HANCOCK WHITNEY CORPORATION FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning and protections of section 27A of the Securities Act of 1933, as amended, and section 21E of the Securities Exchange Act of 1934, as amended. Important factors that could cause actual results to differ materially from the forward-looking statements we make in this Quarterly Report on Form 10-Q and in other reports or documents that we file from time to time with theSEC include, but are not limited to, the following:
• the negative impacts and disruptions resulting from the outbreak of the
novel coronavirus, or COVID-19, on the economies and communities we serve,
which has had and may continue to have an adverse impact on our business
operations and performance, and could have a negative impact on our credit
portfolio, stock price, borrowers and the economy as a whole both globally
and domestically;
• government or regulatory responses to the COVID-19 pandemic;
• balance sheet and revenue growth expectations may differ from actual results;
• the risk that our provision for loan losses may be inadequate or may be
negatively affected by credit risk exposure;
• loan growth expectations;
• management's predictions about charge-offs, including energy-related
credits, the impact of changes in oil and gas prices on our energy
portfolio, including changes in prices related to COVID-19 and the continued
spread of the same, and the downstream impact on businesses that support
that sector, especially in the
• the risk that our enterprise risk management framework may not identify or
address risks adequately, which may result in unexpected losses;
• the impact of the transaction with MidSouth or future business combinations
upon our performance and financial condition including our ability to
successfully integrate the businesses;
• deposit trends;
• credit quality trends;
• changes in interest rates;
• the impact of reference rate reform;
• net interest margin trends;
• future expense levels;
• improvements in expense to revenue (efficiency ratio);
• success of revenue-generating initiatives;
• the effectiveness of derivative financial instruments and hedging activities
to manage risks;
• risks related to our reliance on third parties to provide key components of
our business infrastructure, including the risks related to disruptions in
services or financial difficulties of a third-party vendor;
• risks related to the ability of our operational framework to manage risks
associated with our business such as credit risk and operation risk,
including third-party vendors and other service providers, which could among
other things, result in a breach of operating or security systems as a
result of a cyber-attack or similar act;
• projected tax rates;
• future profitability;
• purchase accounting impacts, such as accretion levels;
• our ability to identify and address potential cybersecurity risks, including
data security breaches, credential stuffing, malware, "denial-of-service"
attacks, "hacking" and identity theft, a failure of which could disrupt our
business and result in the disclosure of and/or misuse or misappropriation
of confidential or proprietary information, disruption or damage to our
systems, increased costs, losses, or adverse effects to our reputation;
• our ability to receive dividends from
liquidity, including our ability to pay dividends or take other capital
actions;
• the impact on our financial results, reputation, and business if we are
unable to comply with all applicable federal and state regulations or other
supervisory actions or directives and any necessary capital initiatives;
• our ability to effectively compete with other traditional and
non-traditional financial services companies, some of whom possess greater
financial resources than we do or are subject to different regulatory
standards than we are;
• our ability to maintain adequate internal controls over financial reporting;
• potential claims, damages, penalties, fines and reputational damage
resulting from pending or future litigation, regulatory proceedings and
enforcement actions;
• the financial impact of future tax legislation; and
• changes in laws and regulations affecting our businesses, includinglegislation and regulations relating to bank products and services, as well
as changes in the enforcement and interpretation of such laws and
regulations by applicable governmental and self-regulatory agencies, which
could require us to change certain business practices, increase compliance
risk, reduce our revenue, impose additional costs on us, or otherwise
negatively affect our businesses.
