Hancock Holding Company — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. The unaudited filing is for Hancock Holding Company, a regional banking company that reported its overall banking operations as its sole reportable segment. Dollar amounts below are in millions unless stated otherwise.
Financial performance and key metrics
| Metric | Q3 2014 | Comparison |
|---|---|---|
| Net interest income | $163.5 | $171.5 in Q3 2013 |
| Net interest income, taxable-equivalent basis | $166.2 | $174.1 in Q3 2013 |
| Noninterest income | $57.9 | $63.1 in Q3 2013 |
| Provision for loan losses | $9.5 | $7.6 in Q3 2013 |
| Noninterest expense | $149.1 | $182.2 in Q3 2013 |
| Net income | $46.6; diluted EPS $0.56 | $33.2; diluted EPS $0.40 in Q3 2013 |
| Operating income (company-defined, non-GAAP) | $49.1; diluted operating EPS $0.59 | $46.8; diluted operating EPS $0.56 in Q3 2013 |
| Net interest margin | 3.81% | 4.23% in Q3 2013 |
| Core net interest margin (company-defined) | 3.32% | 3.37% in Q3 2013 |
For the first nine months, net income was $135.6 million versus $128.6 million, and diluted EPS was $1.62 versus $1.51. Tax-equivalent net interest income was $501.9 million versus $522.7 million; the reported margin was 3.95% versus 4.24%, while core margin was 3.35% versus 3.38%. Management attributed much of the decline in reported interest income and margin to lower purchase-accounting accretion, alongside falling loan yields.
- Balance sheet at September 30: Total assets were $20.0 billion, up from $19.0 billion at year-end 2013. Loans were $13.35 billion, up $1.02 billion; deposits were $15.74 billion, up $376 million.
- Funding and debt: Short-term borrowings rose to $1.17 billion from $658 million at year-end, including $565 million borrowed from the Federal Home Loan Bank (FHLB). Long-term debt was $376 million. The company said loan growth outpaced deposit growth and FHLB advances helped fund asset growth.
- Liquidity: Cash and due from banks were $332 million; interest-bearing bank deposits and federal funds sold totaled about $472 million. The company reported $3.3 billion of FHLB borrowing capacity and more than $1.8 billion of Federal Reserve discount-window capacity, with no discount-window borrowings. Free securities were 23% of total securities.
- Capital: Stockholders’ equity was $2.51 billion; tangible common equity ratio was 9.10%. At September 30, holding-company total risk-based capital was 12.66%, Tier 1 risk-based capital 11.59%, and Tier 1 leverage 9.48%. The company and bank were categorized as well capitalized and management said they exceeded the future Basel III requirements, including the fully phased-in conservation buffer.
- Credit quality: Allowance for loan losses was $125.6 million, or 0.94% of loans, versus $133.6 million and 1.18% at year-end. Nonperforming assets were $147.2 million, or 1.10% of loans and other real estate, compared with $185.9 million and 1.50% at year-end. Q3 noncovered net charge-offs were $6.4 million, or 0.19% of average loans on an annualized basis.
- Cash flows, nine months: Operating activities provided $287.6 million, down from $411.2 million. Investing activities used $1.12 billion, mainly reflecting $1.06 billion of net loan growth. Financing activities provided $811.4 million, including deposit growth and increased short-term borrowings. Cash and due from banks decreased $16.1 million to $332.4 million.
- Shareholder returns: The quarterly dividend was $0.24 per share, unchanged from 2013. The company repurchased 305,263 shares in Q3 at an average $32.65 per share; its July 2014 authorization permitted repurchases of up to approximately 4 million shares through December 31, 2015.
Material changes versus comparable periods
- Q3 net income increased from Q3 2013, while net interest income and noninterest income declined. Lower expenses—particularly personnel, occupancy, and other costs—contributed to improved earnings.
- Q3 total noninterest expense fell 18% year over year. Management cited expense and efficiency actions, including the sale or closure of about 60 branches and a reduction of nearly 450 full-time-equivalent employees since January 2013.
- Loans grew materially, with reported net loan growth of $488 million quarter over quarter excluding the FDIC-covered portfolio. Deposits increased $491 million in the quarter. Short-term borrowings also increased substantially to support asset growth.
- Asset quality improved from year-end, with lower nonperforming assets and a lower allowance-to-loan ratio. Noncovered net charge-offs rose from the prior quarter, however, including a charge-off tied to one customer.
- Noninterest income was affected by the April 2014 sale of the property-and-casualty and group-benefits insurance intermediary business, which represented about half of 2013 insurance commissions and fees. Trust fees increased, while secondary mortgage-market fees declined with lower mortgage originations and refinancing activity.
Outlook, management commentary, risks, and unusual items
- Management described economic activity across most markets as improving, with strength in energy-related businesses, tourism, retail, manufacturing, and parts of commercial real estate. Residential real estate conditions were mixed. Management also noted intense competition for high-quality loans and pressure on loan pricing.
- The filing provides no specific earnings or revenue guidance. Management expected the effective tax rate for the remainder of 2014 to be about 27%, and said operating expenses remained below its targeted Q4 expense goal. It anticipated elevated FDIC loss-share receivable amortization through 2014 as expected covered-loan losses declined.
- Q3 included $3.9 million of nonoperating expense, primarily tied to expense and efficiency initiatives. Nine-month unusual items included a $10.3 million FDIC settlement expense, $11.4 million of expense-and-efficiency items, a $3.5 million early debt-redemption fee, and a $9.1 million gain from the insurance-business divestiture, net of related costs.
- The FDIC settlement followed a dispute over administration of certain covered assets and calculation of loss claims. The company paid the $10.3 million settlement in Q3, after which the FDIC resumed claim payments; the filing reported $21.1 million due from the FDIC for December 2013 through August 2014.
- Interest-rate risk is material because earnings depend substantially on net interest income. Management’s simulations indicated slight asset sensitivity: a 100-basis-point rate increase was estimated to raise taxable-equivalent net interest income 1.11% in year one and 3.02% in year two; a 200-basis-point increase was estimated to raise it 2.72% and 5.78%, respectively.
- Energy-sector exposure is a stated risk: approximately 13% of the loan portfolio was to energy-industry borrowers. The filing also identifies real-estate-sector vulnerability, interest-rate and competitive pressures, and risks inherent in estimates and forward-looking projections. Pending ordinary-course legal matters were not expected to have a material adverse effect on financial position or liquidity.
Important facts for investors to verify
- Whether loan growth can be sustained without further margin compression, and how purchase-accounting accretion and loan yields evolve.
- Whether deposit growth keeps pace with lending and whether increased FHLB and other short-term funding remains manageable.
- Trends in energy-related credit exposure, noncovered charge-offs, criticized loans, and the adequacy of the allowance.
- Timing and amount of FDIC reimbursements, remaining loss-share receivable, and any further consequences of the settlement.
- Durability of cost savings and fee income after the insurance-business sale and branch rationalization, alongside progress on the share-repurchase authorization.
- Management’s tax-rate expectation and the sensitivity of earnings and securities values to changes in interest rates.