HANCOCK WHITNEY CORP - Quarter Report: 2017 September (Form 10-Q)





UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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FORM 10-Q

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(Mark one)



For the quarterly period ended September 30, 2017

OR





For the transition period from                      to                      

Commission file number: 001-36827



HANCOCK HOLDING COMPANY

(Exact name of registrant as specified in its charter)





(228) 868-4000

(Registrant’s telephone number, including area code)

NOT APPLICABLE

(Former name, address and fiscal year, if changed since last report)



Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     ☒  Yes    ☐  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     ☒  Yes    ☐  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):



If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     ☐  Yes    ☒  No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. 

85,180,800 common shares were outstanding as of November 3, 2017.  



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Hancock Holding Company

Index



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Hancock Holding Company

Glossary of Defined Terms



AFS – available for sale securities

AOCI – accumulated other comprehensive income

ASC – Accounting Standards Codification

ASU – Accounting Standards Update

ATM - automatic teller machine

Bank – Whitney Bank

Basel II - Basel Committee's 2004 Regulatory Capital Framework (Second Accord)

Basel III - Basel Committee's 2010 Regulatory Capital Framework (Third Accord)

Basel Committee - Basel Committee on Banking Supervision

Beige Book - Federal Reserve’s Summary of Commentary on Current Economic Conditions    

bp(s) – basis point(s)

C&I – commercial and industrial loans

CD – certificate of deposit

CDE – Community Development Entity

CMO – Collateralized Mortgage Obligation

Company – Hancock Holding Company and its wholly-owned subsidiaries

CRE – commercial real estate

Dodd-Frank Act – The Dodd-Frank Wall Street Reform and Consumer Protection Act

FASB – Financial Accounting Standards Board

FDIC – Federal Deposit Insurance Corporation

Federal Reserve Bank – The 12 banks that are the operating arms of the U.S. central bank. They implement the

policies of the Federal Reserve Board and also conduct economic research.

Federal Reserve Board – The 7-member Board of Governors that oversees the Federal Reserve System, establishes

monetary policy (interest rates, credit, etc.), and monitors the economic health of the country. Its members are appointed

by the President subject to Senate confirmation, and serve 14-year terms.

Federal Reserve System – The 12 Federal Reserve Banks, with each one serving member banks in its own district.

This system, supervised by the Federal Reserve Board, has broad regulatory powers over the money supply and the

credit structure.

FHLB – Federal Home Loan Bank

FNBC – First NBC Bank

FNBC I – acquired selected assets and liabilities from FNBC under agreement dated March 10, 2017

FNBC II – acquired selected assets and liabilities from the FDIC as receiver for FNBC under agreement dated April 28, 2017

GAAP – Generally Accepted Accounting Principles in the United States of America

Hancock – Hancock Holding Company

Hancock Bank – Whitney Bank does business as Hancock Bank in Mississippi, Alabama, and Florida

HTM – held to maturity securities

LIBOR – London Interbank Offered Rate

LIHTC – Low Income Housing Tax Credit

MD&A – management’s discussion and analysis of financial condition and results of operations

NAICS – North American Industry Classification System

n/m – not meaningful

OCI – other comprehensive income

OFI – Louisiana Office of Financial Institutions

ORE – other real estate defined as foreclosed and surplus real estate

Parent Company – Hancock Holding Company

PCI – purchased credit impaired loans

Repos – securities sold under agreements to repurchase

SEC – U.S. Securities and Exchange Commission

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Securities Act – Securities Act of 1933, as amended

te – taxable equivalent adjustment

TDR – troubled debt restructuring (as defined in ASC 310-40)

TSR – total shareholder return

U.S. Treasury – The United States Department of the Treasury

Whitney Bank – wholly-owned subsidiary of Hancock Holding Company, through which Hancock conducts its banking operations

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Part I. Financial Information

Item 1. Financial Statements

Hancock Holding Company and Subsidiaries

Consolidated Balance Sheets

(Unaudited)







See notes to unaudited consolidated financial statements.

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Hancock Holding Company and Subsidiaries

Consolidated Statements of Income

(Unaudited)







See notes to unaudited consolidated financial statements.

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Hancock Holding Company and Subsidiaries

Consolidated Statements of Comprehensive Income

(Unaudited)







See notes to unaudited consolidated financial statements.

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Hancock Holding Company and Subsidiaries

Consolidated Statements of Changes in Stockholders’ Equity

(Unaudited)







See notes to unaudited consolidated financial statements.

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 Hancock Holding Company and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)



See notes to unaudited consolidated financial statements.

 

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HANCOCK HOLDING COMPANY AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS



1.  Basis of Presentation

The consolidated financial statements include the accounts of Hancock Holding Company and all other entities in which it has a controlling interest (the “Company”). The financial statements include all adjustments that are, in the opinion of management, necessary to fairly state the Company’s financial condition, results of operations, changes in stockholders’ equity and cash flows for the interim periods presented.  The Company has also evaluated all subsequent events for potential recognition and disclosure through the date of the filing of this Quarterly Report on Form 10-Q.  Some financial information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the U.S. (“GAAP”) have been condensed or omitted in this Quarterly Report on Form 10-Q pursuant to Securities and Exchange Commission rules and regulations. These financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.  Financial information reported in these financial statements is not necessarily indicative of the Company’s financial condition, results of operations, or cash flows for any other interim or annual period.

Certain prior period amounts have been reclassified to conform to the current period presentation.  Select Stockholders’ Equity line items in the Consolidated Balance Sheets and Statements of Changes in Stockholders’ Equity have been modified to simplify the presentation as discussed in Note 7 – Stockholders’ Equity.  Presentation of derivatives contracts cleared through a central clearing counterparty has been revised prospectively to reflect netting of variation margin as settlements to the derivative assets and liabilities rather than collateral, effective January 3, 2017, as discussed in Note 6 – Derivatives.  These changes in presentation did not have a material impact on the Company’s financial condition or operating results.

Use of Estimates

The accounting principles the Company follows and the methods for applying these principles conform to GAAP and general practices followed by the banking industry.   These accounting principles require management to make estimates and assumptions about future events that affect the amounts reported in the consolidated financial statements and the accompanying notes.  Actual results could differ from those estimates.    

Critical Accounting Policies and Estimates



There were no material changes or developments during the reporting period with respect to methodologies that the Company uses when applying what management believes are critical accounting policies and developing critical accounting estimates as disclosed in its Annual Report on Form 10-K for the year ended December 31, 2016.   Refer to Note 14 – Recent Accounting Pronouncements for a discussion of accounting standards adopted in 2017.



 

2.  Acquisitions



On March 10, 2017, the Company, through its banking subsidiary, Whitney Bank (“Whitney”), completed the acquisition of certain assets and liabilities, including nine branches, from First NBC Bank (“FNBC”), referred to as the FNBC I transaction.  Whitney paid approximately $323 million in cash consideration ($326 million cash paid net of $3 million in branch cash acquired), including a $41.6 million transaction premium for the earnings stream acquired. 



On April 28, 2017, the Louisiana Office of Financial Institutions (“OFI”) closed FNBC and appointed the FDIC as receiver.  Whitney entered into a purchase and assumption agreement with the FDIC,  referred to as the FNBC II transaction. Pursuant to the agreement, Whitney acquired selected assets and liabilities of the former FNBC, including substantially all of the transaction and savings deposits, and continued to operate its 29 branch locations (24 in Louisiana and five in Florida).  Whitney also had the option to purchase (or assume the leases for) the branch and non-branch locations, including furniture, fixtures, and equipment subsequent to the date of the transaction. This option was exercised for seven branch locations. Whitney paid a premium of $35 million to the FDIC for the earnings stream acquired and received approximately $800 million in cash ($642 million from the FDIC for the net liabilities assumed and $158 million in branch cash acquired). 



The FNBC I and FNBC II transactions were accounted for as business combinations and therefore, assets acquired and liabilities assumed were recorded at estimated fair values on the acquisition dates. 

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The following table sets forth the preliminary acquisition date fair value of  the assets acquired and liabilities assumed, the consideration paid or received, and the resulting goodwill recorded in each of the FNBC I and FNBC II transactions, and in the aggregate. The Company recorded certain purchase accounting adjustments and a cash settlement with the FDIC during the third quarter of 2017.  The Company expects to finalize acquisition date fair values and the resulting goodwill in the fourth quarter of 2017. 





The loans acquired were recorded at estimated fair value at the acquisition dates with no carryover of the related allowance for loan losses.  Substantially all of the loans acquired were considered to be performing (“purchased credit performing”) based on such factors as past due status and nonaccrual status, and were accounted for under Accounting Standards Codification (“ASC”) 310-20.    The unpaid principal balance of the performing loans acquired totaled $1.4 billion, of which $31.7 million is not expected to be collected.  The difference at the acquisition dates between the fair value and the contractual amounts due (the “fair value discount”) of $41.0 million will be accreted into income over the estimated lives of the loan pools established in the valuation. Loans with an unpaid principal balance of $39.9 million and a fair value of $23.4 million were considered to be purchased credit impaired and were accounted for under ASC 310-30 using the cost recovery method; as such, the related fair value discount of $16.5 million will not be accreted into income. 



The Company assumed approximately $604 million of borrowings in the FNBC I transaction, consisting of both short-term and long-term Federal Home Loan Bank (“FHLB”) borrowings.  The short-term borrowings consisted of $460 million in variable rate term notes, of which $200 million mature in 2025 and $260 million mature in 2026.  These notes reprice quarterly and may be repaid at the Company’s option, either in full or in part, on any quarterly repricing date.  Also included in short-term borrowings are $51 million in fixed rate term notes.  The long-term borrowings include $93.1 million in fixed rate term notes, of which $88 million mature in 2018,  $3.2 million mature in 2019, and $1.9 million mature in 2023.  Short-term borrowings assumed in the FNBC II transaction consisted of securities sold under repurchase agreements.    No long-term borrowings were assumed in the FNBC II transaction.



Identifiable intangible assets consist of core deposit intangibles totaling $25.3 million that are being amortized using sum of years’ digits over the asset’s life of eight years for the FNBC I transaction and eleven years for the FNBC II transaction.  Goodwill totaling $118 million represents the excess of the consideration paid over the fair value of the net assets acquired, or the excess of the fair value of the net liabilities assumed over the consideration received. It is comprised of estimated future economic benefits arising from these transactions that cannot not be individually identified or do not qualify for separate recognition. These benefits include increased market share in the Greater New Orleans and Florida Panhandle market areas, expected earnings streams, and operational efficiencies that the Company believes will result from these business combinations.  The tax basis of the goodwill generated from these transactions is expected to be deductible for federal income tax purposes.





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The operating results of the Company for the three and nine months ended September 30, 2017 include the results from the operations acquired in the FNBC transactions since the respective acquisition dates.  Estimating reliable historical financial information is impracticable as only selected components of the businesses, as historically operated, were acquired. A number of post-acquisition events, including the consolidation of certain branch locations and the integration of operations, cash and investments acquired make quantifying discrete earnings contributions of the businesses acquired impracticable.  As such, neither supplemental pro forma financial information of the combined entity, nor revenue and earnings contributed by the businesses acquired since the dates of acquisition are presented.



The Company incurred merger-related costs in connection with the FNBC I and FNBC II transactions.  The following table reflects the merger-related costs for the three and nine months ended September 30, 2017 for both the FNBC I and FNBC II transactions combined.    The Company does not expect to incur any additional merger-related costs related to the FNBC transactions in any subsequent period.

















3.  Securities

The amortized cost, gross unrealized gains and losses, and estimated fair value of securities classified as available for sale and held to maturity follow.







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The following table presents the amortized cost and estimated fair value of debt securities available for sale and held to maturity at September 30, 2017 by contractual maturity.  Actual maturities will differ from contractual maturities because of rights to call or repay obligations with or without penalties and scheduled and unscheduled principal payments on mortgage-backed securities and collateralized mortgage obligations.







The Company held no securities classified as trading at September 30, 2017 or December 31, 2016.    

The fair value and gross unrealized losses for securities classified as available for sale with unrealized losses for the periods indicated follow. 





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The fair value and gross unrealized losses for securities classified as held to maturity with unrealized losses for the periods indicated follow. 