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Also, any statement that does not describe historical or current facts is a forward-looking statement. These statements often include the words "believes," "expects," "anticipates," "estimates," "intends," "plans," "forecast," "goals," "targets," "initiatives," "focus," "potentially," "probably," "projects," "outlook," or similar expressions or future conditional verbs such as "may," "will," "should," "would," and "could." Forward-looking statements are based upon the current beliefs and expectations of management and on information currently available to management. Our statements speak as of the date hereof, and we do not assume any obligation to update these statements or to update the reasons why actual results could differ from those contained in such statements in light of new information or future events. Forward-looking statements are subject to significant risks and uncertainties. Investors are cautioned against placing undue reliance on such statements. Actual results may differ materially from those set forth in the forward looking statements. Additional factors that could cause actual results to differ materially from those described in the forward-looking statements can be found in Part I, Item 1A. "Risk Factors" in our Annual Report on Form 10-K for the year endedDecember 31, 2019 , Part II, Item 1A. "Risk Factors" in this Quarterly Report on Form 10-Q, and in other periodic reports that we file with theSEC . You are cautioned not to place undue reliance on these forward-looking statements. We do not intend, and undertake no obligation, to update or revise any forward-looking statements, whether as a result of differences in actual results, changes in assumptions or changes in other factors affecting such statements, except as required by law. OVERVIEW Non-GAAP Financial Measures Management's Discussion and Analysis of Financial Condition and Results of Operations include non-GAAP measures used to describe our performance. These non-GAAP financial measures have inherent limitations as analytical tools and should not be considered on a standalone basis or as a substitute for analyses of financial condition and results as reported under GAAP. Non-GAAP financial measures are not standardized and therefore, it may not be possible to compare these measures with other companies that present measures having the same or similar names. These disclosures should not be considered an alternative to GAAP. A reconciliation of those measures to GAAP measures are provided within the Selected Financial Data section that appears later in this item. The following is a summary of these non-GAAP measures and an explanation as to why they are deemed useful. Consistent with Securities and Exchange Commission Industry Guide 3, we present net interest income, net interest margin and efficiency ratios on a fully taxable equivalent ("te") basis. The te basis adjusts for the tax-favored status of net interest income from certain loans and investments using a statutory federal tax rate of 21% to increase tax-exempt interest income to a taxable equivalent basis. We believe this measure to be the preferred industry measurement of net interest income, and that it enhances comparability of net interest income arising from taxable and tax-exempt sources. We present certain additional non-GAAP financial measures to assist the reader with a better understanding of the Company's performance period over period, as well as to provide investors with assistance in understanding the success management has experienced in executing its strategic initiatives. These non-GAAP measures may reference the concept "operating." We use the term "operating" to describe a financial measure that excludes income or expense considered to be nonoperating in nature. Items identified as nonoperating are those that, when excluded from a reported financial measure, provide management or the reader with a measure that may be more indicative of forward-looking trends in our business. We define Operating Pre-Provision Net Revenue as total revenue (te) less noninterest expense, excluding nonoperating items. Management believes that operating pre-provision net revenue is a useful financial measure because it enables investors and others to assess the Company's ability to generate capital to cover credit losses through a credit cycle. We define Operating Earnings as reported net income excluding nonoperating items net of income tax. We define Operating Earnings per Share as operating earnings expressed as an amount available to each common shareholder on a diluted basis.
