Hancock Whitney Corporation — FY2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; includes fourth-quarter results. Hancock Whitney Corporation is a Gulf South regional financial services company. It changed its name from Hancock Holding Company in May 2018. Figures below are U.S. dollars; “bn” and “mm” denote billions and millions.
Financial performance and position
- Earnings: Net income was $323.8mm, up 50% from $215.6mm in 2017; diluted EPS was $3.72 versus $2.48. Operating earnings, a company-defined non-GAAP measure, were $347.3mm and operating diluted EPS was $3.99. The 2017 comparison included a $19.5mm deferred-tax remeasurement charge.
- Revenue and expenses: Net interest income was $848.8mm, up 7%; on a taxable-equivalent basis it was $865.0mm, up 5%. Noninterest income was $285.1mm, up 6%, while noninterest expense rose 3% to $715.7mm. The efficiency ratio improved to 57.77% from 58.87%.
- Margins and returns: Taxable-equivalent net interest margin declined 5 basis points to 3.38% for the year, as funding costs rose faster than asset yields. Return on average assets increased to 1.17% from 0.82%; return on average common equity was 11.04% versus 7.68%.
- Credit: Provision for loan losses fell to $36.1mm from $59.0mm. Net charge-offs were $52.3mm, or 0.27% of average loans, versus $68.6mm, or 0.38%. Nonperforming assets declined to $352.6mm from $400.8mm; the allowance was $194.5mm, 0.97% of period-end loans, compared with $217.3mm, or 1.14%.
- Balance sheet and funding: Total assets were $28.2bn, loans $20.0bn and deposits $23.2bn at year-end. Loans grew 5% and deposits 4% year over year. Noninterest-bearing deposits were $8.5bn, about 36.7% of deposits. Brokered deposits increased to $1.23bn, about 5% of deposits.
- Debt and liquidity: Short-term borrowings were $1.59bn and long-term debt $225mm. The bank had $3.1bn of remaining FHLB borrowing capacity and approximately $2.5bn of unused Federal Reserve discount-window capacity. Free securities were 41.39% of total securities; the average loan-to-deposit ratio was 87.42%.
- Capital: Stockholders’ equity was $3.08bn. The tangible common equity ratio was 8.02%, up from 7.73%. The Company’s CET1 and total risk-based capital ratios were 10.48% and 11.99%; the Bank’s were 10.32% and 11.17%. Both were reported above applicable well-capitalized standards.
- Cash flows: Operating cash flow was $449.2mm; investing cash flow was negative $846.9mm and financing cash flow was positive $394.1mm. Cash and due from banks decreased $3.6mm to $383.4mm.
Material changes and unusual items
- Acquired Capital One’s bank-managed trust and asset-management business in July 2018. Trust fees rose 25% to $55.5mm; year-end trust assets under administration were approximately $23.6bn, versus $15.5bn a year earlier. The acquisition added $45.4mm of goodwill in the preliminary accounting.
- Sold consumer finance subsidiary Harrison Finance Company in March 2018, recording a $1.1mm loss on sale.
- Fourth-quarter portfolio restructuring included a $33.2mm gain from selling Visa Class B shares, offset by $25.5mm of securities-sale losses and $7.1mm of loan-sale losses. Management said the restructuring was expected to benefit 2019 net interest margin by 7 basis points.
- Fourth-quarter net income was $96.2mm, or $1.10 per diluted share. Net interest margin rose to 3.39% from 3.36% in the prior quarter. Quarterly net charge-offs increased to $28.1mm, or an annualized 0.56% of average loans, primarily due to two commercial relationships.
- Year-end energy loans were $1.1bn, or 5.3% of total loans, down from 12.4% at year-end 2014. Criticized commercial loans fell 42% to $626mm, though energy and Gulf Coast exposures remain relevant credit risks.
Outlook, risks and contingencies
- Management described the 2019 economic outlook as positive but less optimistic than a year earlier, citing trade and political uncertainty and commodity-price volatility. It expected full-year average loan growth in the mid-single digits and forecast a 17%–19% effective tax rate for 2019.
- Management expected first-quarter 2019 period-end loan growth of approximately $200mm–$250mm, citing seasonality. It anticipated continued improvement in problem credits, assuming no significant economic changes, while noting TDR balances may remain elevated.
- Interest-rate sensitivity modeling indicated estimated net interest income would increase 3.12% in year one with a 100-basis-point rate increase, but decrease 3.97% with a 100-basis-point decline. Actual results may differ from model assumptions. Rising deposit costs, LIBOR transition, credit concentrations (including energy, real estate and healthcare), and Gulf Coast hurricanes are identified risks.
- CECL was scheduled for adoption in 2020. The Company had not quantified the impact but expected an increase in the allowance for credit losses and possible pressure on earnings and capital.
- Subsequent event: A borrower, DC Solar, filed for Chapter 11 in February 2019. The Company disclosed allegations that the borrower may have operated a Ponzi-type scheme and that assets or lease revenues may not have existed. Potential loss exposure was up to $11mm, which could result in an allowance charge.
- Management said ordinary-course legal proceedings were not expected to materially affect consolidated financial position or liquidity. PwC issued unqualified opinions on the financial statements and internal control over financial reporting; management concluded controls were effective.
Important facts for investors to verify
- Whether loan growth, lower criticized balances and improved credit metrics persist, particularly in energy and other commercial portfolios; track charge-offs, TDRs and allowance coverage.
- Whether rising deposit and wholesale funding costs pressure net interest margin, and whether the fourth-quarter restructuring delivers the stated 2019 benefit.
- The eventual credit and allowance impact, if any, from the DC Solar exposure and subsequent bankruptcy developments.
- The effect of CECL adoption on reserves and regulatory capital, and the Company’s progress in its implementation.
- Whether the Capital One trust acquisition integrates as planned and contributes durable fee revenue without costs exceeding expectations.