Hancock Holding Company — FY2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016; filed February 24, 2017. The registrant was Hancock Holding Company, operating through Whitney Bank across the Gulf South. The filing includes fourth-quarter results and audited consolidated financial statements.
Financial performance and position
| Metric | FY2016 / year-end 2016 | FY2015 / year-end 2015 |
|---|---|---|
| Net interest income (GAAP) | $659.1 million | $625.2 million |
| Net interest income, taxable-equivalent | $685.0 million | $638.8 million |
| Noninterest income | $250.8 million | $237.3 million |
| Net income | $149.3 million | $131.5 million |
| Diluted earnings per share | $1.87 | $1.64 |
| Net interest margin, taxable-equivalent | 3.23% | 3.33% |
| Total assets | $24.0 billion | $22.8 billion |
| Loans | $16.8 billion | $15.7 billion |
| Deposits | $19.4 billion | $18.3 billion |
| Allowance for loan losses | $229.4 million | $181.2 million |
| Stockholders’ equity | $2.72 billion | $2.41 billion |
- Profitability and operating trends: Net income increased 14%. Taxable-equivalent net interest income rose 7%, primarily on 10% growth in average earning assets. The reported margin fell 10 basis points, largely reflecting lower purchase-accounting accretion; core margin was 3.14%, unchanged. Noninterest expense declined 1% to $612.3 million, while the efficiency ratio improved to 62.79% from 66.12%.
- Credit costs and asset quality: Provision for loan losses increased to $110.7 million from $73.0 million. Nonperforming loans rose to $357.8 million from $164.0 million; nonperforming assets reached $376.7 million, or 2.25% of loans plus foreclosed assets, versus 1.22%. Non-purchased-credit-impaired net charge-offs were $59.1 million, or 0.37% of average loans, compared with $16.2 million, or 0.11%.
- Cash flow: Operating activities provided $340.7 million; investing activities used $1.32 billion; financing activities provided $1.05 billion. Cash and due from banks increased $68.8 million to $372.7 million. These cash-flow measures should be considered in the context of the Company’s banking activities and balance-sheet growth.
- Debt and liquidity: Year-end short-term borrowings were $1.23 billion and long-term debt was $436.3 million. Core deposits were 93.22% of total deposits; free securities were 23.46% of securities. The Bank had $3.2 billion of available FHLB borrowing capacity and approximately $1.8 billion of unused Federal Reserve discount-window capacity. Brokered deposits were $693 million.
- Capital: The Company’s CET1 and total risk-based capital ratios were 11.26% and 13.21%, respectively; the Bank’s were 10.39% and 11.57%. Both were reported as well-capitalized. The Company issued 6.325 million shares for approximately $259 million in December, raising tangible common equity to 8.64% from 7.62%.
Material changes versus prior comparable period
- Loan growth was 7%, while deposits increased 6%; total assets grew 5%. Growth was broad-based outside the energy portfolio.
- Energy-related loans declined to $1.41 billion, or 8.4% of loans, from approximately $1.58 billion. However, energy-related nonperforming loans increased to $239 million from $70 million, and energy-related criticized loans reached $889 million.
- The allowance for loan losses increased 27%, while non-purchased-credit-impaired net charge-offs rose substantially. Management attributed the deterioration primarily to energy-sector credits.
- Noninterest income rose 6%, supported by secondary mortgage activity, bank-owned life insurance, derivatives and asset-sale gains. Noninterest expense fell, in part because nonoperating items declined; certain ordinary operating costs, including personnel and regulatory fees, increased.
- The securities portfolio grew to $5.0 billion. Its average expected maturity and effective duration increased to 5.79 years and 5.07 years, respectively, from 4.90 years and 3.89 years, partly due to increased municipal securities holdings.
- Fourth-quarter net income was $51.8 million, or $0.64 per diluted share, versus $46.7 million in Q3 2016 and $15.3 million in Q4 2015. Q4 loans increased $681 million sequentially; reported margin was 3.26%. Q4 provision was $14.5 million, but net charge-offs rose to $20.4 million, including an $11.9 million charge-off on one energy drilling-support credit.
Outlook, commentary, risks and unusual items
- First NBC acquisition: The Company agreed to acquire approximately $1.3 billion of loans, nine Louisiana branches with about $500 million in transaction and savings deposits, and assume about $600 million of FHLB borrowings, for a $44 million premium. Approximately $260 million of loans were acquired in January 2017; the remainder was expected to close March 10, 2017. Management estimated approximately $26 million in annual incremental earnings and $12 million in one-time acquisition costs. Pro forma tangible common equity ratio was estimated at 7.84%, versus 8.64% reported at year-end. The Company planned to close about 10 overlapping branches. These are estimates, not realized results.
- Energy outlook: Management said oil prices and drilling activity improved in the second half of 2016 but expected a lagged recovery for energy services and support borrowers. It estimated cumulative energy-cycle charge-offs of $65–$95 million; approximately $42 million had been incurred through December 2016. Reserve-based lending was showing initial improvement, with possible upgrades in the second half of 2017.
- Tax outlook: Management expected a 2017 effective tax rate of 25%–27%, excluding potential tax-code changes. The 2016 effective rate was 20.1%, aided by tax-exempt income and tax credits.
- Key risks: Energy-sector credit exposure and spillover into Gulf South markets; real-estate and borrower credit deterioration; interest-rate, funding and deposit-pricing sensitivity; acquisition integration and loan-mark valuation; regulatory and compliance costs; and operational, cyber, hurricane and other disaster risks. The Company stated that it was slightly asset-sensitive in its two-year interest-rate simulations, but actual results could differ from modeled outcomes.
- Unusual items and contingencies: 2016 results included a $4.3 million gain on sale of mortgage loans, a $3.3 million bank-property gain, a $5.3 million ORE disposition credit, $4.0 million of early contract-termination expense, and $3.7 million of flood-related expense. Management did not expect pending ordinary-course litigation or regulatory matters to materially affect consolidated financial position or liquidity. Goodwill impairment testing found no impairment. The auditor issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective.
Most important facts for investors to verify
- Whether energy-sector criticized and nonperforming loans stabilize, and whether cumulative energy charge-offs remain within management’s $65–$95 million estimate.
- Actual credit performance, allowance adequacy and charge-offs, including the effect of Q4’s large energy-credit charge-off.
- Completion and integration of the First NBC transaction, including realized earnings, acquisition costs, deposit retention, credit marks and post-close capital ratios.
- Whether core margin and loan/deposit growth are sustained as funding costs rise and purchase-accounting income declines.
- Liquidity and funding mix, including brokered and public-fund deposits, FHLB borrowings, and the capacity to meet debt maturities and regulatory capital needs.
- Effects of the December 2016 share issuance on per-share results, and the sustainability of the $0.96 annual dividend.