Impact of COVID-19
Economic activity in the first quarter of 2020 contracted sharply and abruptly across all regions inthe United States as a result of the COVID-19 pandemic ("the pandemic") with mandated economic closures for non-essential businesses because of social distancing measures to slow the spread of the disease. The spread of COVID-19 has created a global public health crisis that has resulted in unprecedented uncertainty, volatility and disruption in financial markets and in governmental, commercial and consumer activity globally, and in the markets that we serve. A large portion of our customer base is concentrated inLouisiana , which was an early hot spot for the coronavirus, prompting business closures in mid-March and causing significant disruption to the economy and our customer base. Our geographic markets are concentrated in areas that depend on highly impacted industries such as hospitality and 40
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tourism, nonessential healthcare and oil and gas. Demand for COVID-19 related loan modification has been high, further indicating that our impact may be more significant than others in our industry. Conversely, success of current and future economic stimulus programs, such as enhanced unemployment benefits and theSmall Business Administration guaranteed paycheck protection programs, among others, mitigates some of the risk. The impact to our business will be contingent upon the success of containment measures in our markets and across the country, success in medical advancements for treatment and/or vaccines, and restoration of consumer confidence, which will allow for profitable restart of the economy. Timing and success of these items are difficult to predict and therefore significant uncertainty exists for the near term. The realization of these economic conditions have been reflected in our first quarter results most notably through the increase to the allowance for credit losses which is discussed further below. The Company utilizes Moody's macroeconomic forecasts that provide various scenarios to assist with the development of our outlook. These forecasts are anchored on a baseline forecast scenario, which by definition reflects a 50% probability distribution that the economy will perform better or worse than the baseline forecasted parameters. Several upside and downside scenarios are also provided that compare to the baseline scenario. OurMarch 2020 baseline scenario reflects a sharp and severe recession in the first and second quarters of 2020. The catalysts are the pandemic, turmoil in equity markets, and the steep decline in global oil prices. This scenario is based on the assumption that infections peak in May and begin to abate by July. Restrictions on travel and stay at home orders start to wind down slowly in May and will be lifted in July. Fifty percent of industries will be on lockdown in April, with restrictions gradually easing throughJune 2020 . The unemployment rate peaks in the second quarter of 2020. Oil prices remain depressed as the oil supply significantly exceeds demand, and are not forecasted to rebound to equilibrium until 2021. As a result of these factors, real gross domestic product begins to contract in first quarter 2020 and more dramatically in second quarter. Recovery is relatively quick with economic growth resuming in third quarter 2020. Consumer housing prices are only marginally impacted, but commercial real estate price index are more heavily impacted. The real estate price indices both return to positive growth in 2021. TheFederal Reserve continues to aggressively respond to the pandemic and emergency measures are expected to remain in place until the end of 2021, with unlimited quantitative easing and the zero interest rate policy in place until the economy is on track to return to full employment. The baseline forecast also assumes that lawmakers will pass additional stimulus bills in 2020 to support the economy. Downside scenarios from the baseline have varying degrees of severity of the outcome of the economic downturn as well as varying shapes and length of recovery. The downside scenarios S-3 and S-4 include double-dip recessions with a more prolonged recovery, with the S-4 scenario having a more severe immediate impact and a longer, more gradual recovery compared to S-3. We believe these scenarios are less likely to occur than baseline and have weighted them accordingly in developing our outlook. The utilization of these economic forecasts in our allowance for credit models resulted in a$247 million provision for credit losses this quarter. The extent to which observed and forecasted economic conditions deteriorate beyond that currently forecasted may result in additional material allowance for credit loss builds in the future. Changes in the depth and duration of these unprecedented economic conditions may also require revisions to the Company's currently forecasted cash flows that could result in impairment of certain intangible or other assets in future periods. The Company's response to the current and forecasted economic conditions described above has been proactive. Business continuity plans have been effective in maintaining operations and we continue to meet the needs of the customers we serve. Approximately 98% of our financial centers remain open and operating with full service drive up lanes and availability of in person meetings by appointment. Our online and mobile banking applications have also allowed us to continue to assist our customers. Our corporate service team members continue to support our operations with approximately 70% of our associates working remotely. We have also taken meaningful measures to enhance our liquidity and strengthen our balance sheet maintaining solid capital levels in anticipation of continued market disruption that negatively