Hancock Whitney Corporation — Q2 2019 Form 10-Q
Business context and reporting period. Regional bank holding company serving markets across the Gulf Coast and parts of Texas and Tennessee. This unaudited filing covers the quarter and six months ended June 30, 2019; comparisons below are with Q2 or the first six months of 2018 unless otherwise stated.
Key financial metrics
| Metric | Q2 / June 30, 2019 | Comparable period / prior date |
|---|---|---|
| Net income; diluted EPS | $88.3 million; $1.01 | Q2 2018: $71.2 million; $0.82 |
| Net interest income | $219.9 million GAAP; $223.6 million taxable-equivalent | Q2 2018 GAAP: $211.5 million; taxable-equivalent: $215.6 million |
| Net interest margin | 3.45% taxable-equivalent | 3.40% Q2 2018; 3.46% Q1 2019 |
| Provision for loan losses | $8.1 million | $8.9 million Q2 2018; $18.0 million Q1 2019 |
| Noninterest income / expense | $79.3 million / $183.6 million | Q2 2018: $68.8 million / $184.4 million |
| Efficiency ratio | 58.95% | 57.40% Q2 2018; excludes amortization of purchased intangibles and nonoperating items |
| Return on average assets / common equity | 1.24% / 10.96% | Q2 2018: 1.04% / 9.81% |
| Total assets; loans | $28.76 billion; $20.18 billion | December 31, 2018: $28.24 billion; $20.03 billion |
| Deposits; short-term borrowings; long-term debt | $23.24 billion; $1.64 billion; $232.8 million | December 31, 2018 deposits: $23.15 billion; short-term borrowings: $1.59 billion; long-term debt: $225.0 million |
| Stockholders’ equity; tangible common equity ratio | $3.32 billion; 8.75% | December 31, 2018 equity: $3.08 billion; Q2 2018 tangible common equity ratio: 7.76% |
| Allowance for loan losses | $195.6 million; 0.97% of loans | June 30, 2018: $214.5 million; 1.11% of loans |
Material changes and operating trends
- Q2 net income rose 24% year over year; diluted EPS increased from $0.82 to $1.01. First-half net income was $167.4 million, up from $143.7 million, and diluted EPS was $1.92 versus $1.65.
- First-half net interest income (taxable-equivalent) increased to $446.7 million from $425.3 million. Margin was 3.45% versus 3.39% in the first half of 2018; higher deposit costs continued to pressure results.
- Q2 noninterest income increased 15% year over year, supported by trust fees following the 2018 trust-business acquisition, card and derivative income, and seasonal activity. Operating expenses increased 9% year over year excluding Q2 2018 nonoperating expenses, reflecting personnel, technology, processing and occupancy costs.
- Loans grew 4.2% year over year but were up only $63 million from Q1 2019. Deposits rose 5% year over year but declined $144 million sequentially. Noninterest-bearing deposits were $8.11 billion, or 35% of deposits.
- For the six months, operating cash flow was $128.8 million versus $220.2 million. The 2019 figure included a $100 million discretionary pension contribution. Investing activities used $251.0 million; financing activities provided $104.0 million. Cash and due from banks ended at $365.2 million.
Outlook, risks and unusual items
- Management expected 2019 average loan growth in the mid-single digits, excluding MidSouth, and projected a 17%–19% effective tax rate.
- The proposed MidSouth Bancorp acquisition was expected to close late in Q3 2019, subject to regulatory and shareholder approvals. Management forecast approximately $38 million of 2019 acquisition expenses, accretion beginning in Q1 2020, and a fully phased-in earnings benefit of $0.13–$0.15 per share. These are expectations, not reported results.
- Q1 2019 included a $10.1 million charge-off related to DC Solar, whose borrower filed for bankruptcy amid allegations of a Ponzi-type scheme. Management said the charge-off represented most of its exposure and noted possible future recovery from selling or re-leasing equipment. Q2 provision was lower than Q1 partly because it did not include that charge-off.
- Credit indicators improved year over year: nonperforming assets were $338.6 million, or 1.68% of loans and foreclosed assets, versus $416.5 million and 2.15% in Q2 2018. Criticized commercial loans declined 36% year over year to $572.9 million. Energy loans were about $1.0 billion, approximately 5% of loans; management identified energy-sector conditions and oil prices as risks.
- Management described most markets as expanding modestly to moderately, while noting trade uncertainty, slower energy activity, deposit competition and potential margin pressure if rates fell further. The company reported asset sensitivity in its interest-rate models, but actual outcomes could differ from modeled estimates.
- Liquidity indicators included a 40.10% free-securities-to-total-securities ratio, against a 20% internal minimum, and an 87.09% average loan-to-deposit ratio. The Bank reported $3.8 billion of available FHLB borrowing capacity and $2.6 billion of unused Federal Reserve discount-window capacity. Company and Bank regulatory capital ratios exceeded well-capitalized thresholds.
- CECL was scheduled for adoption January 1, 2020. The company had not quantified the effect and expected an increase in loan-loss allowances, as well as an allowance for held-to-maturity securities. Ordinary-course legal proceedings were not expected by management to materially affect financial position or liquidity.
Most important facts for investors to verify
- Whether MidSouth received approvals, closed on the expected timetable, and met the stated cost and accretion assumptions.
- How deposit pricing, deposit mix and interest-rate changes affect net interest margin and funding costs.
- Whether loan growth and credit quality remain on track, especially energy exposure, criticized loans, charge-offs and any DC Solar recoveries.
- The eventual CECL allowance impact and whether first-half cash generation normalizes after the pension contribution.
- Whether operating expense growth and the 58.95% efficiency ratio improve as technology investment and acquisition integration proceed.