Hancock Whitney Corporation — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. The company is a regional bank holding company operating through Hancock Whitney Bank. It changed its name from Hancock Holding Company on May 25, 2018; its ticker changed from HBHC to HWC. Unless stated otherwise, amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q2 2018 | Comparison |
|---|---|---|
| Net income | $71.2 million; diluted EPS $0.82 | $52.3 million and $0.60 per share in Q2 2017; $72.5 million and $0.83 per share in Q1 2018 |
| Net interest income | $211.5 million GAAP; $215.6 million taxable-equivalent | Taxable-equivalent amount up 3% from Q1 2018 and 4% from Q2 2017 |
| Net interest margin | 3.40% taxable-equivalent; 3.31% core | Reported margin up 3 basis points sequentially and down 3 basis points year over year; core margin up 5 basis points sequentially |
| Noninterest income / expense | $68.8 million / $184.4 million | Expense includes $15.8 million of nonoperating items |
| Credit costs | $8.9 million provision; $5.1 million net charge-offs | Provision was $15.0 million in Q2 2017; net charge-offs were $12.2 million in Q1 2018 |
| Operating metrics | Efficiency ratio 57.4%; ROA 1.04%; operating diluted EPS $0.96 | Operating EPS was $0.90 in Q1 2018 and $0.68 in Q2 2017; these are company-defined non-GAAP measures |
For the first six months, net income was $143.7 million versus $101.3 million in 2017. Taxable-equivalent net interest income was $425.3 million, up 7%; provision for loan losses was $21.1 million versus $30.9 million. Cash dividends were $0.24 per share for Q2.
- Balance sheet at June 30: Total assets $27.9 billion; loans $19.4 billion; deposits $22.2 billion; stockholders’ equity $2.93 billion.
- Funding and debt: Short-term borrowings were $2.31 billion, up $610 million from year-end, while long-term debt was $266 million. Deposits were nearly unchanged from year-end. The company cited increased FHLB borrowings and brokered deposits as drivers of higher wholesale funding.
- Liquidity: Cash, interest-bearing bank deposits and federal funds sold totaled about $459 million. Free securities were 49.31% of total securities. The Bank reported $2.7 billion of available FHLB borrowing capacity and about $2.2 billion of unused Federal Reserve discount-window capacity.
- Capital: Tangible common equity ratio was 7.76%, below management’s 8.00% internal target. Company and Bank regulatory capital ratios remained above minimums, and both were classified as well-capitalized. A board-authorized buyback of up to approximately 4.3 million shares had not been used by quarter-end.
- Cash flows, first half: Operating activities provided $220.2 million; investing activities used $765.4 million; financing activities provided $513.4 million. Cash and due from banks decreased $31.9 million to $355.1 million.
Material changes and notable items
- Loans grew 5% year over year to $19.4 billion. Management cited growth in several commercial and consumer categories, while energy-related loans declined.
- Nonperforming assets were $416.5 million, down $51.8 million from Q1 but up $15.7 million from year-end 2017. Criticized commercial loans fell $187 million, or 17%, sequentially. The allowance for loan losses was $214.5 million, or 1.11% of period-end loans.
- Energy-related loans totaled approximately $984 million, or 5.1% of loans. Energy criticized loans were $408 million, about 46% of that portfolio. Management estimated cumulative energy net charge-offs over the downturn could reach $95 million; approximately $79 million had been recorded to date.
- Accumulated other comprehensive loss widened to $203.2 million from $134.4 million at year-end, primarily reflecting unrealized losses on securities and cash-flow hedges. First-half other comprehensive loss, net of tax, was $68.8 million.
- The company sold consumer finance subsidiary Harrison Finance Company in March, receiving approximately $78.9 million cash and recording a $1.1 million loss. Q2 nonoperating expenses included $9.8 million for brand consolidation, $1.5 million for the Capital One transaction, and a $3.2 million charge related to restructuring certain bank-owned life insurance contracts.
- After quarter-end, on July 13, 2018, the company acquired Capital One’s bank-managed investment management and trust business. It added $4 billion of assets under management and $10.4 billion of assets under management and administration, and assumed approximately $217 million of customer deposits.
Outlook, risks and contingencies
- Management expected Q3 end-of-period loan growth of approximately $250–$300 million and full-year 2018 end-of-period loan growth of 5%–6%. No specific earnings or margin guidance is provided in the filing text.
- Management described the regional economy as expanding solidly to modestly, while noting uncertainty around trade tariffs, labor availability, energy-sector constraints and interest-rate effects on loan demand.
- The company is asset-sensitive in its interest-rate simulations: a 100-basis-point rise was estimated to increase net interest income by 1.98% in year one and 2.49% in year two; a 100-basis-point decline was estimated to reduce it by 1.24% and 1.69%, respectively. Results depend on model assumptions.
- Key disclosed risks include energy credit performance, deposit and wholesale-funding trends, interest rates and net interest margin, acquisition integration, cyberattacks and operational disruptions, regulatory requirements, and possible effects of tax reform. Management stated that pending legal and regulatory matters were not expected to materially affect financial position or liquidity.
- The company was preparing for CECL, effective for it after December 15, 2019, and expected adoption to increase credit-loss allowances; the amount was not yet quantified. Management also expected the new lease standard to increase reported lease assets and liabilities, with the extent still under evaluation.
Important facts for investors to verify
- Whether projected loan growth is achieved and how loan growth, deposit mix, brokered deposits and FHLB borrowing affect funding costs and margins.
- Whether energy and nonenergy credit quality continues to improve, and how criticized loans, nonperforming assets, charge-offs and allowance coverage develop against management’s estimates.
- How much of reported earnings growth depends on non-GAAP adjustments and whether Q2’s nonoperating costs recur as branding and acquisition integration proceed.
- The realized effects of the Capital One trust-business acquisition and the HFC divestiture, including integration costs and contribution to fee revenue.
- Potential impacts of CECL, lease-accounting adoption, securities valuation changes and the tangible common equity ratio relative to management’s internal target.