The unrealized losses primarily relate to changes in market rates on fixed rate debt securities since the respective purchase dates.  In all cases, the indicated impairment on these debt securities would be recovered no later than the security’s maturity date or possibly earlier if the market price for the security increases with a reduction in the yield required by the market.  None of the unrealized losses relate to the marketability of the securities or the issuers’ abilities to meet contractual obligations.  The Company believes it has adequate liquidity and, therefore, does not plan to and, more likely than not, will not be required to sell these securities before recovery of the indicated impairment.  Accordingly, the unrealized losses on these securities have been determined to be temporary.

Proceeds from the sales of securities were approximately $213.9 million with no gross gain or loss and $141.7 million with a gross gain of $1.5 million and no loss for the nine months ended September 30, 2017 and 2016, respectively. 

Securities with carrying values totaling $3.6 billion and $3.8 billion at September 30, 2017 and December 31, 2016, respectively, were pledged as collateral primarily to secure public deposits or securities sold under agreements to repurchase.





4.  Loans and Allowance for Loan Losses

The Company generally makes loans in its market areas of south Mississippi, southern and central Alabama, south Louisiana, the Houston, Texas area and the northern, central and panhandle regions of Florida. Loans, net of unearned income, by portfolio are

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presented in the table below.







The following briefly describes the composition of each loan category.



Commercial and industrial



Commercial and industrial loans are made available to businesses for working capital (including financing of inventory and receivables), business expansion, to facilitate the acquisition of a business, and the purchase of equipment and machinery, including equipment leasing. These loans are primarily made based on the identified cash flows of the borrower and, when secured, have the added strength of the underlying collateral.



Commercial non-real estate loans may be secured by the assets being financed or other business assets such as accounts receivable, inventory, ownership or commodity interests, and may incorporate a personal or corporate guarantee; however, some short-term loans may be made on an unsecured basis, including a small portfolio of corporate credit cards, generally issued as a part of overall customer relationships.



Commercial real estate – owner occupied loans consist of commercial mortgages on properties where repayment is generally dependent on the cash flow from the ongoing operations and activities of the borrower.  Like commercial non-real estate, these loans are primarily made based on the identified cash flows of the borrower, but also have the added strength of the value of underlying real estate collateral.  



Commercial real estate – income producing



Commercial real estate – income producing loans consist of loans secured by commercial mortgages on properties where the loan is made to real estate developers or investors and repayment is dependent on the sale, refinance, or income generated from the operation of the property.  Properties financed include retail, office, multifamily, senior housing, hotel/motel, skilled nursing facilities and other commercial properties. 



Construction and land development



Construction and land development loans are made to facilitate the acquisition, development, improvement and construction of both commercial and residential-purpose properties.  Such loans are made to builders and investors where repayment is expected to be made from the sale, refinance or operation of the property or to businesses to be used in their business operations.  This portfolio also includes a small amount of residential construction loans and loans secured by raw land not yet under development.   



Residential Mortgages



Residential mortgages consist of closed-end loans secured by first liens on 1- 4 family residential properties. The portfolio includes both fixed and adjustable rate loans, although most longer term, fixed rate loans originated are sold in the secondary mortgage market.  



Consumer



Consumer loans include second lien mortgage home loans, home equity lines of credit and nonresidential consumer purpose loans. Nonresidential consumer loans include both direct and indirect loans.   Direct nonresidential consumer loans are made to finance the purchase of personal property, including automobiles, recreational vehicles and boats, and for other personal purposes (secured and unsecured), and deposit account secured loans. Indirect nonresidential consumer loans include automobile financing provided to the consumer through an agreement with automobile dealerships.  Consumer loans also include a small portfolio of credit card receivables issued on the basis of applications received through referrals from the Bank’s branches, online and other marketing efforts.    



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Allowance for Loan Losses

The following schedule shows activity in the allowance for loan losses by portfolio class for the nine months ended September 30, 2017 and 2016, as well as the corresponding recorded investment in loans at the end of each period.















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Impaired Loans

The following table shows the composition of nonaccrual loans by portfolio class.  Purchased credit impaired loans accounted for in pools with an accretable yield are considered to be performing and are excluded from the table. 





Nonaccrual loans include nonaccruing loans modified in troubled debt restructurings (“TDRs”) of $119.3 million and $81.9 million at September 30, 2017 and December 31, 2016, respectively.  Total TDRs, both accruing and nonaccruing, were $216.0 million as of September 30, 2017 and $121.7 million at December 31, 2016.  All TDRs are individually evaluated for impairment.

The table below details by portfolio class TDRs that were modified during the nine months ended September 30, 2017 and 2016. 







The TDRs modified during the nine months ended September 30, 2017 reflected in the table above include $96.1 million of loans with extended amortization terms or other payment concessions, $50.1 million of loans with significant covenant waivers and $1.3 million with other modifications.  The TDRs modified during the nine months ended September 30, 2016 include $43.4 million of loans with extended amortization terms or other payment concessions,  $14.7 million of loans with significant covenant waivers and $0.4 million of other modifications.

No TDRs recorded during the nine months ended September 30, 2017 and 2016 subsequently defaulted within twelve months of modification.

The tables below present loans that are individually evaluated for impairment disaggregated by portfolio class at September 30, 2017 and December 31, 2016.  Loans individually evaluated for impairment include TDRs and loans that are determined to be impaired and have aggregate relationship balances of $1 million or more. 





The tables below present the average balances and interest income for total impaired loans for the three and nine months ended September 30, 2017 and 2016.  Interest income recognized represents interest on accruing loans modified in a TDR.















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Aging Analysis

The tables below present the age analysis of past due loans by portfolio class at September 30, 2017 and December 31, 2016.  Purchased credit impaired loans accounted for in pools with an accretable yield are considered to be current. 











Credit Quality Indicators

The following tables present the credit quality indicators by segments and portfolio class of loans at September 30, 2017 and December 31, 2016. 









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Below are the definitions of the Company’s internally assigned grades:

Commercial:

Residential and Consumer:



Purchased Credit Impaired Loans

Changes in the carrying amount of purchased credit impaired loans and related accretable yield are presented in the following table for the nine months ended September 30, 2017 and the year ended December 31, 2016.







Loans Acquired in an FDIC-Assisted Transaction and the Related FDIC Loss Share Receivable



Loans purchased in the 2009 acquisition of Peoples First Community Bank were covered by two loss share agreements between the FDIC and the Company.  In the third quarter of 2017, the Company terminated the agreements with the FDIC on the remaining covered loan balances totaling $154 million at June 30, 2017.  The indemnification asset was written down to the final settlement amount of $3.2 million in the second quarter of 2017. The final cash settlement was received from the FDIC in July 2017.

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The following schedule shows activity in the FDIC loss share receivable for the nine months ended September 30, 2017 and 2016.







Residential Mortgage Loans in Process of Foreclosure



Included in loans are $8.0 million and $10.1 million of consumer loans secured by single family residential real estate that are in process of foreclosure as of September 30, 2017 and December 31, 2016, respectively.   Loans in process of foreclosure include those for which formal foreclosure proceedings are in process according to local requirements of the applicable jurisdiction.  In addition to the single family residential real estate loans in process of forecislosure, the Company also held $2.5 million and $3.1 million of foreclosed single family residential properties in other real estate owned as of September 30, 2017 and December 31, 2016, respectively.



5.  Securities Sold under Agreements to Repurchase

Included in short-term borrowings are customer securities sold under agreements to repurchase (“repurchase agreements”) that mature daily and are secured by U.S. agency securities totaling $512.0 million and $358.1 million at September 30, 2017 and December 31, 2016, respectively.  The Company borrows funds on a secured basis by selling securities under agreements to repurchase, mainly in connection with treasury management services offered to its deposit customers. As the Company maintains effective control over assets sold under agreements to repurchase, the securities continue to be carried on the consolidated statements of financial condition. Because the Company acts as borrower transferring assets to the counterparty, and the agreements mature daily, the Company’s risk is limited.

6.  Derivatives

Risk Management Objective of Using Derivatives

The Company enters into derivative financial instruments to manage risks related to differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments, currently related to select pools of variable rate loans and fixed rate brokered deposits.  The Bank also enters into interest rate derivative agreements as a service to certain qualifying customers.  The Bank manages a matched book with respect to these customer derivatives in order to minimize its net risk exposure resulting from such agreements.  The Bank also enters into risk participation agreements under which it may either sell or buy credit risk associated with a customer’s performance under certain interest rate derivative contracts related to loans in which participation interests have been sold to or purchased from other banks.

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Fair Values of Derivative Instruments on the Balance Sheet

The table below presents the notional or contractual amounts and fair values of the Company’s derivative financial instruments as well as their classification on the consolidated balance sheets as of September 30, 2017 and December 31, 2016.  Effective January 3, 2017, the Company’s central clearing counterparty amended its rulebook to legally characterize variation margin accounts as settlements, rather than being reflected separately as collateral.  As a result of that change, the Company began prospectively reflecting derivative assets and liabilities net of the central clearing counterparty derivative margin account.

 









Cash Flow Hedges of Interest Rate Risk

The Company is party to various interest rate swap agreements designated and qualifying as cash flow hedges of the Company’s forecasted variable cash flows for pools of variable rate loans.   For each agreement, the Company receives interest at a fixed rate and pays at a variable rate.  The notional amounts of the swap agreements at September 30, 2017 expire as follows:  $250 million in 2019;  $200 million in 2020; and $425 million in 2022.    

During the terms of the swap agreements, the effective portion of changes in the fair value of the derivative instruments are recorded in Accumulated Other Comprehensive Income (“AOCI”) and subsequently reclassified into earnings in the periods that the hedged forecasted variable rate interest payments affect earnings.  The impact on AOCI is reflected in Note 7- Shareholders’ Equity.  There was virtually no ineffective portion of the change in fair value of the derivatives recognized directly in earnings during the three or nine months ended September 30, 2017 and 2016.



Fair Value Hedges of Interest Rate Risk 



During 2017, the Company entered into interest rate swap agreements that modify the Company’s exposure to interest rate risk by effectively converting a portion of the Company’s brokered certificates of deposit from fixed rates to variable rates. The maturities and call features of these interest rate swaps match the features of the hedged deposits.  As interest rates fall, the decline in the value of the certificates of deposit is offset by the increase in the value of the interest rate swaps.  Conversely, as interest rates rise, the value of the underlying hedged deposits increases, but the value of the interest rate swaps decreases, resulting in no impact on earnings.  Interest expense is adjusted by the difference between the fixed and floating rates for the period the swaps are in effect.  Hedge ineffectiveness on these transactions results in an increase or decrease in noninterest income. 

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Derivatives Not Designated as Hedges

Customer interest rate derivative program

The Bank enters into interest rate derivative agreements, primarily rate swaps, with commercial banking customers to facilitate their risk management strategies.  The Bank enters into offsetting agreements with unrelated financial institutions, thereby mitigating its net risk exposure resulting from such transactions.  Because the interest rate derivatives associated with this program do not meet hedge accounting requirements, changes in the fair value of both the customer derivatives and the offsetting derivatives are recognized directly in earnings.

Risk participation agreements

The Bank also enters into risk participation agreements under which it may either assume or sell credit risk associated with a borrower’s performance under certain interest rate derivative contracts.  In those instances where the Bank has assumed credit risk, it is not a direct counterparty to the derivative contract with the borrower and has entered into the risk participation agreement because it is a party to the related loan agreement with the borrower.  In those instances in which the Bank has sold credit risk, it is the sole counterparty to the derivative contract with the borrower and has entered into the risk participation agreement because other banks participate in the related loan agreement.  The Bank manages its credit risk under risk participation agreements by monitoring the creditworthiness of the borrower, based on the Bank’s normal credit review process.

Mortgage banking derivatives

The Bank also enters into certain derivative agreements as part of its mortgage banking activities.  These agreements include interest rate lock commitments on prospective residential mortgage loans and forward commitments to sell these loans to investors on a best efforts delivery basis.

Customer foreign exchange forward contract derivatives

The Bank enters into foreign exchange forward derivative agreements, primarily forward foreign currency contracts, with commercial banking customers to facilitate their risk management strategies.  The Bank manages its risk exposure from such transactions by entering into offsetting agreements with unrelated financial institutions.  Because the foreign exchange forward contract derivatives associated with this program do not meet hedge accounting requirements, changes in the fair value of both the customer derivatives and the offsetting derivatives are recognized directly in earnings.