impacts the customers and markets we serve. These measures include increasing our line of credit with theFederal Reserve to$4.4 billion (up$1.8 billion fromDecember 31, 2019 ) and increasing short-term investments by$766 million ; providing total available net liquidity of$13.9 billion atMarch 31, 2020 . These proactive measures have allowed the Company to effectively support and participate in the various economic relief strategies employed at the federal level and provide loan payment deferral options in response to the COVID-19 pandemic. AtMarch 31, 2020 , there were 1,618 customers with loans totaling$839.4 million with payment deferral modifications of principal, interest or both under this program. Demand for such modifications continues, with 7,299 customers with loans totaling$3.1 billion modified throughApril 22, 2020 . We are also waiving fees on certain product offerings such as penalty-free CD withdrawals and various overdraft fees to provide relief to our customers. These fee waiver relief measures to help support our customer base will likely result in reduced fee income realized by the Company in the near term. Further, changes in consumer spending behavior in response to economic uncertainty may have a negative impact on other sources of noninterest income, such as bank card and ATM fees. OnMarch 27, 2020 , the Coronavirus Aid, Relief, and Economic Security ("CARES") Act was signed into law. It contains substantial tax and spending provisions intended to address the impact of the COVID-19 pandemic. The CARES Act includes the Paycheck Protection Program ("PPP"), a$349 billion program designed to aid small- and medium-sized businesses through federally guaranteed loans distributed through banks. The Company originated 4,893 loans totaling$1.7 billion to our customers under the initial phase of the PPP. OnApril 24, 2020 , an additional$310 billion in new funds was approved for this program and we processed approximately 7,000 additional applications totaling about$800 million in loans under the second phase of this program. The fees earned by administering these loan will provide substantial income to the Company that will be accreted through margin for the remainder of year. 41
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Our customers have also taken measures to enhance their liquidity, drawing on existing credit lines and participating in the PPP, which will contribute to loan growth in the short-term. As funding from government sponsored relief programs evaporates and economic conditions continue to slow, loan demand will likely fall in the near term. The participation in these programs by our customers and draws on lines of credit have also bolstered deposits, which will likely be depleted in the short term as depositors supplement lost cash flows. We continue to monitor the impact of COVID-19 closely, as well as any effects that may result from the CARES Act; however, the extent to which the COVID-19 pandemic will impact our operations and financial results during the remainder of 2020 and beyond is highly uncertain.
Overview of First Quarter 2020
Net loss for the first quarter of 2020 was$111.0 million , or$(1.28) per diluted common share (EPS), driven by a reserve build in response to deterioration in the macroeconomic environment from the pandemic and lower oil prices. Fourth quarter 2019 net income was$92.1 million , or$1.03 and first quarter 2019 net income was$79.2 million , or$0.91 EPS. The first quarter of both 2020 and 2019 did not include any nonoperating items. The fourth quarter of 2019 included$3.9 million , or$0.03 per share (after-tax impact) of nonoperating expenses related to the MidSouth acquisition that closed onSeptember 21, 2019 .
First quarter 2020 results compared to fourth quarter 2019:
• Net loss was
provision for credit loss of
related to the pandemic and declining oil prices and a
received in borrower bankruptcy restructurings
• We implemented the current expected credit loss accounting standard ("CECL")
effective
losses to
0.92% of total loans
• Loans were up
million, or 5%
• Net interest margin narrowed by 2 bps to 3.41%, with purchase accounting
accretion down
• Capital remains solid with common equity tier 1 (CET1) ratio of 10.03% and
tangible common equity (TCE) ratio of 8%; all regulatory ratios are well in
excess of required levels, including capital conservation buffer
• Liquidity solid with approximately
sources of funding
We ended 2019 with solid capital and liquidity and were well positioned to
weather the economic turmoil that we and our customers are facing in 2020. Our
first quarter 2020 increase in the allowance for credit loss is based on
scenario modeling that reflects a prolonged return to normal economic activity
in our market areas and considers continued concerns related to our oil and gas
portfolio. Our healthy liquidity position allows us to work with our customers
by offering loan modifications and participating in other stimulus lending
programs designed to help our customer until our markets return to full
operation. We believe our stress testing process has prepared us to deal with
the challenges ahead and we are committed to executing those strategies and
being a source of strength for our customers.
RESULTS OF OPERATIONS
Net Interest Income
Net interest income (te) for the first quarter of 2020 was $234.6 million , a
$2.1 million , or 1%, decrease from the fourth quarter of 2019. Compared to the
first quarter of 2019, net interest income (te) increased $11.6 million , or 5%.
The linked quarter decrease is primarily attributable to one less accrual day, a
lower rate environment and a $2.5 million decrease in purchase accounting
accretion. The increase compared to the prior year is due largely to an increase
in earning asset balances and one more accrual day, partially offset by a lower
rate environment.
