Hancock Holding Company (now identified in the request as Hancock Whitney Corp.) — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; balance-sheet figures are as of March 31, 2015 unless noted. The filing is for Hancock Holding Company and its subsidiaries and was filed May 8, 2015. Amounts below are in U.S. dollars.
Business context and financial performance
The company is a regional banking organization. Results reflected loan growth and ongoing pressure on lending yields, purchase-accounting accretion declining from the prior year, and exposure to the energy downturn.
| Metric | Q1 2015 | Comparable period / change |
|---|---|---|
| Net interest income (GAAP) | $158.2 million | $165.6 million in Q1 2014 |
| Net interest income, taxable-equivalent | $161.1 million | $168.2 million in Q1 2014; $163.6 million in Q4 2014 |
| Net interest margin | 3.55% | 4.06% in Q1 2014; 3.63% in Q4 2014 |
| Core net interest margin | 3.21% | 3.37% in Q1 2014; 3.27% in Q4 2014 |
| Provision for loan losses | $6.2 million | $8.0 million in Q1 2014; $9.7 million in Q4 2014 |
| Noninterest income | $56.5 million | $56.7 million in Q1 2014 |
| Noninterest expense | $153.5 million | $147.0 million in Q1 2014 |
| Net income / diluted EPS | $40.2 million / $0.49 | $49.1 million / $0.58 in Q1 2014 |
| Core income / diluted EPS | $39.6 million / $0.49 | $37.7 million / $0.45 in Q1 2014 |
| Operating income / diluted EPS | $44.7 million / $0.55 | $49.1 million / $0.58 in Q1 2014 |
Net income was nearly flat versus Q4 2014 ($40.1 million), while lower than Q1 2014. Management reported $7.3 million of nonoperating expense in Q1 2015; Q1 2014 had none. Core and operating income are company-defined non-GAAP measures.
Balance sheet, liquidity, capital and cash flow
- Assets and loans: Total assets were $20.7 billion. Loans were $13.9 billion, up $29 million from year-end 2014 and $1.4 billion year over year. Average loans increased $291 million sequentially. Securities totaled $4.1 billion.
- Deposits and funding: Deposits were $16.9 billion, up $288 million from year-end and $1.6 billion year over year. Noninterest-bearing deposits were $6.2 billion. Short-term borrowings fell to $755 million from $1.15 billion at year-end; long-term debt rose to $516 million from $374 million, including newly issued subordinated notes.
- Liquidity: Free securities were 27.06% of total securities, above management’s 15% minimum target. Core deposits were 93.08% of total deposits; wholesale funds were 8.10% of core deposits. The average loan-to-deposit ratio was 84.13%. The company reported $3.4 billion of FHLB borrowing capacity and $1.8 billion of Federal Reserve discount-window capacity.
- Capital: Stockholders’ equity was $2.43 billion; tangible common equity ratio was 8.40%. Company regulatory capital ratios were 12.77% total capital, 10.86% Tier 1 common equity, and 9.17% Tier 1 leverage. The company and bank were described as well-capitalized and above fully phased-in Basel III capital requirements.
- Cash flow: Operating activities provided $65.3 million, versus $103.1 million in Q1 2014. Investing activities used $21.0 million; financing activities used $67.1 million. Cash and due from banks declined $22.7 million to $333.7 million. These cash-flow figures should be considered alongside changes in interest-bearing bank deposits and other short-term liquidity assets.
- Shareholder returns: The quarterly dividend was $0.24 per share. The company completed its repurchase authorization, buying 2.56 million shares in Q1 for $75.3 million at an average $29.36 per share; total program purchases were about 4.1 million shares at an average $30.02.
Material changes and asset quality
- Interest income and net interest income declined year over year as lending yields fell and net purchase-accounting adjustments decreased by $13 million. Average loans were $1.5 billion higher than a year earlier, partially offsetting those effects.
- The reported loan yield was 4.36%, down 64 basis points year over year; excluding purchase-accounting accretion, it was 3.88%, down 15 basis points. The reported yield on earning assets was 3.79%, down 50 basis points year over year.
- Nonperforming assets were $141.3 million, down from $148.1 million at year-end 2014 and $179.7 million in Q1 2014. The nonperforming-assets ratio was 1.01%. Nonaccrual loans increased to $90.8 million from $79.5 million at year-end; management attributed much of the increase in commercial non-real-estate nonaccruals to one energy-related loan.
- The allowance for loan losses was $128.4 million, or 0.92% of period-end loans. Net charge-offs were $6.1 million including FDIC-acquired loans; non-FDIC acquired net charge-offs were $3.7 million, or 0.11% of average loans on an annualized basis.
- Noninterest expense increased $6.5 million year over year, including $7.3 million of nonoperating items. Management cited technology and risk-management consulting costs and a net premium on the sale of four Houston branches. Operating expense excluding nonoperating items was $146.2 million, nearly flat year over year.
Outlook, risks and contingencies
- Management updated 2015 end-of-period annual loan-growth guidance to 5%–8%, citing first-quarter energy-portfolio paydowns and expected headwinds from the energy cycle. Management described the broader growth outlook as cautiously optimistic.
- Energy loans totaled $1.7 billion, about 12% of total loans, and declined approximately $50 million sequentially. Management said further energy-related risk-rating downgrades could require additional provisions; potential severity depends on the level and duration of oil-price weakness.
- Management expected an effective tax rate of approximately 27% for the remainder of 2015. It expected secondary mortgage-market fee trends to continue through 2015.
- Management reported continued economic improvement in most of its markets but noted weakness among energy-related businesses in south Louisiana and Houston, and stiff competition for quality borrowers. The filing identifies interest-rate exposure as a principal market risk; modeled net interest income sensitivity indicated modest asset sensitivity to rising rates.
- Commitments to extend credit totaled $5.88 billion and letters of credit $400.7 million. These are off-balance-sheet exposures and do not necessarily represent future cash requirements. The company stated that ordinary-course litigation and regulatory matters were not expected to materially adversely affect consolidated financial position or liquidity.
- The non-single-family FDIC loss-share agreement expired in December 2014; the single-family agreement runs through December 2019. The company stated that securities with unrealized losses were temporarily impaired and that it did not expect to need to sell them before recovery.
Most important facts for investors to verify
- Whether energy-sector credit deterioration, including shared national credits and borrower support businesses, leads to further downgrades, provisions or losses.
- Whether loan growth reaches the revised 5%–8% guidance and how growth affects yields, funding costs and core net interest margin.
- Whether the increase in nonaccrual loans is isolated or signals broader asset-quality weakening; review charge-offs, criticized loans and reserve coverage.
- How the $150 million subordinated-note issuance, completed share repurchases and capital ratios affect funding expense and capital flexibility.
- Whether liquidity and deposit quality remain stable, particularly given brokered CDs of $262 million and the seasonality of public-fund deposits.
- Reconcile company-defined core and operating measures with GAAP results, and assess the sustainability of noninterest income and nonoperating expenses.