Business context and reporting period
Hancock Holding Company (the registrant; the filing is not under the name Hancock Whitney Corp.) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2012. It operates Hancock Bank and Whitney Bank. Comparisons with 2011 are significantly affected by the June 2011 Whitney acquisition; Whitney’s results were included only from the acquisition date in the prior-year period. In March 2012, certain Whitney operations were transferred to Hancock Bank.
Financial performance and position
Unless noted otherwise, amounts are in millions of dollars. The financial statements report dollars in thousands.
| Metric | Q2 2012 | Comparable period / context |
|---|---|---|
| Net interest income | $177.5 | $99.1 in Q2 2011; up 77%, with the Whitney acquisition contributing materially |
| Noninterest income | $63.6 | $46.7 in Q2 2011 |
| Net income | $39.3 | $12.1 in Q2 2011; $18.5 in Q1 2012 |
| Diluted earnings per share | $0.46 | $0.22 in Q2 2011; $0.21 in Q1 2012 |
| Operating income / diluted EPS | $47.0 / $0.55 | Excludes after-tax merger costs and securities gains or losses; $40.5 / $0.47 in Q1 2012 |
| Net interest margin, taxable-equivalent | 4.48% | 4.11% in Q2 2011; 4.43% in Q1 2012 |
| Provision for loan losses | $8.0 | $9.1 in Q2 2011; $10.0 in Q1 2012 |
| Total noninterest expense | $180.0 | Includes $11.9 of merger-related costs |
For the first six months, net income was $57.8 million versus $27.4 million in 2011; diluted EPS was $0.67 versus $0.59. Six-month operating cash flow was $195.0 million, investing cash flow was $788.3 million, and financing cash flow was negative $1,028.6 million. Cash and due from banks ended at $392.6 million.
At June 30, total assets were $18.78 billion, down from $19.77 billion at year-end 2011. Loans were $11.08 billion, versus $11.19 billion at year-end; deposits were $14.93 billion, versus $15.71 billion. Securities totaled $4.32 billion, including $2.00 billion held to maturity. Short-term borrowings were $832.7 million and long-term debt was $360.3 million. Stockholders’ equity was $2.40 billion. The tangible common equity ratio was 8.72%; regulatory capital ratios were reported well above minimums, and the Company and Banks were categorized as well capitalized.
Material changes and credit quality
- Second-quarter net income increased from Q1 as merger-related expenses fell to $11.9 million from $33.9 million. Excluding merger costs, noninterest expense declined 2% quarter over quarter.
- Management reported a 5-basis-point quarter-over-quarter increase in net interest margin, reflecting lower funding costs; earning-asset yield was nearly unchanged. Deposit repricing opportunities were narrowing.
- Noninterest income rose 3% sequentially. Deposit service-charge income increased following standardized products introduced with the systems integration.
- Total loans were nearly flat from year-end after excluding the $84 million reduction in FDIC-covered loans. Originated loans grew $923 million, offset by a $938 million decline in acquired Whitney loans and an $83 million decline in covered loans.
- The allowance for loan losses was $140.8 million, or 1.27% of period-end loans. Second-quarter non-covered net charge-offs were $10.2 million, an annualized 0.37% of average loans. Reported nonperforming assets were $271.0 million, or 2.42% of loans and foreclosed assets, versus $277.0 million and 2.44% at year-end. The detailed loan note reports $123.1 million of nonaccrual loans; MD&A selected data show a different figure under different portfolio exclusions, so definitions should be checked.
- Management recorded a $5.1 million allowance increase for impairment in certain FDIC-covered loan pools, mostly offset by a $4.1 million increase in the FDIC indemnification asset.
- In Q1, the Company reclassified approximately $1.5 billion of available-for-sale securities to held-to-maturity. The transfer generated no recognized gain or loss; approximately $39 million of unrealized gain remains in accumulated other comprehensive income and is being accreted over time.
Outlook, commentary, risks and contingencies
- Management described market-area economic activity as modestly expanding, with uncertainty and uneven recovery. It was cautiously optimistic about net loan growth in the second half of 2012, citing a strong origination pipeline but competitive conditions for quality loans.
- No numerical earnings guidance is provided. Management expected overall fee income to decline in Q3, including an estimated $2.5 million quarterly impact from Durbin debit-card interchange restrictions as they began affecting Hancock Bank on July 1, 2012.
- On July 16, 2012, Whitney Bank accepted $52.0 million of subordinated notes in a tender offer, paying a $5.2 million premium expected to be recorded as Q3 other expense. Management estimated the transaction would lower annual funding costs by approximately $3 million.
- Liquidity sources included a $2.08 billion approved Federal Home Loan Bank line and more than $925.6 million of Federal Reserve discount-window borrowing capacity. Core deposits were $13.71 billion and net wholesale funding was $1.11 billion at quarter-end.
- Off-balance-sheet commitments to extend credit and letters of credit totaled $4.17 billion. The filing notes these expose the Banks to credit risk but do not necessarily represent future cash requirements.
- Risk disclosures emphasize credit deterioration, low interest rates and economic uncertainty, regulatory changes including Dodd-Frank, and operational, information-system, cyberattack and third-party disruption risks. The Company reported disclosure controls as effective.
- A proposed class-action settlement had received preliminary court approval; the Company had established a $6.8 million reserve. Management said other ordinary-course legal matters were not expected to have a material adverse effect.
Important facts for investors to verify
- Separate acquisition-related growth from underlying performance, especially in year-over-year revenue, earnings and per-share comparisons.
- Track nonaccrual loans, nonperforming assets, charge-offs, and the adequacy of the allowance; reconcile differing asset-quality figures by portfolio definition.
- Assess whether loan growth can offset runoff in acquired portfolios and whether deposit outflows and wholesale funding remain manageable.
- Monitor fee-income effects of Durbin restrictions, merger integration costs and any remaining integration or cost-savings expectations.
- Review the performance, valuation sensitivity and liquidity implications of the large mortgage-security portfolio, including the held-to-maturity classification.
- Confirm the Q3 accounting and realized funding benefit of the subordinated-debt tender, and monitor regulatory capital after the repurchase.