Hancock Whitney (HWC) - 2020 Q4 - Annual Report

PART I ITEM 1. BUSINESS Hancock Whitney Corporation is a regulated financial services company in the U.S. Gulf South, offering banking, trust, and investment services, with $33.6 billion in assets - Key Financial Metrics (as of Dec 31, 2020) | Metric | Amount (Billion USD) | | :--- | :--- | | Total Assets | $33.6 | | Total Loans | $21.8 | | Total Deposits | $27.7 | - The company's strategic focus in 2020 was on navigating the COVID-19 pandemic and a highly active hurricane season by de-risking its balance sheet, which included divesting a significant portion of its energy loan portfolio and issuing $172.5 million of subordinated debt[22] - The company operates primarily in the Gulf South region, including Mississippi, Alabama, Louisiana, Florida, and Texas, with a loan production office in Nashville, Tennessee[20] - As of December 31, 2020, the company had 3,986 full-time equivalent employees, with headcount reduced by approximately 5% in the latter half of 2020 through attrition and other efficiency initiatives[54] Loan Portfolio and Underwriting The Bank's lending focuses on commercial, consumer, and real estate loans, with underwriting standards designed for consistency and risk management - The Bank's lending focuses on commercial, consumer, and real estate loans. Underwriting standards are designed for consistency and risk management, with specific policies for loan concentrations, collateral, and approval hierarchies[24][25] - Portfolio Segment Concentrations (as of Dec 31, 2020) | Portfolio Segment | Concentration (% of risk-based capital) | | :--- | :--- | | Commercial non-real estate | 527% | | Commercial real estate - owner occupied | 103% | | Commercial real estate-income producing | 121% | | Construction and land development | 78% | | Residential mortgage | 92% | | Consumer | 121% | - The loan portfolio includes loans made under the SBA's Paycheck Protection Program (PPP), which are guaranteed by the SBA, bear 1% interest, and have two or five-year terms[34] Securities Portfolio The investment portfolio primarily consists of U.S. agency debt, mortgage-related securities, and municipal obligations, managed with a target effective duration of two to five and a half years - The investment portfolio primarily consists of U.S. agency debt, mortgage-related securities, and municipal obligations. It is managed with a target effective duration of two to five and a half years[47] - A significant portion of the securities portfolio is used to secure certain deposits and other liabilities, with limits on the percentage pledged to maintain liquidity[48] Deposits and Trust Services Deposits are the most significant funding source, with levels in 2020 influenced by pandemic-driven factors, and the trust department managing approximately $27.0 billion of assets - Deposits are the most significant funding source. Deposit levels in 2020 were influenced by pandemic-driven factors, including government stimulus payments and PPP loan proceeds[50] - Brokered deposits decreased to $14 million at year-end 2020, as the company did not renew maturing brokered deposits due to strong growth in transaction and savings deposits[52] - The Bank's trust department had approximately $27.0 billion of assets under administration at December 31, 2020[53] Supervision and Regulation The company is a financial holding company subject to extensive supervision by federal and state authorities, with regulations primarily protecting consumers, depositors, and the Deposit Insurance Fund - The Company is a financial holding company subject to extensive supervision by the Federal Reserve, FDIC, and other state and federal agencies. Regulations are intended primarily for the protection of consumers, depositors, and the Deposit Insurance Fund (DIF)[64][66][67] - The Company and the Bank are subject to minimum capital requirements under Basel III rules. Both entities must maintain a capital conservation buffer of 2.5% above minimums to avoid restrictions on dividends and share buybacks[79][82] - Company and Bank Capital Ratios (as of Dec 31, 2020) | Ratio | Minimum + Buffer | Company | Bank | | :--- | :--- | :--- | :--- | | Tier 1 leverage capital | N/A | 7.88% | 8.11% | | Common Equity Tier 1 capital | 7.00% | 10.61% | 10.94% | | Tier 1 capital | 8.50% | 10.61% | 10.94% | | Total risk-based capital | 10.50% | 13.22% | 12.19% | - The Company adopted the CECL accounting standard on January 1, 2020, and elected the optional five-year transition period to delay the estimated impact on regulatory capital[87][88] ITEM 1A. RISK FACTORS The company faces material risks across economic, financial industry, operational, strategic, legal, and regulatory categories, including COVID-19 impacts and LIBOR transition challenges Risks Related to Economic and Market Conditions The COVID-19 pandemic has created extensive disruptions, adversely impacting credit risk, collateral values, customer demand, and operational stability, with the ultimate impact remaining highly uncertain - The COVID-19 pandemic has created extensive disruptions, adversely impacting credit risk, collateral values, customer demand, and operational stability. The ultimate impact remains highly uncertain[122][123] - The company has significant lending concentrations in commercial real estate, healthcare, hospitality, and energy, making it vulnerable to downturns in these sectors, which have been exacerbated by COVID-19[138] - The transition away from LIBOR after 2021 presents a significant risk, as it could adversely affect interest rates on a substantial portion