Hancock Holding Company (now associated with Hancock Whitney Corp.) — Q1 2014 Form 10-Q
Business context and period: Regional banking company reporting the three months ended March 31, 2014, compared primarily with Q1 2013 and, where noted, Q4 2013. On March 31, Whitney Bank was merged into Hancock Bank; the combined bank was renamed Whitney Bank, operating under Hancock Bank and Whitney Bank brands across its markets.
Financial results and position
| Metric | Q1 2014 / March 31, 2014 | Comparison |
|---|---|---|
| Net income; diluted EPS | $49.1 million; $0.58 | Q1 2013: $48.6 million; $0.56. Q4 2013 net income was $34.7 million, including significant one-time expenses. |
| Net interest income | $165.6 million GAAP; $168.2 million taxable-equivalent | Taxable-equivalent figure was $176.7 million in Q1 2013 and $168.5 million in Q4 2013. |
| Noninterest income / expense | $56.7 million / $147.0 million | Q1 2013: $60.2 million / $159.6 million. |
| Net interest margin | 4.06% reported; 3.37% core | Reported margin was 4.32% in Q1 2013 and 4.09% in Q4 2013; core margin was 3.41% and 3.40%, respectively. |
| Loans and allowance | $12.53 billion gross loans; $128.2 million allowance, or 1.02% of loans | Loans increased $203 million from year-end and about 9% year over year. Allowance was $133.6 million at year-end and $137.8 million a year earlier. |
| Asset quality | $179.7 million nonperforming assets; $6.5 million total net charge-offs | Nonperforming assets were $185.9 million at year-end and $229.3 million a year earlier. Non-covered net charge-offs were $4.0 million, or 0.13% of average loans annualized. |
| Deposits, borrowings, and equity | $15.27 billion deposits; $712.6 million short-term borrowings; $380.0 million long-term debt; $2.46 billion equity | Deposits declined $85.7 million from year-end; short-term borrowings rose $54.7 million; equity increased $37.5 million. |
| Liquidity and cash flow | $415.0 million cash and due from banks; operating cash flow $103.1 million | Operating cash flow was $132.4 million in Q1 2013. Q1 2014 investing cash flow was $19.9 million and financing cash flow was negative $56.5 million. |
| Capital | Company total capital ratio 13.20%; Tier 1 risk-based 11.90%; Tier 1 leverage 9.43% | Company and bank were reported well-capitalized and above stated Basel III requirements, including the fully phased-in conservation buffer, based on estimates. |
Material changes and management commentary
- Q1 net income rose modestly year over year as lower expenses and reduced loan-loss provision offset weaker net interest income and noninterest income. Expense reductions reflected branch closures, branch sales, and other efficiency actions.
- Management said the $50 million annual expense-reduction initiative, measured against annualized Q1 2013 expense, had achieved its first-quarter 2014 milestone; it remained on track for the remaining target by Q4 2014. The 2016 sustainable efficiency-ratio target is 57%–59%; the Q1 ratio was 62.23%.
- Core net interest income was approximately flat sequentially, while core margin narrowed 3 basis points. Management attributed pressure mainly to declining loan yields; it expected purchase-accounting loan accretion to keep declining, with faster decreases in the second half of 2014.
- Loan growth excluding the FDIC-covered portfolio was approximately $231 million sequentially, or 8% annualized. Management expected full-year 2014 period-end loan growth in the upper-single-digit range.
- Management expected a 2014 effective tax rate of approximately 26%–27%. It described regional economic activity as generally improving but uneven; loan pricing remained competitive, and home-sale conditions were mixed.
Outlook, risks, contingencies, and unusual items
- In April 2014, the company sold its property-and-casualty and group-benefits insurance intermediary business for $15.5 million and recorded an estimated $9.4 million gain. The divested lines represented approximately half of 2013 insurance commissions and fees; the gain occurred after the reporting quarter.
- Interest-rate risk is a key exposure. The company characterized itself as slightly asset-sensitive; its simulation estimated net interest income increases of 1.78%, 4.27%, and 6.86% under instantaneous, sustained rate increases of 100, 200, and 300 basis points, respectively.
- Liquidity sources included $98 million in brokered CDs, a $2.8 billion approved Federal Home Loan Bank line, and more than $0.5 billion of Federal Reserve discount-window capacity; no amounts were drawn under those lines at quarter-end. Securities available to pledge or sell were lower than a year earlier, with free securities at 21% of total securities versus 41% in Q1 2013.
- Off-balance-sheet commitments to extend credit totaled $5.30 billion and letters of credit $423.6 million. The filing notes that commitment amounts do not necessarily represent future cash requirements.
- Management stated that pending litigation and regulatory matters were not expected to materially affect consolidated financial position or liquidity. It reported no material change in previously disclosed risk factors, no material change in internal control over financial reporting, and effective disclosure controls.
- Unrealized losses on investment securities were attributed to market-rate changes; management considered them temporary and stated it was not likely to be required to sell the securities before recovery. Regulatory, credit, interest-rate, and economic risks remain relevant; forward-looking statements are subject to the risks described in the company’s SEC filings.
Important facts for investors to verify
- Whether projected upper-single-digit loan growth and the $50 million expense-reduction plan are achieved, and whether the 2016 efficiency target remains attainable.
- The pace of decline in purchase-accounting accretion and its effect on net interest income and margin.
- Credit trends, including nonperforming assets, charge-offs, allowance adequacy, and exposures to commercial real estate, energy-related borrowers, and shared national credits.
- Deposit mix, brokered-CD usage, pledged securities, and funding needs as loan growth continues.
- The final accounting and ongoing revenue impact of the post-quarter insurance-business sale, and the effects of the bank merger and branch rationalization.
- The filing presents differing nonperforming-asset ratio figures in its discussion and selected-data tables; confirm the intended measure in the full filing. The selected-data table reports 1.43% at March 31, 2014.