Hancock Holding Company — Q1 2017 Form 10-Q
Business context and reporting period. The filing covers the three months ended March 31, 2017, with balance-sheet comparisons to December 31, 2016. The company operates through Whitney Bank. Unless otherwise stated, dollar amounts below are in millions. On March 10, Whitney completed an acquisition of selected First NBC Bank assets and liabilities, including nine branches, that expanded its Greater New Orleans presence.
Financial results and position
| Metric | Q1 2017 | Comparison / context |
|---|---|---|
| Net interest income (GAAP) | $181.7 | $162.8 in Q1 2016; taxable-equivalent NII was $190.0 |
| Net interest margin | 3.37% | 3.23% in Q1 2016; core margin was 3.29% |
| Provision for loan losses | $16.0 | $60.0 in Q1 2016, which included a large energy-related provision |
| Noninterest income | $63.5 | Up 9% year over year; included a $4.4 gain on sale of selected Hancock Horizon funds |
| Noninterest expense | $163.5 | Included $6.5 of FNBC acquisition-related charges |
| Net income / diluted EPS | $49.0 / $0.57 | $3.8 / $0.05 in Q1 2016; $51.8 / $0.64 in Q4 2016 |
| Operating cash flow | $96.3 | $92.9 in Q1 2016; cash and due from banks ended at $333.3 |
Assets were $25.49 billion, loans $18.20 billion, and deposits $19.92 billion at quarter-end. Compared with year-end, loans rose about $1.45 billion and deposits rose $498 million, with the FNBC transaction a major contributor. Stockholders’ equity was $2.76 billion. Short-term borrowings were $2.12 billion and long-term debt was $525 million. The allowance for loan losses was $213.6 million, or 1.17% of period-end loans.
Liquidity included approximately $2.8 billion of additional FHLB borrowing capacity and $2.1 billion of unused Federal Reserve discount-window capacity. Wholesale funds were 14.30% of core deposits, below the company’s internal ceiling of 25%. The average loan-to-deposit ratio was 89.90%, above its 83%–87% internal target; management expected it to move closer to target in coming quarters. The tangible common equity ratio was 7.94%, below the company’s 8% internal target temporarily, while regulatory capital ratios remained above minimums and the company and bank were described as well-capitalized.
Material changes and unusual items
- FNBC’s March acquisition added approximately $1.2 billion of loans, $398 million of deposits, and $604 million of FHLB borrowings. Acquired loans were recorded at fair value without a carried-over loan-loss allowance; a 4% loan mark was applied, and a $52.7 million fair-value discount is expected to accrete into income over the estimated lives of the loan pools. The acquired business contributed an estimated $2.9 million of net income after acquisition date, excluding merger costs.
- Core pre-provision net revenue was $93.3 million, up $6.1 million, or 7%, from Q4 2016. Reported Q1 net income was below Q4 despite higher core pre-provision revenue, reflecting items including acquisition costs and changes in noninterest income.
- The energy portfolio was $1.3 billion, or 7.1% of loans, down from 8.4% at year-end. Energy allowance was $83.7 million, 6.5% of that portfolio. Q1 included approximately $23 million of energy charge-offs.
- Cash used in investing activities was $605.1 million, including $322.7 million net cash paid for the March acquisition and $273.5 million of net loan growth. Financing activities provided $469.4 million, including increased short-term borrowings.
Outlook, commentary, and risks
- Management described economic activity in most markets as modest to moderately expanding, with improving energy activity but continuing sector volatility. Houston commercial real estate remained a weaker market relative to most of the company’s footprint.
- Management estimated cumulative energy-related net charge-offs over the cycle, which began in Q4 2014, could total $65 million–$95 million; approximately $65 million had been recorded through Q1 2017. Further downgrades, provisions, and charge-offs remain possible, particularly in energy services and support lending.
- Management expected the 2017 effective tax rate to be 25%–27%, excluding the variable impact of employee share-based compensation. It expects additional FNBC merger costs in Q2 for branch consolidation and systems conversion; operational conversion was expected in mid-May with ten overlapping branches closing.
- On April 28, 2017, after quarter-end, Whitney entered a separate FDIC purchase-and-assumption agreement relating to FNBC. It acquired approximately $1.6 billion of deposits and approximately $1.0 billion of selected assets and received a $655 million cash payment, net of a $35 million transaction premium; final amounts were subject to settlement adjustments. The FDIC agreed to indemnify Whitney against certain liabilities not assumed.
- Interest-rate simulations showed the company as asset-sensitive: a sustained 100-basis-point increase was estimated to raise taxable-equivalent net interest income 2.69% in year one and 2.70% in year two; a 50-basis-point decline was estimated to reduce it 0.63% and 1.33%, respectively. These are model estimates, not guidance.
- Off-balance-sheet commitments to extend credit totaled $6.29 billion and letters of credit $352 million. Management said ordinary-course litigation and regulatory matters were not expected to materially affect financial position or liquidity. No changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- How quickly the FNBC branches and operations are integrated, whether expected cost savings materialize, and the final accounting and settlement amounts for the March and April transactions.
- Energy loan performance, charge-offs, criticized exposures, and whether cumulative cycle losses remain within management’s $65 million–$95 million estimate.
- Whether core NIM, loan growth, and deposit funding trends support profitability while the loan-to-deposit ratio returns toward its target and wholesale funding remains controlled.
- Whether the allowance and capital position remain adequate as acquired loans season; the FNBC loans had no carried-over allowance and were recorded with a fair-value mark.
- Progress on branch consolidation, the expected Q2 merger costs, and the sustainability of reported earnings after the $4.4 million fund-sale gain and acquisition-related expenses.