Hancock Holding Company — Q2 2013 Form 10-Q
Business context and reporting period. The filing is for the quarter and six months ended June 30, 2013; the registrant is Hancock Holding Company. It operates Hancock Bank and Whitney Bank, providing commercial, consumer and mortgage lending, deposit, trust and other financial services. Amounts below are in U.S. dollars; financial statement amounts are in millions unless otherwise noted.
Financial performance and condition
| Metric | Q2 2013 | Comparable period |
|---|---|---|
| Net income | $46.9 million | $39.3 million in Q2 2012; $48.6 million in Q1 2013 |
| Diluted EPS | $0.55 | $0.46 in Q2 2012; $0.56 in Q1 2013 |
| Net interest income, GAAP | $169.2 million | $177.5 million in Q2 2012 |
| Net interest income, taxable-equivalent | $171.8 million | $180.3 million in Q2 2012 |
| Net interest margin, taxable-equivalent | 4.17% reported; 3.38% core | 4.48% reported and 3.80% core in Q2 2012 |
| Noninterest income | $63.9 million | $63.6 million in Q2 2012 |
| Noninterest expense | $162.3 million | $180.0 million in Q2 2012, including $11.9 million of merger costs |
| Provision for loan losses | $8.3 million | $8.0 million in Q2 2012 |
- For the first six months, net income was $95.4 million versus $57.8 million in 2012; diluted EPS was $1.11 versus $0.67. Six-month net interest income (taxable-equivalent) was $348.6 million versus $359.5 million, and reported NIM was 4.24% versus 4.45%.
- Q2 return on average assets was 0.99%; the efficiency ratio was 65.68%. The effective tax rate was about 25%; management expected 26%–27% for 2013.
- At June 30, total assets were $18.9 billion, loans net of allowance were $11.5 billion, deposits were $15.2 billion, and stockholders’ equity was $2.35 billion. Total loans before allowance and unearned income were $11.68 billion.
- Cash and due from banks were $400.6 million; interest-bearing bank deposits were $440.1 million. For the six months, operating cash flow was $273.0 million, investing cash flow was $245.3 million and financing cash flow was negative $566.2 million. These bank holding company cash-flow figures reflect substantial securities, deposit and borrowing movements.
- Deposits fell $588 million from year-end 2012. Short-term borrowings increased $189 million to $828 million; long-term debt was $385 million. The loan-to-deposit ratio was 76.41% on an average basis. The company reported unused FHLB borrowing capacity of $1.7 billion and Federal Reserve discount-window capacity exceeding $1.0 billion.
Material changes versus comparable periods
- Q2 net income rose year over year but declined from Q1 2013. The six-month increase in earnings partly reflects the absence of substantial 2012 merger-integration costs: $45.8 million in the first half of 2012. Excluding those costs, first-half 2013 noninterest expense was down about 5% year over year.
- Loan growth strengthened: loans excluding the FDIC-covered portfolio rose about $245 million sequentially, or 9% annualized, and about $760 million (7%) year over year. Originated and acquired commercial non-real-estate lending contributed to growth; the covered portfolio continued to run off.
- Interest margins compressed as loan and securities yields declined. Core NIM was down 3 basis points sequentially and 42 basis points year over year. Lower funding costs partly offset lower asset yields; management said opportunities to reprice time deposits materially lower were largely exhausted.
- Asset quality improved on several aggregate measures. Nonperforming assets were $216.5 million, down from $256.1 million at year-end 2012; NPAs as a share of loans and foreclosed assets fell to 1.84% from 2.19%. Noncovered net charge-offs were $7.0 million in Q2, or 0.24% of average loans annualized, versus $10.2 million, or 0.37%, in Q2 2012.
- Period-end equity fell from $2.45 billion at year-end to $2.35 billion. The tangible common equity ratio was 8.52%, down from 8.72% at year-end and 9.14% at Q1-end, reflecting the share repurchase and a decline in accumulated other comprehensive income.
Outlook, management commentary and risks
- Management expected earnings to remain flat to slightly lower for the rest of 2013, citing expected declines and volatility in purchase-accounting loan accretion and other adjustments. No specific earnings-per-share guidance was provided.
- The company targeted expense and efficiency improvements by Q1 2014. It planned to close about 40 branches across its five-state footprint, with most closures scheduled for August 30, 2013 and the remainder to close or be sold by year-end. Agreements to sell 10 locations were announced in late July; the sales were subject to regulatory approval and closing conditions. One-time costs were expected in Q3 and to be below earlier guidance of $18–$22 million. Buyers expected to acquire about $54 million of loans and $60 million of deposits.
- Management described regional economic activity as improving unevenly, with strength in energy, tourism and some real-estate markets. It also cited intense competition for high-quality borrowers and downward pressure on loan pricing. Interest-rate risk is material: the company characterized itself as slightly asset-sensitive, estimating net interest income increases of 1.70%, 4.52% and 7.66% under instantaneous, sustained rate increases of 100, 200 and 300 basis points, respectively.
- Rising market rates substantially reduced the fair value of available-for-sale securities: the six-month net unrealized change was negative $86.4 million before tax, contributing to a $55.8 million decline in other comprehensive income after tax. Management said the securities losses were temporary and it did not expect to need to sell the securities before recovery. The portfolio included $2.8 billion of pledged securities.
- The allowance for loan losses was $138.0 million, or 1.18% of period-end loans; coverage of nonperforming loans plus accruing loans 90 days past due was 91.43%. Total troubled debt restructurings were $33.7 million. Management revised its loss-rate methodology in Q2 to use more granular loan segments, risk ratings or delinquency data, and longer loss-emergence periods; it said the change did not materially change the allowance.
- The company reported regulatory capital ratios above minimum requirements and said it exceeded the fully phased-in Basel III requirements, based on its estimates. Legal proceedings arose in the ordinary course of business; management did not expect related loss contingencies to materially adversely affect financial position or liquidity. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether loan growth and credit performance persist, particularly in commercial lending, energy-related exposures and shared credits; monitor nonperformers, charge-offs and allowance adequacy.
- How much reported earnings depend on purchase-accounting accretion and excess cash recoveries, and whether margin pressure continues as asset yields reprice.
- Completion, timing, regulatory approvals and realized savings or costs from the branch closures and 10 announced branch sales.
- Final settlement of the $115 million accelerated share repurchase, which had delivered about 2.8 million shares by quarter-end, and its effect on capital and per-share results.
- Deposit trends, customer sweep balances, wholesale funding reliance, available liquidity and sensitivity of securities valuations and earnings to changing rates.
- Capital ratios and the assumptions supporting management’s assessment of compliance with Basel III, particularly after repurchases, dividends and implementation of the new rules.