Business context and reporting period
Hancock Holding Company’s Form 10-K covers the fiscal year ended December 31, 2014; it also reports fourth-quarter results. The Gulf South banking company operates through Whitney Bank, using the Hancock Bank and Whitney Bank brands across Mississippi, Alabama, Florida, Louisiana and Texas. On March 31, 2014, it consolidated its two bank charters into one Whitney Bank charter. Total assets were $20.7 billion at year-end.
Key financial metrics
| Metric | 2014 | 2013 | Change or context |
|---|---|---|---|
| Net income | $175.7 million | $163.4 million | Up 8%; diluted EPS was $2.10 versus $1.93 |
| Operating income (non-GAAP) | $194.1 million | $188.0 million | Up 3.3%; excludes specified nonoperating items and securities gains or losses |
| Core income (non-GAAP) | $159.2 million | $121.1 million | Up 31%; excludes purchase-accounting adjustments from operating income |
| Net interest income, taxable-equivalent | $665.3 million | $691.1 million | Down 4% |
| Net interest margin, reported / core | 3.87% / 3.33% | 4.20% / 3.39% | Down 33 / 6 basis points, respectively |
| Noninterest income | $228.0 million | $246.1 million | Down 7% |
| Noninterest expense | $606.7 million | $678.3 million | Down 11%; includes nonoperating costs |
| Provision for loan losses | $33.8 million | $32.7 million | Slightly higher |
| Total assets / loans / deposits at year-end | $20.7 billion / $13.9 billion / $16.6 billion | $19.0 billion / $12.3 billion / $15.4 billion | Assets up 9%, loans up 13%, deposits up 8% |
| Operating cash flow | $352.4 million | $473.5 million | Investing cash flow was negative $1.91 billion; financing cash flow was positive $1.57 billion |
| Year-end capital ratios | Tier 1 leverage 9.17%; Tier 1 risk-based 11.23%; total risk-based 12.30% | 9.34%; 11.76%; 13.11% | Company and bank were reported well capitalized |
Year-end short-term borrowings were $1.15 billion, including $515 million borrowed from the Federal Home Loan Bank; long-term debt was $374.4 million. The bank reported approximately $2.8 billion of remaining FHLB borrowing capacity and $1.9 billion of Federal Reserve discount-window capacity. Core deposits were 93.95% of total deposits. Free securities were 12.6% of total securities, below the company’s 15% internal target; management attributed this partly to seasonal public-fund collateral needs and said the shortfall was temporary. The company paid $0.96 per share in dividends during 2014.
Material changes versus the prior comparable period
- Net income and EPS improved primarily because of expense reductions. Operating expense declined $59.3 million, excluding nonoperating expense, and the efficiency ratio improved to 62.03% from 65.17%.
- Management said it achieved its target to reduce annualized operating expenses by $50 million versus first-quarter 2013 levels by fourth-quarter 2014. It closed or sold more than 50 branches since 2013 and reduced year-end full-time-equivalent staffing to 3,794 from 3,978.
- Reported net interest income fell as purchase-accounting accretion declined by $41.3 million. Excluding purchase-accounting adjustments, net interest income increased $15.6 million, supported by loan growth, asset mix and lower funding costs.
- Noninterest income declined, reflecting increased amortization of the FDIC loss-share receivable, lower secondary-mortgage activity and the sale of certain insurance lines. Trust fees increased 17%.
- Credit quality improved: nonperforming assets fell 20% to $148.1 million, or 1.06% of loans plus foreclosed assets, from $185.9 million and 1.50%. Non-FDIC acquired net charge-offs declined to 0.13% of average loans from 0.21%.
- The company repurchased 1.53 million shares in 2014 for an average $31.13 per share. Tangible common equity was 8.59%, down from 9.00%, reflecting balance-sheet growth and repurchases.
Outlook, management commentary, risks and unusual items
- Management set a longer-term efficiency-ratio target of 57%–59% for 2016. It expects the 2015 effective tax rate to be 27%–29%; it gave no specific earnings or loan-growth guidance in the supplied filing text.
- Fourth-quarter net income was $40.1 million, or $0.48 per diluted share, versus $46.6 million in the third quarter and $34.7 million in fourth-quarter 2013. Fourth-quarter loans grew $547 million and deposits grew $836 million from the prior quarter. The reported net interest margin declined to 3.63% from 3.81% in the third quarter.
- Energy exposure is a key risk: oil-and-gas loans totaled about $1.7 billion, or 12% of loans, including $648 million to exploration-and-production borrowers. After oil prices fell sharply in the second half of 2014, management stress-tested larger energy credits and concluded no additional reserve was needed at year-end. It warned prolonged price pressure could lead to credit downgrades and higher future provision expense.
- The non-single-family FDIC loss-share agreement expired December 31, 2014; $196.7 million of loans remained covered by the single-family agreement, which expires in December 2019. The FDIC loss-share receivable declined to $60.3 million from $113.8 million.
- Unusual items included a $10.3 million FDIC settlement expense related to disputed prior loss reimbursements, $3.5 million in early-termination fees on repurchase obligations, and a $9.4 million gain on the sale of insurance business lines. Nonoperating expenses totaled $25.7 million.
- Management described improving activity in most markets but noted slowing energy-related business amid lower oil prices. Other principal risks include Gulf South economic and real-estate conditions, interest-rate and margin sensitivity, commercial real-estate and industry concentrations, liquidity and deposit volatility, regulatory changes, operational and cyber risks, and hurricanes or other disasters.
- The company reported that pending legal and regulatory matters were not expected to materially affect consolidated financial position or liquidity. Management and the independent auditor reported effective internal control over financial reporting; the auditor issued an unqualified opinion.
Most important facts for investors to verify
- Whether loan growth and core earnings can continue to offset declining purchase-accounting accretion and margin pressure.
- Energy portfolio performance, borrower hedges and collateral, risk-rating changes, and any resulting provisions as oil-market conditions evolve.
- Deposit stability and liquidity, including seasonal public-fund withdrawals, pledged securities, and increased short-term/FHLB borrowing.
- Credit quality and allowance adequacy as loans expand; review the movement in substandard commercial loans and the allowance’s decline to 0.93% of period-end loans.
- Progress toward the 2016 efficiency target and the sustainability of expense savings after branch consolidation and restructuring.
- Capital, dividends and repurchases under Basel III requirements, including the effect of asset growth and any future regulatory constraints.