of the company's variable-rate loans, derivatives, and other financial instruments[152][154] Risks Related to the Financial Services Industry Effective liquidity management is essential, and access to funding could be impaired by factors affecting the financial services industry or the broader economy, while the CECL accounting standard adds potential volatility to credit loss allowances - Effective liquidity management is essential, and access to funding could be impaired by factors affecting the financial services industry or the broader economy[161] - The adoption of the CECL accounting standard on January 1, 2020, accelerates the recognition of expected credit losses and adds potential volatility to the allowance for credit losses due to its forward-looking nature[165] Risks Related to Our Operations The company is dependent on operational systems and infrastructure, and a failure or breach, including those of third-party vendors, could disrupt business, result in financial loss, and damage its reputation, with cybersecurity risks heightened by remote work - The company is dependent on operational systems and infrastructure, and a failure or breach, including those of third-party vendors, could disrupt business, result in financial loss, and damage its reputation[168][169] - Cybersecurity risks have dramatically increased due to new technologies and sophisticated attackers. The transition to remote work during the COVID-19 pandemic has heightened these risks[173][174] Risks Related to Our Business Strategy The financial services industry is highly competitive, requiring adaptation to new technology-driven products and services, while future growth through acquisitions carries risks such as integration challenges and potential overpayment - The financial services industry is highly competitive, with pressure from larger institutions and non-bank competitors not subject to the same regulatory oversight. Success depends on the ability to adapt to new technology-driven products and services[181][182] - Future growth may depend on acquisitions, which carry risks such as failing to obtain regulatory approval, integration challenges, and potentially overpaying for targets in a competitive M&A environment[188][190][191] ITEM 1B. UNRESOLVED STAFF COMMENTS The company reports no unresolved staff comments from the SEC - None[220] ITEM 2. PROPERTIES The company operates 208 full-service banking offices and 275 ATMs across the Gulf South, with its main office in Gulfport, Mississippi - The Company operates 208 full-service banking offices and 275 automated teller machines across its primary markets in the Gulf South[222] - Approximately 48% of the company's banking facilities are owned, with the remaining facilities being leased[222] ITEM 3. LEGAL PROCEEDINGS The company is party to various legal proceedings arising in the ordinary course of business but does not believe any pending matters will have a material adverse effect on its financial position or liquidity - The company does not expect any pending legal proceedings to have a material adverse effect on its consolidated financial position or liquidity[223] ITEM 4. MINE SAFETY DISCLOSURES This item is not applicable to the company's operations - Not applicable[224] PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES The company's common stock trades on NASDAQ under 'HWC', and it repurchased approximately 4.9 million shares at an average of $37.65 per share under a program that expired in 2020 - The Company's common stock is traded on the NASDAQ Global Select Market under the ticker symbol "HWC"[226] - A stock buyback program authorized in September 2019 for up to 5.5 million shares expired on December 31, 2020. The company repurchased approximately 4.9 million shares at an average price of $37.65 per share under this program[233][235] - Final settlement of a $185 million Accelerated Share Repurchase (ASR) agreement occurred on March 18, 2020, resulting in a final delivery of 1,001,472 shares and a cash receipt of approximately $12.1 million[234] ITEM 6. SELECTED FINANCIAL DATA The company reported a net loss of $45.2 million in 2020, driven by a $602.9 million provision for credit losses, despite growth in total assets to $33.6 billion and deposits to $27.7 billion - Selected Financial Data (2020 vs. 2019) | Metric (in thousands, except per share) | 2020 | 2019 | | :--- | :--- | :--- | | Net income (loss) | $(45,174) | $327,380 | | Diluted earnings (loss) per share | $(0.54) | $3.72 | | Provision for credit losses | $602,904 | $47,708 | | Total assets (period-end) | $33,638,602 | $30,600,757 | | Total loans (period-end) | $21,789,931 | $21,212,755 | | Total deposits (period-end) | $27,697,877 | $23,803,575 | | Return on average assets | (0.14%) | 1.12% | | Net charge-offs to average loans | 1.78% | 0.23% | ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The company recorded a $45.2 million net loss in 2020, primarily due to a $602.9 million provision for credit losses, while assets grew to $33.6 billion and deposits to $27.7 billion Executive Overview The company reported a $45.2 million net loss for 2020, heavily impacted by a $602.9 million provision for credit losses, despite stable operating pre-provision net revenue and significant growth in assets and deposits - The company reported a net loss of $45.2 million for 2020, heavily impacted by a $602.9 million provision for credit losses. This provision included $160.1 million related to the sale of a substantial portion of the energy loan portfolio[265] - Operating pre-provision net revenue (PPNR) was stable at $491.2 