Hancock Holding Company (planned rebrand: Hancock Whitney Corporation) — Q1 2018 10-Q
Business context and period. The filing covers the three months ended March 31, 2018. Hancock operates Whitney Bank across Gulf Coast markets and reports a diversified commercial, mortgage, consumer and fee-based banking business. The company said it planned to consolidate its Hancock and Whitney brands, subject to shareholder approval.
Financial performance and position
Amounts below are in millions of dollars unless otherwise noted. Income and cash-flow figures are for the three months ended March 31; balance-sheet comparisons are to December 31, 2017.
| Metric | Q1 2018 / March 31, 2018 | Comparison |
|---|---|---|
| Revenue and earnings | Net interest income $205.7; taxable-equivalent net interest income $209.6; noninterest income $66.3; net income $72.5; diluted EPS $0.83 | Net income $49.0 and diluted EPS $0.57 in Q1 2017. Taxable-equivalent net interest income rose 10% year over year. |
| Operating results | Operating earnings $78.3; operating diluted EPS $0.90 | Operating earnings were $50.4 and operating EPS $0.58 in Q1 2017. These are company-defined non-GAAP measures. |
| Margins and returns | Net interest margin 3.37%; core NIM 3.26%; return on average assets 1.08%; operating ROA 1.17%; efficiency ratio 57.51% | Reported NIM was 3.37% in Q1 2017 and 3.48% in Q4 2017. Core NIM was 3.29% and 3.35%, respectively. |
| Loans and credit | Loans $19.09 billion; allowance $210.7; provision $12.3; net charge-offs $12.2 (0.26% annualized) | Loans rose $88 million from year-end, including the $95 million reduction from HFC’s sale. Allowance-to-loans ratio was 1.10%, versus 1.14% at year-end. |
| Deposits and borrowings | Deposits $22.49 billion; short-term borrowings $1.45 billion; long-term debt $300.4 | Deposits increased $232.5 million and short-term borrowings declined $251.8 million from year-end. |
| Liquidity and capital | Cash and due from banks $253.9; stockholders’ equity $2.90 billion; tangible common equity ratio 7.80%; average loan-to-deposit ratio 86.32% | TCE was 7.73% at year-end; management’s internal target is at least 8.00%. Company and bank regulatory capital ratios exceeded minimums and both were described as well-capitalized. |
| Cash flows | Operating cash provided $104.5; investing cash used $193.8; financing cash used $43.7; cash and due from banks decreased $133.1 | Investing cash use included $196.3 million net loan growth and was partly offset by $77.1 million proceeds from the HFC sale. |
Material changes and unusual items
- Net income increased 48% year over year, supported by higher net interest income, lower provision expense and a lower effective tax rate. The Q1 2018 effective tax rate was 18.5%, versus 25.3% in Q1 2017.
- Q1 2018 included $7.0 million of nonoperating items, including a $1.1 million loss on the HFC sale and costs tied to the pending Capital One transaction, brand consolidation and a one-time employee bonus. Q1 2017 included $6.5 million of FNBC-related costs and a $4.4 million gain on a fund sale. Q4 2017 included a $19.5 million deferred-tax-asset remeasurement charge.
- HFC was sold on March 9, 2018. A final cash settlement was expected in Q2. The company had announced an agreement to acquire Capital One’s bank-managed trust and investment-management business; closing was expected in early Q3 2018, subject to regulatory approval and other conditions. Management estimated the combined business would bring approximately $26 billion in assets under administration, $10 billion under management and $70–$75 million in annual revenue.
- Other comprehensive loss was $46.1 million for Q1, largely reflecting unrealized losses on available-for-sale securities and hedges; accumulated other comprehensive loss reached $180.5 million. Management attributed securities unrealized losses primarily to market-rate changes, considered them temporary, and said it did not expect to need to sell securities before recovery.
Outlook, commentary and risks
- Management projected Q2 2018 period-end loan growth of approximately $250–$300 million and full-year 2018 loan growth of 5%–6%. Strong production was offset by elevated payoffs and HFC’s sale in Q1.
- Management described the regional economy and loan demand as generally positive, while noting uncertainty from new trade tariffs, tight labor markets and uneven consumer and residential real-estate demand.
- Energy loans were $1.05 billion, 5.5% of total loans, with a $62.6 million allocated allowance. Management estimated cumulative energy net charge-offs could reach $95 million over the cycle; approximately $81 million had been recorded. Energy criticized loans were $523 million, and energy loans more than 30 days delinquent were $101 million.
- Asset quality weakened on some measures: nonperforming assets were $468.3 million, or 2.45% of loans and foreclosed assets, up from $400.8 million and 2.11% at year-end. The filing attributed most of the increase in nonperforming loans to energy-related accruing restructured support credits. Total TDRs were $284.5 million.
- Liquidity sources included approximately $3.5 billion of available FHLB borrowing capacity and $2.2 billion of unused Federal Reserve discount-window capacity. Core deposits were 90.84% of total deposits; brokered deposits were $1.2 billion. The company disclosed interest-rate sensitivity: modeled net interest income increased 1.91% in year one under a 100-basis-point rise and declined 1.36% under a 100-basis-point fall.
- CECL adoption was not expected before its required effective date; the company had not quantified its effect but expected an increase in credit-loss allowances. Tax Act calculations remained provisional and later adjustments could materially affect tax expense. The filing also highlights cybersecurity and operational-disruption risks; management reported effective disclosure controls and no material change in internal control over financial reporting.
- The company reported ordinary-course legal proceedings and did not believe any resulting loss contingencies would materially adversely affect consolidated financial position or liquidity.
Most important facts for investors to verify
- Whether projected loan growth is achieved and how payoffs, HFC’s exit and the Capital One acquisition affect growth and earnings.
- Trends in energy criticized, delinquent and nonperforming loans, charge-offs, and adequacy of the energy allowance relative to management’s remaining loss estimate.
- Whether rising deposit costs continue to pressure NIM, and whether the reported margin trend is comparable after tax-reform effects on the taxable-equivalent adjustment.
- Capital and liquidity resilience, including the TCE ratio relative to the internal 8% target, deposit mix and reliance on brokered or wholesale funding.
- Changes in securities marks and AOCI, the final HFC settlement, and eventual CECL and Tax Act impacts.