Hancock Holding Company — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2011. The filing identifies the registrant as Hancock Holding Company. Financial statements are unaudited.
Business context
Hancock completed its acquisition of Whitney Holding Corporation on June 4, 2011, substantially expanding the bank. Whitney results are included from the acquisition date; reported year-over-year comparisons therefore reflect a materially different company. Hancock operated more than 300 banking and financial-services offices across Mississippi, Louisiana, Florida, Alabama, and Texas. On September 16, it divested eight branches, including about $47 million of loans and $180 million of deposits, to address Department of Justice concerns.
Financial results and condition
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net interest income | $177.0 million | $66.8 million | $342.9 million | $201.3 million |
| Provision for loan losses | $9.3 million | $16.3 million | $27.2 million | $54.6 million |
| Noninterest income | $65.0 million | $35.2 million | $145.8 million | $101.9 million |
| Noninterest expense | $194.0 million | $68.1 million | $388.4 million | $208.0 million |
| Net income | $30.4 million | $14.9 million | $57.8 million | $35.2 million |
| Diluted EPS | $0.36 | $0.40 | $0.97 | $0.94 |
- Q3 net interest margin was 4.32% (tax-equivalent), up 47 basis points year over year and 21 basis points sequentially. Average earning assets were $16.6 billion. Management attributed margin improvement primarily to Whitney, lower funding costs, and a more favorable funding mix; lower investment yields partly offset these benefits.
- Q3 operating income, a management-defined non-GAAP measure excluding after-tax merger costs and securities gains or losses, was $45.2 million, or $0.53 per diluted share. Reported diluted EPS was lower year over year in Q3, in part because shares outstanding more than doubled following the stock offering and Whitney acquisition.
- At September 30, total assets were $19.4 billion, loans net of unearned income were $11.1 billion, deposits were $15.3 billion, and stockholders’ equity was $2.43 billion. Each increased substantially versus year-end 2010, primarily due to the Whitney acquisition.
- Cash and due from banks were $373.7 million. For the nine months, operating cash flow was $276.8 million, investing cash flow was $170.5 million, and financing cash flow was negative $213.3 million; cash and due from banks increased $234.0 million.
- Long-term debt was $356.4 million; total borrowings, including repurchase agreements and other borrowing, were approximately $1.26 billion. The company reported common equity at 12.50% of assets, total risk-based capital of 13.99%, Tier 1 risk-based capital of 11.91%, and leverage of 8.28%. Tangible common equity ratio was 8.56%, down from 9.68% a year earlier.
- Credit indicators improved in some respects: Q3 net charge-offs were 0.28% of average loans versus 1.10% a year earlier; nonperforming assets were 2.06% of loans and foreclosed assets versus 3.55%. However, foreclosed assets reached $123.1 million, with much of the increase attributable to Whitney. The allowance for loan losses was $118.1 million, or 1.06% of period-end loans; the lower ratio largely reflects acquired loans recorded at fair value without carrying forward Whitney’s prior allowance.
Material changes and unusual items
- Whitney was acquired for approximately $1.6 billion in total consideration, including Hancock shares and cash paid for Whitney’s TARP preferred stock and warrant. Hancock issued 40.8 million shares. Preliminary goodwill from the acquisition was $514 million; total goodwill and indefinite-lived intangibles reached $629.7 million.
- Whitney contributed approximately $128.9 million in revenue, net of interest expense, and estimated net income of $25.6 million for the 118 days after acquisition. Merger-related expenses were $22.8 million in Q3 and $46.6 million for the nine months.
- Q3 noninterest expense rose sharply, reflecting the acquired operations and integration costs. Excluding Whitney and merger costs, management said noninterest expense increased about 10% year over year.
- A $214.0 million net common-stock offering completed in March and April supported general corporate purposes, capital, and the Whitney transaction. Quarterly dividends remained $0.24 per share.
- Nonaccrual loans were $98.2 million; total troubled debt restructurings were $14.0 million. Management changed its specific-reserve review threshold prospectively from loans over $250,000 to loans over $500,000 and increased the unallocated reserve.
Outlook, risks, and contingencies
- The filing gives no specific earnings or growth guidance. Management expected the Durbin Amendment interchange-rate changes to reduce fee income by about $2–$3 million for the remainder of 2011 and $15–$18 million in 2012.
- Management cited uncertain economic conditions, including tight credit markets, volatile equity markets, high unemployment, and weak consumer spending. Estimates for the allowance, deferred taxes, goodwill, purchase accounting, and contingent liabilities could change materially.
- A $140 million variable-rate term loan bears interest at LIBOR plus 2.00% and matures in June 2013. Hancock Bank’s Tier 1 leverage ratio was 6.93%, seven basis points below a covenant threshold; the company reported that it had taken action to regain compliance. Other stated financial covenants were reported as met.
- Available short-term borrowing capacity included a $2.8 billion FHLB line and more than $1 billion at the Federal Reserve Discount Window. Market-risk modeling indicated a 1.37% increase in net interest income under an instantaneous 100-basis-point rate increase; the filing lists the 100-basis-point decrease scenario as not available.
- A putative class action against Whitney Bank alleges improper overdraft and insufficient-funds fee practices and seeks various remedies. Class certification, potential damages, and outcome were uncertain. Earlier merger-related shareholder suits were settled in principle for amounts management said were not material.
- Management stated that disclosure controls were effective. It said the interim results are not necessarily indicative of full-year results.
Key facts investors should verify
- How merger integration proceeds, whether anticipated cost savings and synergies materialize, and the final purchase-accounting values, including goodwill and acquired-loan marks.
- Whether Hancock Bank restored covenant compliance and how the combined company’s capital ratios develop after the acquisition and integration.
- Underlying credit quality of acquired and legacy portfolios, including nonperforming assets, foreclosed property, loan-loss coverage, and the effects of FDIC loss-sharing arrangements.
- The sustainability of net interest margin and fee income, including the expected interchange-fee impact and the effect of changing interest rates.
- Potential exposure from the overdraft-fee class action and other legal, regulatory, and integration contingencies.