Hancock Holding Company (now Hancock Whitney Corp. in request metadata) — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. Unless noted, financial amounts below are in U.S. dollars; balance-sheet comparisons are to December 31, 2016. The filing reports the registrant as Hancock Holding Company.
Business context and period highlights
The company operates through Whitney Bank across markets including Mississippi, Alabama, Louisiana, Texas, and Florida. Results include First NBC Bank (FNBC) acquired assets and liabilities from their respective closing dates. The acquisitions materially expanded the company and make year-over-year comparisons less directly comparable.
- FNBC I closed March 10: nine branches and selected assets and liabilities, including approximately $1.2 billion of loans and $604 million of assumed FHLB borrowings; cash consideration was approximately $323 million.
- FNBC II closed April 28 after FNBC was placed into receivership: Whitney acquired selected assets and liabilities, including about $1.6 billion of deposits and customer repurchase agreements, and continued operating 29 branches. Systems conversion occurred in July; 25 overlapping branches were consolidated in Q3.
Financial performance and condition
| Metric | Q3 / September 30, 2017 | Comparable period |
|---|---|---|
| Net income | $58.9 million | $46.7 million in Q3 2016; $52.3 million in Q2 2017 |
| Diluted EPS | $0.68 | $0.59 in Q3 2016; $0.60 in Q2 2017 |
| Net interest income | $202.9 million GAAP; $211.4 million taxable-equivalent | $163.5 million GAAP and $170.3 million taxable-equivalent in Q3 2016 |
| Net interest margin | 3.44%; core margin 3.32% | 3.20% and 3.12%, respectively, in Q3 2016 |
| Provision for loan losses | $13.0 million | $19.0 million in Q3 2016 |
| Noninterest income | $67.1 million | $63.0 million in Q3 2016 |
| Noninterest expense | $177.6 million, including $11.4 million of nonoperating expense | $149.1 million in Q3 2016 |
| Operating measures | Efficiency ratio 57.5%; return on average assets 0.88% | 61.8% and 0.80%, respectively, in Q3 2016 |
For the first nine months, net income was $160.2 million versus $97.5 million in 2016; diluted EPS was $1.85 versus $1.23. Taxable-equivalent net interest income was $609.7 million, up 20%, and net interest margin was 3.41% versus 3.23%. Nine-month provision expense fell to $44.0 million from $96.2 million, which included $50 million related to energy lending in 2016. Management reported core pre-provision net revenue of $111.1 million for Q3, up 9% from Q2.
At September 30, total assets were $26.8 billion, loans $18.8 billion, deposits $21.5 billion, and stockholders’ equity $2.9 billion. Since year-end 2016, assets rose 12%, loans 12%, and deposits 11%, largely reflecting FNBC transactions. The allowance for loan losses was $223.1 million, or 1.19% of loans, compared with $229.4 million, or 1.37%, at year-end.
- Credit quality: Nonaccrual loans were $269.7 million, down from $318.0 million at year-end; nonperforming assets were $387.6 million, or 2.06% of loans, ORE, and foreclosed assets. Accruing loans 90 days past due increased to $28.9 million from $3.0 million at year-end. Total TDRs were $216.4 million, up from $121.7 million.
- Energy exposure: Energy loans totaled $1.13 billion, 6.0% of loans, down from 6.7% in Q2 and 6.7% at year-end. The allocated energy allowance was $79.8 million, about 7.0% of energy loans. Q3 energy net charge-offs were $3.6 million.
- Liquidity and funding: Cash and due from banks was $333.8 million. Core deposits were $19.7 billion; core deposits represented 91.7% of total deposits. The loan-to-deposit ratio was 87.08%. The company reported approximately $3.0 billion of available FHLB line capacity and $2.2 billion of unused Federal Reserve discount-window capacity.
- Debt: Short-term borrowings were $1.74 billion and long-term debt $331.2 million. The company reported FHLB borrowings of approximately $1.2 billion. Long-term debt declined $105.1 million from year-end; short-term borrowings increased $511.7 million.
