Hancock Holding Company (issuer named in filing; metadata identifies Hancock Whitney Corp.) — Q2 2014 Form 10-Q
Business context and reporting period
Quarter ended June 30, 2014; financial statements are unaudited. The company reported consolidated community-banking operations as its sole reportable segment after combining its two state bank charters on March 31, 2014.
Financial performance and condition
Unless noted otherwise, amounts are in millions of dollars. Second-quarter net income was $40.0 million, or $0.48 per diluted share; taxable-equivalent net interest income was $167.3 million and noninterest income was $56.4 million. Net interest income plus noninterest income was $221.2 million. Operating income, the company’s non-GAAP measure excluding specified nonoperating items, was $49.6 million, or $0.59 per diluted share.
- Margins and returns: Reported net interest margin was 3.99%; core margin, excluding purchase-accounting effects, was 3.35%. Return on average assets was 0.84% (1.04% operating); return on average common equity was 6.51% (8.07% operating). Efficiency ratio was 61.67%.
- Credit: Provision for loan losses was $6.7 million in Q2. Noncovered net charge-offs were $4.1 million, or 0.13% of average loans annualized. Nonperforming assets were $157.5 million, 1.22% of loans and other real estate; allowance for loan losses was $128.7 million, 1.00% of loans.
- Balance sheet at June 30: Total assets were $19.35 billion; loans $12.88 billion; deposits $15.25 billion; stockholders’ equity $2.49 billion. Short-term borrowings were $1.06 billion and long-term debt $375.0 million. Tangible common equity ratio was 9.29%.
- Liquidity and cash flow: Cash and due from banks was $424.6 million, with interest-bearing bank deposits of $439.3 million. For the six months, operating cash flow was $184.1 million, investing cash flow was negative $348.1 million, financing cash flow was $240.1 million, and cash and due from banks increased $76.2 million. FHLB borrowing capacity was $2.7 billion, with $415 million drawn; the company also cited more than $1.8 billion of Federal Reserve discount-window capacity, unused at period-end.
Material changes versus comparable periods
- Q2 net income declined from $46.9 million in Q2 2013 and from $49.1 million in Q1 2014. Six-month net income was $89.1 million, versus $95.4 million in 2013. Q2 results included $12.1 million of net nonoperating expense items.
- Q2 net interest income (taxable equivalent) fell $4.5 million year over year; reported margin declined 18 basis points year over year. Core Q2 margin was down 3 basis points year over year. Management attributed pressure chiefly to lower loan yields and declining purchase-accounting accretion.
- Q2 noninterest income fell $7.5 million year over year, while noninterest expense fell $5.4 million. Excluding nonoperating items, Q2 operating expense was $144.7 million, down $17.5 million year over year. Six-month provision expense decreased to $14.7 million from $17.8 million.
- Loans grew $356 million from March 31 and $559 million from year-end; excluding FDIC-covered loans, Q2 growth was approximately $383 million. Deposits were down slightly from year-end, while short-term borrowings rose $406 million from year-end.
- Nonperforming assets declined from $216.5 million a year earlier to $157.5 million. The allowance-to-loans ratio decreased from 1.18% to 1.00%.
Outlook, commentary, risks and unusual items
- Management reported improving activity in energy-related businesses, tourism, retail, manufacturing and commercial real estate across its markets, but described the broader recovery as slow and uneven. Residential home sales were soft to flat, and intense competition continued to pressure loan pricing.
- Management expected sizeable quarterly declines in purchase-accounting accretion in Q3 and Q4 2014, and anticipated near-term operating-expense increases as it invested in revenue-generating initiatives. It expected an effective tax rate of approximately 27% for the remainder of 2014. No full-year earnings guidance was stated.
- Q2 nonoperating items included a $10.3 million FDIC settlement expense, $3.5 million of early-termination fees on $115 million of reverse-repurchase obligations, $7.5 million for expense/efficiency initiatives and other items, and a $9.1 million net gain from selling property-and-casualty and group-benefits insurance businesses. The debt redemption is expected to save approximately $3.7 million of annualized interest expense. Fifteen branches were scheduled to close in July; associated costs were recorded in Q2.
- The FDIC had suspended processing claims pending resolution of the loss-share dispute. Following the settlement, the company said it would submit claims for September 2013 through May 2014 totaling $25 million, net of the $10.3 million reimbursement. The timing and collectability of these claims remain relevant.
- Management described the company as slightly asset-sensitive: modeled net interest income increased 1.46%, 3.43% and 5.25% under sustained parallel rate increases of 100, 200 and 300 basis points, respectively. Oil-and-gas-related customer loans were approximately $1.6 billion; shared national credits to oil-and-gas customers were approximately $976 million.
- Unrealized securities losses were considered temporary by management; securities carrying value of approximately $2.9 billion was pledged. The company reported no material change in risk factors from its prior annual report. It said pending legal and regulatory matters were not expected to materially affect financial position or liquidity.
Important facts for investors to verify
- Reconcile the $12.1 million net nonoperating charge, including the FDIC settlement, branch and efficiency costs, debt termination fees, and insurance-sale gain.
- Track FDIC claim submissions and recoveries following the $10.3 million settlement, including the stated $25 million of claims.
- Assess whether loan growth, especially commercial and energy-related exposure, can offset further loan-yield and purchase-accounting-accretion declines without weakening credit quality.
- Monitor deposit trends, increased wholesale funding and FHLB usage, pledged securities, and liquidity as loan growth continues.
- Evaluate execution and recurring effects of the insurance-business sale, branch closures, expense initiatives and the newly authorized share-repurchase plan (up to approximately 4 million shares through December 31, 2015).