Hancock Holding Company‘s (HBHC) second quarter 2012 operating earnings of 55 cents per share lagged the Zacks Consensus Estimate by 2 cents. However, this compares favorably with the prior quarter’s earnings of 47 cents.
After considering certain non-recurring items, Hancock’s net income came in at $39.3 million or 46 cents per share. This was significantly higher than the previous quarter net income of $18.5 million or 21 cents per share.
Stable net interest income coupled with higher non-interest income and falling operating expenses were the primary highlights of the quarter. Moreover, robust capital position was amongst the positives. However, mixed movements in asset quality, slight decline in loan balances and reduced deposits were the major headwinds.
Performance in Detail
On an operating basis, Hancock’s total revenue was $254.0 million, up 0.3% from $253.2 million in the previous quarter. Moreover, total revenue surpassed the Zacks Consensus Estimate of $240.0 million.
Net interest income (taxable equivalent) inched up 0.6% sequentially to $180.3 million. The increase was mainly attributable to lower funding costs. Similarly, net interest margin (NIM) hiked 5 basis points from the prior quarter to 4.48%. Growth was fueled by positive changes in funding sources and lower funding costs, which were partly offset by the reduced securities portfolio yield.
Non-interest income, excluding securities transaction gains, stood at $63.6 million, climbing 3.3% from $61.5 million in the prior quarter. The rise was driven by higher service charges on deposit accounts, increased insurance fees along with higher ATM fees as well as mounted investment & annuity fees. These were partially mitigated by lower bankcard fees, a decline in trust fees along with reduced accretion of indemnification asset and other income.
Non-interest expense, excluding merger related expenses, was $168.1 million, dipping 2.0% from the previous quarter. The fall was mainly due to lower amortization of intangibles, reduced personnel expenses and declining occupancy costs, partly offset by higher equipment costs and rise in other miscellaneous expenses.
Asset Quality
Credit quality displayed mixed movements in the reported quarter. Provision for loan losses came in at $8.0 million, dropping 19.9% from the previous quarter and 12.2% from the year-ago quarter. However, net charge-offs from the non-covered loan portfolio were $10.2 million as of June 30, 2012, surging 44.8% as of March 31, 2012 and 23.9% as of June 30, 2011.
Further, the ratio of allowance for loan losses to period-end loans stood at 1.27% at the end of the second quarter as against 1.28% at the end of the prior quarter and 1.00% at the end of the prior-year quarter. Non-performing assets were $271.0 million, down from $287.6 in the previous quarter but up from $258.2 million in the year-ago quarter.
Loans and Deposits
Total loans for the quarter under review were $11.08 billion, slightly declining 0.5% from the previous quarter. All the loan portfolios except commercial real estate loans declined, leading to the marginal dip in total loans. Average total loans stood at $11.14 billion, marginally dipping 0.5% from the last quarter.
Total deposits were $14.9 billion, dropping 3.3% from $15.4 billion in the prior quarter. The decline was primarily due to lower levels of both non-interest-bearing deposits and interest bearing deposits. Moreover, average deposits fell nearly 1% from previous quarter to $15.2 billion.
Profitability and Capital Metrics
Hancock’s capital ratios remained stable in the quarter. As of June 30, 2012, tier 1 leverage ratio was 8.62% versus 8.27% in the previous quarter and 13.77% in the year-ago quarter. Likewise, tier 1 risk-based capital ratio was 11.98% compared with 11.53% as of March 31, 2012 and 11.05% as of June 30, 2011.
On an operating basis, return on average assets improved to 1.00% in the reported quarter from 0.85% in the prior quarter and 0.92% in the prior-year quarter. As of June 30, 2012, tangible common equity ratio was 8.72%, up from 8.27% in the prior quarter and from 8.09% in the year-ago quarter.
Guidance
The management expects NIM to remain comparatively stable over the subsequent quarters. However, overall fee income is anticipated to decline nearly $2.5 million per quarter in the upcoming quarters, resulting from the restrictions imposed due to the Durbin Amendment. The restrictions became effective for Hancock as of the current quarter.
Further, the incremental cost savings is expected to benefit the remaining quarters of the current year. Total operating expenses (excluding amortization of intangibles) is anticipated to be in the range of $149-$153 million. Management expects tax rate to remain around 25% for 2012.
In addition, the company anticipates provision for loan losses and other credit quality metrics to remain in line with performances in the past few quarters. Moreover, given the opportunities to generate new loans remains strong, management remains positive regarding loan growth in the second half of 2012.
Our Viewpoint
We believe that Hancock’s consistent dividend policy makes it an attractive asset for yield-seeking investors. Moreover, we are quite impressed with the company’s decent top-line growth. However, escalating operating expenses remain a major cause of concern.
Nevertheless, we are concerned about the impacts of the prevailing low interest rate environment, sluggish economic growth and stringent regulatory landscape on the company’s financials in the subsequent quarters.
Hancock currently retains a Zacks #4 Rank, which translates into a short-term Sell rating. One of its peers, Farmers Capital Bank Corporation (FFKT), retains a Zacks #1 Rank, which translates into a short-term Strong Buy rating.
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