Hancock Whitney (US:HWC)2020-05-06 22:41Part I. Financial Information Financial Statements Q1 2020 resulted in a $111.0 million net loss, primarily due to increased credit loss provisions and CECL adoption, reversing prior year's net income Consolidated Balance Sheets Total assets grew to $31.76 billion by March 31, 2020, driven by loans and deposits, while stockholders' equity slightly decreased due to net loss and accounting changes Consolidated Balance Sheet Highlights (in thousands) | Account | March 31, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Total Assets | $31,761,693 | $30,600,757 | | Loans, net | $21,089,678 | $21,021,504 | | Allowance for loan losses | ($426,003) | ($191,251) | | Goodwill | $855,453 | $855,453 | | Total Liabilities | $28,340,629 | $27,133,072 | | Total Deposits | $25,008,496 | $23,803,575 | | Total Stockholders' Equity | $3,421,064 | $3,467,685 | | Retained Earnings | $1,297,129 | $1,476,232 | Consolidated Statements of Income The company reported a $111.0 million net loss for Q1 2020, a significant reversal from prior year's net income, primarily due to a substantial increase in provision for credit losses Consolidated Income Statement Summary (in thousands, except per share data) | Metric | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | | :--- | :--- | :--- | | Net Interest Income | $231,188 | $219,254 | | Provision for credit losses | $246,793 | $18,043 | | Noninterest income | $84,387 | $70,503 | | Noninterest expense | $203,335 | $175,700 | | Net income (loss) | ($111,033) | $79,164 | | Earnings (loss) per share-diluted | ($1.28) | $0.91 | Notes to Consolidated Financial Statements The notes detail significant accounting policies, including CECL adoption, which increased credit loss allowance and reduced retained earnings, and the impact of COVID-19 on loan modifications - The company adopted ASC 326 (CECL) on January 1, 2020, on a modified retrospective basis, materially changing how it estimates credit losses on financial instruments29 Impact of CECL Adoption on Jan 1, 2020 (in thousands) | Account | CECL Adoption Impact | | :--- | :--- | | Allowance for loan and lease losses | $49,411 | | Reserve for unfunded lending commitments | $27,330 | | Total Allowance for credit losses | $76,741 | | Decrease to retained earnings (after tax) | $44,086 | - As of March 31, 2020, 1,618 customers with loans totaling $839.4 million had received payment deferral modifications under the CARES Act, which are excluded from TDR reporting78 - The company suspended its share repurchase program after repurchasing 4.9 million shares out of 5.5 million authorized, including settling an Accelerated Share Repurchase (ASR) agreement in March 2020117118 Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes the Q1 2020 net loss of $111.0 million to the COVID-19 pandemic and declining oil prices, necessitating a large credit loss provision, while maintaining strong capital and liquidity - The Q1 2020 net loss of $111.0 million was driven by a $246.8 million provision for credit loss related to the COVID-19 pandemic and declining oil prices196 - The company adopted the CECL accounting standard on January 1, 2020, and further increased its allowance for credit losses to $475 million, or 2.21% of total loans200 - Capital remains solid with a Common Equity Tier 1 (CET1) ratio of 10.03%, and liquidity is strong with approximately $14 billion in available funding sources200248 - The company is actively participating in the Paycheck Protection Program (PPP), originating 4,893 loans totaling $1.7 billion in the initial phase and processing an additional 7,000 applications for about $800 million in the second phase194 Results of Operations Q1 2020 net interest income (te) was $234.6 million, with net interest margin declining, and a $246.8 million provision for credit losses driven by economic downturn and a significant write-down Key Operating Metrics Comparison | Metric | Q1 2020 | Q4 2019 | Q1 2019 | | :--- | :--- | :--- | :--- | | Net Interest Income (te) | $234.6M | $236.7M | $223.1M | | Net Interest Margin (te) | 3.41% | 3.43% | 3.46% | | Provision for Credit Losses | $246.8M | $9.2M | $18.0M | | Noninterest Income | $84.4M | $82.9M | $70.5M | | Noninterest Expense | $203.3M | $197.9M | $175.7M | - Net charge-offs in Q1 2020 were $43.8 million (0.83% of average loans), up significantly from $9.5 million (0.18%) in Q4 2019, primarily due to $35.9 million in energy-related charge-offs205206 - Other real estate and foreclosed asset expense was $10.1 million, which included a $9.8 million non-cash write-down of equity interests in two energy-related companies received in bankruptcy restructurings230 Liquidity and Capital Resources The company strengthened liquidity in Q1 2020, ending with nearly $14 billion in available funding, maintained strong regulatory capital ratios with CECL transition benefits, and