Business context and reporting period
Hancock Whitney Corporation’s Form 10-K reports the fiscal year ended December 31, 2022; it is an annual filing, with selected fourth-quarter results also disclosed. The company is a Gulf South regional bank holding company operating through Hancock Whitney Bank and related businesses. At year-end, it had $35.2 billion in assets, $23.1 billion in loans, $29.1 billion in deposits, 177 banking locations and 226 ATMs.
Financial performance and condition
- Earnings: 2022 net income was $524.1 million, or $5.98 per diluted share, versus $463.2 million, or $5.22, in 2021. Return on average assets was 1.49%, up from 1.32%; return on average common equity was 15.39%, up from 13.07%.
- Revenue and margins: Taxable-equivalent net interest income rose 12% to $1.06 billion. Net interest margin expanded 31 basis points to 3.26%, reflecting higher rates and a shift from excess liquidity to loans. Noninterest income declined 9% to $331.5 million, including a sharp reduction in secondary mortgage income. The efficiency ratio improved to 52.93% from 57.29%.
- Credit costs and quality: The company recorded a $28.4 million negative provision for credit losses, versus a $77.5 million negative provision in 2021. Net charge-offs fell to $1.9 million, or 0.01% of average loans, from $31.2 million, or 0.15%. Nonperforming assets declined 36% to $42.9 million. The $341.1 million allowance for credit losses equaled 1.48% of loans, down from 1.76%.
- Balance sheet and deposits: Loans increased 9% to $23.1 billion, including $2.5 billion of core loan growth, partly offset by $492 million of PPP loan forgiveness. Deposits fell 5% to $29.1 billion; noninterest-bearing deposits were 47% of deposits. Commercial real estate construction and land development loans grew 39% to $1.7 billion. Estimated uninsured deposits were $14.7 billion.
- Liquidity, debt and capital: Management reported $17.9 billion of net available funding sources. Year-end short-term borrowings were $1.87 billion, including a $1.425 billion FHLB advance that matured January 3, 2023; long-term debt was $242.1 million, including $172.5 million of 6.25% subordinated notes due 2060. CET1 was 11.41%, and the leverage ratio was 9.53%; the company and bank were reported well capitalized. The common dividend was $1.08 per share for 2022.
- Cash flow and equity: Operating cash flow was $842.0 million, investing cash flow was positive $662.4 million and financing cash flow was negative $1.34 billion; cash and due from banks increased $163.3 million. Stockholders’ equity fell $327.7 million to $3.34 billion, mainly reflecting a $718.2 million after-tax other comprehensive loss, largely from securities and hedging valuation changes. Tangible common equity was 7.09%, down from 7.71%.
- Fourth quarter: Net income was $143.8 million, or $1.65 per diluted share, versus $137.7 million, or $1.55, in fourth-quarter 2021. Quarterly net interest margin rose to 3.68%; loans increased $528 million from the prior quarter.
Material changes versus 2021
- Higher rates and improved earning-asset mix lifted annual net interest income and margin, while interest expense rose to $87.1 million from $49.0 million as funding costs increased.
- Average excess short-term investments declined, and the company redeployed liquidity into loans. Year-end deposits decreased 5%, with reported pressure from higher customer spending and deposit competition.
- Noninterest expense fell 7% to $750.7 million. However, 2021 included $46.9 million of nonoperating expenses, including efficiency initiatives, branch consolidation, Hurricane Ida costs and debt redemption costs; excluding nonoperating items, 2022 operating expense declined about 1%.
- The company transferred $561.8 million of available-for-sale securities to held-to-maturity during 2022. At year-end, available-for-sale securities had $756.5 million of gross unrealized losses; held-to-maturity securities had $237.9 million. Management characterized the losses as non-credit-related and said it did not expect to need to sell securities before recovery.
Outlook, risks and unusual items
- Management forecast 2023 loan growth in the low-to-mid-single digits and deposits relatively flat or slightly higher than year-end 2022. It expected noninterest income to rise 3%–4%, despite an estimated $10–$11 million annual reduction from eliminating certain consumer NSF and overdraft fees.
- Management expected 2023 noninterest expense to increase approximately 6%–7% (4%–5% excluding higher pension and FDIC assessment costs), and an effective tax rate of about 21%. It expected low-to-modest charge-offs and provision in first-quarter 2023. Management expected the rate environment to support near-term net interest income, but at a slower pace than in 2022 and subject to funding costs.
- For its year-end credit-loss estimate, management weighted a recessionary downside scenario at 75% and the baseline at 25%. Management cited inflation, higher rates, deposit competition and recession uncertainty; it expected loan growth could slow and said it was monitoring borrowers sensitive to these pressures.
- Key exposures include interest-rate and securities valuation risk, deposit outflows and funding costs, credit concentrations (including real estate, healthcare, hospitality and shared national credits), and operational, cyber, regulatory, weather and regional economic risks. Commercial pass-watch loans increased to $457.6 million from $320.4 million, while criticized commercial loans were $301.9 million.
- The 2021 comparison included $35.9 million of pretax net nonoperating expense and $11.0 million of nonoperating income; 2022 had no annual nonoperating items as defined by management. Pending ordinary-course legal matters were not expected by management to materially affect financial position or liquidity. The independent auditor issued unqualified opinions on the financial statements and internal controls; it identified the collectively evaluated allowance for credit losses as a critical audit matter.
Important facts for investors to verify
- How deposit balances, the uninsured deposit base, deposit pricing and borrowing needs developed after year-end, particularly as the temporary $1.425 billion FHLB advance matured.
- Whether securities unrealized losses remain unrealized, and how any sales, liquidity needs or further rate changes could affect earnings, AOCI and tangible common equity.
- Whether loan growth, construction and commercial real estate exposures, pass-watch credits and criticized loans are consistent with the assumptions supporting the $341.1 million credit-loss allowance.
- Whether 2023 guidance is achieved, especially net interest margin and funding costs, expense growth, fee reductions, and the expected deposit and loan trends.
- The status and execution of the January 2023 dividend increase to $0.30 per share and the new authorization to repurchase up to 4.3 million shares through December 31, 2024.