million, up slightly from 2019. Total assets grew 10% to $33.6 billion, and deposits grew 16% to $27.7 billion[252][265] - The company participated in the Paycheck Protection Program (PPP), originating over 13,000 loans totaling $2.4 billion in 2020, which contributed to loan growth and net interest income[257][258] - Net interest margin (NIM) decreased by 17 basis points to 3.27% due to sharp interest rate contractions and a changing asset/liability mix from excess liquidity[265] Results of Operations Net interest income increased by 5% to $955.5 million in 2020, driven by growth in earning assets, while the provision for credit losses surged to $602.9 million due to the pandemic and an energy loan sale - Net interest income (tax-equivalent) increased by 5% to $955.5 million in 2020, driven by a $2.8 billion increase in average earning assets, primarily from PPP loans and the MidSouth acquisition[271] - The provision for credit losses surged to $602.9 million in 2020 from $47.7 million in 2019, reflecting the economic impact of the pandemic and a $160.1 million provision for the energy loan sale[283] - Noninterest income increased by 3% to $324.4 million, largely due to a 103% increase in income from secondary mortgage market operations ($40.2 million) amid a favorable rate environment for refinancing[287][293] - Noninterest expense rose 2% to $788.8 million. Excluding prior-year merger costs, operating expenses increased by 7%, driven by higher personnel costs and OREO write-downs[297] - The company recorded an income tax benefit at an effective rate of 63.8% due to a pre-tax loss and benefits from the CARES Act, which allowed for a net operating loss (NOL) carryback to a higher tax rate year[310] Balance Sheet Analysis Total loans grew by $0.6 billion (3%) to $21.8 billion, primarily due to PPP loan originations, while total deposits increased by $3.9 billion (16%) to $27.7 billion, with noninterest-bearing deposits comprising 44% - Total loans grew by $0.6 billion (3%) to $21.8 billion, primarily due to $2.4 billion in PPP loan originations, which was partially offset by the sale of a portion of the energy loan portfolio[326][329] - The energy loan portfolio was significantly reduced to $308 million from $1.0 billion at year-end 2019, mainly due to a $497 million loan sale in July 2020[331] - Total deposits increased by $3.9 billion (16%) to $27.7 billion, with noninterest-bearing deposits growing 39% to $12.2 billion, comprising 44% of total deposits[368][369] - The Allowance for Credit Losses (ACL) increased to $480.1 million (2.20% of total loans) from $195.2 million, reflecting the adoption of CECL and a significant reserve build due to the pandemic's economic impact[356] Enterprise Risk Management The company manages risk through a framework overseen by the Board of Directors and senior management, focusing on seven primary risk categories, while actively managing interest rate risk and the transition from LIBOR - The company manages risk through a framework overseen by the Board of Directors and senior management, focusing on seven primary risk categories: credit, market, liquidity, operational, legal, reputational, and strategic[386][387] - Asset/Liability management is a key function, utilizing models to quantify and control interest rate risk (IRR) with the objective of maintaining a stable net interest income[396][399] - The company has a LIBOR Transition Working Group to manage the risks associated with the discontinuation of LIBOR. As of year-end 2020, approximately 30% of the loan portfolio was tied to LIBOR[408][409] - At December 31, 2020, the company had $17.5 billion in net available sources of liquidity from internal and external sources, demonstrating a strong liquidity position[410][411] Capital Resources Stockholders' equity totaled $3.4 billion at year-end 2020, with all regulatory capital ratios remaining well in excess of minimum requirements, including a Common Equity Tier 1 (CET1) ratio of 10.61% - Stockholders' equity totaled $3.4 billion at year-end 2020, a slight decrease from $3.5 billion in 2019, attributable to the net loss and dividends, partially offset by gains in other comprehensive income[428] - All regulatory capital ratios remained well in excess of minimum requirements, including the capital conservation buffer. The Common Equity Tier 1 (CET1) ratio was 10.61% at December 31, 2020[431][432] - The company maintained its quarterly dividend of $0.27 per share throughout 2020, continuing an uninterrupted quarterly dividend payment history since 1967[437] ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The company's primary market risk is interest rate risk, with an asset-sensitive balance sheet projecting a 3.95% increase in net interest income for a +100 basis point rate shock in year one - Net Interest Income (NII) at Risk (as of Dec 31, 2020) | Change in Interest Rates (bps) | Estimated Increase in NII (Year 1) | Estimated Increase in NII (Year 2) | | :--- | :--- | :--- | | +100 | 3.95% | 6.47% | | +200 | 8.62% | 14.13% | | +300 | 13.19% | 21.55% | - The company's balance sheet is generally asset-sensitive, driven by variable-rate loans and a high volume of non-interest bearing and low-rate sensitive deposits[402] ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA This section presents the company's audited consolidated financial statements and the independent auditor's unqualified report, highlighting the adoption of the CECL accounting standard Note 1. Summary of Significant Accounting Policies and Recent Accounting Pronouncements The company adopted the CECL accounting