Hancock Holding Company (now Hancock Whitney Corp.) — FY2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017; filed February 26, 2018. The filing reports the company as Hancock Holding Company and its banking subsidiary as Whitney Bank. It covers the full year and includes fourth-quarter results.
Business context
The company is a Gulf South financial services holding company operating through Whitney Bank, with consumer, commercial, mortgage, trust and investment services. It completed two 2017 transactions involving selected assets and liabilities of failed First NBC Bank (FNBC), expanding its Greater New Orleans presence. The transactions added approximately $1.4 billion of loans and $1.9 billion of deposits. A Capital One trust and investment-management business acquisition was pending at year-end.
Financial performance and position
| Metric | FY2017 | FY2016 |
|---|---|---|
| Net interest income (GAAP) | $792.3 million | $659.1 million |
| Net interest income, taxable-equivalent | $826.7 million | $685.0 million |
| Noninterest income | $267.8 million | $250.8 million |
| Total revenue (GAAP net interest income plus noninterest income) | $1.060 billion | $909.9 million |
| Provision for loan losses | $59.0 million | $110.7 million |
| Noninterest expense | $692.7 million | $612.3 million |
| Net income | $215.6 million | $149.3 million |
| Diluted EPS | $2.48 | $1.87 |
| Net interest margin (taxable-equivalent) | 3.43% | 3.23% |
| Return on average assets | 0.82% | 0.64% |
| Efficiency ratio | 58.87% | 62.79% |
- Net income rose 44%, primarily from higher net interest and noninterest income and lower loan-loss provision. Core pre-provision net revenue, a non-GAAP measure, increased to $422.5 million from $334.8 million.
- Net interest margin expansion reflected higher rates and acquired higher-yielding loans; taxable-equivalent net interest income also benefited from growth in average earning assets. Core net interest margin, excluding purchase-accounting effects, was 3.31%, up from 3.14%.
- Reported income-tax expense was $92.8 million, including a $19.5 million charge to remeasure deferred tax assets after the Tax Cuts and Jobs Act. The reported effective rate was 30.1%; excluding that charge, management reported 23.8%.
Balance sheet, funding and credit
- Year-end assets were $27.3 billion, up 14%; loans were $19.0 billion, up 13%; and deposits were $22.3 billion, up 15%. FNBC acquisitions contributed materially to growth.
- Stockholders’ equity was $2.9 billion. Company regulatory capital ratios were 8.43% Tier 1 leverage, 10.21% CET1 and 11.90% total risk-based capital; the company and bank were reported well-capitalized.
- Cash and due from banks ended at $386.9 million. Operating cash flow was $411.1 million; investing activities used $895.3 million; financing activities provided $498.5 million; cash increased $14.3 million.
- Short-term borrowings were $1.70 billion and long-term debt was $305.5 million. Long-term debt declined from $436.3 million, including repayment at maturity of $95.5 million in subordinated notes. The bank had $3.2 billion of remaining FHLB borrowing capacity and approximately $2.2 billion of unused Federal Reserve discount-window capacity.
- Core deposits were 93.03% of deposits; brokered deposits were approximately $0.8 billion, less than 4% of deposits. Free securities were 44.15% of total securities, above the company’s 15% internal minimum target.
- Nonperforming assets were $400.8 million, versus $376.7 million; the ratio to loans and foreclosed assets improved to 2.11% from 2.25%. Nonperforming loans were $373.3 million, including $120.5 million of accruing restructured loans. The allowance was $217.3 million, or 1.14% of loans, compared with $229.4 million, or 1.37%.
- Energy-related loans were $1.06 billion, or 5.6% of loans, down 25% year over year. The related allowance was $70.2 million, 6.7% of energy loans. Energy net charge-offs were $35.0 million in 2017; management estimated cumulative energy-cycle net charge-offs could reach $95 million, versus approximately $76 million recorded through year-end.
Material changes and fourth-quarter results
- First-quarter and second-quarter FNBC transactions added assets and deposits; the company converted branches and consolidated overlapping locations during the year. Acquisition-related costs and temporary operating expenses raised 2017 noninterest expense.
- Noninterest expense increased 13%; operating expense excluding nonoperating items increased 9%. Nonoperating expenses were $28.5 million, including acquisition costs and a $6.6 million charge related to termination of FDIC loss-share agreements.
- Fourth-quarter net income was $55.4 million, or $0.64 per diluted share, versus $51.8 million and $0.64 in fourth-quarter 2016. Fourth-quarter 2017 included the $19.5 million tax remeasurement charge. Net interest margin was 3.48%; provision for loan losses was $15.0 million.
- Cash dividends were $0.96 per share for the year, unchanged from 2016. No shares were repurchased in 2017.
Outlook, risks and unusual items
- Management expected 2018 loan growth of 6%–8% and an effective tax rate of 16%–18%. It expected to restore the tangible common equity ratio to its 8% internal target during 2018; it was 7.73% at year-end, down from 8.64%.
- The pending Capital One trust business acquisition was expected to close in the second quarter of 2018, subject to approvals. Management projected combined assets under administration of approximately $26 billion, assets under management of $10 billion, and annual revenue of $70–$75 million.
- Management described the regional outlook as positive but conservative. It noted aggressive lending competition, potential moderation in loan growth, and possible pressure on residential mortgage demand from higher rates.
- Key risks include continued stress and delayed recovery in energy-service credits; borrower and collateral deterioration, including in real estate; interest-rate, deposit-cost and liquidity pressures; acquisition integration and purchase-accounting estimates; regulatory and tax changes; cybersecurity and operational disruption; and hurricanes or other disasters affecting the Gulf South.
- The $19.5 million deferred-tax remeasurement was provisional; the filing said later adjustments could materially affect tax expense. The company also noted that the 2018 adoption of CECL was expected to increase credit-loss allowances, but the amount was not yet clear.
- Management said pending litigation and regulatory matters were not expected to materially affect consolidated financial position or liquidity. The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether energy credit quality, charge-offs and reserve adequacy evolve consistently with management’s projected recovery and cumulative loss estimate.
- How much reported growth and earnings reflect FNBC acquisitions, purchase-accounting accretion and other nonrecurring items; acquired-business pro forma results were not provided.
- Whether deposit growth, funding costs, the loan-to-deposit ratio and net interest margin remain supportive as rates and competition change.
- The final tax effects of the 2017 Tax Act and the expected 2018 tax rate, including any revisions to provisional estimates.
- Execution, regulatory approval and realized economics of the Capital One acquisition, and progress toward the 8% tangible common equity target.