Hancock Whitney Corporation — 10-Q Summary
Reporting period: Quarter ended September 30, 2019; comparisons are primarily with the third quarter and first nine months of 2018. Amounts are in U.S. dollars.
Business context and reporting period
Hancock Whitney is a regional banking holding company operating through Hancock Whitney Bank across markets in the Gulf Coast region and elsewhere in the South. On September 21, 2019, it completed its acquisition of MidSouth Bancorp, adding loans, deposits, branches and new market opportunities in Louisiana and Texas. MidSouth contributed only ten days of operations to the quarter.
Key financial metrics
| Metric | Q3 2019 / September 30, 2019 | Comparison |
|---|---|---|
| Net income | $67.8 million; diluted EPS $0.77 | Q3 2018: $83.9 million; $0.96 per diluted share. Q3 2019 includes $28.8 million of MidSouth-related costs. |
| Operating earnings per diluted share (non-GAAP) | $1.03 | Q3 2018: $1.01. The company says earnings excluding merger costs were in line with expectations. |
| Net interest income | $222.9 million GAAP; $226.6 million taxable-equivalent | Taxable-equivalent income rose 4% year over year and 1% from Q2 2019. |
| Net interest margin | 3.41% taxable-equivalent | Down 4 basis points from Q2 2019; up 5 basis points from Q3 2018. |
| Noninterest income and expense | $83.2 million income; $213.6 million expense | Income rose 10% year over year; expense rose 18%, substantially reflecting MidSouth costs. |
| Total assets, loans and deposits | $30.5 billion; $21.0 billion in loans; $24.2 billion in deposits | At September 30, 2018, loans were $19.5 billion and deposits $22.4 billion. Growth includes the MidSouth acquisition. |
| Credit quality | $195.6 million allowance; 0.93% of period-end loans. Nonperforming assets: $314.7 million, or 1.49% of loans, ORE and foreclosed assets. | Q3 net charge-offs were $12.5 million, or 0.25% of average loans annualized, versus $6.9 million, or 0.14%, in Q3 2018. |
| Capital and liquidity | Stockholders’ equity $3.6 billion; tangible common equity ratio 8.82%. Company total capital ratio 12.43%; Bank 11.19%. | Both entities were described as well-capitalized. Free securities were 54.44% of total securities; average loan-to-deposit ratio was 87.47%. |
| Debt and funding | Short-term borrowings $2.1 billion; long-term debt $246.6 million. | Short-term borrowings increased from $1.6 billion at year-end 2018; deposits totaled $23.2 billion then. |
| Cash flows, first nine months | Operating cash flow $166.3 million; investing cash outflow $246.4 million; financing cash flow $164.8 million. | Operating cash flow was $330.1 million in the comparable 2018 period. The company made a $100 million pension contribution in 2019. |
Material changes versus comparable periods
- For the first nine months, net income increased to $235.2 million from $227.5 million, and diluted EPS was $2.69 versus $2.61. Noninterest income rose 11% to $233.0 million, while noninterest expense increased 7% to $572.8 million.
- Q3 GAAP earnings fell year over year, principally due to $28.8 million of MidSouth acquisition and integration expenses. Management reported that operating pre-provision net revenue increased $5.8 million from Q2, with revenue up $7.0 million and operating expense up $1.2 million, excluding nonoperating items.
- MidSouth added approximately $785 million of loans, net of a $41 million purchase discount, and $1.3 billion of deposits. Hancock Whitney issued approximately 5.0 million shares; estimated goodwill was $69.2 million. The company closed or consolidated 20 acquired branches.
- Nonperforming assets declined to $314.7 million from $391.3 million at September 30, 2018. However, Q3 net charge-offs rose, primarily because of $9.8 million in energy-related losses.
- Available-for-sale securities increased to $3.5 billion from $2.7 billion at year-end 2018; total securities were $6.4 billion at quarter-end. The company said it expected the bond portfolio to return to a target of approximately $6.2 billion during Q4.
Outlook, management commentary, risks and unusual items
- Management anticipated 2019 year-over-year average loan growth in the mid-single digits. It projected MidSouth would become accretive beginning in Q1 2020 and contribute approximately $0.13–$0.15 to 2020 earnings once fully phased in. It expected another $3–$5 million of acquisition expenses before year-end.
- Management expected an approximately 17% effective tax rate for Q4 and full-year 2019, based on current forecasts. This is a forward-looking estimate, not a reported result.
- Energy loans were approximately $1.0 billion, or 4.9% of total loans. Management cited weaker energy-sector expectations and upstream borrower liquidity concerns, and said it expected to reduce energy exposure over coming quarters. A $9.0 million charge-off related to DC Solar was included in the first-nine-month provision; the borrower filed for bankruptcy amid allegations of a potentially fraudulent scheme. Management said recovery efforts continued.
- CECL was scheduled to take effect January 1, 2020. Parallel testing suggested a 20%–30% increase over the September 30 incurred loan-loss reserve using the then-current models and economic forecast; the estimate excluded MidSouth-acquired loans and securities and could change with portfolio and economic conditions.
- Interest-rate sensitivity modeling indicated estimated net interest income changes of -4.30% in year one and -6.84% in year two for a 100-basis-point rate decline; a 100-basis-point increase was estimated to raise NII 1.94% and 3.69%, respectively. The company noted modeling assumptions and risks. Approximately 30% of loans were LIBOR-linked, and transition work was underway.
- On October 18, 2019, the company entered a $185 million accelerated share repurchase agreement and received approximately 3.6 million shares initially. Final settlement was expected by Q3 2020. The company also declared a $150 million Bank dividend to the Parent in September to support the acquisition and parent liquidity.
- Management said pending litigation and regulatory matters were not expected to materially affect consolidated financial position or liquidity. Forward-looking risks include credit losses, energy exposure, interest rates and margins, deposit trends, acquisition integration, cybersecurity, regulation, and third-party service disruptions.
Important facts for investors to verify
- Whether MidSouth integration delivers the projected 2020 earnings contribution and whether remaining merger costs stay within the stated range.
- Credit performance, especially energy and DC Solar exposures; monitor charge-offs, criticized loans, nonperforming assets and allowance coverage.
- The final CECL allowance impact at adoption, including the effect of acquired assets and updated economic forecasts.
- Net interest margin, deposit costs, funding mix and exposure to falling rates and the LIBOR transition.
- Capital and liquidity after the $185 million share repurchase, including the effect on tangible common equity and regulatory capital ratios.
Note: Operating earnings, operating EPS, taxable-equivalent measures and certain ratios are non-GAAP measures as defined by the company.