Hancock Holding Company (Hancock Whitney Corp.) — Q3 2016 Form 10-Q
Business context and period: Regional banking company. This unaudited quarterly report covers the three and nine months ended September 30, 2016; balance-sheet comparisons are primarily with December 31, 2015. Financial amounts below are in U.S. dollars.
Key financial results
| Metric | Q3 2016 | Comparable period |
|---|---|---|
| Net interest income | $163.5 million | $156.8 million in Q3 2015 |
| Noninterest income | $63.0 million | $60.2 million in Q3 2015 |
| Net income / diluted EPS | $46.7 million / $0.59 | $41.2 million / $0.52 in Q3 2015; $46.9 million / $0.59 in Q2 2016 |
| Provision for loan losses | $19.0 million | $10.1 million in Q3 2015; $17.2 million in Q2 2016 |
| Net interest margin | 3.20% reported; 3.12% core, tax-equivalent | 3.28% reported in Q3 2015; 3.25% reported in Q2 2016 |
| Noninterest expense | $149.1 million | $151.2 million in Q3 2015 |
- For the first nine months, net income was $97.5 million, or $1.23 diluted EPS, versus $116.2 million, or $1.45, in 2015. The $73.4 million increase in loan-loss provision, largely energy-related, was the main drag; higher net interest and noninterest income and lower expenses partly offset it.
- Year-to-date total revenue, calculated as net interest income plus noninterest income, was $676.2 million versus $644.4 million. Core pre-tax, pre-provision income (a non-GAAP measure) was $247.7 million, up 24% year over year. The Q3 efficiency ratio was 61.80%.
- Operating cash flow for the first nine months was $268.5 million, compared with $222.8 million in 2015. Investing cash outflow was $365.0 million and financing cash inflow was $122.4 million. Cash and due from banks ended at $329.9 million.
Balance sheet, credit, and liquidity
- Total assets were $23.11 billion; loans were $16.07 billion and deposits $18.89 billion. Loans grew 9% year over year. Stockholders’ equity was $2.49 billion.
- Allowance for loan losses was $236.1 million, or 1.47% of period-end loans, versus $181.2 million and 0.95% a year earlier. Nonaccrual loans rose to $302.8 million from $166.9 million at September 30, 2015; nonperforming assets were $330.7 million, or 2.06% of loans and foreclosed assets.
- Energy-related loans were approximately $1.4 billion, 9% of loans. Criticized energy loans reached $893 million, about 64% of the energy portfolio; nonperforming energy loans were $199 million. Energy allowance was $118.3 million, or 8.5% of energy loans. Total loans to troubled debt restructurings were $56.3 million, versus $13.1 million at year-end 2015.
- Short-term borrowings were $1.08 billion and long-term debt $463.7 million, down from $1.42 billion and $490.1 million, respectively, at year-end. Core deposits were 93.03% of deposits; the average Q3 loan-to-deposit ratio was 85.64%. Available borrowing capacity included a $3.1 billion FHLB line and $1.7 billion at the Federal Reserve discount window.
- Tangible common equity ratio was 7.93%, below management’s 8% internal target; management expected a slight year-end decline and a return above target during 2017. Regulatory capital ratios remained above minimums, and the company and bank were reported as well-capitalized.
Outlook, commentary, and notable items
- Management expected Q4 2016 loan-loss provision of $12–17 million. It estimated cumulative net charge-offs from the energy cycle could reach $65–95 million; approximately $30 million had been recorded since the cycle began in late 2014. Further downgrades, provisions, and charge-offs were possible, particularly in energy support services.
- Management said it was on track to exceed its 2016 core PTPP goal of $323.4 million; $247.7 million had been generated through September. Expected effective tax rates were approximately 21–22% for 2016 and 25–27% for 2017.
- August 2016 flooding damaged five Baton Rouge-area locations. Management did not expect significant credit losses from the flooding; Q3 expense included a $2.5 million accrual, mainly for insurance deductibles. A $5.3 million gain on foreclosure and disposition of a property contributed to a $5.2 million net credit in other real estate expense.
- Management described modest-to-moderate economic expansion in most markets, but continued weakness in energy-dependent areas and Houston. The filing identifies interest-rate risk, energy-credit deterioration, deposit and funding conditions, and uncertain credit-loss estimates as relevant risks. It reported no material change to previously disclosed risk factors; ordinary-course legal matters were not expected to materially affect financial position or liquidity.
Most important facts for investors to verify
- Whether energy criticized and nonperforming loans, especially non-drilling support credits, stabilize and whether the $65–95 million cycle charge-off estimate remains appropriate.
- Whether the Q4 provision falls within management’s $12–17 million estimate and how allowance coverage and nonaccrual trends develop.
- Whether core PTPP reaches or exceeds the 2016 target, and whether margin pressure from funding costs and nonaccrual loans persists.
- Whether tangible common equity returns above the 8% internal target in 2017 while regulatory capital remains strong.
- The filing reports that the stock repurchase authorization expired September 30, 2016; no shares were repurchased under it during 2016. The quarterly dividend was $0.24 per share.