Hancock Holding Company — Q2 2016 Form 10-Q
Business context and reporting period. The filing reports unaudited consolidated results for the quarter and six months ended June 30, 2016. Hancock Holding Company is a regional banking company; its loan portfolio and results were materially affected by weakness in the energy sector.
Financial performance and position
Amounts below are in millions of dollars unless stated otherwise.
- Quarterly earnings: Net income was $46.9 million, or $0.59 per diluted share, versus $34.8 million, or $0.44 per share, in Q2 2015. Net interest income was $165.0 million; on a taxable-equivalent basis it was $171.2 million. Noninterest income was $63.7 million and noninterest expense was $150.9 million.
- First-half earnings: Net income was $50.7 million, or $0.64 per diluted share, compared with $75.0 million, or $0.93 per share, in the first half of 2015. Net interest income was $327.8 million; taxable-equivalent net interest income was $339.3 million.
- Margin and operating measures: Q2 net interest margin was 3.25%, up 2 basis points sequentially and down 5 basis points year over year. Excluding net purchase-accounting accretion, it was 3.15%. The efficiency ratio was 62.14%; core pre-tax, pre-provision income was $85.2 million.
- Credit costs and asset quality: Q2 provision for loan losses was $17.2 million, versus $60.0 million in Q1 2016 and $6.6 million in Q2 2015. First-half provision was $77.2 million, up from $12.8 million a year earlier. The allowance was $226.1 million, or 1.41% of period-end loans. Nonperforming assets were $325.1 million, or 2.02% of loans and foreclosed assets.
- Balance sheet and funding: Total assets were $23.06 billion; loans were $16.04 billion and deposits $18.82 billion. Short-term borrowings were $1.10 billion and long-term debt $468 million. Stockholders’ equity was $2.46 billion. Tangible common equity ratio was 7.81%; regulatory capital ratios were above minimums, and the company and bank were categorized as well-capitalized.
- Cash flow: For the first half, operating cash flow was $177.7 million, investing cash outflow was $246.5 million, and financing cash inflow was $78.3 million. Cash and due from banks ended the period at $313.4 million.
Material changes versus comparable periods
- Q2 net income rose from Q2 2015, reflecting higher revenue, lower expenses and fewer nonoperating costs. First-half net income fell year over year, mainly because loan-loss provision increased by $64.5 million, largely related to energy credits.
- Compared with Q1 2016, Q2 provision fell by $42.8 million and earnings rebounded from $3.8 million. The Q1 result included a $5.0 million pre-tax nonoperating charge, mainly separation costs; Q2 had no nonoperating items.
- Compared with June 30, 2015, loans increased 12% and deposits increased 9%. The year-over-year net interest margin declined from 3.30% to 3.25%; deposit funding costs rose.
- Nonaccrual loans increased to $265.7 million from $159.7 million at year-end 2015. Total troubled debt restructurings rose to $70.8 million from $13.1 million.
- Accumulated other comprehensive loss narrowed to $49.5 million from $80.6 million at year-end, largely reflecting securities valuation movements.
Outlook, risks and unusual items
- Energy exposure: Energy-related loans were approximately $1.5 billion, or 9% of loans. Criticized energy loans totaled $798 million, about 54% of the energy portfolio; nonperforming energy loans were $197 million. Management warned that continued weakness, particularly in energy support services, could drive further downgrades, provisions and charge-offs. It estimated cumulative energy net charge-offs of $65–$95 million over the cycle; approximately $25 million had been recorded since November 2014. Energy allowance was $111 million, or 7.5% of energy loans. Unfunded energy commitments were about $746 million.
- Management outlook: Management expected 2016 year-over-year period-end loan growth of 5%–7%, biased toward the lower end if energy paydowns persisted. It expected a 22%–24% effective tax rate for the remainder of 2016 and anticipated possible continued energy-related credit deterioration. Management described expected energy losses as manageable and capital as solid.
- Liquidity and capital: Core deposits were 91.99% of deposits; brokered deposits were $959 million. The company reported a $3.0 billion FHLB line and $1.7 billion of Federal Reserve discount-window capacity, with no discount-window borrowings. Tangible common equity was below its 8.00% internal target; management said it could remain below temporarily. Share repurchases were on hold pending evidence of an energy recovery.
- Other items and risks: Management tested goodwill for impairment at March 31 and June 30 because of the energy downturn, share-price decline and elevated provisions; its weighted valuation indicated fair value about 13% above book value, with no impairment recorded. Securities unrealized losses were considered temporary, and management said it did not expect to need to sell the affected securities before recovery. Ordinary-course legal proceedings were not expected to materially affect financial position or liquidity. The filing reported no changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether energy prices and energy customers’ repayment capacity improve, especially in support services, and how criticized and nonperforming energy credits evolve.
- Whether subsequent provisions, charge-offs and the allowance remain consistent with management’s $65–$95 million cumulative energy charge-off estimate.
- Whether loan growth reaches the 5%–7% outlook despite energy paydowns, and whether deposit growth and funding costs support net interest margin.
- Whether tangible common equity and regulatory capital remain adequate as credit losses and asset growth develop.
- Whether brokered-deposit reliance, liquidity metrics and the paused share-repurchase plan change in subsequent filings.