Hancock Whitney Corporation — Q3 2018 Form 10-Q
Business context and reporting period. Regional bank holding company; quarter ended September 30, 2018. The company changed its name from Hancock Holding Company to Hancock Whitney Corporation in May 2018. Financial amounts below are in U.S. dollars; “9M” means the nine months ended September 30. Comparisons are year over year unless stated otherwise.
Key financial results
| Metric | Q3 2018 | Comparable period | Change |
|---|---|---|---|
| Net interest income (GAAP) | $214.2 million | $202.9 million, Q3 2017 | +5.6% |
| Net interest income, taxable-equivalent basis | $218.3 million | $211.4 million, Q3 2017 | +3% |
| Noninterest income | $75.5 million | $67.1 million, Q3 2017 | +13% |
| Net income | $83.9 million | $58.9 million, Q3 2017 | +42% |
| Diluted EPS | $0.96 | $0.68, Q3 2017 | +$0.28 |
| Net interest margin, taxable-equivalent basis | 3.36% | 3.44%, Q3 2017; 3.40%, Q2 2018 | Down 8 bps YoY and 4 bps sequentially |
For 9M 2018, net income was $227.5 million versus $160.2 million; diluted EPS was $2.61 versus $1.85. Taxable-equivalent net interest income was $643.5 million, up 6%. The reported effective tax rate was 17.5% for Q3 and approximately 18.0% for 9M.
Balance sheet, liquidity and credit
- At September 30, 2018, assets were $28.1 billion, loans $19.5 billion, deposits $22.4 billion and stockholders’ equity $3.0 billion. Compared with December 31, 2017, loans rose about 3%, deposits less than 1%, and assets about 3%.
- Short-term borrowings were $2.28 billion and long-term debt $216 million. Short-term borrowings increased about $573 million from year-end; long-term debt declined about $90 million. The company repaid a $50 million parent-company term loan early in Q3.
- Operating cash flow for 9M was $330.1 million, compared with $505.1 million in 9M 2017. Investing cash outflow was $745.3 million and financing cash inflow was $367.9 million. Cash and due from banks ended the period at $339.6 million.
- Management reported adequate liquidity. Core deposits were 89.7% of total deposits; wholesale funding was 19.3% of core deposits, below the company’s internal ceiling of 25%. The bank had approximately $2.8 billion available under its FHLB line and $2.3 billion of unused Federal Reserve discount-window capacity.
- Regulatory capital ratios remained above “well-capitalized” thresholds. The company’s total capital ratio was 11.98% and its Tier 1 leverage ratio 8.50%. Tangible common equity was 7.67%, below management’s 8.00% internal target.
- Asset quality improved in several measures: nonaccrual loans were $201.6 million, down from $252.8 million at year-end; nonperforming assets were $391.3 million, down from $400.8 million. The allowance for loan losses was $214.6 million, or 1.10% of loans. Q3 net charge-offs were $6.9 million, or 0.14% of average loans annualized.
Material changes and unusual items
- Q3 earnings included $4.8 million of nonoperating items, primarily acquisition-related. Reported diluted EPS was $0.96; management’s non-GAAP operating diluted EPS was $1.01. The filing reports Q3 2017 nonoperating items of $11.4 million.
- The July 2018 Capital One trust and asset-management business acquisition added $4 billion of assets under management and $10.4 billion of assets under management and administration. It contributed approximately $5.5 million of Q3 trust fees and involved approximately $217 million of assumed customer deposits. Preliminary goodwill recorded was $45.6 million; final settlement was expected in Q1 2019.
- The company sold Harrison Finance Company in March 2018, recording a $1.1 million loss. The business had $95 million in loans at year-end 2017.
- Q3 net interest margin faced higher funding costs: management cited an 11-basis-point increase in cost of funds, deposit repricing and greater use of higher-cost FHLB advances. Average loan yields improved, but did not offset funding pressure.
- Accumulated other comprehensive loss widened to $220.2 million from $134.4 million at year-end, primarily reflecting unrealized losses on available-for-sale securities and cash-flow hedges. Management attributed securities losses mainly to market-rate changes, classified them as temporary, and stated it did not intend or expect to need to sell before recovery.
Outlook, management commentary and risks
- Management expected Q4 2018 net loan growth of $200–$225 million, while anticipating a slight slowdown in loan production. It expected seasonal deposits to improve funding mix and the September rate increase to benefit loan yields.
- Management projected an effective tax rate of 8%–10% for Q4 and 15%–17% for full-year 2018, including an estimated $9–$11 million additional tax benefit from year-end share vesting and tax strategies. These estimates were conditional and could change.
- Energy loans were $927 million, 4.7% of total loans, down from $1.055 billion at year-end 2017. There were no Q3 energy charge-offs. Management estimated cumulative energy net charge-offs could reach $95 million over the cycle; approximately $79 million had been recorded through Q3. It noted $357 million of criticized energy loans and $71 million of energy loans more than 30 days delinquent.
- Management said the tangible common equity ratio was expected to return to its internal target range in the first half of 2019. It also authorized buybacks of up to approximately 4.3 million shares through December 31, 2019; none had been repurchased by September 30.
- Principal risks discussed include interest-rate and deposit-cost pressure, credit quality and energy exposures, economic and trade uncertainty, acquisition integration, regulatory requirements, and cybersecurity or operational disruption. Management stated pending litigation and regulatory matters were not expected to materially harm financial position or liquidity.
- The company had not quantified the effect of adopting CECL, but expected it to increase credit-loss allowances; implementation was underway, with software implementation expected to be completed in Q2 2019.
Most important facts for investors to verify
- Whether deposit costs and wholesale funding stabilize enough to support net interest margin, which declined sequentially and year over year.
- Whether projected Q4 loan growth materializes and whether core deposit growth reduces reliance on borrowings and brokered deposits.
- Trends in criticized, delinquent and nonperforming energy credits, and whether ultimate energy charge-offs remain within management’s estimate.
- The final Capital One acquisition settlement, integration costs, realized fee growth and resulting capital impact.
- Whether the projected tax benefits and effective tax rates are achieved, and the eventual CECL allowance increase and tangible-capital recovery.