Effect of Derivative Instruments on the Income Statement



Derivative instrument income consisting primarily of customer interest rate swap fees, net of fair value adjustments, is reflected in the income statement in other noninterest income, totaling $1.3 million and $4.4 million for the three and nine months ended September 30, 2017, respectively, and $1.3 million and $1.7 million for the three and nine months ended September 30, 2016, respectively.  The impact to interest income from cash flow hedges was ($0.1) million and ($0.2) million for the three and nine months ended September 30, 2017, respectively and $0.7 million and $1.7 million for the three and nine months ended September 30, 2016, respectively.  For the three and nine months ended September 30, 2017, the fair value hedges entered into during the period reduced interest expense on deposits by $0.2 million and $0.6 million, respectively, and had minimal impact on noninterest income due to ineffectiveness.   

Credit Risk-Related Contingent Features

Certain of the Bank’s derivative instruments contain provisions allowing the financial institution counterparty to terminate the contracts in certain circumstances, such as a downgrade of the Bank’s credit ratings below specified levels, a default by the Bank on its indebtedness, or the failure of the Bank to maintain specified minimum regulatory capital ratios or its regulatory status as a well-capitalized institution.  These derivative agreements also contain provisions regarding the posting of collateral by each party.  As of September 30, 2017,  the aggregate fair value of derivative instruments with credit risk-related contingent features that were in a net liability position was $16.6 million. 

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Offsetting Assets and Liabilities

The Bank’s derivative instruments with certain counterparties contain legally enforceable netting provisions that allow for net settlement of multiple transactions to a single amount, which may be positive, negative, or zero.  Agreements with certain bilateral counterparties require both parties to maintain collateral in the event that the fair values of derivative instruments exceed established exposure thresholds.  For centrally cleared derivatives, the Company is subject to initial margin posting and daily variation margin exchange with the central clearinghouses.  As noted above, effective January 3, 2017, the Company began to reflect its derivative assets and liabilities net of the central clearing party variation margin account in the Statement of Income.  Offsetting information in regards to all derivative assets and liabilities, including accrued interest, subject to these master netting agreements at September 30, 2017 and December 31, 2016 is presented in the following tables.











The Company has excess collateral compared to total exposure due to initial margin requirements for day-to-day rate volatility. 



7.    Stockholders’ Equity



The presentation of the components of stockholders’ equity was modified from prior filings to consolidate treasury stock into surplus in the Consolidated Balance Sheets and Statements of Changes in Stockholders’ Equity in order to simplify the presentation.  Additional information on treasury stock is reflected in the common shares outstanding section below.





Common Shares Outstanding



Common shares outstanding excludes treasury shares of 1.0  million and 1.3 million at September 30, 2017 and December 31, 2016, respectively, with a first-in-first-out cost basis of $17.6 million and $24.1  million at September 30, 2017 and December 31, 2016, respectively.  Shares outstanding also excludes unvested restricted share awards of 1.7  million and 2.0 million at September 30, 2017 and December 31, 2016, respectively.

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Accumulated Other Comprehensive Income (Loss)

The components of AOCI and changes in those components are presented in the following table.





AOCI is reported as a component of stockholders’ equity.  AOCI can include, among other items, unrealized holding gains and losses on securities available for sale (“AFS”), gains and losses associated with pension or other post-retirement benefits that are not recognized immediately as a component of net periodic benefit cost, and gains and losses on derivative instruments that are designated as, and qualify as, cash flow hedges.  Net unrealized gains/losses on AFS securities reclassified as securities held to maturity (“HTM”) also continue to be reported as a component of AOCI and will be amortized over the estimated remaining life of the securities as an adjustment to interest income.  Subject to certain thresholds, unrealized losses on employee benefit plans will be reclassified into income as pension and post-retirement costs are recognized over the remaining service period of plan participants.  Accumulated gains/losses on the cash flow hedge of the variable rate loans described in Note 6 will be reclassified into income over the life of the hedge.  Gains (losses) in AOCI are net of deferred income taxes. 

The following table shows the line items of the consolidated statements of income affected by amounts reclassified from AOCI.







 

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8.  Other Noninterest Income

Components of other noninterest income are as follows: 









































































9.  Other Noninterest Expense

Components of other noninterest expense are as follows:





 

10.  Earnings Per Share

The Company calculates earnings per share using the two-class method.  The two-class method allocates net income to each class of common stock and participating security according to common dividends declared and participation rights in undistributed earnings.  Participating securities consist of unvested stock based payment awards that contain nonforfeitable rights to dividends or dividend equivalents. 

A summary of the information used in the computation of earnings per common share follows.





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Potential common shares consist of employee and director stock options.  These potential common shares do not enter into the calculation of diluted earnings per share if the impact would be anti-dilutive, i.e., increase earnings per share or reduce a loss per share.  Weighted average anti-dilutive potential common shares totaled 1,380 and 11,057, respectively, for the three and nine months ended September 30, 2017.  Weighted-average anti-dilutive potential common shares totaled 317,893 and 578,863, respectively, for the three and nine months ended September 30, 2016.    

 

11.  Retirement Plans



During the second quarter of 2017, the Company amended both the Hancock Holding Company Pension Plan and Trust Agreement (“Pension Plan”), a qualified defined benefit plan, and the Hancock Holding Company 401(k) Savings Plan and Trust Agreement (“401(k) Plan”), a defined contribution plan.  The Pension Plan was amended to exclude any individual hired or rehired by the Company after June 30, 2017 from eligibility to participate. The Pension Plan amendment further provides that the accrued benefits of each participant in the Pension Plan whose combined age plus years of service as of January 1, 2018 totals less than 55 will be frozen as of January 1, 2018 and will not thereafter increase.  As a result of the plan amendments, pension assets and the benefit obligations were re-measured as of June 30, 2017. The impact of the amendment to the benefit obligation was a reduction of $17.3 million. As of June 30, 2017, pension assets totaled $537.6 million and the benefit obligation totaled $476.9 million. 

The 401(k) Plan was amended for participants whose benefits are frozen under the Pension Plan, to add an enhanced Company contribution beginning January 1, 2018, in the amount of 2%,  4% or 6% of such participant’s eligible compensation, based on the participant’s age and years of service with the Company. The 401(k) Plan’s amendment further provides that the Company will contribute to the benefit of those associates of the Company hired or rehired after June 30, 2017 and those associates of the Company never enrolled in the Pension Plan an additional basic contribution in an amount equal to 2% of the associate’s eligible compensation beginning January 1, 2018.  Participants will vest in the new basic and enhanced Company contributions upon completion of three years of service.



The Company also has a nonqualified defined benefit plan covering certain legacy Whitney employees that was frozen as of December 31, 2012 and no future benefits are accrued under this plan.

The Company sponsors defined benefit postretirement plans for both legacy Hancock and legacy Whitney employees that provide health care and life insurance benefits.  Benefits under the Hancock plan are not available to employees hired on or after January 1, 2000. Benefits under the Whitney plan are restricted to retirees who were already receiving benefits at the time of plan amendments in 2007 or active participants who were eligible to receive benefits as of December 31, 2007.



The following tables show the components of net periodic benefits cost included in expense for the plans for the periods indicated.







No contribution to the pension plans is required in 2017 to meet minimum funding requirements, and the Company has no plans to make a contribution in the current year.

 

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12.  Share-Based Payment Arrangements

Hancock maintains incentive compensation plans that provide for awards of share-based compensation to employees and directors.  These plans have been approved by the Company’s shareholders.  Detailed descriptions of these plans were included in Note 16 to the consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.  Effective January 1, 2017, the Company prospectively adopted accounting guidance intended to improve the accounting for employee share-based payments.  The Company elected to account for forfeitures as they occur. The adoption of this guidance did not have a material impact on the Company’s financial condition or results of operations.    

A summary of option activity for the nine months ended September 30, 2017 is presented below:



The total intrinsic value of options exercised for the nine months ended September 30, 2017 was $4.1 million.  There was minimal intrinsic value of options exercised for the nine months ended September 30, 2016.

The restricted and performance shares in the table below are subject to service requirements. A summary of the status of the Company’s nonvested restricted and performance shares as of September 30, 2017 and changes during the nine months ended September 30, 2017, is presented in the following table.



As of September 30, 2017,  there was $40.1 million of total unrecognized compensation expense related to nonvested restricted and performance shares expected to vest.  This compensation is expected to be recognized in expense over a weighted average period of 3 years.  The total fair value of shares which vested during the nine months ended September 30, 2017 and 2016 was $10.1 million and $2.2 million, respectively.    

During the nine months ended September 30, 2017,  the Company granted 23,489 performance shares subject to a total shareholder return (“TSR”) performance metric with a grant date fair value of $42.92 per share and 23,489 performance shares subject to a core earnings per share performance metric with a grant date fair value of $38.26 per share to key members of executive management. The number of performance shares subject to TSR that ultimately vest at the end of the three-year performance period, if any, will be based on the relative rank of the Company’s three-year TSR among the TSRs of a peer group of 44 regional banks. The fair value of the performance shares subject to TSR at the grant date was determined using a Monte Carlo simulation method.  The number of performance shares subject to core earnings per share that ultimately vest will be based on the Company’s attainment of certain core earnings per share goals over the two-year performance period.  The maximum number of performance shares that could vest is 200% of the target award.  Compensation expense for these performance shares is recognized on a straight line basis over the three-year service period. 

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13.  Fair Value

The Financial Accounting Standards Board (“FASB”) defines fair value as the exchange price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.  The FASB’s guidance also establishes a fair value hierarchy that prioritizes the inputs to these valuation techniques used to measure fair value, giving preference to quoted prices in active markets for identical assets or liabilities (“level 1”) and the lowest priority to unobservable inputs such as a reporting entity’s own data (“level 3”).    Level 2 inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical assets or liabilities in markets that are not active, observable inputs other than quoted prices, such as interest rates and yield curves, and inputs that are derived principally from or corroborated by observable market data by correlation or other means.

Fair Value of Assets and Liabilities Measured on a Recurring Basis

The following tables present for each of the fair value hierarchy levels the Company’s assets and liabilities that are measured at fair value on a recurring basis in the consolidated balance sheets.











Securities classified as level 2 include obligations of U.S. Government agencies and U.S. Government-sponsored agencies, residential mortgage-backed securities and collateralized mortgage obligations that are issued or guaranteed by U.S. government agencies, and state and municipal bonds.  The level 2 fair value measurements for investment securities are obtained quarterly from a third-party pricing service that uses industry-standard pricing models.  Substantially all of the model inputs are observable in the marketplace or can be supported by observable data. 





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The Company invests only in securities of investment grade quality with a targeted duration, for the overall portfolio, generally between two and five years.  Company policies generally limit investments to U.S. agency securities and municipal securities determined to be investment grade according to an internally generated score which generally includes a rating of not less than “Baa” or its equivalent by a nationally recognized statistical rating agency.        

The fair value of derivative financial instruments, which are predominantly customer interest rate swaps, is obtained from a third-party pricing service that uses an industry-standard discounted cash flow model that relies on inputs, LIBOR swap curves and Overnight Index swap rate curves, observable in the marketplace.  To comply with the accounting guidance, credit valuation adjustments are incorporated in the fair values to appropriately reflect nonperformance risk for both the Company and the counterparties.  Although the Company has determined that the majority of the inputs used to value the derivative instruments fall within level 2 of the fair value hierarchy, the credit value adjustments utilize level 3 inputs, such as estimates of current credit spreads.  The Company has determined that the impact of the credit valuation adjustments is not significant to the overall valuation of these derivatives.  As a result, the Company has classified its derivative valuations in their entirety in level 2 of the fair value hierarchy. The Company’s policy is to measure counterparty credit risk quarterly for all derivative instruments, including those subject to master netting arrangements consistent with how market participants would price the net risk exposure at the measurement date. 

The Company also has certain derivative instruments associated with the Bank’s mortgage banking activities.  These derivative instruments include interest rate lock commitments on prospective residential mortgage loans and forward commitments to sell these loans to investors on a best efforts delivery basis.  The fair value of these derivative instruments is measured using observable market prices for similar instruments and is classified as a level 2 measurement. 

