Hancock Holding Company — Second-Quarter 2015 Form 10-Q
Business context and reporting period. The filing is for the quarter and six months ended June 30, 2015. The registrant is Hancock Holding Company; its banking subsidiary is Whitney Bank. The company reported as a regional bank, with lending, deposits, investment securities, trust and other fee-based businesses. Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless noted.
Financial performance and position
| Metric | Q2 2015 / June 30, 2015 | Comparable period or prior date |
|---|---|---|
| Interest income | $164.9 million for Q2; $334.0 million for six months | Q2 2014: $174.0 million; six months 2014: $349.1 million |
| Net interest income, GAAP | $151.8 million for Q2; $309.9 million for six months | Q2 2014: $164.8 million; six months 2014: $330.3 million |
| Noninterest income | $60.9 million for Q2; $117.4 million for six months | Q2 2014: $56.4 million; six months 2014: $113.1 million |
| Net income / diluted EPS | $34.8 million / $0.44 for Q2; $75.0 million / $0.93 for six months | Q2 2014: $40.0 million / $0.48; six months 2014: $89.1 million / $1.06 |
| Operating income / diluted EPS | $40.6 million / $0.51 for Q2; $85.3 million / $1.06 for six months | Q2 2014: $49.6 million / $0.59; six months 2014: $98.7 million / $1.17 |
| Net interest margin, taxable-equivalent | 3.30% reported; 3.14% core for Q2 | Q2 2014: 3.99% reported; 3.35% core |
| Loans / allowance | $14.345 billion / $131.1 million | Loans: $13.895 billion at Dec. 31, 2014; allowance: $128.8 million |
| Deposits / total assets | $17.302 billion / $21.538 billion | Deposits: $16.573 billion; assets: $20.747 billion at Dec. 31, 2014 |
| Borrowings / long-term debt | $1.079 billion short-term / $507.3 million long-term | $1.152 billion / $374.4 million at Dec. 31, 2014 |
| Stockholders’ equity | $2.430 billion; tangible common equity ratio 8.12% | Equity: $2.472 billion at Dec. 31, 2014 |
- Cash flow, first half: operating activities provided $130.7 million, versus $184.1 million in first-half 2014; investing activities used $828.2 million and financing activities provided $670.6 million. Cash and due from banks ended at $329.6 million, down $26.8 million from year-end.
- Asset quality: nonperforming assets were $165.0 million, or 1.15% of loans, ORE and foreclosed assets, versus $148.1 million and 1.06% at year-end. Nonaccrual loans were $118.4 million. The allowance was 0.91% of period-end loans. First-half non-FDIC-acquired net charge-offs were $4.9 million, compared with $8.0 million in first-half 2014.
- Liquidity and capital: free securities were 27.37% of total securities; core deposits were 93.56% of deposits; and the average loan-to-deposit ratio was 83.85%. The company reported regulatory capital ratios of 12.54% total capital, 10.77% Tier 1 common equity and 9.07% Tier 1 leverage, and stated that it exceeded regulatory minimums, including the fully phased-in capital conservation buffer.
Material changes versus comparable periods
- Q2 net income declined about 13% year over year; first-half net income declined about 16%. Operating income also fell year over year for both periods.
- Reported Q2 net interest margin fell 69 basis points year over year. Management attributed the decrease chiefly to reduced purchase-accounting accretion and lower loan yields; core margin also declined.
- Net purchase-accounting accretion was $7.7 million in Q2, versus $26.7 million in Q2 2014, and $23.0 million for the first half, versus $54.9 million in first-half 2014. Management said purchase-accounting effects had substantially diminished.
- Q2 noninterest income rose 8% year over year, supported by trust fees, mortgage-market activity and derivative income. Total noninterest expense rose 1% year over year; the efficiency ratio increased to 66.67% from 61.67%.
- Loans increased $449 million, or about 3%, from year-end; deposits increased $729 million, or about 4%. At quarter-end, total assets were up $791 million from year-end.
- Commercial criticized loans increased $207 million, approximately 50%, from the prior quarter to $626 million; about 90% of the increase was energy-related. The energy portfolio totaled $1.7 billion, or 12% of loans.
Outlook, risks and unusual items
- Outlook: Management expected the effective tax rate for the remainder of 2015 to be approximately 25%–27%. It expected no growth or a slight decline in energy loans for the rest of 2015, and expected higher secondary-mortgage-market activity to continue. The filing does not provide quantified earnings or margin guidance.
- Energy and credit risk: Falling oil prices and related borrower pressures drove risk-rating downgrades and a $10.6 million linked-quarter increase in the energy reserve. Management warned that further downgrades could require additional loan-loss provisions; the impact depends on the depth and duration of the oil-price cycle. Energy-related businesses were weakening in parts of south Louisiana and Houston.
- Funding and rate sensitivity: The company issued $150 million of 5.95% subordinated notes maturing in 2045, qualifying as Tier 2 capital. Q2 margin was affected by the full-quarter cost of this debt and deposit initiatives. Management’s interest-rate simulations estimated net interest income increases of 1.13%–5.05% in year one and 1.30%–5.39% in year two under parallel rate increases of 100–300 basis points.
- Nonoperating items: Q2 nonoperating expense was $8.9 million, including branch closures and asset dispositions, resolution of FDIC denied claims, and technology-related consulting and professional fees. First-half nonoperating expense was $16.2 million.
- Capital returns: The company completed its prior stock-repurchase authorization in March 2015, buying 4.1 million shares at an average $30.02 per share. Q2 dividends were $0.24 per share.
- Other disclosures: Management reported effective disclosure controls and no material change in internal control over financial reporting. It did not expect pending ordinary-course legal matters to materially affect consolidated financial position or liquidity; no risk-factor changes from the 2014 Form 10-K were reported.
Important facts for investors to verify
- Whether energy borrower downgrades, criticized-credit trends and reserve needs continue to rise, particularly in commercial energy and support-service exposures.
- Whether loan growth and fee income can offset lower purchase-accounting accretion, declining loan yields and higher funding costs.
- Whether nonperforming assets and nonaccrual loans stabilize after their increase, and how the allowance compares with future credit losses.
- Whether deposit growth and liquidity remain adequate as lending and securities balances grow, including the company’s use of FHLB and other wholesale funding.
- How the $150 million subordinated debt issuance, completed share repurchases and asset growth affect capital ratios and tangible common equity.
- Whether reported operating and core measures, which are non-GAAP measures defined by management, reconcile consistently with GAAP results in subsequent filings.