Hancock Whitney Corporation — Q1 2019 10-Q
Business context and reporting period. Hancock Whitney is a regional bank holding company operating through Hancock Whitney Bank. This unaudited filing covers the three months ended March 31, 2019; balance-sheet comparisons are with December 31, 2018 unless otherwise noted. Amounts below are in U.S. dollars; financial-statement figures are generally in millions.
Financial performance and position
- Earnings: Net income was $79.2 million, or $0.91 per diluted share, versus $72.5 million and $0.83 a year earlier. Return on average assets was 1.13%; return on average common equity was 10.30%. Management’s non-GAAP operating earnings were $87.1 million, or $1.00 per diluted share.
- Revenue and margins: Net interest income was $219.3 million GAAP and $223.1 million on a taxable-equivalent basis (up 6% year over year). Taxable-equivalent net interest margin was 3.46%, up 9 basis points year over year and 7 basis points sequentially. Noninterest income was $70.5 million, up 6% year over year. Noninterest expense was $175.7 million, up 3% year over year. The reported efficiency ratio, excluding specified items, was 58.10%.
- Credit costs: Provision for loan losses was $18.0 million, including a $10.1 million charge-off tied to DC Solar. Net charge-offs were $17.9 million, or 0.36% of average loans annualized; excluding DC Solar, management cited 0.16%. The allowance was $194.7 million, or 0.97% of period-end loans.
- Loans and deposits: Loans were $20.1 billion, up $86.4 million from year-end and 5.3% year over year. Deposits were $23.4 billion, up $230.1 million from year-end and 4% year over year. The average loan-to-deposit ratio was 87.08%.
- Liquidity and funding: Cash and due from banks totaled $360.2 million; short-term investments were $163.8 million. Short-term borrowings were $1.39 billion and long-term debt was $225.0 million. The bank reported about $3.8 billion of available FHLB borrowing capacity and $2.7 billion of unused Federal Reserve discount-window capacity. Free securities were 33.57% of total securities, above management’s 20% internal minimum; core deposits were 89.98% of deposits.
- Capital: Stockholders’ equity was $3.19 billion; tangible common equity ratio was 8.36%, against an internal target of at least 8.00%. The company and bank were described as well-capitalized. The company’s total capital ratio was 12.24% and the bank’s was 11.73%.
- Cash flow: Operating cash flow was $13.4 million versus $104.5 million in Q1 2018. The 2019 quarter included a discretionary $100 million pension contribution. Investing cash used was $42.9 million and financing cash provided was $6.3 million.
Material changes versus comparable periods
- Year-over-year net income and diluted EPS increased, while net interest margin expanded. Loan interest income rose, partly offset by higher deposit interest expense.
- Nonperforming assets were $349.6 million, down $118.8 million year over year; the ratio to loans and foreclosed assets improved to 1.74% from 2.45%. Nonaccrual loans, however, increased to $204.8 million from $187.3 million at year-end.
- Criticized commercial loans fell $41 million sequentially and $500 million year over year. Energy loans were approximately $1.1 billion; about 25% of that portfolio was criticized.
- Available-for-sale and held-to-maturity securities totaled $5.58 billion, down 2% from year-end. AOCI loss narrowed to $132.5 million from $180.7 million, principally reflecting improved fair values.
- Deposits increased, while short-term borrowings declined $200.4 million sequentially. Noninterest-bearing deposits fell $340.4 million from year-end, partly offset by growth in interest-bearing balances.
Outlook, commentary, risks and unusual items
- Management outlook: Management anticipated $75 million–$125 million of period-end loan growth in Q2 2019 and mid-single-digit full-year average loan growth. It expected a 17%–19% effective tax rate for 2019.
- MidSouth transaction: On April 30, 2019, after quarter-end, Hancock Whitney agreed to acquire MidSouth Bancorp in a stock-for-stock transaction valued at approximately $213 million based on the agreement-date share price. MidSouth had approximately $1.7 billion of assets, $0.9 billion of loans and $1.4 billion of deposits. Closing was expected late in Q3 2019, subject to approvals and other conditions. The company expected about $38 million of 2019 acquisition expenses and anticipated accretion beginning Q1 2020, with $0.13–$0.15 of fully phased-in earnings benefit.
- DC Solar: The borrower filed for Chapter 11 in February 2019; an FBI affidavit alleged a potentially fraudulent Ponzi-type scheme involving mobile solar generators and lease revenues. The $10.1 million charge-off represented the majority of Hancock Whitney’s exposure. Some recovery may be possible through sale or re-leasing of units, but the amount is uncertain.
- Interest-rate exposure: Management’s model indicated estimated net interest income increases of 3.10% in year one and 3.92% in year two under a +100-basis-point shock, and decreases of 4.27% and 5.69% under a −100-basis-point shock. Outcomes depend on modeling assumptions and actual asset and liability repricing.
- Other risks and contingencies: Risks include credit losses, energy-sector exposures, deposit competition and funding costs, interest-rate changes, integration of acquisitions, cybersecurity and third-party disruptions, regulatory matters and litigation. Management did not expect pending legal or regulatory matters to materially affect financial position or liquidity. Unfunded credit commitments were $7.20 billion and letters of credit were $336.4 million.
- Accounting and unusual items: The company adopted lease accounting Topic 842 on January 1, 2019, recording right-of-use assets and lease liabilities; management said the change was not expected to materially affect earnings. CECL was scheduled for adoption in 2020; management expected an increase in credit-loss allowances but had not quantified it. Q1 operating cash flow was notably affected by the pension contribution.
Important facts for investors to verify
- DC Solar exposure, the basis for the charge-off, and any recoveries from the equipment or bankruptcy process.
- Loan quality trends, especially the increase in nonaccrual loans, energy criticized credits, and coverage under the allowance.
- MidSouth deal approvals, closing and systems-conversion timing, total integration costs, and realization of projected accretion.
- Deposit pricing and mix, including rising deposit betas and the effect on net interest margin and funding costs.
- The eventual CECL allowance impact and whether loan growth and credit conditions match management’s expectations.
- Capital and liquidity after the pension contribution, acquisition-related spending, dividends and any share repurchases.