The Company’s policy is to recognize transfers between valuation hierarchy levels as of the end of a reporting period.  There were no transfers between levels during the periods shown.

Fair Value of Assets Measured on a Nonrecurring Basis

Certain assets and liabilities are measured at fair value on a nonrecurring basis.  Collateral-dependent impaired loans are level 2 assets measured at the fair value of the underlying collateral based on independent third-party appraisals that take into consideration market-based information such as recent sales activity for similar assets in the property’s market. 

Other real estate owned, including both foreclosed property and surplus banking property, are level 3 assets that are adjusted to fair value, less estimated selling costs, upon transfer to other real estate owned.  Subsequently, other real estate owned is carried at the lower of carrying value or fair value less estimated selling costs.  Fair values are determined by sales agreement or third-party appraisals as discounted for estimated selling costs, information from comparable sales, and marketability of the property. 

The fair value information presented below is not as of the period-end, rather it was as of the date the fair value adjustment was recorded during the twelve months for each of the dates presented below, and excludes nonrecurring fair value measurements of assets no longer on the balance sheet. 

The following tables present the Company’s financial assets that are measured at fair value on a nonrecurring basis for each of the fair value hierarchy levels.











Accounting guidance from the FASB requires the disclosure of estimated fair value information about certain on- and off-balance sheet financial instruments, including those financial instruments that are not measured and reported at fair value on a recurring basis.  The significant methods and assumptions used by the Company to estimate the fair value of financial instruments are discussed below.

Cash, Short‑Term Investments and Federal Funds Sold – For these short‑term instruments, the carrying amount is a reasonable estimate of fair value.

Securities – The fair value measurement for securities available for sale was discussed earlier in the note.  The same measurement techniques were applied to the valuation of securities held to maturity. 

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Loans, Net – The fair value measurement for certain impaired loans was discussed earlier in the note.  For the remaining portfolio, fair values were generally determined by discounting scheduled cash flows using discount rates determined with reference to current market rates at which loans with similar terms would be made to borrowers of similar credit quality. 

Loans Held for Sale – These loans are recorded at fair value and carried at the lower of cost or market.  The carrying amount is considered a reasonable estimate of fair value. 

Deposits – The accounting guidance requires that the fair value of deposits with no stated maturity, such as noninterest-bearing demand deposits, interest-bearing checking and savings accounts, be assigned fair values equal to amounts payable upon demand (“carrying amounts”).  The fair value of fixed maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities.

Securities Sold under Agreements to Repurchase, Federal Funds Purchased, and FHLB Borrowings – For these short-term liabilities, the carrying amount is a reasonable estimate of fair value.

Long-Term Debt – The fair value is estimated by discounting the future contractual cash flows using current market rates at which debt with similar terms could be obtained. 

Derivative Financial Instruments – The fair value measurement for derivative financial instruments was discussed earlier in the note.

The following tables present the estimated fair values of the Company’s financial instruments by fair value hierarchy levels and the corresponding carrying amount at September 30, 2017 and December 31, 2016.













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14.  Recent Accounting Pronouncements



Accounting Standards Adopted in 2017



In March 2017, the FASB issued Accounting Standards Update (“ASU”) 2017-08, “Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities,” which amends the amortization period for certain purchased callable debt securities held at a premium.  The amendments require the premium to be amortized to the earliest call date.  The amendments do not, however, require an accounting change for securities held at a discount; instead, the discount continues to be amortized to maturity.  The amendments in this ASU more closely align the amortization period of premiums and discounts to expectations incorporated in market pricing on the underlying securities.  These amendments are effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2018.  The Company early adopted this amendment in the second quarter of 2017 and, in accordance with the standards, the Company began amortizing the premium for certain purchased callable debt securities to the earliest call date.  The adoption of this guidance did not have a material impact on the Company’s financial condition or results of operations.



In March 2016, the FASB issued ASU 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting,” to improve the accounting for employee share-based payments. Several aspects of the accounting for share-based payment award transactions are simplified, including income tax consequences; classification of awards as either equity or liabilities; and classification on the statement of cash flows.  The amendments were effective for public business entities for annual periods beginning after December 15, 2016, and interim periods within those annual periods.  The Company adopted the guidance effective January 1, 2017.  In accordance with the standard, the Company elected to account for forfeitures of stock-based compensation as they occur and will reclassify dividends paid on forfeited shares to compensation expense from retained earnings.  Classification of shares forfeited for taxes are reflected in the statement of cash flows as a financing rather than operating activity, with all historical periods restated.  In addition, the Company began recognizing excess tax benefits and tax deficiencies during the period in income (rather than in equity) on a prospective basis.  Adoption of this guidance did not have a material impact on the Company’s financial condition or results of operations; however, the prospective change in treatment of excess tax benefits resulted in a reduction in income tax expense of approximately $0.2 million and $2.0 million for the three and nine months periods ended September 30, 2017, respectively, and could result in volatility of future earnings, depending on changes in the Company’s stock price.   



Issued but Not Yet Adopted Accounting Standards



In August 2017, the FASB issued ASU 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities,” with the objective of improving financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements. The update provides changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. The amendments in this update are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early application is permitted in any interim period after issuance of the update. All transition requirements and elections are to be applied to hedging relationships existing on the date of adoption, and the effect of the adoption should be reflected as of the beginning of the fiscal year of adoption.  The Company is currently assessing all potential impacts of adoption of this update and is considering early adoption effective January 1, 2018. 

 

In May 2017, the FASB issued ASU 2017-09, “Compensation – Stock Compensation (Topic 718):  Scope of Modification Accounting,” which seeks to provide clarity, reduce diversity in practice, and reduce complexity when applying the guidance regarding a change to the terms of conditions of a share-based payment award.  Specifically, an entity is to account for the effects of a modification, unless all of the following are satisfied:  (1) the fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the modified award is the same as the fair value (or calculated value or intrinsic value, if such an alternative measurement is used) of the original award immediately before the original award is modified; (2) the vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified; and (3) the classification of the modified award as an equity instrument or as a liability instrument is the same as the classification of the original award immediately before the original award is modified.  The amendments are effective for annual periods, and for interim periods within those annual periods, beginning after December 15, 2017.  Early adoption is permitted, including adoption in any interim period, for reporting periods for which financial statements have not yet been issued.  The Company does not expect the adoption of this guidance to have a material impact on its financial condition or results of operations.



In March 2017, the FASB issued ASU 2017-07, “Compensation – Retirement Benefits (Topic 715):  Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Costs,” to improve the presentation of net periodic pension cost and net periodic postretirement benefit cost.  The amendments require that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period.  The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented.  The amendments also allow only the service cost component to be eligible for capitalization when applicable.  These amendments are effective for public business entities for annual periods beginning after December

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15, 2017, including interim periods within those annual periods.  Disclosures of the nature of and reason for the change in accounting principle are required in the first interim and annual periods of adoption.  The amendments should be applied retrospectively for the presentation of the service cost component and the other components of net periodic pension cost and net periodic postretirement benefit cost in the income statement and prospectively, on and after the effective date, for the capitalization of the service cost component of net periodic pension cost and net periodic postretirement benefit in assets. Refer to Note 11 – Retirement Plans – for detail on the components of net periodic pension and post-retirement benefit costs.   Application of this guidance is not expected to have a material impact on the Company’s financial condition or results of operations.



In January 2017, the FASB issued ASU 2017-04, “Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment,” which simplifies the manner in which an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test.  Under the amendments in this ASU, an entity should (1) perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount, and (2) recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, with the understanding that the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit.  Additionally, ASU No. 2017-04 removes the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails such qualitative test, to perform Step 2 of the goodwill impairment test.  This ASU is effective for public business entities that are SEC filers for fiscal years beginning after December 15, 2019, and for interim periods within those fiscal years.  Early adoption is permitted, including adoption in an interim period.  The ASU should be applied using a prospective method.  Application of this guidance is not expected to have a material impact on the Company’s financial condition or results of operations.



In January 2017, the FASB issued ASU 2017-01, “Business Combinations (Topic 805) – Clarifying the Definition of a Business,” which addresses stakeholders’ concerns that the current definition of a business is applied too broadly and analyzing transactions under the current definition is difficult and costly.  Under the amended guidance, a transaction is initially subject to a screening process to determine whether a “set” (i.e. an integrated set of assets and activities) qualifies as a business.  Under the screen, if substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or in a group of similar identifiable assets, the set is deemed not to be a business.  Further evaluation is required only if the transferred set does not meet the screen.  Under the further evaluation, to be considered a business, a set must include, at a minimum, an input and a substantive process that, together, significantly contribute to the ability to create output.  The amendment also narrows the definition of the term “output” so that it is consistent with the manner in which outputs are described in Topic 606, Revenue from Contracts with Customers.  The amendments are effective for annual periods beginning after December 15, 2017, including interim periods within those periods.  Early application is permitted under certain circumstances.  The amendments should be applied prospectively on or after the effective date.  Adoption of this guidance is not expected to have a material impact on the Company’s financial condition or results of operations.



In October 2016, the FASB issued ASU No. 2016-16, “Income Taxes (Topic 740) – Intra-Entity Transfers of Assets Other than Inventory,” which addresses stakeholders’ concerns that the limited amount of authoritative guidance has led to diversity in practice and is a source of complexity in financial reporting and results in an unfaithful representation of the economics of an intra-entity asset transfer.  The amendment eliminates the exception to the United States generally accepted accounting principle (“U.S. GAAP”) of comprehensive recognition of current and deferred income taxes that prohibits recognizing current and deferred income tax consequences for an intra-equity asset transfer (excluding the transfer of inventory) until the asset has been sold to an outside party.  The amendments are effective for annual reporting periods beginning after December 15, 2017, including interim periods within those annual reporting periods.  Early adoption is permitted, including adoption in an interim period.  The amendments should be applied using a retrospective transition method to each period presented.  Adoption of this guidance is not expected to have a material impact on the Company’s financial condition or results of operations.

   

In August 2016, the FASB issued ASU 2016-15, “Statement of Cash flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments,” to address diversity in how certain cash receipts and cash payments are presented and classified in the statement of cash flows.  The amendments provide guidance on eight specific cash flow issues, including debt prepayment or extinguishment costs, settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies (including bank-owned), life insurance policies, distributions received from equity method investees, beneficial interests in securitization transactions, and separately identifiable cash flows and application of the predominance principle.  The amendments are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years.  Early adoption is permitted, including adoption in an interim period.  The amendments should be applied using a retrospective transition method to each period presented.  Adoption of this guidance will not have a material impact on the Company’s financial condition or results of operations, and the Company does not expect a material impact to the presentation of its Statement of Cash Flows.



In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credits Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations.  The ASU, more commonly referred to as Current Expected Credit

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Losses, or CECL, requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts.  Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates.  Many of the loss estimation techniques currently applied will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses.  Organizations will continue to use judgment to determine which loss estimation method is appropriate for their circumstances.  In addition, the ASU amends the accounting for credit losses on debt securities and purchased financial assets with credit deterioration.  The ASU is effective for SEC filers for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption.  Early application is permitted for all organizations for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.  The Company has begun the process of implementation and currently is not planning to early adopt.  The Company expects the guidance will result in an increase in the allowance for loan losses given the change from covering losses inherent in the portfolio to covering losses over the remaining expected life of the portfolio and the nonaccretable difference on purchased credit impaired loans moving to an allowance (offset by an increase in the carrying value of the related loans). The guidance will also result in the establishment of an allowance for credit loss on held to maturity debt securities.  The amount of the increase in these allowances will be impacted by the portfolio composition and quality at the adoption date as well as economic conditions and forecasts at that time.



In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842),” that provides new lease accounting guidance.  Under the guidance, lessees (with the exception of short-term leases) will be required to recognize a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term.  Lessor accounting is largely unchanged.  Lessees will need to recognize almost all leases on their balance sheet as a right-of-use asset and a lease liability.  Lessees will no longer be provided with a source of off-balance sheet financing.  Public business entities are required to apply the amendments for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.  The Company is currently assessing this pronouncement and the impact of adoption by reviewing its existing lease contracts and service contracts that may include embedded leases.  The Company expects a gross-up of its Consolidated Balance Sheets as a result of recognizing lease liabilities and right of use assets; the extent of such is under evaluation.  The Company does not expect material changes to its consolidated results of operations.