The net interest margin for the first quarter of 2020 was down 2 bps at 3.41%
from the fourth quarter of 2019. The decrease is primarily due to the $2.5
million reduction in purchase accounting accretion, resulting in a 4 bp (basis
point) decline in the margin. The net interest margin less purchase accounting
accretion was up 1 bp to 3.32%. The decline in Prime and LIBOR rates also
negatively impacted the yield on loans by 7 bps. However, proactive deposit
pricing, and changes in wholesale funding related to a lower rate environment,
positively impacted the net interest margin by 8 bps. There were no interest
reversals related to nonaccrual activity in the first quarter as compared to one
bp of interest reversals in the prior quarter.
Compared to the first quarter of 2019, the net interest margin decreased 5 bps,
primarily due to a lower rate environment that resulted in a 27 bp drop in the
earning asset yield and a 22 bp drop in the cost of funds.
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We expect margin pressure to continue into the second quarter with lower earning
assets yields from the full effect of the March Federal Reserve interest rate
cuts and potential lower LIBOR rates as market uncertainty abates, as 55% of our
loans are variable rate, with approximately one third of those having floors.
Additional pressures include a reduced level of scheduled purchase accounting
accretion (down an estimated 5 bps) and a less favorable earning asset mix as
the Company maintains additional liquidity with an increased level of short-term
investments. Partially offsetting the lower asset yields will be a reduction in
cost of funds from actions taken on deposit pricing and funding mix as well as
from a significant number of higher rate certificates of deposit maturing during
the quarter.
The following tables detail the components of our net interest income (te) and
net interest margin.
Three Months Ended
March 31, 2020 December 31, 2019 March 31, 2019
(dollars in millions) Volume Interest (d) Rate Volume Interest (d) Rate Volume Interest (d)
Rate
Average earning assets Commercial & real estate loans (te) (a)$ 16,109.2 $ 182.5 4.56
%
2,969.0 29.5 3.98 % 3,004.8 30.3 4.04 % 2,942.4 31.1 4.23 %
Consumer loans 2,155.9 29.4 5.48 % 2,151.9 30.9 5.70 % 2,122.4 29.9 5.72 %
Loan fees & late charges - (0.6 ) 0.00 % - (0.3 ) 0.00 % - (0.9 ) 0.00 %
Total loans (te) (b) 21,234.1 240.8 4.56 % 21,038.0 248.6 4.69 % 20,126.9 240.6 4.84 %
Loans held for sale 40.3 0.6 6.17 % 62.3 0.7 4.41 % 20.6 0.3 4.92 %
US Treasury and government
agency securities 124.7 0.8 2.37 % 145.0 0.8 2.30 % 123.8 0.7 2.25 %
Mortgage-backed securities and
collateralized mortgage
obligations 5,139.5 31.3 2.44 % 5,162.7 32.0 2.48 % 4,599.4 29.9 2.60 %
Municipals (te) 877.2 6.7 3.07 % 888.1 6.9 3.09 % 930.0 7.4 3.17 %
Other securities 8.0 0.1 4.29 % 5.8 0.0 4.61 % 3.5 0.0 3.09 %
Total securities (te) (c) 6,149.4 38.9 2.53 % 6,201.6 39.7 2.56 % 5,656.7 38.0 2.69 %
Total short-term investments 206.9 0.5 0.87 % 139.6 0.5 1.51 % 216.2 1.2 2.18 %
Total earning assets (te) $ 27,630.7 $ 280.8 4.08 % $ 27,441.5 $ 289.5 4.20 % $ 26,020.4 $ 280.1 4.35 %
Average interest-bearing
liabilities
Interest-bearing transaction
and savings deposits $ 8,798.5 $ 12.7 0.58 % $ 8,803.7 $ 14.4 0.65 % $ 8,082.6 $ 14.7 0.74 %
Time deposits 3,513.2 15.4 1.76 % 3,364.4 16.4 1.93 % 3,743.3 18.0 1.95 %
Public funds 3,252.2 10.8 1.33 % 3,079.0 12.0 1.55 % 3,060.5 13.4 1.78 %
Total interest-bearing deposits 15,563.9 38.9 1.01 % 15,247.1 42.8 1.11 % 14,886.4 46.1 1.26 %
Short-term borrowings 2,150.2 4.5 0.83 % 2,393.4 7.1 1.19 % 1,684.9 8.1 1.92 %
Long-term debt 231.4 2.8 4.76 % 242.5 2.9 4.79 % 225.0 2.8 4.99 %
Total borrowings 2,381.6 7.3 1.22 % 2,635.9 10.0 1.51 % 1,909.9 10.9 2.30 %
Total interest-bearing
liabilities 17,945.5 46.2 1.03 % 17,883.0 52.8 1.17 % 16,796.3 57.0 1.38 %
Net interest-free funding
sources 9,685.2 9,558.5 9,224.1
