Hancock Whitney Corporation — Q2 2022 Form 10-Q
Business context and reporting period. Hancock Whitney is a regional bank holding company. This unaudited filing covers the quarter and six months ended June 30, 2022; comparisons are primarily with Q2 and the first six months of 2021, and with March 31, 2022 for balance-sheet trends. Dollar amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q2 2022 / June 30, 2022 | Comparison |
|---|---|---|
| Net income | $121.4 million; diluted EPS $1.38 | Net income rose 37% from $88.7 million in Q2 2021; declined from $123.5 million and $1.40 per diluted share in Q1 2022 |
| Net interest income | $245.7 million GAAP; $248.3 million taxable-equivalent (TE) | TE income rose 5% year over year and 7% sequentially |
| Net interest margin | 3.04% TE | Up 8 basis points year over year and 23 basis points sequentially; first-half margin was 2.92%, down 10 basis points year over year |
| Noninterest income / expense | $85.7 million / $187.1 million | Income down 9% year over year; expense down 21%, but Q2 2021 expense included $45.0 million of nonoperating items |
| Loans / deposits | $21.85 billion / $29.87 billion | Loans rose 3% from June 2021 and 2% sequentially; deposits rose 2% year over year but fell 2% sequentially |
| Allowance for credit losses | $339.5 million; 1.55% of loans | Down from $429.2 million and 2.03% at June 2021 |
| Capital and equity | Stockholders’ equity $3.35 billion; CET1 ratio 11.08%; tangible common equity ratio 7.21% | Equity fell from $3.67 billion at year-end 2021, primarily reflecting accumulated other comprehensive loss |
For the six months, net income was $244.9 million versus $195.9 million a year earlier, while diluted EPS was $2.78 versus $2.20. Operating pre-provision net revenue, a non-GAAP measure, was $146.9 million in Q2, up 9% sequentially; the efficiency ratio was 54.95%, meeting management’s 55% target ahead of schedule.
Cash flow and liquidity. For the first six months, operating cash flow was $486.8 million, investing cash flow was positive $1.55 billion, and financing cash flow was negative $1.74 billion. Cash and due from banks ended at $698.3 million. Management reported $19.9 billion of net available liquidity, including $5.3 billion of free securities and substantial FHLB and Federal Reserve borrowing capacity. The average Q2 loan-to-deposit ratio was 72.24%.
Debt and funding. Short-term borrowings were $630.0 million, down from $1.67 billion at year-end 2021, largely after repayment of $900 million in FHLB advances. Long-term debt was $240.1 million, including $172.5 million of 6.25% subordinated notes due in 2060. Deposits were 99% core deposits; wholesale funds were 2.97% of core deposits.
Material changes and notable items
- Core loans (excluding PPP loans) grew strongly: management reported $706.2 million of linked-quarter growth, or 13% annualized. Total loans increased less because PPP balances declined with forgiveness.
- Q2’s negative provision for credit losses was $9.8 million, comprising a $9.1 million reserve release and $0.7 million of net recoveries. Management reported improving asset quality, including nonperforming assets of 0.20% of loans and foreclosed assets.
- Noninterest income was pressured by lower mortgage banking activity: secondary mortgage market income fell 76% year over year in Q2. Bank card fees, trust fees and deposit service charges increased year over year.
- The company reported a $473.2 million after-tax other comprehensive loss for the first half, chiefly from fair-value declines in available-for-sale securities and cash-flow hedges. AOCI was a loss of $527.2 million at June 30, versus a loss of $53.9 million at year-end 2021. The company transferred $561.8 million of securities from available-for-sale to held-to-maturity during the first half.
- The company repurchased 1.15 million shares for $56.5 million during the first half and paid $0.54 per share in dividends. Q2’s repurchases were 804,368 shares at an average $47.24 per share.
- Q2 2021 included $45.0 million of nonoperating expense, including VERIP and other efficiency costs, facility impairment, severance and a subordinated-debt redemption loss. Q2 2021 noninterest income also included a $2.8 million Mastercard share-sale gain. No nonoperating items were reported for Q2 2022.
Outlook, commentary and risks
- Management expected 2022 core loan growth of 6%–8%, potentially nearer 8%; deposits were expected to be flat to slightly down from year-end 2021, with seasonal fourth-quarter growth.
- Management expected full-year noninterest income, excluding nonoperating items, to decline 1%–3% from 2021, with the current expectation nearer 3%. Operating noninterest expense was expected to decline 1%–3%, with the current expectation nearer 1%.
- Management expected a 19%–21% effective tax rate for 2022, absent tax-law changes. It did not anticipate further reserve releases and expected zero or low credit-loss provisions for the remainder of 2022.
- Management anticipated further NIM expansion as rates rose, noting July 2022 monthly NIM of 3.42% versus 3.24% in June. Its interest-rate model estimated that an immediate parallel 100-basis-point increase would raise net interest income by 5.61% in year one and 8.36% in year two; a 100-basis-point decrease would reduce it by 6.34% and 9.26%, respectively. These are model estimates, not guidance.
- Management’s credit-loss forecast assigned 75% probability to a downside scenario featuring a mild two-quarter recession in the second half of 2022, greater inflation and supply-chain disruption, and unemployment peaking at 6.5% in mid-2023. The baseline forecast instead assumed GDP growth of 2.7% in 2022 and 2.6% in 2023.
- Key risks include inflation, rate changes, recession, geopolitical and supply-chain disruption, deposit competition and outflows, credit deterioration, mortgage-market slowing, and execution of the LIBOR transition. About 26% of loans excluding PPP were still tied to LIBOR at quarter-end. The company said failure to manage the transition could materially adversely affect results.
- The filing says ordinary-course litigation and regulatory matters were not expected to materially adversely affect consolidated financial position or liquidity. Management concluded disclosure controls were effective as of June 30, 2022.
Important facts for investors to verify
- Whether NIM expansion and core loan growth continue as deposit costs rise and the rate environment changes.
- Whether the stated loan, deposit, revenue, expense and credit-loss outlooks were achieved, and how mortgage-market weakness affects fee income.
- How the large securities-related AOCI loss affects book value, capital measures and flexibility, including the impact of securities held to maturity and pledged securities.
- Whether asset quality and reserve adequacy remain resilient under weaker economic conditions; review commercial criticized loans, nonperforming assets and charge-offs.
- Whether LIBOR-linked exposures transition successfully, and whether deposit outflows or borrowing needs change liquidity and funding costs.