Hancock Whitney Corporation — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; balance-sheet figures are as of March 31, 2020. Comparisons are primarily with Q1 2019 and December 31, 2019. Amounts are in U.S. dollars; financial figures below are rounded to millions unless stated otherwise.
Business context and reporting period
Hancock Whitney is a regional bank holding company operating across the Gulf Coast and other Southern markets. The quarter was shaped by the COVID-19 economic shutdown, sharply lower oil prices, Federal Reserve rate cuts and the January 1 adoption of CECL. The company had acquired MidSouth Bancorp in September 2019, affecting year-over-year comparisons.
Financial performance and condition
| Metric | Q1 2020 / March 31, 2020 | Comparable period |
|---|---|---|
| Net interest income (GAAP) | $231.2 million | $219.3 million in Q1 2019 |
| Net interest income (taxable-equivalent) | $234.6 million | $223.1 million in Q1 2019 |
| Net interest margin (taxable-equivalent) | 3.41% | 3.46% in Q1 2019; 3.43% in Q4 2019 |
| Noninterest income / expense | $84.4 million / $203.3 million | $70.5 million / $175.7 million in Q1 2019 |
| Provision for credit losses | $246.8 million | $18.0 million in Q1 2019 |
| Net income (loss) / diluted EPS | $(111.0) million / $(1.28) | $79.2 million / $0.91 in Q1 2019 |
| Total assets / total loans | $31.8 billion / $21.5 billion | Assets $30.6 billion and loans $21.2 billion at year-end 2019 |
| Total deposits | $25.0 billion | $23.8 billion at year-end 2019 |
| Allowance for credit losses | $475.0 million, or 2.21% of loans | $195.2 million, or 0.92%, at year-end 2019 |
| Stockholders’ equity / tangible common equity ratio | $3.42 billion / 8.00% | $3.47 billion / 8.45% at year-end 2019 |
| Operating cash flow | $11.5 million | $13.4 million in Q1 2019 |
Cash and due from banks were $476.8 million. Short-term investments were $876.3 million, up $766.1 million from year-end, as the company built liquidity. Short-term borrowings were $2.67 billion and long-term debt was $225.6 million. Management reported $13.95 billion in net available liquidity, including available Federal Reserve and FHLB capacity. Regulatory capital remained above minimum requirements; management cited a 10.03% CET1 ratio and described capital as solid. The quarterly dividend remained $0.27 per share.
Material changes versus comparable periods
- The company swung from Q1 2019 net income of $79.2 million to a $111.0 million loss, principally because the credit-loss provision rose to $246.8 million amid the pandemic and oil-price shock.
- Q1 provision included a $203.0 million increase in expected credit reserves related to deteriorating economic conditions, in addition to net charge-offs of $43.8 million. Energy-related charge-offs were $35.9 million.
- CECL adoption increased the allowance for credit losses by $76.7 million on January 1, 2020 and reduced retained earnings by $44.1 million after tax. Prior periods continue under the prior accounting method.
- Net interest income (taxable-equivalent) rose 5% year over year, while margin declined five basis points year over year. Noninterest income rose 20%, partly reflecting MidSouth-related activity and stronger mortgage and derivative income; noninterest expense increased 16%.
- Loans increased 1% from year-end and 7% year over year. Deposits increased 5% from year-end; noninterest-bearing deposits grew $429 million during the quarter.
- Net charge-offs were 0.83% of average loans, annualized, versus 0.36% in Q1 2019. Nonperforming assets were $306.8 million, down from $337.5 million at year-end.
Outlook, management commentary, risks and unusual items
- Management expected further net interest margin pressure in Q2 from the full effect of rate cuts, variable-rate loan repricing, reduced purchase-accounting accretion and a larger short-term investment balance. Lower deposit costs and maturing higher-rate CDs were expected to partly offset that pressure. No formal earnings guidance was provided.
- The credit-loss estimate used a two-year forecast period, weighted 80% to a sharp recession followed by relatively quick recovery, 15% to a more severe downside scenario and 5% to a protracted-slump scenario. Management warned that further deterioration could require material additional reserve builds.
- COVID-19 deferrals covered 1,618 customers and $839.4 million of loans at March 31; by April 22, the company reported 7,299 customers and $3.1 billion modified. It originated 4,893 initial-phase PPP loans totaling $1.7 billion and processed about 7,000 further applications totaling approximately $800 million. PPP processing fees were expected to contribute income through the remainder of 2020.
- Management identified particular vulnerability in hospitality and tourism, retail, certain healthcare services and energy. Energy loans were approximately $939.5 million, or 4.4% of loans; management expected to continue reducing energy exposure. The company also highlighted uncertainty about borrower repayment, collateral values, loan demand, deposit behavior and the duration of the downturn.
- A $9.8 million noncash write-down of equity interests in two energy companies received in borrower bankruptcy restructurings contributed to other real estate and foreclosed-asset expense. Management said it had suspended share repurchases; about 4.9 million of 5.5 million authorized shares had been repurchased. The company elected the five-year CECL regulatory-capital transition.
- Operational measures included keeping about 98% of financial centers open, with approximately 70% of associates working remotely. Management cited cybersecurity, third-party service, and business-continuity risks. It also noted LIBOR transition exposure; approximately 32% of loans were LIBOR-linked at quarter-end.
- Management concluded pending legal proceedings were not expected to materially adversely affect financial position or liquidity. Goodwill was not considered impaired at quarter-end, though management said it would continue monitoring economic conditions.
Important facts for investors to verify
- How borrower performance, payment deferrals and sector exposures evolve, especially in energy, hospitality, retail and affected healthcare segments.
- Whether the CECL allowance remains adequate as economic forecasts change, and how charge-offs and criticized loans develop.
- Whether margin, fee income and PPP-related fees meet management’s expectations, including the effects of rate changes and customer fee relief.
- Liquidity and funding composition, including brokered deposits, wholesale funding, pledged collateral and the availability of stated borrowing capacity.
- Capital levels, dividend capacity and the impact of the CECL transition and stressed credit losses.
- Potential goodwill or other asset impairment, operational and cybersecurity risks, and progress in transitioning LIBOR-linked contracts.