Total cost of funds $ 27,630.7 $ 46.2 0.67 % $ 27,441.5 $ 52.8 0.76 % $ 26,020.4 $ 57.0 0.89 %
Net interest spread (te) $ 234.6 3.05 % $ 236.7 3.02 % $ 223.1 2.97 %
Net interest margin $ 27,630.7 $ 234.6 3.41 % $ 27,441.5 $ 236.7 3.43 % $ 26,020.4 $ 223.1 3.46 %
(a) Taxable equivalent (te) amounts were calculated using a federal income tax
rate of 21%.
(b) Includes nonaccrual loans.
(c) Average securities do not include unrealized holding gains/losses on
available for sale securities.
(d) Included in interest income is net purchase accounting accretion of
million,
2020, December 31, 2019 and March 31, 2019 , respectively.
Provision for Credit Losses
During the first quarter of 2020, we recorded a provision for credit losses
totaling $246.8 million , up from $9.2 million in the fourth quarter of 2019 and
$18.0 million in the first quarter of 2019. The first quarter of 2020 provision
expense includes an increase to the allowance for credit losses of $203.0
million related to the update of expected lifetime credit losses as a result of
the impact of the pandemic and widespread economic shutdown. The allowance
increase was comprised of $185.3 million of allowance for loan losses and a
$17.7 million reserve for unfunded commitments. Net charge-offs in the first
quarter of 2020 were $43.8 million , or 0.83% of
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average total loans on an annualized basis, up from$9.5 million or 0.18% in the fourth quarter of 2019, and$17.9 million , or 0.36% in the first quarter of 2019. The first quarter of 2020 included$35.9 million of energy charge-offs in our reserve based lending subsector, with virtually no energy charge-offs in the fourth or first quarters of 2019. The first quarter of 2019 included a$10.1 million charge-off related to a lease financing facility fraud.
The discussion of Allowance for Credit Losses and Asset Quality later in this Item provides additional information on these changes and on general credit quality.
Noninterest Income
Noninterest income totaled$84.4 million for the first quarter of 2020, up$1.5 million , or 2%, from the fourth quarter of 2019 and up$13.9 million , or 20%, compared to the first quarter of 2019. The increase in noninterest income linked-quarter was primarily due to a$1.5 million gain on the sale of historic tax credits and higher income on bank-owned life insurance, partially offset by lower transactional and trust fees. The increase in noninterest income compared to the prior year was due largely to higher derivative and secondary mortgage income driven by the lower interest rate environment as well as increased transaction and other fees from higher activity due to the MidSouth acquisition. Fees were collected as usual for most of the first quarter of 2020. As noted earlier, we began waiving fees on certain products in mid-March to provide relief to our customers during the economic shutdown. Depending on the duration of the impact of the pandemic on our customers, fee waivers will impact our results in future quarters. Further, changes in consumer spending habits in response to economic uncertainty are expected to negatively impact other sources of noninterest income, such as bank card and ATM fees. The components of noninterest income are presented in the following table for the indicated periods. Three Months Ended March 31, December 31, March 31, (in thousands) 2020 2019 2019 Service charges on deposit accounts$ 22,837 $ 23,382 $ 20,367 Trust fees 14,806 15,483 15,124 Bank card and ATM fees 17,362 17,913 15,290 Investment and annuity fees and insurance commissions 7,150 6,407 6,528 Secondary mortgage market operations 6,053 5,981 3,726 Income from bank-owned life insurance 4,266 3,451 3,265 Credit related fees 3,065 2,879 2,595 Income from derivatives 3,871 4,225 809 Other miscellaneous 4,977 3,203 2,799 Total noninterest income$ 84,387 $ 82,924 $ 70,503 Service charges on deposits