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Hancock Holding Company’s (HBHC - Analyst Report) second-quarter operating earnings came in at 55 cents per share. This was in line with the Zacks Consensus Estimate as well as the year-ago quarter earnings. The prior-year quarter results excluded merger-related costs.

Results benefited from a marginal rise in fee income and a decline in operating expenses. However, a fall in net interest income and a rise in provision for loan losses were the headwinds. Further, credit quality and capital ratios displayed mixed results, while profitability ratios deteriorated.

Net income in the reported quarter came in at $46.9 million, up 19.3% year over year.  

Performance in Detail

On an operating basis, Hancock’s total revenue came in at $243.5 million, down 4.1% from the prior-year quarter. However, it surpassed the Zacks Consensus Estimate of $234.0 million.

Net interest income (taxable equivalent) came in at $171.8 million, down 4.7% year over year. Moreover, net interest margin (NIM) fell 31 basis points from the prior-year quarter to 4.17%.

Non-interest income (excluding securities transaction gain) was $63.9 million, up 0.5% from $63.6 million in the prior-year quarter. The marginal rise was primarily driven by increases in trust fees, investment & annuity fees, secondary mortgage market operations and insurance fees, partially offset by a fall in service charges on deposit accounts, bank card fees and other income.

Non-interest expenses were $162.3 million, declining 9.8% year over year. The fall was mainly due to decreases in personnel expense, net occupancy expense and other operating expense. The operating expenses in the year-ago quarter included $11.9 million of merger-related expenses.

Efficiency ratio increased to 65.68% from 65.67% in the previous-year quarter. The increase reflects deterioration in profitability.

Total loans, excluding loans held for sale, reached $11.7 billion, up 5.4% from the previous-year quarter. All the loan portfolios, except construction and land development loans and consumer loans, increased during the quarter.

Total deposits were $15.2 billion, nudging up 1.5% on a year-over-year basis. The rise was primarily due to growth in non-interest bearing deposits and interest bearing transaction and savings deposits.

Credit Quality

Credit quality displayed mixed results in the quarter. Net charge-offs from the non-covered loan portfolio reached $7.0 million or 0.24% of average total loans, compared with $10.2 million or 0.37% of average total loans in the year-ago quarter. Moreover, total nonperforming assets were $216.5 million, falling 20.1% year over year.

However, provision for loan losses was $8.3 million, rising 2.9% from the prior-year quarter.

Capital and Profitability Ratios

Hancock’s capital ratios were a mixed bag and profitability ratios declined. As of Jun 30, 2013, Tier 1 leverage ratio was 8.91%, improving from 8.62% in the year-ago quarter. However, Tier 1 risk-based capital ratio was 12.15%, compared with 12.20% as of Jun 30, 2012.

On an operating basis, return on average assets deteriorated to 0.99% from 1.00% in the prior-year quarter. As of Jun 30, 2013, tangible common equity ratio was 8.52%, down from 8.72% in the year-ago quarter.

Share Repurchase Update

During the quarter, Hancock repurchased 2.8 million shares. In May 2013, the company had authorized a new share repurchase program to repurchase up to 5% of common shares outstanding.

Other Developments

Earlier this week, Hancock announced its plan to divest 10 of the 40 branches that were slated to close by this year-end. These branches are part of Whitney Holding Corporation, which the company acquired in Jun 2011. The company will sell 3 branches located in Louisiana to Many, La.-based Sabine State Bank, while the remaining 7 branches in Texas will be disposed to Lake Jackson, Texas-based Texas Dow Employees Credit Union.

The sale of branches – still subject to regulatory approvals and certain closing conditions – will expectedly close by the end of this year. Moreover, the sale’s financial impact will be reflected in Hancock’s fourth-quarter 2013 results.

Guidance

Hancock remains on track to achieve its efficiency and expense reduction target for first-quarter 2014, with the majority derived from the closure and sale of branches. Management expects one-time costs associated with branch closures and sales to be recorded in the third quarter of 2013. These costs will likely be lower than the previous guidance in the range of $18–$22 million.

Management expects effective tax rate in the range of 26%–27% for 2013.

For the second half of 2013, management anticipates earnings to remain flat or slightly fall from the current level, as expected declines and volatility in accretion levels on the acquired portfolios continue to adversely impact results.

Performance of Other Southeast Banks

Among other Southeast banks, Synovus Financial Corporation (SNV - Analyst Report), Regions Financial Corp (RF - Analyst Report) and F.N.B. Corporation (FNB - Snapshot Report) reported in-line results. Top-line improvement and a rise in deposits and loans were positives for all the companies.

Our Viewpoint

Hancock’s consistent capital deployment program makes it an attractive option for yield-seeking investors. Further, we expect the company to be successful with respect to its organic and inorganic growth strategies on the back of a stable liquidity position. However, persistently rising operating expenses, a low rate environment and increased regulations are likely to dent its performance in the near term.

Hancock currently carries a Zacks Rank #4 (Sell).

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