In January 2016, the FASB issued ASU 2016-01, “Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities,” that improves the recognition and measurement of financial instruments through targeted changes to existing GAAP. It requires equity investments (except those that are accounted for under the equity method of accounting or result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. It also requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. The amendments in this update are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years.  The Company is currently assessing this pronouncement; however, the adoption of this guidance is not expected to have a material impact on the Company’s financial condition or results of operations.

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606),” affecting any entity that enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards. The core principle of this standard is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Most revenue associated with financial instruments, including interest and loan origination fees, is outside the scope of the guidance. Gains and losses on investment securities, derivatives, and sales of financial instruments are also excluded from the scope.  Subsequent to issuance of the revenue recognition guidance, the FASB has issued several updates that deferred by one year the effective date for revenue recognition guidance; clarified its guidance for performing the principal-versus-agent analysis; clarified guidance for identifying performance obligations allowing entities to ignore immaterial promised goods and services in the context of a contract with a customer and other clarifying guidance and technical corrections.  Entities can elect to adopt the guidance either on a full or modified retrospective basis.  Full retrospective adoption will require a cumulative effect adjustment to retained earnings as of the beginning of the earliest comparative period presented.  Modified retrospective adoption will require a cumulative effect adjustment to retained earnings as of the beginning of the reporting period in which the entity first applies the new guidance.  The standard will be effective for the Company for annual reporting periods beginning after December 15, 2017.  The Company will adopt this guidance on January 1, 2018 and plans to use the modified retrospective approach.  The Company has inventoried its contracts with customers and has evaluated a material portion of those contracts for compliance with the standard. The Company has not yet identified any material changes to the timing of revenue recognition. Based on the analysis performed to date, adoption of this guidance is not expected to have a material impact on its financial condition or results of operations. The Company is continuing to evaluate disaggregation for select categories of revenue in the scope of the guidance. Upon adoption, the Company will provide qualitative disclosures of its performance obligations related to revenue recognition.



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Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations



FORWARD-LOOKING STATEMENTS



This report contains forward-looking statements within the meaning of section 27A of the Securities Act of 1933, as amended, and section 21E of the Securities Exchange Act of 1934, as amended, and are intended to be covered by the safe harbor provided therein. Forward looking statements that we may make include statements regarding balance sheet and revenue growth; the provision for loan losses, loan growth expectations, management’s predictions about charge-offs for loans, including energy related credits, the impact of changes in oil and gas prices on our energy portfolio, and the downstream impact on businesses that support the energy sector, especially in the Gulf Coast region; the impact of the First NBC transactions on our performance and financial condition, including our ability to successfully integrate the business; deposit trends; credit quality trends; net interest margin trends; future expense levels; success of revenue-generating initiatives; the effectiveness of derivative financial instruments and hedging activities to manage risk; projected tax rates; future profitability; improvements in expense to revenue (efficiency) ratio; purchase accounting impacts such as accretion levels; and the financial impact of regulatory requirements. Also, any statement that does not describe historical or current facts is a forward-looking statement. These statements often include the words “believes,” “expects,” “anticipates,” “estimates,” “intends,” “plans,” “forecast,” “goals,” “targets,” “initiatives,” “focus,” “potentially,” “probably,” “projects,” “outlook” or similar expressions or future conditional verbs such as “may,” “will,” “should,” “would,” and “could.” Forward-looking statements are based upon the current beliefs and expectations of management and on information currently available to management. Our statements speak as of the date hereof, and we do not assume any obligation to update these statements or to update the reasons why actual results could differ from those contained in such statements in light of new information or future events.

Forward-looking statements are subject to significant risks and uncertainties. Investors are cautioned against placing undue reliance on such statements. Actual results may differ materially from those set forth in the forward looking statements. Additional factors that could cause actual results to differ materially from those described in the forward-looking statements can be found in Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016 and in other periodic reports that we file with the SEC.

OVERVIEW



Non-GAAP Financial Measures



Management’s Discussion and Analysis of Financial Condition and Results of Operations include non-GAAP measures used to describe our performance.  A reconciliation of those measures to GAAP measures are provided within the appropriate sections of this Item. The following is a summary of these non-GAAP measures and an explanation as to why they are deemed useful. 



Consistent with Securities and Exchange Commission Industry Guide 3, we present net interest income, net interest margin and efficiency ratios on a fully taxable equivalent (“te”) basis. The te basis adjusts for the tax-favored status of net interest income from certain loans and investments using a federal tax rate of 35% to increase tax-exempt interest income to a taxable-equivalent basis. We believe this measure to be the preferred industry measurement of net interest income, and it enhances comparability of net interest income arising from taxable and tax-exempt sources.



Over the past several quarters we have disclosed our focus on strategic initiatives that were designed to replace declining levels of purchase accounting income with improvement in core income, which we define as income excluding net purchase accounting income. We present core income non-GAAP measures including core net interest income and core net interest margin, core revenue and core pre-tax, pre-provision net revenue.   These measures are provided to assist the reader with a  better understanding of our performance period over period as well to provide investors with assistance in understanding the success management has experienced in executing its strategic initiatives.



We define Core Net Interest Income as net interest income (te) excluding net purchase accounting accretion resulting from the fair market value adjustments related to acquired operations.  We define Core Net Interest Margin as reported core net interest income, annualized, expressed as a percentage of average earning assets.  



We define Core Revenue as core net interest income and noninterest income less the amortization of the FDIC loss share receivable related to loans acquired in an FDIC assisted transaction and other nonoperating revenues.  



We define Core Pre-Provision Net Revenue as core revenue less noninterest expense, excluding intangible amortization and other nonoperating items. Management believes that core pre-tax, pre-provision net revenue is a useful financial measure because it enables investors and others to assess the Company’s ability to generate capital to cover credit losses through a credit cycle.











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Acquisitions

On March 10, 2017, we, through our wholly-owned subsidiary, Whitney Bank (“Whitney”), completed a transaction with First NBC Bank (“FNBC”), whereby Whitney acquired approximately $1.2 billion in loans (net of fair value discount or “loan mark”), nine branch locations with $398 million in deposits, and assumed $604 million in FHLB borrowings.  The operational conversion of the branch locations occurred in the second quarter of 2017, along with the simultaneous closure of 10 overlapping branches.  This transaction is referred to as the FNBC I transaction throughout this document.



On April 28, 2017, Whitney entered into a purchase and assumption agreement with the FDIC (“Agreement”), which acted as the receiver for the Louisiana Office of Financial Institutions (OFI) following the OFI’s closure of FNBC.  This transaction is referred to as the FNBC II transaction throughout this document. Pursuant to the Agreement, Whitney acquired selected assets and liabilities of FNBC from the FDIC and continued to operate the 29 former FNBC branch locations until systems conversion, which occurred in July 2017.  In the third quarter of 2017, Whitney exercised its option to acquire seven former FNBC locations and closed and consolidated 25 overlapping branch locations.



Under the Agreement, Whitney received approximately $642 million in cash from the FDIC, and acquired/assumed the following assets and liabilities:





The terms of the Agreement require the FDIC to indemnify Whitney against certain liabilities of FNBC and its affiliates not assumed or otherwise purchased by Whitney. Neither the Company nor Whitney Bank acquired any assets, common stock, preferred stock or debt, or assumed any other obligations, of First NBC Bank Holding Company.



Management believes these low risk in-market transactions strengthen our position in the Greater New Orleans area and are financially compelling, which will help us achieve our long term goals.



For additional information on both transactions, see Notes to Unaudited Consolidated Financial Statements – Note 2 – Acquisitions.    

Recent Economic and Industry Developments

Current Economic Environment

Most of Hancock’s market area experienced a modest to moderate expansion in economic activity during the third quarter of 2017, according to the Federal Reserve’s Summary of Commentary on Current Economic Conditions (“Beige Book”).  Energy related businesses operating mainly in Hancock’s south Louisiana and Houston, Texas markets continued to expand, but at a slightly slower rate in the third quarter.  Although inventories decreased as a result of Hurricane Harvey, drilling activity has returned to pre-hurricane levels.  Overall growth in oil and gas production continued, but oilfield services firms noted weaker demand growth.  Drilling activity is expected to decline slightly by the end of 2017, and demand for oilfield services is softening outside of the Permian Basin.  However, six-month outlooks for 2018 were optimistic relative to the last reporting period, and uncertainty has moderated.

The commercial real estate market continued to improve in most of our footprint, with growing demand for multi-family construction.  In the Houston market, apartment leasing activity picked up, occupancy rose and rent concessions diminished following Hurricane Harvey.  Commercial construction activity also increased in these sectors.  Continued improvement is expected in the commercial real estate market in 2018. 

The residential real estate market has a  varied outlook, with new home starts and closings expected to be behind schedule for the remainder of the year in our Houston market due to Hurricane Harvey.  Residential real estate contracts signaled modest growth and construction activity was slightly up from the year-ago level in the rest of our markets.  Builders expect homes sales to be flat over the next three months, while brokers anticipate slightly higher sales.  Construction activity is expected to match or marginally surpass the current pace over the next three months. 

Retail sales activity and consumer spending outlook was positive.  There is an expected increase in building materials in the hurricane impacted areas.  In Houston, there is also increased demand for warehouses from building supply companies. Auto sales surged and are expected to remain elevated from replacement activity due to the hurricanes.    Employment growth was steady,  with challenges continuing in filling construction, information technology, finance, transportation and nursing positions.  Wage growth remained steady, with the exception of wage pressures for highly skilled positions and rising wages in the construction industry.  Due to the impact of Hurricane Harvey, finding and hiring workers may be more difficult over the next six months in the Houston market.   





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Overall economic reports indicate that loan demand continued to increase, however at a more sluggish pace than during the prior period with growth in commercial real estate loans, but with decreases in demand for residential real estate loans and consumer loans.    While we experienced loan growth across the our markets compared to the prior quarter, with loan volume increases primarily in commercial real estate and mortgage loans, maintaining that level of growth will be challenging with the slow down of demand in our markets.  Overall, the economic outlook remains positive, as most businesses expect activity to increase over the next year.

Highlights of Third Quarter 2017 Financial Results

Net income for the third quarter of 2017 was $58.9 million, or $.68 per diluted common share (EPS), compared to $52.3 million, or $.60 EPS in the second quarter of 2017 and $46.7 million, or $.59 EPS, in the third quarter of 2016. The third quarter of 2017 includes nonoperating expenses of approximately $11.4 million ($.08 per share impact), while the second quarter of 2017 included $10.6 million of nonoperating expenses ($.08 per share). The nonoperating expenses in both quarters were mainly related to the two previously disclosed FNBC transactions. There were no nonoperating expenses in the third quarter of 2016.

Highlights of Our Third Quarter 2017 Results (Compared to Second Quarter 2017):

The FNBC I and II transactions continue to positively impact our franchise by expanding our customer base and strengthening the market position in our footprint. As noted in the prior quarter, these transactions also temporarily added cost.  In addition to merger-related costs identified as nonoperating items, second quarter results also included other nonpermanent costs estimated at $7 million, or $0.05 per share, to separately operate the 29 branches FNBC had at the time of its closure. These expenses were eliminated during the third quarter through systems conversions and the consolidation of overlapping branches, resulting in a more normalized expense level for the current quarter.

The active hurricane season brought severe weather to several areas in our footprint, with Harvey impacting Texas and Southwest Louisiana, Irma impacting Florida, and Nate impacting coastal Mississippi and Alabama.  Despite the widespread coverage of our market, the Company experienced minimal impact to facilities and operations and we do not expect any significant change to the credit quality of the loan portfolio as a result of the storms.      

 

The Company recently announced the intent to consolidate the Hancock Bank and Whitney Bank brands during the first half of 2018, subject to regulatory approval.  The Company intends to operate as Hancock Whitney Corporation, with the wholly owned bank subsidiary operating as Hancock Whitney Bank.  The brand consolidation is a natural progression of our business that allows the simplification of certain operations and sets the stage for continued growth across all the markets we serve, while honoring the legacies of the iconic brands of Hancock and Whitney that have existed since 1899 and 1883, respectively.  We expect to incur additional costs for re-branding during the first and second quarters of 2018, including capital expenditures for new signage for our financial centers.  