- Capital: Tangible common equity ratio was 7.80%, below management’s 8.00% internal target. Regulatory capital ratios remained above applicable minimums, and the company and bank were described as well-capitalized.
- Cash flows, nine months: Operating cash flow was $505.1 million, investing cash outflow $389.9 million, and financing cash outflow $154.1 million. Ending cash and due from banks was $333.8 million versus $372.7 million at year-end. Operating cash flow included a $180.9 million increase in payable to the FDIC.
Material changes and unusual items
- Q3 net income increased year over year alongside higher net interest income, loan growth, and lower provision expense. Higher interest expense and noninterest expense partly offset those gains.
- Q3 nonoperating expense was $11.4 million, mainly related to FNBC merger costs. Nine-month nonoperating expense was $28.5 million, including $19.4 million of FNBC merger costs and a $6.6 million write-down related to terminating legacy FDIC loss-share agreements. The company said it expected no additional FNBC merger-related costs in subsequent periods.
- FNBC acquisition accounting remained preliminary at September 30. The transactions generated approximately $118 million of goodwill in aggregate; final fair values and goodwill were expected in Q4 2017. Acquired performing loans had a $41 million fair-value discount expected to accrete over estimated lives; acquired purchased-credit-impaired loans had a $16.5 million discount not expected to accrete.
- The company terminated remaining FDIC loss-share agreements in Q3; the final settlement was received in July. The related receivable was zero at September 30.
- The pension plan was amended in Q2, reducing the benefit obligation by $17.3 million. Certain participants’ benefits will freeze in 2018, with enhanced or additional 401(k) contributions beginning then.
Outlook, commentary, and risks
- Management described regional economic conditions as generally positive but noted slower loan-demand growth, softer energy-services demand outside the Permian Basin, and Hurricane Harvey-related delays to Houston homebuilding. The company reported minimal operational impact from Hurricanes Harvey, Irma, and Nate and no specific hurricane-related loan-loss provision.
- Management estimated cumulative energy-related net charge-offs of approximately $65 million to $95 million over the cycle that began in Q4 2014; approximately $68 million had been recorded through Q3 2017. It cautioned that further downgrades could lead to additional provisions and charge-offs, particularly in energy support services.
- Management expected Q4 2017 effective tax rate of approximately 21%–22%, and estimated about $3.6 million of additional tax benefit from Q4 restricted-stock vesting based on the September 30 share price. These estimates depend on share price and vesting.
- The company planned to consolidate the Hancock Bank and Whitney Bank brands in the first half of 2018, subject to regulatory approval, and expected rebranding costs and capital spending on signage in Q1 and Q2 2018.
- Interest-rate sensitivity analysis showed estimated net interest income increasing 2.16% in year one and 3.29% in year two for a 100-basis-point rate increase, and declining 2.66% and 5.56% for a 100-basis-point decrease. Management characterized the balance sheet as asset-sensitive.
- CECL adoption was expected to increase the loan-loss allowance and establish an allowance for held-to-maturity securities; the amount was not yet quantified. Management said it was not planning early adoption. A proposed federal tax-law change could also reduce deferred tax assets and cause a material noncash tax expense or capital reduction if enacted.
- Pending legal and regulatory matters arose in the ordinary course; management did not believe any resulting loss contingencies would materially affect consolidated financial position or liquidity. No changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Final FNBC purchase-accounting valuations, goodwill, integration outcomes, and whether any additional acquisition-related costs arise.
- Trends in criticized, nonaccrual, past-due, and restructured loans, particularly energy credits and the increase in accruing loans 90 days past due.
- Whether energy charge-offs remain within management’s $65 million–$95 million cycle estimate, and how energy-sector conditions affect provisions and reserves.
- Deposit mix and funding costs, including brokered deposits, FHLB borrowings, and maintenance of liquidity and capital targets.
- Actual Q4 tax rate and stock-compensation tax benefits; effects of any enacted tax-law changes and eventual CECL estimates.
- Regulatory approval, timing, costs, and expected benefits of the planned brand consolidation.