Hancock Holding Company — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015; balance-sheet comparisons are primarily with December 31, 2014. The filing issuer is Hancock Holding Company, a bank holding company.
Business context and financial results
The company provides banking and related financial services across Gulf South markets. Results reflect loan and deposit growth, declining acquisition-related purchase-accounting income, and increased credit pressure in energy-related lending.
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net interest income, GAAP | $156.8 million | $163.5 million | $466.8 million | $493.9 million |
| Noninterest income | $60.2 million | $57.9 million | $177.6 million | $171.0 million |
| Provision for loan losses | $10.1 million | $9.5 million | $22.8 million | $24.1 million |
| Net income | $41.2 million | $46.6 million | $116.2 million | $135.6 million |
| Diluted EPS | $0.52 | $0.56 | $1.45 | $1.62 |
Financial position, cash flow, and capital
- Balance sheet at September 30: Assets were $21.61 billion; loans were $14.76 billion, up $868 million (6%) from year-end; deposits were $17.44 billion, up $867 million (5%); and stockholders’ equity was $2.45 billion.
- Funding and liquidity: Cash, interest-bearing bank deposits, and federal funds totaled $518 million. The loan-to-deposit ratio was 83.82%; core deposits were 93.50% of deposits; free securities were 33.68% of total securities. The company reported $3.5 billion of FHLB borrowing capacity and $1.8 billion of Federal Reserve discount-window capacity, with no discount-window borrowing.
- Debt: Long-term debt was $497 million, including $150 million of 5.95% subordinated notes issued in March 2015 and qualifying as Tier 2 capital. A $123 million term loan was scheduled to mature in December 2015. Short-term borrowings were $1.05 billion.
- Cash flow for nine months: Operating activities provided $222.8 million; investing activities used $989.4 million; financing activities provided $733.9 million. Cash and due from banks ended at $323.7 million.
- Capital: Tangible common equity ratio was 8.24%. Company regulatory ratios included 12.32% total capital, 10.56% Tier 1 capital, and 8.85% Tier 1 leverage. Management said the company and bank exceeded applicable regulatory requirements, including the fully phased-in capital conservation buffer.
Margins, asset quality, and changes versus prior periods
- Third-quarter taxable-equivalent net interest income was $160.1 million, down $6.1 million year over year but up $5.3 million from Q2 2015. Core net interest income, excluding purchase-accounting adjustments, rose $6.6 million from Q2 to $153.7 million.
- Reported net interest margin was 3.28%, versus 3.81% in Q3 2014; core margin was 3.15%, versus 3.32%. For the first nine months, reported margin was 3.37% versus 3.95%, and core margin was 3.16% versus 3.35%. Management attributed much of the reported decline to lower purchase-accounting accretion; higher deposit costs and new subordinated debt also raised funding costs.
- Noninterest expense was $151.2 million in Q3, up 1% year over year. The efficiency ratio was 65.88%, compared with 61.84% a year earlier. Q3 2015 had no nonoperating expense, while Q2 2015 included $8.9 million of such items.
- Year-to-date net income fell primarily because after-tax purchase-accounting income declined $25.6 million. Operating income was $126.5 million, down $21.3 million year over year. For Q3, the filing reports net income of $41.2 million versus $46.6 million a year earlier; it was up from $34.8 million in Q2 2015, partly because Q2 included nonoperating expenses.
- Asset quality weakened: nonaccrual loans were $166.9 million, versus $79.5 million at year-end 2014; nonperforming assets were $206.3 million, versus $148.1 million; and nonperforming assets were 1.39% of loans, ORE, and foreclosed assets, versus 1.06%. The allowance was $139.6 million, or 0.95% of loans, up from 0.91% at Q2-end.
- Energy-related lending totaled $1.6 billion (11% of loans). Criticized commercial loans increased $181.1 million during Q3 to $806.9 million, with $173.0 million of the increase tied to energy credits. Energy-related nonaccruals were $98.3 million. The energy reserve rose about $5 million linked-quarter to $35.2 million, or 2.12% of that portfolio.
Outlook, risks, and unusual items
- Management expected energy lending to show no growth or a slight decline for the remainder of 2015. Further energy-credit downgrades could increase provisions, reserves, and charge-offs; management said the outcome would depend on the severity and duration of low oil prices.
- The filing describes modest-to-moderate economic growth across most markets, but ongoing weakness among energy businesses, particularly in south Louisiana and Houston. Management also cited stiff competition for quality borrowers and uncertainty from low oil prices and financial-market conditions.
- Management expected an effective tax rate of approximately 25%–27% for the remainder of 2015. No broader quantified earnings or margin guidance is provided in the filing.
- On October 6, 2015, the company announced a Nashville loan production office and an agreement to purchase approximately $190 million of healthcare loans, expected to affect Q4 results.
- The board authorized a new repurchase program of up to approximately 3.9 million shares through September 30, 2016. By September 30, the company had repurchased 568,279 shares at an average $27.39; nine-month buybacks totaled $90.8 million.
- The non-single-family FDIC loss-share agreement expired in December 2014; the remaining single-family agreement expires in December 2019. The related receivable fell to $32.0 million from $60.3 million at year-end.
- The company disclosed ordinary-course legal proceedings and did not expect any resulting loss contingencies to materially affect consolidated financial position or liquidity. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Key facts for investors to verify
- Whether energy-sector risk-rating changes, nonaccruals, criticized loans, and reserve needs continued to rise after quarter-end.
- How core net interest margin and deposit costs evolved as purchase-accounting income continued to decline.
- Repayment or refinancing of the $123 million term loan due December 2015 and the ongoing cost and use of subordinated debt.
- Whether the announced healthcare-loan purchase closed and how it affected loan growth, concentration, and credit quality.
- The pace and price of share repurchases, and the effect on tangible capital and per-share results.