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RESULTS OF OPERATIONS

Net Interest Income

Net interest income (te) for the third quarter of 2017 was $211.4 million, a $3.2 million, or 2% increase from the second quarter of 2017. Core net interest income was up $4.2 million.  Net interest income (te) for the third quarter of 2017 increased $41.1 million, or 24%, compared to the third quarter of 2016, while core net interest income was up $38.4 million, or 23%. The linked quarter increase is primarily attributable to a full quarter impact from the June 2017 Federal Reserve rate increase partially offset by an approximately $1.4 million increase, or 2 bps on NIM, of interest reversals on nonaccrual loans.  

The reported net interest margin was 3.44% for the third quarter of 2017, up 1 bp from the second quarter of 2017.  The core net interest margin for the third quarter of 2017 was 3.32%, up 3 bps from the second quarter of 2017.  The core loan yield, excluding purchase accounting adjustments, was up 5 bps. Offsetting this improvement was a 4 bp increase in the cost of funds.   The increase in the cost of funds was primarily related to both the Federal Reserve rate hike in June and higher cost deposits acquired in the FNBC II transaction.

Compared to the third quarter of 2016, the net interest margin increased 24 bps and the core margin was up 20 bps.  The major factors in these increases are largely the same as for the comparison to the second quarter of 2017, primarily the impact of the FNBC transactions and the three Federal Reserve interest rate hikes.    



Net interest income (te) for the nine months ended September 30, 2017 totaled $609.7 million, a $100.1 million, or 20%, increase from the same period in 2016. Core net interest income was up $95.3 million. Interest earned on loans, excluding purchase accounting accretion, increased $98.8 million as average total loans grew  $2.1 billion, or 13%, due to both organic loan growth and the addition of the portfolios acquired in the FNBC transactions. A $693.7 million, or 15%, increase in average investment securities and a 14 bps increase in the yield resulted in an $18 million increase in interest earned on investment securities.  Higher-yielding municipal securities comprised approximately 18% of the investment securities portfolio.

The reported net interest margin for the nine months ended September 30, 2017 was 3.41%, up 18 bps from the nine months ended September 30, 2016.  Core margin was 3.30%, up 17 bps from the same period in 2016.

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The following tables detail the components of our net interest income and net interest margin.







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Due to the significant contribution from purchase accounting accretion related to assets acquired in business combinations, management believes that non-GAAP measures of core net interest income and core net interest margin provide investors with meaningful financial measures of the Company’s performance over time.  The following table provides a reconciliation of reported and core net interest income and reported and core net interest margin.







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Provision for Loan Losses

During the third quarter of 2017, we recorded a total provision for loan losses of $13.0 million, down $1.9 million from the second quarter of 2017 and down $5.9 million from the third quarter of 2016.  For the nine months ended September 30, 2017, we recorded a total provision for loan losses of $44.0 million, compared to $96.2 million for the nine months ended September 30, 2016, which included $50 million in provision expense related to the energy portfolio.

Provision for loan losses reflects net charge-offs from the non-purchased credit impaired loan portfolio totaling $11.8 million, which represents 0.25% of average total loans on an annualized basis in the third quarter of 2017, compared to $6.0 million, or 0.13% of average total loans in the second quarter of 2017.  Net charges-offs from energy credits in the third quarter of 2017 includes gross charges of $7.6 million, net of recoveries totaling $4.0 million.  There were no charges-offs related to energy credits in the second quarter of 2017. 

Our company conducts business in several markets impacted by recent hurricanes.  However, very few of our clients experienced significant flooding, damage or disruption.  As a result, our credit quality measures do not include any specific or additional provisionary expenses related to the impact from those storms.

The section in Item 2. “Management's Discussion and Analysis of Financial Condition and Results of Operations – Allowance for Loan Losses and Asset Quality” provides additional information on changes in the allowance for loan losses and general credit quality.

Noninterest Income

Noninterest income totaled $67.1 million for the third quarter of 2017, down $0.4 million, or 1%, from the second quarter of 2017 and up $4.1 million, or 7%, compared to the third quarter of 2016.  Decreases in derivative income, trust fees, insurance commissions and fees, credit related fees and bank card and ATM fees were partially offset by an increase in services charges. Included in the second quarter of 2017 is amortization of $1.3 million related to the FDIC indemnification asset. As a result of the termination of the loss share agreements in the second quarter of 2017, the amortization was eliminated beginning in the third quarter of 2017. Compared to the third quarter of 2016, increases in service charges, bank card and ATM, investment and annuity fees were partially offset by decreases in income from bank-owned life insurance, trust fees, secondary mortgage market operations and gains on sale of assets. Included in the third quarter of 2016 is $1.5 million in amortization related to the FDIC indemnification asset of the loss share agreements. Noninterest income totaled $198.1 million for the first nine months of 2017, up $13.2 million, or 7%, from the first nine months of 2016. Included in the first nine months of the 2017 is a  $4.4 million gain related to sale of selected Hancock Horizon funds, classified as nonoperating.

The components of noninterest income are presented in the following table for the indicated periods.









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Service charges on deposits totaled $21.4 million for the third quarter of 2017, up $1.4 million, or 7%, from the second quarter of 2017 and up $2.7 million, or 15%, from the third quarter of 2016. These increases were primarily due to an increase in consumer overdraft fees and new sustained overdraft fees.

Bank card and ATM fees totaled $13.4 million for the third quarter of 2017, down $0.3 million, or 2%, from the second quarter of 2017 due to the waiver of fees for customers in hurricane impacted areas. Compared to the third quarter of 2016, bank card and ATM fees were up $1.6 million, or 13%, due to increased activity.

Mortgage loan originations for the third quarter of 2017 totaled $330 million, compared to $361 million in the second quarter of 2017 and $384 million in the third quarter of 2016.  Income from secondary mortgage market operations was relatively flat compared to the second quarter of 2017 and down $0.8 million, or 15%, from the third quarter of 2016.



Trust fees decreased $0.8 million, or 7%, linked quarter due to seasonal income related to tax preparation fees earned in the second quarter 2017.  For the first nine months of 2017, trust fees decreased $1.4 million, or 4%, compared to the first nine months of 2016.  This decrease was primarily due to the sale of certain Hancock Horizon funds.



Investment and annuity fees increased $0.3 million, or 6%, compared to second quarter 2017 and increased $1.3 million, or 30%, compared to third quarter 2016.  The increases are mainly due to corporate underwriting fees and an overall appreciation in asset value as a result of favorable market conditions.

Income from bank-owned life insurance increased $0.2 million, or 7%, compared to the second quarter of 2017, but was down $1.0 million, or 24%, compared to the third quarter of 2016.  For the first nine months of 2017, income from bank-owned life insurance decreased $2.5 million, or 23%, compared to the first nine months of 2016. The decrease for the first nine months of 2017 compared to the first nine months of 2016 was due to a lower level of gains on death benefit claims, partially offset by an increase in income due to an additional $50 million investment in bank-owned policies in the second quarter of 2017.



Income on our customer interest rate derivative program resulted in a $1.3 million net gain for the third quarter of 2017 compared to net gains of $2.7 million in the second quarter of 2017 and $1.3 million for the third quarter of 2016.  This income can be volatile and is dependent upon both customer sales activity and market value adjustments due to interest rate movement. 



Other miscellaneous income totaled $3.4 million in the third quarter of 2017, down $0.7 million linked quarter and up $1.0 million compared to the third quarter of 2016.  Other miscellaneous fee income for third quarter 2017 included $0.7 million of income from investments in  Small Business Investment Companies. The second quarter 2017 included a $1.1 million co-arranger fee related to a health care credit facility and $0.7 million in additional income from the sale of the investment in a Small Business Investment Company.  While this income is part of our normal operations, it can be unpredictable as to timing.



Noninterest Expense

Noninterest expense for the third quarter of 2017 was $177.6 million, down $5.9 million, or 3%, from the second quarter of 2017, and up $28.6 million, or 19%, from the third quarter of 2016.  For the nine months ended September 30, 2017, noninterest expense was $524.6 million, a $68.6, or 15% increase over the same period in 2016.   Excluding nonoperating expense items, noninterest expense for the nine months ended September 30, 2017 totaled $496.2 million, up $45.1 million, or 10%, over 2016.

As previously stated, our company conducts business in several markets impacted by recent hurricanes.  However, very few of our locations experienced damage or disruption.  As a result, our reported results do not include any material expenses related to the impact from those storms. 



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Nonoperating expenses incurred in 2017 primarily include merger-related costs associated with the FNBC transactions and $6.6 million of expense due to the second quarter 2017 termination of a FDIC loss share agreements associated with the Peoples First transaction in 2009.  The components of noninterest expense and nonoperating expense are presented in the following tables for the indicated periods.





























































The following discussion of the components of operating expenses excludes nonoperating items for each period.

There were minimal nonpermanent costs related to the FNBC transactions during the third quarter of 2017, while there were approximately $7 million during the second quarter of 2017.  As noted earlier, nonpermanent costs included costs of operating former FNBC branches and maintaining separate operations to serve customers following the FNBC II transaction. These expenses were temporarily elevated until we worked through systems conversions and consolidation of overlapping branches early in the third quarter of 2017.

Personnel expense totaled $92.6 million for the third quarter of 2017, down $3.6 million, or 4%, from the previous quarter due to a decrease in the number of former FNBC employees, and lower pension costs. Year over year, personnel expense was up $9.5 million, or 11%, due to additional employees from the FNBC transactions, as well as merit increases.

Occupancy and equipment expenses totaled $15.7 million in the third quarter of 2017, down $1.0 million, or 6%, from the second quarter of 2017 and up $2.3 million, or 17%, compared to the third quarter of 2016 primarily due to the addition of FNBC locations.



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ORE expense for the third quarter of 2017 was $0.2 million compared to net gains on ORE dispositions of $1.0 million in the linked quarter and $5.2 million in the third quarter of 2016.  Management believes the current quarter reflects a more typical level of ORE expense.



All other expenses, excluding amortization of intangibles and nonoperating expense items, totaled $51.6 million for the third quarter of 2017, down $3.5 million, or 6%, from the second quarter of 2017, and down $1.2 million, or 2% compared to the third quarter of 2016.  The decreases from the prior quarter were primarily seen in the professional services, data processing and advertising categories as the second quarter included $2.2 million of nonpermanent operating costs related to FNBC transactions.  The increases from the third quarter of 2016 include data processing, regulatory fees, and ad valorem taxes, primarily related to the FNBC transactions.













Income Taxes

The effective income tax rate for the third quarter of 2017 was approximately 25.7%, compared to 24.0% in the second quarter of 2017 and 20.1% in the third quarter of 2016.  Management expects the effective tax rate for the fourth quarter of 2017 to be approximately 21% to 22% due to the change in accounting treatment for stock-based compensation and the vesting of awards.    The adoption of the new accounting standard for employee stock-based compensation results in excess tax benefits from stock-based compensation having a direct impact on income tax expense, and therefore lowers our effective tax rate. The impact upon our effective tax rate will vary from quarter to quarter  depending upon the Company’s share price and the number of shares vesting during the period.  For the third quarter of 2017, excess tax benefits from stock-based compensation decreased income tax expense by $0.2 million.  The Company currently estimates that vesting of restricted stock awards in the fourth quarter of 2017 will result in an additional income tax benefit of approximately $3.6 million, based on the share price at September 30, 2017.    

The Company’s effective tax rate varies from the 35% federal statutory rate primarily because of tax-exempt income and tax credits, as well as the impact from employee share based compensation as noted above. Interest income on bonds issued by or loans to state and municipal governments and authorities, and earnings from the BOLI program are the major components of tax-exempt income.  The main sources of tax credits have been investments in tax advantaged securities and tax credit projects.  These investments are made primarily in the markets the Company serves and are directed at tax credits issued under the Qualified Zone Academy Bonds (“QZAB”), Qualified School Construction Bonds (“QSCB”) and Federal and State New Markets Tax Credit (“NMTC”) programs. The investments generate tax credits, which reduce current and future taxes and are recognized when earned as a benefit in the provision for income taxes. 

