Hancock Holding Company (now Hancock Whitney) — Q1 2012 Form 10-Q
Period: Three months ended March 31, 2012; balance-sheet figures are as of March 31, 2012. The filing is by Hancock Holding Company. Results include Whitney, acquired June 4, 2011, so year-over-year comparisons are substantially affected by the acquisition.
Financial results and position
| Metric | Q1 2012 | Comparable period / change |
|---|---|---|
| Net interest income | $176.3 million | $66.8 million in Q1 2011; $178.4 million taxable-equivalent in Q4 2011 |
| Noninterest income | $61.5 million | $34.1 million in Q1 2011; $60.6 million in Q4 2011 |
| Net income | $18.5 million | $15.3 million in Q1 2011; $19.0 million in Q4 2011 |
| Diluted EPS | $0.21 | $0.41 in Q1 2011; $0.22 in Q4 2011 |
| Operating income, excluding after-tax merger costs and securities gains/losses | $40.5 million | $16.4 million in Q1 2011; $45.1 million in Q4 2011 |
| Net interest margin, taxable-equivalent | 4.43% | 3.97% in Q1 2011; 4.39% in Q4 2011 |
| Total assets | $19.3 billion | $8.3 billion in Q1 2011; $19.8 billion at year-end 2011 |
| Total loans / deposits | $11.1 billion / $15.4 billion | Loans were nearly unchanged from year-end; deposits declined 2% |
| Operating cash flow | $78.5 million | $4.0 million in Q1 2011 |
Q1 cash flows also included $329.1 million provided by investing activities and $487.8 million used in financing activities, resulting in an $80.1 million decrease in cash and due from banks to $357.8 million. The balance sheet reported $1.0 billion in interest-bearing bank deposits. Total borrowings were approximately $1.2 billion, including $850.3 million short-term borrowings and $360.3 million long-term debt. Stockholders’ equity was $2.38 billion; tangible common equity ratio was 8.27%.
Reported income before taxes was $22.3 million. Noninterest expense was $205.5 million, including $33.9 million of merger-related costs. The effective tax rate was 17%, affected by discrete items related mainly to branch transfers. The dividend remained $0.24 per share.
Material changes and credit quality
- The Whitney acquisition drove much of the increase in assets, net interest income, noninterest income, and expenses versus Q1 2011. Share count more than doubled year over year, helping explain why diluted EPS fell despite higher net income.
- The company completed a reorganization of bank operations in March: Hancock Bank covers Mississippi, Alabama, and Florida; Whitney Bank covers Louisiana and Texas. Whitney system conversion took place in mid-March.
- Management reported a 4.43% taxable-equivalent net interest margin, up 4 basis points sequentially. Purchase-accounting adjustments contributed about 43 basis points. The cost of funds fell to 0.38% from 0.44% in Q4 2011.
- Allowance for loan losses rose to $142.3 million from $124.9 million at year-end; the allowance was 1.28% of period-end loans. A $32.6 million provision increase for impaired covered-loan pools was largely offset by a $30.9 million increase in the FDIC indemnification asset.
- Nonperforming assets were $287.6 million, or 2.55% of loans and foreclosed assets, compared with $277.0 million and 2.44% at year-end. Management attributed the increase mainly to several legacy Hancock commercial real estate credits moving to nonaccrual status. Noncovered net charge-offs were $7.1 million, or 0.25% of average loans on an annualized basis.
- Loans were broadly stable overall, with growth in originated loans offset by paydowns in acquired Whitney and covered loans. Noninterest-bearing deposits fell, including about $240 million converted to low-cost interest-bearing accounts during systems conversion; time deposits also declined.
Outlook, risks, and unusual items
- No formal earnings or financial guidance is provided. Management said strong liquidity would support favorable growth opportunities and expected customers to favor low-cost transaction accounts while interest rates remain low.
- Management expected Durbin Amendment debit-card limits to extend to all bank card accounts in Q3 2012, with an estimated fee-income reduction of about $2 million per quarter versus current levels.
- Merger costs remained significant at $33.9 million in Q1, although below Q4’s $40.2 million. Management identified integration expenses and future cost synergies as forward-looking factors.
- The company reclassified approximately $1.5 billion of securities from available-for-sale to held-to-maturity. The transfer recognized no gain or loss; approximately $39 million of unrealized net gain remains in accumulated other comprehensive income and will be accreted into interest income over the securities’ remaining lives.
- Liquidity sources included $2.29 billion of approved Federal Home Loan Bank capacity and more than $965.7 million of Federal Reserve discount-window capacity. The company and both banks were reported as well capitalized and above regulatory minimums.
- Interest-rate simulations showed the company slightly asset-sensitive: a 100-basis-point increase was estimated to raise net interest income by 1.68%; a 100-basis-point decrease was estimated to have no impact. Actual results may differ. The filing also identifies cyber and information-system disruption as a risk, particularly during integration.
- Several merger-related shareholder suits were dismissed or settled; a separate Whitney Bank putative class action remained subject to a pending settlement. Management said other ordinary-course proceedings were not expected to materially affect the financial statements.
Important facts for investors to verify
- Whether merger expenses decline as integration proceeds, and whether anticipated synergies offset ongoing operating costs.
- Trends in nonaccrual loans, foreclosed assets, charge-offs, and reserve adequacy, particularly in legacy commercial real estate and covered loan pools.
- The assumptions and recoverability of FDIC loss-share indemnification assets and acquired-loan purchase-accounting accretion.
- The effect of the expected debit-card fee reduction and other regulatory changes on recurring noninterest income.
- Deposit retention, wholesale funding, liquidity, and the implications of moving securities into the held-to-maturity category.
- Progress on systems integration, operational controls, and the pending litigation settlement.