standard on January 1, 2020, requiring the measurement of expected credit losses over the life of financial assets - The company adopted ASC Topic 326, "Financial Instruments – Credit Losses" (CECL), on January 1, 2020. This new standard requires the measurement of expected credit losses over the life of financial assets based on historical experience, current conditions, and reasonable forecasts[508][588] - Impact of CECL Adoption (Jan 1, 2020) | Item | Impact (in thousands) | | :--- | :--- | | Increase in Allowance for Loan Losses | $49,411 | | Increase in Reserve for Unfunded Commitments | $27,330 | | Total Increase in Allowance for Credit Losses | $76,741 | | Decrease to Retained Earnings (after-tax) | $44,087 | Note 2. Business Combination On September 21, 2019, the company acquired MidSouth Bancorp, Inc. for $193.8 million, recording $63.4 million in goodwill - On September 21, 2019, the Company completed the acquisition of MidSouth Bancorp, Inc. The transaction was valued at $193.8 million, resulting in the acquisition of $130.5 million in net assets and the recording of $63.4 million in goodwill[597][599] - The company incurred approximately $32.7 million in acquisition-related costs in 2019, including severance, professional services, and contract termination fees[600] Note 4. Loans and Allowance for Credit Losses In 2020, the company sold $497 million of its energy loan portfolio to reduce risk, increasing the allowance for credit losses to $450.2 million - In 2020, the Company sold $497 million of its energy loan portfolio for net proceeds of approximately $254.4 million to reduce risk in the loan portfolio[619] - The allowance for credit losses increased from $191.3 million at year-end 2019 to $450.2 million at year-end 2020. This includes a $49.4 million adjustment upon adopting CECL and a $604.3 million provision for loan losses during the year, offset by net charge-offs[624] - At December 31, 2020, there were 176 loans totaling $630.6 million with active short-term payment deferrals or other modifications under the CARES Act[635] ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[797] ITEM 9A. CONTROLS AND PROCEDURES Management concluded that the company's disclosure controls and procedures and internal control over financial reporting were effective as of December 31, 2020, with no material changes during the fourth quarter - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2020[799] - Based on an evaluation using the COSO framework, management concluded that the company's internal control over financial reporting was effective as of December 31, 2020[801] ITEM 9B. OTHER INFORMATION The company announced its Annual Meeting of Shareholders will be held virtually on Wednesday, April 21, 2021 - The Annual Meeting of Shareholders is scheduled for April 21, 2021, to be held virtually[803] PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE Information regarding directors, corporate governance, and compliance with Section 16(a) is incorporated by reference from the company's definitive proxy statement for its 2021 annual meeting, with executive officer information provided in Part I - Information required by this item concerning directors and corporate governance is incorporated by reference from the company's definitive proxy statement for the 2021 annual meeting of shareholders[804] - Information regarding executive officers is presented in Part I of this Form 10-K[805] ITEM 11. EXECUTIVE COMPENSATION Information concerning executive and director compensation, including the Compensation Discussion and Analysis, is incorporated by reference from the company's definitive proxy statement for its 2021 annual meeting - Information required by this item is incorporated by reference from the company's definitive proxy statement for the 2021 annual meeting of shareholders[806] ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS Information regarding security ownership of certain beneficial owners and management is incorporated by reference from the company's definitive proxy statement for its 2021 annual meeting - Information required by this item is incorporated by reference from the company's definitive proxy statement for the 2021 annual meeting of shareholders[807] ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE Information concerning related party transactions and director independence is incorporated by reference from the company's definitive proxy statement for its 2021 annual meeting - Information required by this item is incorporated by reference from the company's definitive proxy statement for the 2021 annual meeting of shareholders[808] ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES Information regarding principal accountant fees and services is incorporated by reference from the company's definitive proxy statement for its 2021 annual meeting - Information required by this item is incorporated by reference from the company's definitive proxy statement for the 2021 annual meeting of shareholders[809] PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES This section lists the financial statements, financial statement schedules, and exhibits filed as part of the Form 10-K report, including consolidated financial statements and various agreements and certifications - This section lists all documents filed as part of the report, including the consolidated financial statements, consents of the independent registered public accounting firm, and certifications by the CEO and CFO[811][812] ITEM 16. FORM 10-K SUMMARY This item is not applicable to the company's filing - Not applicable[816]