The Company has invested in NMTC projects through investments in its own Community Development Entity (“CDE”), as well as, other unrelated CDEs.  These investments will generate approximately $104 million in federal and state tax credits.  Federal tax credits from NMTC investments are recognized over a seven-year period, while recognition of the benefits from state tax credits varies from three to five years.

The Company intends to continue making investments in tax credit projects and qualified bonds.  However, its ability to access new credits will depend upon, among other factors, federal and state tax policies and the level of competition for such credits.  Based on tax credit investments that have been made to date, the Company expects to realize benefits from federal and state tax credits totaling $7.8 million, $5.6 million and $3.2 million for 2018, 2019, and 2020, respectively.

The following table reconciles reported income tax expense to that computed at the statutory federal tax rate for the indicated periods.



























On November 2, 2017, the House Ways and Means Committee released a 429-page “Tax Cuts and Jobs Act of 2017” (HR 1). The bill proposes to lower business and individual tax rates, modernize US international tax rules, and simplify the tax law, with significant

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impacts on numerous sectors of the economy.  As disclosed in Part I, Item 1A. “Risk Factors” in our Annual Report on From 10-K for the year ended December 31, 2016, future changes in the tax laws could significantly impact our income tax expense, deferred tax asset balance, and the amount of taxes payable. Current proposals to decrease the federal statutory tax rate, if enacted, could result in a decrease to our deferred tax asset with a corresponding non-cash increase to income tax expense or a decrease to capital that could be material.  We may also be adversely impacted by modifications or adjustments in the determination of taxable income or utilization of tax credits.



Selected Financial Data

The following tables contain selected financial data as of the dates and for the periods indicated.  











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(a) Tax equivalent (te) amounts are calculated using a marginal federal income tax rate of 35%.

(b) The efficiency ratio is noninterest expense to total net interest (te) and noninterest income, excluding amortization of purchased intangibles and nonoperating items.

(c) The tangible common equity ratio is common stockholders’ equity less intangible assets divided by total assets less intangible assets.

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Reconciliation of reported to core net interest income (te) and core net interest margin





























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Core revenue (te) and core pre-tax, pre-provision net revenue (te)









 



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LIQUIDITY

Liquidity management is focused on ensuring that funds are available to meet the cash flow requirements of our depositors and borrowers, while also meeting the operating, capital and strategic cash flow needs of the Company, the Bank and other subsidiaries.  Hancock develops its liquidity management strategies and measures and regularly monitors liquidity risk as part of its overall asset/liability management process.

The asset portion of the balance sheet provides liquidity primarily through loan principal repayments, as well as maturities and repayments of investment securities.  Short-term investments such as federal funds sold, securities purchased under agreements to resell and interest-bearing deposits with the Federal Reserve Bank or with other commercial banks are additional sources of liquidity to meet cash flow requirements.  Free securities represent unpledged securities that can be sold or used as collateral for borrowings, and include unpledged securities assigned to short-term dealer repurchase agreements or to the Federal Reserve Bank discount window.  As shown in the table below, our ratio of free securities to total securities was 36.61% at September 30, 2017, compared to 33.57% at June 30, 2017 and 23.97% at September 30, 2016.  The total of pledged securities at September 30, 2017 was down $203.8 million compared to June 30, 2017 as collateral related to seasonal public fund tax deposits was released. Total securities at September 30, 2017 were $0.8 billion higher than at September 30, 2016.



The liability portion of the balance sheet provides liquidity mainly through the Company’s ability to use cash sourced from various customers’ interest-bearing and noninterest-bearing deposit and sweep accounts.  Core deposits consist of total deposits excluding certificates of deposits (“CDs”) of $250,000 or more and brokered deposits. The ratio of core deposits to total deposits was 91.70% at September 30, 2017, compared to 93.05% at June 30, 2017 and 93.03% at September 30, 2016. Core deposits totaled $19.7 billion at September 30, 2017, a decrease of $0.2 billion from June 30, 2017, and up $2.2 billion from September 30, 2016. The increase from September 30, 2016 was primarily due to the FNBC transactions. Brokered deposits totaled $1.1 billion as of September 30, 2017, a $0.3 billion, or 42%, increase compared to  June 30, 2017 and September 30, 2016. The Company’s use of brokered deposits as a funding source is subject to strict parameters regarding the amount, term and interest rate. 

Purchases of federal funds, securities sold under agreements to repurchase and other short-term borrowings from customers provide additional sources of liquidity to meet short-term funding requirements. Besides funding from customer sources, the Bank has a line of credit with the FHLB that is secured by blanket pledges of certain mortgage loans. At September 30, 2017, the Bank had borrowings of approximately $1.2 billion and had approximately $3.0 billion available under this line. The Bank also has unused borrowing capacity at the Federal Reserve’s discount window of approximately $2.2 billion. The Company did not have outstanding borrowings with the Federal Reserve at any date in the last twelve months.    

Wholesale funds, which are comprised of short-term borrowings and long-term debt, were 10.47% of core deposits at September 30, 2017, compared to 11.12% at June 30, 2017 and 8.76% at September 30, 2016.  The linked quarter decrease primarily related to a $0.2 million decrease in both wholesale funds and core deposits. The year over year increase was primarily due to an increase in FHLB borrowings.  FHLB borrowings totaled $1.2 billion at September 30, 2017 compared to $1.3 billion at June 30,  2017 and $0.7 billion at September 30, 2016.  The Company has established an internal target for wholesale funds to be less than 25% of core deposits.    

Another key measure the Company uses to monitor its liquidity position is the loan-to-deposit ratio (average loans outstanding for the reporting period divided by average deposits outstanding).  The loan-to-deposit ratio measures the amount of funds the Company lends out for each dollar of deposits on hand.  The Company’s loan-to-deposit ratio for the third quarter of 2017 was 87.08%, compared to 87.76%  at June 30, 2017 and 85.64% at September 30, 2016. The Company has established a target range for its loan-to-deposit ratio of 83% to 87%.

Cash generated from operations is another important source of funds to meet liquidity needs.  The consolidated statements of cash flows present operating cash flows and summarize all significant sources and uses of funds for the nine months ended September 30, 2017 and 2016. 

Dividends received from the Bank have been the primary source of funds available to the Parent Company for the payment of dividends to our stockholders and for servicing its debt.   The liquidity management process takes into account the various regulatory provisions that can limit the amount of dividends the Bank can distribute to the Parent Company.  The Parent Company maintains cash and other liquid assets to provide liquidity in an amount sufficient to fund a minimum of at least six quarters of anticipated common stockholder dividends. 

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CAPITAL RESOURCES



Stockholders’ equity totaled $2.9 billion at September 30, 2017, up $49 million, or 2% from June 30, 2017 and up $374 million, or 15%, from September 30, 2016.  The tangible common equity ratio was 7.80% at September 30, 2017, compared to 7.65% at June 30, 2017 and 7.93% at September 30, 2016. The increase in the ratio from prior quarter is due to net tangible earnings. The decline in the ratio from prior periods was due to the effect of the assets acquired in the FNBC transactions, which was partially offset by the $259 million stock issuance in the fourth quarter of 2016.  The Company has established an internal target for the tangible common equity ratio of at least 8.00%. However, management will allow the Company’s tangible common equity ratio to drop below 8.00% on a temporary basis if it believes that the shortfall can be replenished through normal operations.



The regulatory capital ratios of the Company and the Bank as of September 30, 2017 improved from June 30, 2017. While the ratios were lower in the third quarter of 2017 relative to December 31, 2016 as a result the FNBC transactions, all remain well in excess of current regulatory minimum requirements. The Company and the Bank have been categorized as “well-capitalized” in the most recent notices received from our regulators. Both entities currently exceed all capital requirements of the new Basel III requirements, including the fully phased-in conservation buffer.  Bank ratios reflect a $240 million capital contribution in the first quarter of 2017 to support the FNBC I transaction.  See the Supervision and Regulation section in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 for further discussion of the Company’s capital requirements.

The following table shows the regulatory capital ratios for the Company and the Bank as calculated under current rules for the indicated periods.





Regulatory definitions:

 













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BALANCE SHEET ANALYSIS

Securities

Investments in securities totaled $5.6 billion at September 30, 2017, up $44 million, or 1%, from June 30, 2017 and up $781 million from September 30, 2016.  At September 30, 2017, securities available for sale totaled $2.8 billion and securities held to maturity totaled $2.8 billion. 

The securities portfolio consists mainly of residential and commercial mortgage-backed securities and collateralized mortgage obligations issued or guaranteed by U.S. government agencies. The portfolio is designed to enhance liquidity while providing an acceptable rate of return.  The Company invests only in high quality investment grade securities with a targeted effective duration for the overall portfolio of between two and five years.  The effective duration calculates the price sensitivity to changes in interest rates.  At September 30, 2017, the average maturity of the portfolio was 5.57 years with an effective duration of 4.64 years and a nominal weighted-average yield of 2.36%. Management simulations indicate that the effective duration would increase to 4.90 years with a 100 bps increase in the yield curve and to 5.05 years with a 200 bps increase.  At December 31, 2016, the average maturity of the portfolio was 5.79 years with an effective duration of 5.07 years and a nominal weighted-average yield of 2.35%.  The average maturity of the portfolio at September 30, 2016 was 5.06 years, while the duration was 3.78 years, and the nominal weighted average yield was 2.28%.

Loans

Total loans at September 30, 2017 were $18.8 billion, up approximately $312 million, or 1.7%, from June 30, 2017.  Loans to energy related companies decreased $97 million as we continue to decrease our concentration.  There was commercial loan growth throughout the markets in our footprint and in our mortgage and equipment finance lines of business. 

The following table shows the composition of our loan portfolio:



Our commercial customer base is diversified over a range of industries, including energy, healthcare, wholesale and retail trade in various durable and nondurable products and the manufacture of such products, marine transportation and maritime construction, financial and professional services, and agricultural production.

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The following tables provide detail of the more significant industry concentrations for our commercial and industrial loan portfolio, which is based on NAICS codes, and property type concentrations of our commercial real estate – income producing portfolios.





(a) The Company's energy related lending portfolio includes certain balances within each of these selected industry categories as the definition is based on source of revenue.  The energy related lending portfolio totaled $1.1 billion, $1.2 billion, $1.4 billion, $1.4 billion, and $1.4 billion, at September 30, 2017, June 30, 2017, March 31, 2017, December 31, 2016,  and September 30, 2016, respectively.

(b) June 30, 2017 reflects reclassifications from the previous filing for the FNBC transactions.

At September 30, 2017, commercial and industrial (“C&I”) loans, including both non-real estate and owner occupied real estate secured loans, totaled approximately $10.2 billion, an increase of $34.0 million, or 0.3%, from June 30, 2017.  Included in C&I are $1.1 billion in energy related loans, which are comprised of credits to both the exploration and production segment and the support services segment.  Energy related loans comprised 6.0% of total loans at September 30, 2017, down from 12.4% in fourth quarter of 2014, the beginning of the downturn of the energy cycle.  Payoffs and paydowns of approximately $142 million and charge-offs of approximately $8 million were partially offset by approximately $52 million in draws on existing lines of credit.  Management has a strategic target to bring the level of energy loans to total loans to 5%.

The Bank lends mainly to middle market and smaller commercial entities, although it participates in larger shared credit loan facilities.  Shared national credits funded at September 30, 2017 totaling approximately $2.0 billion, or 11% of total loans, were down $75 million compared to June 30, 2017 and down $41 million from September 30, 2016.  Approximately $718 million of shared national credits were with energy related customers at September 30, 2017, down approximately $72 million from June 30, 2017 and down $199 million from September 30, 2016. 



Commercial real estate – income producing loans totaled approximately $2.5 billion at September 30, 2017, an increase of $110 million, or 5%, from June 30, 2017.  The majority of the increase in commercial real estate – income producing loans was related to the hotel/motel and retail property type.  The following table details commercial real estate – income producing by property types for the last five quarters.    

(a) June 30, 2017 reflects reclassifications from the previous filings for the FNBC transactions.

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Construction and land development loans, totaling approximately $1.4 billion at September 30, 2017, increased approximately $60 million from June 30, 2017.  Residential mortgages and consumer loans increased $103 million and $6 million respectively, during the third quarter of 2017.



