Business context and reporting period
Hancock Holding Company, operating through Whitney Bank, filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2017. The filing describes two 2017 acquisitions of selected First NBC Bank assets and liabilities, including branch operations in Louisiana and Florida. The acquired businesses’ separate revenue and earnings contributions are not provided because management says they cannot be reliably determined.
Financial performance and position
Unless otherwise noted, amounts are in U.S. dollars; “Q2” means the three months ended June 30. Q2 2017 net interest income was $199.7 million, and noninterest income was $67.5 million. Net income was $52.3 million, or $0.60 per diluted share, versus $46.9 million, or $0.59 per share, in Q2 2016. For the first six months, net income was $101.3 million, or $1.17 per diluted share, versus $50.7 million, or $0.64, in 2016.
- Margins and operating performance: Tax-equivalent net interest margin was 3.43% in Q2, up from 3.25% a year earlier; core margin was 3.29%. The efficiency ratio was 60.59%, compared with 62.14%. Core pre-provision net revenue was $101.6 million, up from $85.2 million in Q2 2016.
- Credit costs and asset quality: Q2 provision for loan losses was $15.0 million, versus $17.2 million a year earlier. Net charge-offs were $5.9 million (0.13% of average loans, annualized); there were no energy-related charge-offs during Q2. The allowance was $221.9 million, or 1.20% of loans. Nonperforming assets were $346.8 million, or 1.88% of loans and foreclosed assets.
- Balance sheet and funding: At June 30, total assets were $26.63 billion, loans $18.47 billion, deposits $21.44 billion, and stockholders’ equity $2.81 billion. Short-term borrowings were $1.81 billion and long-term debt was $407.9 million. Tangible common equity was 7.65% of assets.
- Liquidity and capital: Free securities were 33.57% of total securities; core deposits were 93.05% of deposits. The Bank had approximately $2.6 billion available under its FHLB line and $2.2 billion of unused Federal Reserve discount-window capacity. Company and Bank regulatory capital ratios remained above well-capitalized minimums; the Company’s total capital ratio was 11.76% and the Bank’s was 11.33%.
- Cash flows: For the first six months, operating cash flow was $182.7 million, investing cash flow was negative $115.6 million, and financing cash flow was negative $74.6 million. Cash and due from banks declined $7.5 million to $365.2 million.
Material changes versus comparable periods
- Q2 net income increased about 11% year over year; diluted EPS rose from $0.59 to $0.60. Six-month net income nearly doubled, but comparison is affected by the first half of 2016 including a $50 million energy-related loan-loss provision.
- Q2 tax-equivalent net interest income increased 22% year over year, reflecting acquired loans, balance-sheet growth and higher interest rates. Acquired deposits also raised funding costs.
- Loans and deposits increased substantially with the First NBC transactions. From December 31, 2016 to June 30, 2017, loans rose from $16.75 billion to $18.47 billion and deposits from $19.42 billion to $21.44 billion.
- Noninterest expense rose 22% year over year to $183.5 million, including acquisition costs and a $6.6 million write-down associated with terminating an FDIC loss-share agreement. The allowance ratio was below the 1.41% reported at June 30, 2016.
Outlook, commentary, risks and unusual items
- Management described regional economic conditions and the overall outlook as generally positive, while noting continued volatility in energy markets and uncertainty about the durability of oil-field services growth.
- Management estimated energy-related net charge-offs over the cycle could total $65 million to $95 million; approximately $65 million had been recorded to date. It noted that further credit downgrades could increase provisions and charge-offs. Energy loans were $1.23 billion, 6.7% of total loans, and management’s strategic target was 5%.
- Management expected acquisition-related nonpermanent operating costs to decline in Q3 and end by Q4 2017, while anticipating additional merger-related expense in Q3. The FNBC II systems conversion and branch consolidation occurred in July; seven additional locations were to add acquired assets in Q3, and final FDIC settlement was expected in the second half of 2017.
- Management expected a 2017 effective tax rate of 25%–27%, excluding share-based compensation effects. The filing also estimated a further $3.7 million tax benefit from restricted-stock vesting in Q4, based on the share price at quarter-end.
- Unusual items include $10.6 million of Q2 nonoperating expense, including about $4.0 million of FNBC merger costs and the $6.6 million loss-share receivable write-down. Management also estimated approximately $7 million of temporary acquisition-related operating costs in Q2. Q2 derivative fee income was described as approximately $1 million above a normal run rate and potentially volatile.
- Key risks include energy-sector credit exposure, acquisition integration and execution, interest-rate sensitivity, deposit and funding costs, and credit quality. The company reported no changes to previously disclosed risk factors; it said pending legal and regulatory matters were not expected to materially adversely affect consolidated financial position or liquidity.
Important facts for investors to verify
- How acquired First NBC balances, purchase-accounting accretion, integration costs and final FDIC settlements affect future earnings and margins.
- Whether energy portfolio credit quality and charge-offs remain within management’s stated cycle estimate, and how the allowance evolves.
- Whether deposit costs, wholesale funding and liquidity metrics remain consistent with management’s internal targets.
- How the 7.65% tangible common equity ratio and regulatory capital ratios change as acquisitions are integrated and assets grow.
- The effects of volatile derivative income, share-based compensation tax benefits and the FDIC loss-share termination on reported results.