totaled$22.8 million for the first quarter of 2020, down$0.5 million , or 2%, from the fourth quarter of 2019 and up$2.5 million , or 12%, from the first quarter of 2019. The decrease from the prior quarter was due to one less processing day and lower overdraft fees, as noted above. The increase from the first quarter of 2019 was primarily attributable to the MidSouth acquisition inSeptember 2019 . Trust fees decreased$0.7 million , or 4%, linked quarter largely due to the downturn in the market during the quarter and strong fourth quarter results. Compared to the first quarter of 2019, trust fees decreased$0.3 million , or 2%, largely due to changes in market conditions. Bank card and ATM fees totaled$17.4 million for the first quarter of 2020, down$0.6 million , or 3%, from the fourth quarter of 2019, primarily due to one fewer day in the quarter. Compared to the first quarter of 2019, bank card and ATM fees were up$2.1 million , or 14%, primarily due to increased card activity and the acquisition of MidSouth. Investment and annuity fees and insurance commissions increased$0.7 million , or 12%, compared to fourth quarter 2019 primarily due to an increase in annuity fees, corporate underwriting fees, equities and bond trading fees, partially offset by lower insurance commissions. Investment and annuity fees and insurance commissions increased$0.6 million , or 10%, compared to first quarter 2019 due to higher investment fees, insurance fees, and underwriting fees partially offset by a decrease in annuity sales. Income from secondary mortgage market operations was up$0.1 million , or 1%, from the fourth quarter of 2019 and up$2.3 million , or 62%, from the first quarter of 2019. Origination volume during the first quarter of 2020, particularly when compared to the first quarter of 2019, was positively impacted by the rate environment. Secondary mortgage market operations income will vary based on origination volume and the timing of subsequent sales. 44
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Income from bank-owned life insurance was$4.3 million in the first quarter of 2020, up$0.8 million , or 24%, from the fourth quarter of 2019 and up$1.0 million , or 31%, from the first quarter of 2019. The increase from the fourth quarter of 2019 was due to mortality gains and the increase from the first quarter of 2019 is attributable to both higher mortality gains and incremental earnings on the additional investment of$33 million inApril 2019 . Credit related fees were$3.1 million for the first quarter of 2020, up$0.2 million , or 6%, from the fourth quarter of 2019 and up$0.5 million , or 18%, from the first quarter of 2019. The linked quarter increase was due to both higher unused commitment fees and letter of credit fees, with the increase over the same quarter last year primarily due to higher unused commitment fees. Income from our customer interest rate derivative program totaled$3.9 million for the first quarter of 2020 compared to$4.2 million in the fourth quarter of 2019 and$0.8 million for the first quarter of 2019. Increased derivative income reflects increased transaction volume due to customer demand given the lower interest rates in the first quarter of 2020. Derivative income can be volatile and is dependent upon the composition of the portfolio, customer sales activity and market value adjustments due to market interest rate movement. Other miscellaneous income was$5.0 million in the first quarter of 2020, up$1.8 million compared to the fourth quarter of 2019 and up$2.2 million compared to the first quarter of 2019. The increase compared to the prior quarter was largely due to a$1.5 million gain on the sale of historic tax credits. The increase compared to the first quarter of 2019 includes the historic tax credit sale, an increase of$0.6 million in income from investments in small business investment companies and$0.3 million in higher syndication fees.
