Hancock Holding Company — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013; unaudited. The filing registrant is Hancock Holding Company, which operated Hancock and Whitney bank segments. Amounts below are in U.S. dollars; financial statement figures are generally in millions unless otherwise noted.
Financial performance
| Metric | Q3 2013 | Comparable period |
|---|---|---|
| Net income | $33.2 million | $47.0 million in Q3 2012; $46.9 million in Q2 2013 |
| Diluted EPS | $0.40 | $0.55 in Q3 2012 and Q2 2013 |
| Operating income / diluted EPS | $46.8 million / $0.56 | $49.8 million / $0.58 in Q3 2012 |
| Net interest income, taxable-equivalent | $174.1 million | $180.1 million in Q3 2012; $171.8 million in Q2 2013 |
| Net interest margin, taxable-equivalent | 4.23%; core margin 3.37% | 4.54% and 3.75% core in Q3 2012 |
| Noninterest income / expense | $63.1 million / $182.2 million | $63.8 million / $169.7 million in Q3 2012 |
| Provision for loan losses | $7.6 million | $8.1 million in Q3 2012 |
For the first nine months, net income was $128.6 million, up from $104.8 million in 2012; diluted EPS was $1.51 versus $1.22. Taxable-equivalent net interest income was $522.7 million, down 3%, and reported net interest margin was 4.24% versus 4.48%. Core margin was 3.38% versus 3.78%.
Balance sheet, liquidity and capital
- Total assets were $18.80 billion at September 30, down from $19.46 billion at year-end 2012. Loans were $11.73 billion, up $157 million from year-end; excluding FDIC-covered loans, loan growth was $280 million, or 3%.
- Total deposits were $15.05 billion, down $689 million (4%) from year-end. Noninterest-bearing demand deposits were $5.48 billion, or 36% of deposits. Short-term borrowings were $783 million and long-term debt was $377 million.
- Cash and due from banks was $426 million; interest-bearing bank deposits and federal funds sold brought those balances to about $462 million. Operating cash flow for the nine months was $411 million; investing cash flow was $307 million and financing cash flow was negative $741 million.
- Stockholders’ equity was $2.36 billion, down $97 million from year-end. Tangible common equity ratio was 8.68%. The company and both banks were reported well-capitalized; company total capital, Tier 1 risk-based capital and Tier 1 leverage ratios were 13.52%, 12.07% and 9.10%, respectively.
- Liquidity disclosures included free securities at 37% of total securities and available borrowing capacity of $2.6 billion at the Federal Home Loan Bank and more than $1.0 billion at the Federal Reserve discount window; neither line was drawn at quarter-end.
Material changes and asset quality
- Q3 GAAP net income declined year over year, while nine-month earnings improved. The quarter included $20.9 million of one-time expense, or $13.6 million after tax ($0.17 per share), mainly related to efficiency actions. Excluding such items, operating income was $46.8 million.
- Noninterest expense excluding one-time items was $161.3 million in Q3, down 2% from Q3 2012; nine-month adjusted expense declined 4% to $483.2 million.
- Nonperforming assets were $215.9 million, or 1.83% of loans and ORE, versus $256.1 million and 2.19% at year-end. Nonaccrual loans were $100.6 million; total troubled debt restructurings were $29.7 million. Noncovered net charge-offs were $5.4 million in Q3, down from $9.7 million a year earlier.
- The allowance for loan losses was $138.2 million, or 1.18% of loans. Management revised its general reserve methodology in Q2, adding more granular loan segments and longer loss-emergence periods; it said the change did not materially affect the allowance.
Outlook, commentary and notable items
- Management described improving regional economic activity, including energy, tourism and real estate, but noted cautious consumers, intense competition for quality borrowers and continued pressure on loan pricing from low rates. It expected the Federal Reserve to maintain low rates pending further labor-market improvement.
- Management expected the 2013 effective tax rate to be approximately 26%–27%. It said it remained on track to meet its efficiency and expense-reduction target by Q1 2014; no specific earnings or revenue guidance was provided.
- The company closed 26 branches in August, recording about $2.5 million of severance expense and $12.6 million of losses on premises, equipment and lease settlements. Sales of 10 additional branches remained subject to approvals and closing conditions, with completion expected in Q4 2013 or Q1 2014.
- About $1.0 billion of available-for-sale securities were transferred to held-to-maturity during Q3 because management said they were not needed for liquidity and would be held to maturity. A related pretax unrealized loss of about $56.8 million remains in accumulated other comprehensive income and will be amortized over the securities’ remaining lives. AOCI loss increased to $84.8 million from $22.9 million at year-end, largely reflecting securities valuation changes.
- The board authorized repurchases of up to 5% of outstanding shares. The company paid $115 million in an accelerated share repurchase in May; final settlement was scheduled between November 2013 and May 2014. The quarterly dividend remained $0.24 per share.
- Management said pending litigation and regulatory matters were not expected to materially affect consolidated financial position or liquidity. No material change to previously disclosed risk factors was reported.
Important facts for investors to verify
- Whether the $20.9 million of Q3 efficiency-related charges are genuinely nonrecurring, and whether the stated Q1 2014 expense-reduction target is achieved.
- Trends in core net interest margin and loan yields as purchase-accounting accretion and low-rate repricing affect reported results.
- Deposit outflows, use and stability of repurchase-agreement funding, and liquidity after the securities reclassification and branch transactions.
- Credit quality, including commercial real estate and construction exposures, troubled restructurings, and the adequacy of the allowance after the methodology change.
- Final accelerated-share-repurchase settlement, capital effects, and regulatory approval and completion of the 10 branch sales.