Hancock Whitney Corporation — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. Hancock Whitney is a financial holding company whose banking operations are conducted through Hancock Whitney Bank.
Financial results and position
- Earnings: Net income was $123.5 million, or $1.40 per diluted share, versus $107.2 million, or $1.21, in Q1 2021. Return on average assets was 1.39%; return on average common equity was 13.88%.
- Revenue and margin: Net interest income was $228.5 million, down 2.6% year over year; on a taxable-equivalent basis it was $231.0 million, down 3%. Net interest margin was 2.81%, versus 3.09%. Noninterest income was $83.4 million, down 4%; total noninterest expense was $179.9 million, down 7%. The efficiency ratio was 56.03%.
- Credit costs and quality: The company recorded a $22.5 million negative provision for credit losses, including a $22.8 million reserve release and $0.3 million in net charge-offs. Allowance for credit losses was $348.6 million, or 1.63% of loans (1.66% excluding PPP loans). Nonperforming assets were $51.7 million, or 0.24% of loans and foreclosed assets; nonperforming loans and criticized commercial loans declined from year-end.
- Balance sheet: Total assets were $36.3 billion; loans were $21.3 billion, up 1% from year-end, including $385.3 million of core loan growth partly offset by $196.2 million of PPP loan runoff. Deposits were $30.5 billion, essentially flat from year-end, with noninterest-bearing deposits up $583.9 million and interest-bearing deposits down $550.1 million.
- Funding, debt, and liquidity: Short-term borrowings were $1.62 billion and long-term debt was $240.5 million. The company reported $21.4 billion of net available liquidity sources. The average loan-to-deposit ratio was 70.34%. Cash and due from banks was $703.4 million at quarter-end.
- Capital and cash flow: Stockholders’ equity was $3.45 billion, down from $3.67 billion at year-end, largely due to a $305.3 million after-tax other comprehensive loss, principally reflecting securities valuation changes. CET1 was 11.12%; tangible common equity was 7.15%. Operating cash flow was $280.5 million; cash and due from banks increased $302.2 million during the quarter.
Material changes and notable items
- Compared with Q1 2021, net income increased 15%, while net interest income and noninterest income declined. Lower expenses and the much smaller provision for credit losses supported earnings.
- Core loans grew during the quarter, while PPP loans continued to run off. Year over year, total loans declined 2%, as $2.0 billion of PPP runoff more than offset $1.7 billion of core loan growth.
- Rising interest rates contributed to significant unrealized securities losses: AFS securities had $395.7 million of gross unrealized losses at March 31. The company transferred $561.8 million of securities from AFS to held-to-maturity during the quarter; the transfer does not remove the associated unrealized loss from equity.
- The company repurchased 350,000 shares for $18.5 million and declared a $0.27-per-share dividend. It reported no nonoperating items in Q1 2022; Q1 2021 also had none.
Outlook, management commentary, and risks
- Management expects core loan growth of 6%–8% for 2022, with most remaining PPP loans expected to be forgiven by the end of Q2. It expects deposits to be flat to slightly down from year-end.
- Management expects net interest margin to widen during the remainder of 2022, citing anticipated Federal Reserve rate increases and deployment of excess liquidity into higher-yielding assets. Its stated forecast assumes continued management of the asset/liability mix.
- Management expects 2022 fee income, excluding nonoperating items, to decline 1%–3% from 2021, and operating expense to decline approximately 2%–3%. It targets a 55% efficiency ratio by Q4 2022 or possibly sooner. The expected 2022 effective tax rate is 19%–21%, absent tax-law changes.
- The company plans to eliminate consumer NSF fees and certain overdraft fees by year-end 2022, estimating an annual fee-income impact of $10–$11 million and an average reduction of $2–$3 million per quarter in 2023. It anticipates potential account-acquisition benefits in 2023.
- Management weighted a downside slower-growth economic scenario at 60% and the baseline at 40% for credit-loss estimates. Cited uncertainties include inflation, supply-chain disruption, labor shortages, the Russia-Ukraine conflict, COVID-19 effects, interest-rate changes, credit performance, and mortgage-market slowdown. Management expects reserve releases to taper over coming quarters.
- Other disclosed risks include interest-rate and securities valuation exposure, LIBOR transition, cybersecurity and third-party risks, regulatory and litigation matters, and possible effects of economic or geopolitical disruption. Management said pending legal and regulatory matters were not expected to materially affect consolidated financial position or liquidity.
Important facts for investors to verify
- Whether loan growth, deposit trends, and margin expansion develop in line with management’s 2022 expectations.
- How securities marks and further interest-rate movements affect AOCI, tangible common equity, and capital.
- Whether asset quality remains strong and reserve releases taper as management expects, particularly under downside economic conditions.
- The realized fee-income effects of consumer overdraft and NSF fee changes, and the expected expense and efficiency improvements.
- Execution of the LIBOR transition and management of the company’s substantial off-balance-sheet credit commitments.