Allowance for Loan Losses and Asset Quality

The Company's total allowance for loan losses was $223.1 million at September 30, 2017, compared to $221.9 million at June 30, 2017.  The ratio of the allowance for loan losses to period-end loans decreased 1 bp to 1.19%, compared to 1.20% at June 30, 2017.  The increase in allowance is primarily driven by higher non-energy reserves due to continued growth and diversification of that portfolio.  Energy prices improved compared the prior quarter and have remained relatively stable. Energy exposure and criticized loan levels continued to decline in all portfolios.  Management believes the allowance level for the energy portfolio, as built in previous quarters, remains adequate.

Net charge-offs from the non-purchased credit impaired loan portfolio were $11.8 million, or 0.25%, of average total loans on an annualized basis in the third quarter of 2017, up from $6.0 million, or 0.13%, of average total loans in the second quarter of 2017.  Net charge-offs to energy credits in the third quarter of 2017 totaled $3.6 million, consisting of gross charge-offs of $7.6 million, net of recoveries of $4.0 million.  There were no charges-offs related to energy credits in the second quarter of 2017.  Third quarter residential mortgage charge-offs were up $1.4 million compared to second quarter 2017 due largely to a single credit and not necessarily indicative of a portfolio trend.  Consumer loan charge-offs also increased $1.1 million compared to second quarter, however, was lower than first and fourth quarters of 2017 and 2016, respectively.

The following table provides a breakout of the Company’s allowance for loan loss for the energy portfolio, allocated by sector, as of September 30, 2017.

Management continues to closely monitor the impact that the sustained decrease in oil and natural gas prices will have on the ability of the Company’s energy related customers to service their debt.  Part of the ongoing monitoring includes a review of customers’ balance sheets, leverage ratios, collateral values and other critical lending metrics.  As previously noted, even with improving oil prices, management expects a continued lag in the recovery of energy service and support credits.  Many reserve based lending credits are showing signs of improvement given the stabilization of oil prices.  We continue to expect lagging improvement in the support sector, with the expectation for land based services to recover more quickly than drilling and non-drilling services that support offshore production.  As new information becomes available, additional risk rating downgrades could occur, which could lead to additional loan loss provisions, a higher allowance for loan losses, and additional charge-offs.  Management believes that any additional losses will be manageable and that capital will remain solid.  Based upon information currently available, management is maintaining the estimate that net charge-offs from energy related credits could approximate $65 million to $95 million over the duration of the cycle, which started in the fourth quarter of 2014.  To date, the Company has recorded approximately $68 million in energy related net charge-offs since the start of the cycle including the net charge-off of $3.6 million in the current quarter.  See Item 7 in our Annual Report on Form 10-K for the year ended December 31, 2016 for further discussion of our energy portfolio and its potential impact on the allowance for loan losses.

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The following table sets forth activity in the allowance for loan losses for the periods indicated:





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The following table sets forth nonperforming assets by type for the periods indicated, consisting of nonaccrual loans, troubled debt restructurings and foreclosed and surplus ORE and other foreclosed assets.  Loans past due 90 days or more and still accruing are also disclosed.







Nonperforming assets totaled $388 million at September 30, 2017, up $11 million, or 3%, from December 31, 2016, up $41 million, or 12%, from June 30, 2017 and up $57 million from September 30, 2016.  During the third quarter of 2017, total nonperforming loans increased approximately $38 million, and up $9 million compared to December 31, 2016. Most of the increase in nonperforming loans linked quarter was in nonenergy commercial, with approximately $13 million of the increase in the energy portfolio. ORE and other foreclosed assets increased approximately $3 million in the third quarter of 2017, due mostly to the transfer of consolidated bank-owned facilities.  Nonperforming assets as a percent of total loans, ORE and other foreclosed assets was 2.06% at September 30, 2017, up 18 bps from June 30, 2017.  This ratio was at 2.25% at December 31, 2016 and 2.06% at September 30, 2016.    

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Short-Term Investments

Short-term liquidity assets are held to ensure funds are available to meet the cash flow needs of both borrowers and depositors.  Short-term liquidity investments, including interest-bearing bank deposits and federal funds sold, were $112 million at September 30, 2017. This represents a decrease of $15 million and $17 million from June 30, 2017 and September 30, 2016, respectively.  These assets are highly volatile on a daily basis depending upon movement in customer loan and deposit accounts.  Average short-term investments of $195 million for the third quarter of 2017 were down $510 million compared to the second quarter of 2017, and down $233 million compared to the third quarter of 2016. Year-to-date average short-term investments were $435 million, a decrease of $17 million from the same period in 2016.  See the Liquidity section above for further discussion regarding the Company’s management of its short-term investment portfolio and the impact upon its liquidity in general.

Deposits

Total deposits were $21.5 billion at September 30, 2017, up $91 million, or less than 1% from June 30, 2017, and up $2.6 billion, or 14%, from September 30, 2016.  Average deposits for the third quarter of 2017 were $21.3 billion, up $417 million, or 2%, from the second quarter of 2017 and up $2.6 billion, or 14%, from the third quarter of 2016. The deposits assumed in the FNBC transactions made up $1.6 billion of the increase in both deposits and average deposits over the third quarter 2016. 



Noninterest-bearing demand deposits were $7.9 billion at September 30, 2017, up $9 million, or less than 1%, linked quarter, and $353 million, or 5%, year over year. The FNBC transactions added noninterest-bearing demand deposits of $259 million, compared to the third quarter of 2016.  Noninterest-bearing demand deposits comprised 37% of total deposits at September 30, 2017 and June 30, 2017, and 40% at September 30, 2016.  



Interest-bearing transaction and savings accounts of $7.9 billion at September 30, 2017 decreased $509 million, or 6%, compared to June 30, 2017 and $1.3 billion, or 19%, compared to September 30, 2016.  The majority of the increase over the third quarter of 2016 was related to the FNBC transactions.

Interest-bearing public fund deposits totaled $2.8 billion at September 30, 2017, down $225 million, or 9% from June 30, 2017 and up $368 million, or 15% compared to September 30, 2016.  Time deposits other than public funds totaled $3.0 billion at September 30, 2017 up $366 million from June 30, 2017, which includes an increase in brokered CD’s of $317 million.    

Short-Term Borrowings

At September 30, 2017, short-term borrowings totaled $1.7 billion, down $74 million from June 30, 2017, as FHLB borrowings decreased $28 million, and securities sold under agreements to repurchase increased $30 million.  Short-term borrowings increased $661 million from September 30, 2016, due to both an increase in the Company’s FHLB borrowings and the assumption of $511 million in short-term FHLB borrowings as part of the FNBC I transaction.  The Company used a portion of the excess liquidity acquired in the FNBC II transaction to pay down FHLB debt.    

Average quarter-to-date short-term borrowings of $1.9 billion in the third quarter of 2017 were down $323 million, or 14% compared to the second quarter of 2017, and up $543 million, or 40% compared to the third quarter of 2016.  Customer repurchase agreements and FHLB borrowings are the major sources of short-term borrowings. Customer repurchase agreements are offered mainly to commercial customers to assist them with their cash management strategies or to provide a temporary investment vehicle for their excess liquidity pending redeployment for corporate or investment purposes. While customer repurchase agreements provide a recurring source of funds to the Bank, the amounts available over time can be volatile.  FHLB borrowings are funds from the Federal Home Loan Bank that are collateralized by single family and commercial real estate loans included in the Bank’s loan portfolio, subject to specific criteria.

Long-Term Debt

At September 30, 2017, long-term debt totaled $331 million, down $77 million from June 30, 2017.  The Company was in compliance with all contractual covenants, as amended, related to long-term debt as of September 30, 2017.





OFF-BALANCE SHEET ARRANGEMENTS

Loan Commitments and Letters of Credit

In the normal course of business, the Bank enters into financial instruments, such as commitments to extend credit and letters of credit, to meet the financing needs of their customers.  Such instruments are not reflected in the accompanying consolidated financial statements until they are funded, although they expose the Bank to varying degrees of credit risk and interest rate risk in much the same way as funded loans. Under regulatory capital guidelines, the Company must include unfunded commitments meeting certain criteria in its risk-weighted capital calculation.

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Commitments to extend credit include revolving commercial credit lines, nonrevolving loan commitments issued mainly to finance the acquisition and development or construction of real property or equipment, and credit card and personal credit lines.  The availability of funds under commercial credit lines and loan commitments generally depends on whether the borrower continues to meet credit standards established in the underlying contract and has not violated other contractual conditions.  Loan commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee by the borrower.  Credit card and personal credit lines are generally subject to cancellation if the borrower’s credit quality deteriorates.  A number of commercial and personal credit lines are used only partially or, in some cases, not at all before they expire, and the total commitment amounts do not necessarily represent future cash requirements of the Company.

A substantial majority of the letters of credit are standby agreements that obligate the Bank to fulfill a customer’s financial commitments to a third party if the customer is unable to perform.  The Bank issues standby letters of credit primarily to provide credit enhancement to its customers’ other commercial or public financing arrangements and to help them demonstrate financial capacity to vendors of essential goods and services. 

The contract amounts of these instruments reflect the Company's exposure to credit risk.  The Company undertakes the same credit evaluation in making loan commitments and assuming conditional obligations as it does for on-balance sheet instruments and may require collateral or other credit support. 

The following table shows the commitments to extend credit and letters of credit at September 30, 2017 according to expiration date. 







 

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

There were no material changes or developments with respect to methodologies that the Company uses when applying what management believes are critical accounting policies and developing critical accounting estimates as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2016. 

The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America and with those generally practiced within the banking industry which require management to make estimates and assumptions about future events.  We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, and the resulting estimates form the basis for making judgments about the carrying values of certain assets and liabilities not readily apparent from other sources.  Actual results could differ significantly from those estimates.



  

NEW ACCOUNTING PRONOUNCEMENTS

See Note 14 to our Consolidated Financial Statements included elsewhere in this report.  

  

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

Our net income is materially dependent on net interest income.  The Company’s primary market risk is interest rate risk which stems from uncertainty with respect to absolute and relative levels of future market interest rates that affect our financial products and services.  In order to manage the exposures to interest rate risk, management measures the sensitivity of net interest income and cash flows under various market interest rate scenarios, establishes interest rate risk management policies and implements asset/liability management strategies designed to produce a relatively stable net interest margin under varying rate environments.

The Company measures its interest rate sensitivity primarily by running various net interest income simulations.  The Company’s balance sheet is asset sensitive over a two-year period due to a larger volume of rate sensitive assets than rate sensitive liabilities.  The model measures annual net interest income sensitivity relative to a base case scenario and incorporates assumptions regarding balance sheet growth and the mix of earning assets and funding sources as well as pricing, repricing and maturity characteristics of the existing and projected balance sheet. 

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The table below presents the results of simulations run as of September 30, 2017 for year 1 and year 2, assuming the indicated instantaneous and sustained parallel shift in the yield curve at the measurement date. The results demonstrate an increase in net interest income as rates rise and a decline should rates fall as compared to the stable rate environment assumed for the base case.





Note: Decrease in interest rates limited to 100 basis points in the current rate environment

The foregoing disclosures related to our market risk should be read in conjunction with our audited consolidated financial statements, related notes and management’s discussion and analysis for the year ended December 31, 2016 included in our Annual Report on Form 10-K for the year ended December 31, 2016.

 

Item 4. Controls and Procedures

In connection with the preparation of this Quarterly Report on Form 10-Q, an evaluation was carried out by the Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act).  Disclosure controls and procedures are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of September 30, 2017, the Company’s disclosure controls and procedures were effective.

Our management, including the Chief Executive Officer and Chief Financial Officer, identified no change in our internal control over financial reporting that occurred during the three month period ended September 30, 2017, that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.



PART II.  OTHER INFORMATION

Item 1.   Legal Proceedings

The Company, including subsidiaries, is party to various legal proceedings arising in the ordinary course of business.  We do not believe that loss contingencies, if any, arising from pending litigation and regulatory matters will have a material adverse effect on our consolidated financial position or liquidity.

Item 1A.  Risk Factors

There were no changes to the risk factors that were previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2016. 

The risks described may not be the only risks facing us.  Additional risks and uncertainties not currently known to us or that are currently considered to not be material also may materially adversely affect our business, financial condition, and/or operating results.

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

None.









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Item 6.  Exhibits

(a)  Exhibits:













































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SIGNATURES



Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.





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