end 2009. Q3 net charge-offs were $13.8 million, an annualized 1.10% of average loans.
- Nine-month cash flows: operating activities provided $123.4 million, investing activities provided $348.2 million, and financing activities used $500.6 million. Cash and due from banks ended at $175.6 million, down $29.1 million from year-end.
- Reported borrowings included $513.2 million of repurchase agreements, $10.2 million of FHLB borrowings, $3.2 million of federal funds purchased, and $0.4 million of long-term notes. Management cited an $828.4 million FHLB line and more than $135.6 million of Federal Reserve discount-window borrowing capacity.
- Capital measures included a 10.51% period-end common-equity-to-assets ratio, 16.28% total capital to risk-weighted assets, 15.02% Tier 1 capital to risk-weighted assets, and a 9.32% leverage ratio.
Material changes, outlook and risks
- Peoples First drove much of the year-over-year growth in average earning assets, loans, deposits, fee activity, staffing and expenses. Period-end loans and deposits were down from December 2009, but up substantially year over year, primarily due to the acquisition.
- Management attributed the quarter-to-quarter earnings improvement to a lower reserve build and the absence of certain Q2 merger costs. It said lower delinquencies reduced the portfolio reserve build; the Q2 $5.2 million Gulf Oil Spill reserve did not need to be increased in Q3.
- Credit quality remained a key concern. Nonperforming assets were $175.5 million, or 3.55% of loans and foreclosed assets, versus 1.06% a year earlier. Management cited commercial real-estate stress, declining property values, recession-related deterioration and Gulf Oil Spill exposure. It stated that the allowance was adequate, while acknowledging uncertainty in estimates.
- The filing gives no formal earnings or financial guidance. Management said results for the nine months are not necessarily indicative of full-year results. It expected the Gulf spill to have a significant, potentially lasting impact in coastal markets, while noting the ultimate effect remained unknown.
- Interest-rate simulations indicated that an immediate 100-basis-point rate decrease would raise tax-equivalent net interest income 3.10%, while a 100-basis-point increase would reduce it 1.51%. The securities portfolio’s effective duration was 2.1 years.
- Off-balance-sheet exposures included $867.1 million of unused lending commitments and $101.0 million of letters of credit. Management said commitments may not be fully drawn and the liability associated with letters of credit was not material.
- The company identified Dodd-Frank implementation and related compliance costs as uncertain risks. It reported no material changes to contractual obligations since year-end and no material uncertain tax positions. Disclosure controls were considered effective.
Important facts for investors to verify
- Reconcile the filing’s differing Q3 nonaccrual-loan figures: $141.9 million in the loan-quality discussion versus $132.8 million in the selected financial data. The filing text does not explain the difference.
- Assess credit trends beyond acquisition effects, particularly nonaccrual loans, foreclosed assets, Gulf Oil Spill exposures, commercial real-estate deterioration, and reserve coverage.
- Evaluate whether fee growth and cost control can offset elevated credit costs; personnel, data-processing, legal and other expenses increased year over year.
- Confirm deposit retention, liquidity availability and the effect of potential commitment drawdowns, alongside the reported reduction in deposits from year-end.
- Distinguish acquisition-driven growth from underlying performance and note the company’s warning that interim results do not necessarily predict full-year results.