Hancock Whitney Corporation — Q3 2020 Form 10-Q
Reporting period: Quarter ended September 30, 2020; balance-sheet comparisons are primarily with December 31, 2019. The company is a regional bank operating across the Gulf Coast and other southeastern markets. Amounts below are U.S. dollars.
Financial performance and position
| Metric | Q3 / September 30, 2020 | Comparison |
|---|---|---|
| Net income; diluted EPS | $79.4 million; $0.90 | Q3 2019: $67.8 million; $0.77. Q2 2020: net loss of $117.1 million; $(1.36) per share. |
| Net interest income (taxable-equivalent) | $238.4 million; net interest margin 3.23% | Q3 2019: $226.6 million and 3.41%; margin was unchanged from Q2 2020. |
| Total revenue (net interest income plus noninterest income) | $318.9 million | Q3 2019: $306.2 million. Noninterest income was $83.7 million, up 1% year over year. |
| Provision for credit losses | $25.0 million | Q3 2019: $12.4 million; Q2 2020: $306.9 million. |
| Nine-month net income (loss); diluted EPS | $(148.7) million; $(1.73) | Nine months 2019: $235.2 million; $2.69. |
| Assets; gross loans; deposits | $33.2 billion; $22.2 billion; $27.0 billion | At December 31, 2019: $30.6 billion; $21.2 billion; $23.8 billion, respectively. |
| Allowance for credit losses | $480.2 million; 2.16% of loans | $195.2 million at December 31, 2019; includes CECL adoption effects. |
| Equity and capital | Stockholders’ equity $3.38 billion; tangible common equity ratio 7.53%; CET1 ratio 10.30% | TCE ratio was 7.33% at Q2 end and 8.82% at Q3 2019 end. CET1 rose 52 basis points from Q2. |
| Debt and liquidity | Short-term borrowings $1.91 billion; long-term debt $385.9 million. Net available liquidity sources: $18.1 billion. | Long-term debt includes $172.5 million of subordinated notes issued in June 2020 at 6.25% fixed interest. |
| Cash flows, nine months | Operating +$227.5 million; investing $(2.69) billion; financing +$2.51 billion; net increase in cash and due from banks $52.2 million. | Ending cash and due from banks: $484.3 million. |
Material changes and notable items
- Q3 returned to profitability after the Q2 loss, which included a $160.1 million provision associated with selling $497 million of energy loans. The sale closed July 21 and generated $257.5 million in proceeds; the related sale accounting included $242.6 million in charge-offs and an $82.5 million reserve release.
- Nine-month results reflect $578.7 million in credit-loss provision, versus $38.6 million in the prior-year period. The increase reflects pandemic-related economic stress and the energy-loan sale. The company adopted CECL on January 1, 2020, reducing retained earnings by $44.1 million after tax.
- Loans declined $388 million, or 2%, from Q2, partly reflecting weak demand and the energy sale. Year over year, loans increased 6%, supported by $2.32 billion of SBA-guaranteed PPP loans at quarter end. Deposits rose 12% from year-end, substantially reflecting PPP proceeds and stimulus-related balances.
- Nonperforming assets were $192.2 million, down from $212.6 million at Q2 end and $337.5 million at year-end 2019. Criticized commercial loans increased $64 million from Q2 to $412 million, primarily in pandemic-affected sectors.
- Q3 noninterest expense was $195.8 million, down 8% year over year, largely because Q3 2019 included $28.8 million of MidSouth merger costs. Excluding those prior-year costs, expense increased, including pandemic-response and PPP-related costs.
- Goodwill was not impaired in the September 2020 interim test, but estimated fair value exceeded carrying value by only about 14%. The company said further economic deterioration or weaker assumptions could lead to impairment in a future period.
Outlook, management commentary, and risks
- Management expected net interest margin to remain relatively stable for the rest of 2020, with potential margin headwinds in 2021 as PPP loans are forgiven or repaid, beginning in Q4 2020 and continuing into early 2021. Continued loan contraction was anticipated in Q4.
- Management estimated the tangible common equity ratio could approach its 8% internal target by year-end. The company intended to pay its next quarterly dividend but said it was consulting regulators and reviewing dividend policy quarterly. The quarterly dividend remained $0.27 per share; share repurchases were suspended.
- The credit outlook depends on the duration and severity of COVID-19 disruption, recovery timing, government stimulus, and oil prices. Management weighted its CECL forecast scenarios 50% baseline, 25% faster recovery, and 25% slower recovery; further risk-rating changes may be needed.
- Key exposures include healthcare, hospitality, retail, energy, and commercial real estate. The company reported $4.85 billion of funded exposure in identified sectors under focus, excluding PPP loans, or 24.4% of total loans. It also reported 817 loans totaling $564.8 million with active qualifying short-term COVID-related modifications.
- Other risks include interest-rate changes, LIBOR transition (about 28% of the loan portfolio was LIBOR-linked), cybersecurity and third-party operational disruption, PPP compliance or litigation, and the possibility of higher credit losses. Management did not expect significant financial effects from third-quarter hurricanes. Pending legal matters were not expected to materially affect financial position or liquidity.
Important facts for investors to verify
- Whether pandemic-related borrower stress and criticized-loan growth result in further credit losses, provision increases, or changes to the $480.2 million allowance.
- The pace of PPP forgiveness and repayments, their effects on loan balances, deposits, and net interest margin, and the timing of any fee income recognition.
- Whether the September goodwill valuation cushion holds under weaker economic, credit, interest-rate, or share-price assumptions.
- Regulatory capital and liquidity trends, including the company’s progress toward its 8% tangible common equity target and any decision on the next dividend.
- Developments in the identified industry concentrations, the LIBOR transition, and any material PPP-related regulatory or legal matters.