sustained its quarterly dividend - At March 31, 2020, the company had nearly $14 billion in net available sources of funds, including $2.9 billion from the FHLB and $4.4 billion from the Federal Reserve Bank248252 - The company elected to use the five-year CECL transition rule, which delays the estimated impact on regulatory capital, favorably impacting the leverage ratio by 19 bps and risk-based capital ratios by 22 bps260 Key Capital Ratios | Ratio | March 31, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Common equity tier 1 (CET1) | 10.02% | 10.50% | | Tier 1 leverage capital | 8.40% | 8.76% | | Tangible common equity ratio | 8.00% | 8.45% | - The company maintained its quarterly cash dividend of $0.27 per share, expressing confidence in its capital strength to sustain it265 Balance Sheet Analysis Total loans grew to $21.5 billion at March 31, 2020, while the allowance for credit losses surged to $475.0 million (2.21% of loans) due to CECL and pandemic-related risks, with deposits also increasing - Total loans increased by $302.9 million (1%) QoQ to $21.5 billion, driven by increased originations and funding of credit lines270 - The allowance for credit losses increased significantly to $475.0 million, or 2.21% of total loans, at March 31, 2020, up from 0.92% at December 31, 2019280281 - The energy loan portfolio decreased to $939.5 million (4.4% of total loans), with an allowance coverage of 9.4% of that portfolio274282 - Total deposits grew by $1.2 billion (5%) QoQ to $25.0 billion, with noninterest-bearing deposits up $429.0 million293294 Quantitative and Qualitative Disclosures about Market Risk The company's balance sheet is asset-sensitive, projecting increased net interest income in a rising rate environment, and is actively managing the transition away from LIBOR for its variable rate loans Net Interest Income (NII) Sensitivity to Interest Rate Changes | Change in Interest Rates (bps) | Estimated Increase in NII (Year 1) | Estimated Increase in NII (Year 2) | | :--- | :--- | :--- | | +100 | 2.70% | 5.22% | | +200 | 5.70% | 10.37% | | +300 | 8.42% | 14.91% | - The company's interest rate risk profile is generally asset-sensitive, driven by variable rate loans and a significant volume of non-interest bearing deposits320 - As of March 31, 2020, approximately 32% of the loan portfolio consisted of variable rate loans tied to LIBOR, and the company is actively managing the transition away from this benchmark322 Controls and Procedures Management concluded that disclosure controls and procedures were effective as of March 31, 2020, with no material changes to internal control over financial reporting during the quarter - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by this report (March 31, 2020)323 - There were no material changes to the company's internal control over financial reporting during the first quarter of 2020324 Part II. Other Information Legal Proceedings The company is involved in various ordinary course legal proceedings, which management does not expect to have a material adverse effect on its financial position or liquidity - The company is party to various legal proceedings arising in the ordinary course of business, but management does not believe they will have a material adverse effect on its financial position or liquidity327 Risk Factors The COVID-19 pandemic is a significant new risk, potentially impacting credit, operations, and interest rates, exacerbating existing concentration risks in real estate, energy, healthcare, and hospitality sectors - The COVID-19 pandemic is a primary risk factor, with potential adverse impacts on credit, collateral values, customer demand, funding, operations, and interest rate risk329 - Credit risk is heightened as business shutdowns and economic instability may cause customers to be unable to make scheduled loan payments, potentially leading to significant delinquencies and credit losses330 - Operational risks have increased due to remote work arrangements, including greater cybersecurity threats and reliance on third-party vendors who may also be experiencing disruptions333334 - The company is subject to lending concentration risk, with substantial portions of its loan portfolio in real estate, energy, healthcare, and hospitality, which are particularly vulnerable to the current economic downturn337 Unregistered Sales of Equity Securities and Use of Proceeds During Q1 2020, the company repurchased 1,317,323 shares at an average price of $35.56 per share, including shares from an ASR settlement, with 570,807 shares remaining in the program Share Repurchase Activity for Q1 2020 | Period | Total Shares Purchased | Average Price Paid | Shares Remaining in Program | | :--- | :--- | :--- | :--- | | Jan 2020 | 315,851 | $40.26 | 1,572,279 | | Feb 2020 | 0 | N/A | 1,572,279 | | Mar 2020 | 1,001,472 | $34.07 | 570,807 | | Total Q1 | 1,317,323 | $35.56 | 570,807 |