Hancock Whitney Corporation — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Hancock Whitney is a regional bank holding company operating through Hancock Whitney Bank; figures below are in U.S. dollars. The filing was signed August 4, 2021.
Financial performance and condition
- Q2 revenue and earnings: GAAP net interest income was $234.6 million and noninterest income was $94.3 million. Net income was $88.7 million, or $1.00 per diluted share, versus a net loss of $117.1 million, or $1.36 per share, in Q2 2020. Q2 2021 included $42.2 million of net nonoperating items, or $0.37 per share after tax.
- First-half results: Net interest income was $469.2 million, noninterest income $181.4 million, and net income $195.9 million, compared with a net loss of $228.1 million in the first half of 2020.
- Margins and operating measures: Taxable-equivalent net interest margin was 2.96% in Q2, down 13 basis points from Q1 and 27 basis points from Q2 2020. First-half margin was 3.02%, down 29 basis points year over year. Q2 operating pre-provision net revenue was $137.2 million, up 4% sequentially. The reported efficiency ratio was 57.01%.
- Loans and deposits: Total loans were $21.1 billion at June 30, down $516 million from March 31; PPP loans declined by $928 million, while core loans grew $412 million sequentially. Deposits were $29.3 billion, up $63 million sequentially and $2.0 billion year over year. Noninterest-bearing deposits were $13.4 billion, or 46% of deposits.
- Credit quality: The allowance for credit losses was $429.2 million, equal to 2.03% of loans (2.17% excluding SBA-guaranteed PPP loans). Q2 included a $17.2 million negative provision, comprising a $27.7 million reserve release and $10.5 million in net charge-offs. Net charge-offs were 0.20% of average loans, annualized. Nonperforming assets were $97.6 million, or 0.46% of loans and foreclosed assets.
- Liquidity, debt and capital: The company reported $21.0 billion of net available liquidity. Stockholders’ equity was $3.56 billion and the tangible common equity ratio was 7.70%. Company and bank regulatory capital ratios remained above minimum requirements; both were categorized as well capitalized. Long-term debt was $248.1 million after redemption of $150 million of 5.95% subordinated notes; short-term borrowings were $1.52 billion.
- Cash flow: For the first half, operating activities provided $367.6 million, investing activities used $1.64 billion, and financing activities provided $1.25 billion. Cash and due from banks ended the period at $501.6 million. The filing reports substantial additional liquidity in interest-bearing bank deposits and other short-term investments.
Material changes versus comparable periods
- Q2 2021 returned to profitability from the prior-year quarter’s loss, when a $306.9 million credit-loss provision included pandemic-related reserves and costs associated with a $497 million energy-loan sale. The first-half provision shifted from a $553.7 million expense in 2020 to a $22.1 million release in 2021.
- Q2 net interest income was down $3.6 million year over year despite lower funding costs; growth in lower-yielding securities and short-term investments and a lower loan balance weighed on asset yields and margin. Noninterest income rose 27% year over year, reflecting recovery in fee activity and mortgage banking.
- Total loans declined 7% year over year, driven by PPP forgiveness and reductions in residential mortgage and consumer balances. Deposits rose 7%, while securities increased 35% to $8.6 billion, reflecting deployment of excess liquidity.
- Nonperforming assets fell to $97.6 million from $212.6 million a year earlier. The allowance declined from $479.2 million at June 2020 as economic forecasts and asset quality improved, although management said reserves remained elevated amid uncertainty.
Outlook, commentary and risks
- Management expected net interest margin to compress approximately 4 basis points in Q3 and another 5 basis points in Q4 absent opportunities to deploy liquidity; full-year margin was expected to be down 30 basis points from 2020. Net interest income was expected to be flat to slightly down sequentially and down 1%–2% for 2021.
- Management forecast core loan growth of $200–$300 million in Q3 and $400–$500 million in Q4, with year-end total loans of approximately $20.4 billion and PPP loans of $300–$400 million. Deposits were expected to rise $150–$200 million in Q3 and be stable in Q4, ending the year near $29.5 billion.
- Excluding nonoperating expenses, management expected Q3 noninterest expense to be relatively flat sequentially and full-year 2021 expense to decline 3%–4% from 2020. The expected Q4 expense run rate was $187 million. Fee income, excluding nonoperating items, was expected to decline $3–$5 million in Q3 but increase 7%–9% for full-year 2021. The expected 2021 effective tax rate was 19%–20%, absent tax-law changes.
- Unusual Q2 items included $45.0 million of nonoperating expense for the voluntary early retirement program, facility closures, workforce reductions and debt redemption, partially offset by a $2.8 million gain on Mastercard Class B stock. Approximately 260 employees accepted the retirement program; a 200-position reduction and closure of 18 additional financial centers were planned.
- Key risks include pandemic resurgence and variants, uneven recovery in the company’s markets, exposure to hospitality, healthcare and retail sectors, the effect of expiring borrower modifications and stimulus, excess-liquidity pressure on margins, interest-rate sensitivity, and the transition from LIBOR. About 35% of loans excluding PPP were tied to LIBOR. Management cited AMERIBOR and New York Fed SOFR as replacement benchmarks and expected to begin using them toward the end of Q3 2021.
- The company reported no material adverse effect expected from pending ordinary-course legal matters. Disclosure controls were assessed as effective, and management reported no material Q2 change in internal control over financial reporting.
Investor verification points
- Track whether core loan growth offsets PPP forgiveness and whether projected year-end balances are achieved.
- Monitor margin compression, excess liquidity deployment, deposit mix and the realization of management’s 2021 NII and expense outlook.
- Assess whether reserve releases remain appropriate as stimulus and loan modifications expire, particularly in pandemic-sensitive sectors and energy.
- Verify execution and recurring savings from the retirement program, workforce reduction, branch closures and subordinated-debt redemption, separately from one-time costs.
- Follow LIBOR contract remediation and benchmark conversion, including potential effects on loan pricing, hedges and financial results.
- Reconcile reported GAAP results with management’s non-GAAP operating measures and the $42.2 million of Q2 net nonoperating items.