HWC

Hancock Holding Company 10-Q Summary

Business Context and Reporting Period

This report covers the quarterly period ended June 30, 2009. Hancock Holding Company is a bank holding company headquartered in Gulfport, Mississippi, operating through four wholly-owned bank subsidiaries in Mississippi, Louisiana, Florida, and Alabama. The company focuses on commercial, consumer, and mortgage loans and deposit services for individuals and small to middle-market businesses.

Key Financial Metrics

Liquidity and Capital: The company reported a net decrease in cash and due from banks of $47.0 million for the six months ended June 30, 2009. Regulatory capital ratios remained well above minimum requirements, with a Tier 1 capital to risk-weighted assets ratio of 10.98% and a leverage ratio of 8.13%.

Material Changes vs. Prior Period

• Profitability Decline: Net income decreased 34.5% in Q2 2009 compared to Q2 2008, driven primarily by a significant increase in the provision for loan losses and net charge-offs.
• Asset Quality Deterioration: Net charge-offs surged to $16.0 million in Q2 2009 (1.50% of average loans) from $2.5 million in Q2 2008 (0.27%). Non-accrual loans increased to $34.2 million from $18.1 million year-over-year, largely due to weakening commercial real estate and land development markets.
• Expense Increases: Noninterest expenses rose 12% in Q2 2009, primarily due to a $5.3 million increase in deposit insurance and regulatory fees (including a $3.4 million FDIC special assessment) and higher personnel costs.
• Balance Sheet Growth: Despite the economic downturn, total assets grew 12.4% and loans grew 12.8% compared to the prior year, driven by organic growth and increased short-term investments.
• Interest Margin Compression: The net interest margin (tax-equivalent) narrowed to 3.78% in Q2 2009 from 3.91% in Q2 2008, as loan yields fell 80 basis points faster than funding costs declined.

Outlook, Risks, and Management Commentary

Management attributes the decline in earnings to the ongoing recession and rising unemployment, which have increased credit risk. The company noted that higher commercial net charge-offs were confined to a relatively small number of credits in land development and commercial real estate. While the allowance for loan losses was increased to $63.9 million, management believes this level is adequate given current conditions.

Risks and Contingencies:

• Economic Environment: Illiquid credit markets, volatile equity markets, and declining consumer spending increase uncertainty in estimates for loan losses and goodwill.
• Interest Rate Risk: The company is asset-sensitive; a 100 basis point increase in rates is projected to increase net interest income by 2.99%, while a 100 basis point decrease would reduce it by 9.38%.
• Regulatory Costs: Significant increases in FDIC assessments and regulatory fees have impacted operating expenses.

Unusual Items: The company corrected an immaterial error in other income during the quarter, increasing net income by approximately $1.1 million after taxes. There were no material subsequent events identified through August 6, 2009.

Investor Verification Checklist

• Asset Quality Trends: Verify the trajectory of non-accrual loans and net charge-offs, specifically within the commercial real estate and land development sectors.
• Allowance Adequacy: Assess whether the $63.9 million allowance for loan losses (1.49% of loans) remains sufficient given the rising unemployment and recessionary environment.
• Regulatory Fee Impact: Confirm the sustainability of operating margins given the one-time and recurring increases in FDIC assessments and regulatory fees.
• Interest Rate Sensitivity: Evaluate the impact of potential interest rate changes on net interest income, given the company's asset-sensitive position.
• Capital Ratios: Monitor Tier 1 and leverage capital ratios to ensure they remain comfortably above regulatory minimums as credit losses potentially accelerate.