Hancock Holding Company — Q1 2016 Form 10-Q
Business context and period: Unaudited consolidated results for the three months ended March 31, 2016, compared primarily with Q1 2015 and, where noted, Q4 2015. The filing is by Hancock Holding Company, the predecessor to Hancock Whitney Corporation. Amounts below are in U.S. dollars; financial-statement amounts are generally converted from thousands to millions.
Financial performance and position
- Earnings: Net income was $3.8 million, or $0.05 per diluted share, versus $40.2 million and $0.49 in Q1 2015; Q4 2015 net income was $15.3 million and $0.19 per diluted share. Q1 2016 operating income, a non-GAAP measure, was $7.1 million; operating EPS was $0.09.
- Interest income and margins: Net interest income was $162.8 million GAAP and $168.2 million on a taxable-equivalent basis. Reported net interest margin was 3.23%; core margin, excluding purchase-accounting effects, was 3.12%. Average earning assets were $20.9 billion.
- Other income and expenses: Noninterest income was $58.2 million, up 3% year over year. Noninterest expense was $156.0 million, up 2%; this included $5.0 million of nonoperating expense, primarily separation costs. The efficiency ratio was 64.47% under the company’s stated calculation.
- Credit costs: Provision for loan losses was $60.0 million, versus $6.2 million in Q1 2015. Net charge-offs on non-FDIC-acquired loans were $21.3 million, or 0.54% of average loans annualized. The allowance was $217.8 million, equal to 1.36% of period-end loans, compared with $181.2 million and 1.15% at year-end 2015.
- Balance sheet: Total assets were $22.8 billion; loans were $16.0 billion, up $275 million from year-end; deposits were $18.7 billion, up $307 million. Stockholders’ equity was $2.42 billion. Short-term borrowings were $1.10 billion and long-term debt was $471.2 million.
- Cash flow: Operating activities provided $92.7 million; investing activities used $51.2 million and financing activities used $54.4 million. Cash and due from banks declined $12.8 million to $291.1 million. This cash-flow line does not include interest-bearing bank deposits.
- Liquidity and capital: Core deposits were 92.95% of total deposits; the average loan-to-deposit ratio was 86.69%. Free securities were 25.47% of total securities. The company reported $3.0 billion of FHLB borrowing capacity and $1.7 billion of Federal Reserve discount-window capacity, with no discount-window borrowings. Tangible common equity was 7.69% (company internal target at least 8.00%). Regulatory capital ratios remained above minimum requirements, and the company and bank were categorized as well-capitalized.
- Shareholder returns: The quarterly dividend was $0.24 per share. No shares were repurchased in Q1; management had paused the repurchase plan pending evidence of recovery in the energy cycle.
Material changes versus comparable periods
- Year-over-year earnings fell sharply, principally because of the $60.0 million loan-loss provision and lower purchase-accounting accretion. Net interest income (taxable-equivalent) increased 4% year over year, but reported margin declined 32 basis points to 3.23%; core margin declined 9 basis points to 3.12%, reflecting higher funding costs.
- Loan balances grew 15% year over year and deposits grew 11%. Linked-quarter loan growth of $275 million was funded by deposit growth of $307 million.
- Credit quality deteriorated materially: nonaccrual loans rose to $237.3 million from $159.7 million at year-end; total nonperforming loans, including accruing restructured loans, were $282.9 million versus $164.0 million. Nonperforming assets were $307.0 million, up from $191.1 million.
- Energy-related criticized loans increased to $761 million, approximately 47% of the $1.6 billion energy portfolio. Energy nonperforming loans were $159 million, up about $90 million from year-end. Management cited new regulatory guidance used in the March shared-national-credit review as a major factor in downgrades.
- Accruing troubled-debt restructurings rose to $45.6 million from $4.3 million at year-end; total TDRs were $63.9 million versus $13.1 million. Eleven commercial non-real-estate loans totaling $51.2 million were modified during Q1; none of the modified TDRs subsequently defaulted within twelve months.
Outlook, commentary, and risks
- Energy exposure: Management estimated energy-related charge-offs of $65–$95 million over the duration of the cycle; approximately $21 million had been recorded cycle-to-date, including $17 million in Q1. Further downgrades could increase provisions, reserves, and charge-offs. The company had approximately $790 million of unfunded energy commitments, generally subject to borrower, collateral, and contractual conditions.
- Energy lending outlook: Management expected reserve-based lending commitments to decline approximately 15%–20% in the Q2 2016 redetermination amid low commodity prices. It expected period-end loan growth of 5%–7% year over year in 2016, with energy paydowns partly offsetting growth elsewhere. Management said it expected the energy-cycle impact to be manageable and capital to remain solid, while acknowledging possible credit deterioration in related consumer and commercial real-estate portfolios.
- Economic commentary: Management described activity across most markets as improving or stable, with favorable travel, tourism, auto, and real-estate trends in many areas. Energy-dependent markets, particularly south Louisiana and Houston, remained under pressure; loan competition for quality borrowers was stiff.
- Tax outlook: Management expected an effective tax rate of approximately 22%–24% for the remainder of 2016. Q1’s effective rate was approximately 23%.
- Other items: Management tested goodwill for impairment because of the energy downturn, stock-price decline, and elevated provision; its valuation indicated fair value approximately 13% above net book value. Securities unrealized losses were attributed primarily to market-rate changes and were considered temporary; management said it did not expect to need to sell those securities before recovery.
- Contingencies and controls: The company was involved in ordinary-course legal proceedings and stated it did not expect pending litigation or regulatory matters to materially affect consolidated financial position or liquidity. It reported effective disclosure controls and no material change in internal control over financial reporting. No changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether energy-credit downgrades, nonaccruals, charge-offs, and the allowance evolve consistently with management’s $65–$95 million cycle-loss estimate.
- The Q2 reserve-based lending redeterminations, unfunded energy commitments, and borrowers’ collateral and repayment capacity.
- Whether nonperforming loans and restructured loans continue to increase, and how that affects provision expense and reserve coverage.
- Whether loan growth, deposit mix, brokered-deposit usage, funding costs, and core net interest margin meet management’s expectations.
- The sustainability of capital and liquidity metrics, including the tangible common equity ratio below the company’s stated 8.00% internal target, and any future share-repurchase decision.
- Goodwill impairment assumptions and the effect of continued energy-sector weakness or further declines in the company’s stock price.