Hancock Holding Company (now Hancock Whitney Corp.) — Q3 2012 Form 10-Q
Business context and reporting period
Unaudited results cover the quarter and nine months ended September 30, 2012. The registrant in the filing is Hancock Holding Company. The business includes Hancock Bank and Whitney Bank; Whitney was acquired in June 2011, so year-over-year comparisons include different periods of Whitney operations and are not fully like-for-like. The filing was signed November 8, 2012.
Financial and operating performance
| Metric | Q3 2012 | Comparison or period-end |
|---|---|---|
| Net income | $47.0 million; diluted EPS $0.55 | $30.4 million and $0.36 in Q3 2011; $39.3 million and $0.46 in Q2 2012 |
| Operating income, company-defined adjusted measure | $49.8 million; diluted EPS $0.58 | $45.2 million in Q3 2011 and $47.0 million in Q2 2012 |
| Net interest income | $177.3 million GAAP; $180.1 million taxable-equivalent | Taxable-equivalent amount was essentially flat year over year and versus Q2 |
| Net interest margin | 4.54% taxable-equivalent | Up 6 bps from Q2 and 22 bps year over year |
| Noninterest income / expense | $63.8 million / $169.7 million | Expense declined $24.3 million year over year, partly reflecting lower merger costs |
| Provision for loan losses | $8.1 million | $9.3 million in Q3 2011; all Q3 2012 provision related to non-covered loans |
| Cash flow, nine months | $319.8 million operating; $999.6 million investing; $(1,342.7) million financing | Cash and due from banks ended at $414.6 million, down $23.3 million from year-end |
| Balance sheet, September 30 | Assets $18.5 billion; loans $11.4 billion; deposits $14.8 billion | Assets were $19.8 billion and deposits $15.7 billion at December 31, 2011 |
| Borrowings and equity | Short-term borrowings $748.6 million; long-term debt $308.3 million; equity $2.43 billion | Total borrowings were about $1.06 billion, down from about $1.40 billion at year-end |
| Capital and liquidity | Tangible common equity ratio 9.09%; company Tier 1 risk-based capital 12.54%; Tier 1 leverage 9.17% | Company and banks reported as well capitalized; available FHLB line $2.22 billion and Federal Reserve borrowing capacity above $1.37 billion |
For the nine months, net income was $104.8 million versus $57.8 million, and diluted EPS was $1.22 versus $0.97. Net interest income was $531.0 million versus $342.9 million. The large year-over-year changes are affected by the Whitney acquisition and should not be read as organic growth rates.
Material changes and asset quality
- Loans increased 2% from year-end to $11.4 billion. Management attributed growth to originated commercial, mortgage and consumer lending, partly offset by acquired-loan runoff; it expected continued, potentially slower, loan growth.
- Deposits fell 6% from year-end to $14.8 billion. Core deposits were $13.7 billion, down from $14.2 billion; net wholesale funding declined to $1.05 billion from $1.34 billion.
- Nonperforming assets were $298.5 million, or 2.58% of loans and foreclosed assets, versus $277.0 million and 2.44% at year-end. Nonaccrual loans rose to $157.1 million from $103.3 million; total troubled debt restructurings were $32.3 million versus $18.1 million.
- The allowance for loan losses was $135.6 million, 1.19% of period-end loans. The allowance covered 76.72% of nonperforming loans plus accruing loans 90 days past due, down from 101.00% at year-end. Non-covered net charge-offs were $9.7 million in Q3, or 0.34% of average loans on an annualized basis.
- During the first quarter, approximately $1.5 billion of available-for-sale securities were reclassified to held-to-maturity. The company said the change reflected its view that only part of the enlarged portfolio was needed for liquidity. A $39 million unrealized gain at transfer remains in accumulated other comprehensive income and is accreted into interest income over time.
Outlook, commentary, risks and unusual items
- Management expected continued near-term compression in core net interest margin as asset yields reprice lower and the opportunity to further reduce funding costs diminishes. It reported a slightly asset-sensitive interest-rate profile; modeled net interest income increased 2.41%, 5.68% and 9.14% for parallel rate increases of 100, 200 and 300 bps, respectively.
- Management anticipated Q4 noninterest expense of $149 million to $153 million, excluding merger-related expense and amortization of intangibles as described in the filing, and expected additional cost savings. It also noted that loan growth could moderate from Q3’s pace.
- Q3 included $5.3 million of expense from repurchasing approximately $52 million of Whitney subordinated debt. The company said the transaction should lower annual funding costs by approximately $3 million. Q3 had no material merger-related costs; it included $0.9 million of net securities gains.
- Management described modest economic improvement in its markets but cited fragile recovery prospects, low interest rates, uncertainty about the global economy and regulation, and competitive lending conditions. Dodd-Frank interchange restrictions reduced bank-card and ATM fees.
- Risks highlighted include deterioration in credit quality, interest-rate and liquidity exposures, regulatory change, and disruption or breach of the company’s or third parties’ information and operating systems. The filing reported no cyber attack affecting results to date.
- The LaCour putative class action settlement, for which a $6.8 million reserve had been established, received final court approval on October 23, 2012. Management said other ordinary-course legal matters were not expected to have a material adverse effect.
Important facts for investors to verify
- Whether reported earnings and margin benefits from acquired-loan cash-flow re-projections are recurring, and how purchase-accounting accretion affects core margin.
- Trends in nonaccrual loans, restructurings, charge-offs, foreclosed assets and reserve coverage—particularly for commercial real estate and acquired portfolios.
- Deposit retention and funding mix, the sustainability of low funding costs, and the effect of the debt repurchase on future interest expense and regulatory capital.
- Progress against Q4 expense expectations and integration-related cost savings, including the distinction between recurring expenses and management’s adjusted measures.
- The assumptions underlying the interest-rate sensitivity estimates and the company’s stated outlook for loan growth and margin compression.