Hancock Whitney Corporation — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Amounts are in U.S. dollars; financial statement figures are generally in millions unless indicated. The filing reflects the COVID-19 downturn, the energy portfolio reduction, and adoption of CECL on January 1, 2020.
Financial performance
| Metric | Q2 2020 | Comparison |
|---|---|---|
| Net interest income, GAAP | $237.9 million | $219.9 million in Q2 2019; $231.2 million in Q1 2020 |
| Net interest margin, taxable-equivalent | 3.23% | 3.45% in Q2 2019; 3.41% in Q1 2020 |
| Provision for credit losses | $306.9 million | $8.1 million in Q2 2019; $246.8 million in Q1 2020 |
| Noninterest income | $73.9 million | $79.3 million in Q2 2019; $84.4 million in Q1 2020 |
| Noninterest expense | $196.5 million | $183.6 million in Q2 2019; $203.3 million in Q1 2020 |
| Net income (loss) | $(117.1) million; $(1.36) diluted EPS | $88.3 million; $1.01 diluted EPS in Q2 2019 |
- For the first six months, net loss was $228.1 million versus net income of $167.4 million in the prior-year period. Net interest income was $469.1 million versus $439.1 million; provision for credit losses was $553.7 million versus $26.1 million.
- Q2 taxable-equivalent net interest income was $241.1 million, up 3% sequentially and 8% year over year. Management attributed margin pressure chiefly to lower rates and excess liquidity, partly offset by lower funding costs and PPP loan fees.
- Q2 pre-provision net revenue was $118.5 million on a taxable-equivalent basis, up 2.4% sequentially. The efficiency ratio was 60.74%.
- Six-month operating cash flow was $66.9 million, compared with $128.8 million in the prior-year period. Investing cash flow was $(2.64) billion and financing cash flow was $2.68 billion; cash and due from banks increased $103.1 million. These cash-flow figures do not represent all bank liquidity sources.
Balance sheet, credit, liquidity and capital
- At June 30, total assets were $33.22 billion, loans were $22.63 billion, deposits were $27.32 billion and stockholders’ equity was $3.32 billion. At December 31, 2019, these were $30.60 billion, $21.21 billion, $23.80 billion and $3.47 billion, respectively.
- Loan growth included $2.29 billion of SBA-guaranteed PPP loans. Noninterest-bearing deposits rose to $11.76 billion, largely reflecting PPP proceeds and other stimulus funds; management expected some of these balances to decline as funds were used.
- Total allowance for credit losses, including unfunded commitments, was $479.2 million, or 2.12% of loans (2.36% excluding PPP loans). The allowance increased substantially following CECL adoption and pandemic-related economic forecasts.
- Q2 net charge-offs were $302.7 million, or 5.30% of average loans annualized; $242.6 million related to the energy loan transaction. Nonperforming assets were $212.6 million, down from $306.8 million in Q1, largely reflecting that transaction.
- Short-term borrowings were $1.75 billion and long-term debt was $386.3 million, compared with $2.71 billion and $233.5 million at year-end. The company issued $172.5 million of 6.25% subordinated notes due 2060 in June; they qualify as Tier 2 capital.
- Management reported $17.36 billion of net available liquidity at quarter-end. The company’s CET1 ratio was approximately 9.8%; tangible common equity to tangible assets was 7.33%, below management’s 8% internal target. Management said it expected to exceed 8% by year-end, conditional on economic and earnings assumptions.
- The quarterly dividend remained $0.27 per share. Share repurchases were suspended; management said it intended to pay the next dividend while consulting with regulators and reviewing the payout policy.
Material changes, outlook and risks
- Energy loan sale: On July 21, 2020, after quarter-end, the company completed the sale of $497 million of energy-related loans. The Q2 statements include a $160.1 million provision related to the transaction, comprising $242.6 million of charge-offs and an $82.5 million reserve release. The filing reports $254.4 million as the net amount classified as held for sale at June 30 and approximately $257.5 million of proceeds received in Q3; investors should reconcile the net carrying amount with reported proceeds.
- COVID-19 and credit outlook: Management used three recessionary economic scenarios to estimate expected losses and warned that continued deterioration, a slower recovery, or changing oil prices could require further allowance changes. It identified hospitality, retail, healthcare and energy among sectors under close review. Loan deferrals were active on 6,945 loans totaling $2.7 billion at June 30; the amount was $1.4 billion as of July 15.
- Management outlook: Management expected net interest margin to remain relatively stable in the second half of 2020, with lower funding costs potentially offsetting PPP forgiveness cash flows and reduced purchase-accounting accretion. It anticipated near-term loan demand pressure and elevated mortgage activity easing toward typical levels by year-end. These expectations depend on highly uncertain pandemic and economic conditions.
- PPP: The company originated 12,662 loans totaling approximately $2.3 billion and recognized $17.4 million of PPP fees and interest in Q2. Potential risks include forgiveness eligibility, SBA review or servicing issues, and related litigation or regulatory scrutiny.
- Accounting and valuation: CECL adoption reduced retained earnings by $44.1 million after tax. A June 30 goodwill impairment test found no impairment, but estimated fair value exceeded carrying value by approximately 6% under the income approach and 17% under the market approach; changed assumptions or prolonged share-price weakness could prompt further testing.
- Other material risks include continued COVID-19 disruption, oil and gas exposure, borrower repayment and collateral values, interest-rate and LIBOR transition risks, cyber and operational risks from remote work and third parties, and potential regulatory or litigation costs. Management said pending ordinary-course legal matters were not expected to materially adversely affect financial position or liquidity.
Important facts for investors to verify
- Reconcile the energy-loan sale’s $254.4 million net held-for-sale balance with the approximately $257.5 million of reported Q3 proceeds, and track remaining energy exposure and related credit costs.
- Monitor loan deferrals as they expire, borrower risk-rating changes, charge-offs and allowance adequacy; Q2 asset-quality improvement was materially affected by the energy sale.
- Assess the duration and use of PPP-related deposits, loan forgiveness and fee recognition, and any associated SBA, legal or regulatory developments.
- Track margin performance, funding-cost reductions, excess liquidity and management’s conditional goal to restore tangible common equity above 8%.
- Review subsequent dividend decisions and the assumptions supporting the goodwill valuation, including economic forecasts and share-price performance.