Noninterest Expense
Noninterest expense for the first quarter of 2020 was$203.3 million , up$5.5 million , or 3%, from the fourth quarter of 2019, and up$27.6 million , or 16%, from the first quarter of 2019. There were no nonoperating expenses in the first quarters of 2020 and 2019, and there were$3.9 million of nonoperating expenses in the fourth quarter of 2019 related to the acquisition and operational integration of MidSouth. Items identified as nonoperating are those that, when excluded from a reported financial measure, provide management or the reader with a measure that may be more indicative of forward-looking trends in our business.
The components of noninterest and nonoperating expense for the periods indicated are presented in the following tables.
Three Months Ended
March 31, December 31, March 31,
(in thousands) 2020 2019 2019
Operating expense
Compensation expense $ 91,071 $ 96,510 $ 83,968
Employee benefits 22,478 20,556 19,730
Personnel expense 113,549 117,066 103,698
Net occupancy expense 12,522 12,835 11,984
Equipment expense 4,617 4,687 4,679
Data processing expense 22,047 22,030 19,331
Professional services expense 9,741 9,470 8,168
Amortization of intangible assets 5,345 5,770 5,138
Deposit insurance and regulatory fees 5,815 5,356 5,406
Other real estate and foreclosed asset
(income) expense 10,130 (788 ) (991 )
Advertising 4,234 3,483 3,080
Corporate value and franchise taxes 4,296 3,583 4,042
Telecommunications and postage 4,065 4,149 3,466
Entertainment and contributions 2,447 2,562 2,708
Travel expense 1,111 1,664 1,098
Printing and supplies 1,108 1,227 1,169
Tax credit investment amortization 961 1,285 1,138
Other retirement expense (6,122 ) (4,152 ) (4,105 )
Other miscellaneous 7,469 7,629 5,691
Total noninterest expense $ 203,335 $ 197,856 $ 175,700
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Three Months Ended
March 31, December 31, March 31,
(in thousands) 2020 2019 2019
Nonoperating expense
Personnel expense $ - $ 2,504 $ -
Net occupancy expense - 54 -
Equipment expense - 487 -
Data processing expense - 655 -
Other real estate (income) expense - 130 -
Other expense - 26 -
Total nonoperating expenses $ - $ 3,856 $ -
Personnel expense totaled $113.5 million for the first quarter of 2020, down
$3.5 million , or 3%, compared to the prior quarter, primarily related to lower
bonus and incentives, including a reduction of $2.5 million of merger-related
expenses from the MidSouth acquisition reflected in the fourth quarter of 2019,
partially offset by seasonably higher benefits expense in first quarter 2020.
Compared to the first quarter of 2019, personnel costs were up $9.9 million , or
9%, primarily related to annual merit increases, and up $3.0 million as a result
of the acquisition of MidSouth.
Occupancy and equipment expenses totaled $17.1 million in the first quarter of
2020, down $ 0.4 million , or 2%, from the fourth quarter of 2019 and up $0.5
million , or 3%, from the first quarter of 2019. The linked-quarter decrease was
largely due to lower expenses related to leases that were acquired with MidSouth
that were discontinued in the fourth quarter. The increase compared to the first
quarter of 2019 is largely due to additional expenses related to locations
acquired with the MidSouth acquisition.
Data processing expense was $22.0 million for the first quarter of 2020, flat to
the fourth quarter of 2019, and up $2.7 million , or 14%, compared to the first
quarter of 2019. Merger-related expenses reflected in the fourth quarter ceased,
but were offset by an increase in investments in new technology. The increase
from the first quarter of 2019 was primarily due to investments in new
technology, as well as expenses resulting from increased card activity.
Professional services expense for the first quarter of 2020 totaled $9.7
million , up $0.3 million , or 3%, compared to the previous quarter and $1.6
million , or 19%, from the first quarter of 2019. The increase over the fourth
quarter of 2019 was due to higher consulting fees and the increase over the
first quarter of 2019 was due to higher legal fees related to problem credits as
well as a higher level of expense related to the investment in new technology.
Deposit insurance and regulatory fees totaled $5.8 million , up $0.5 million , or
9%, from the fourth quarter of 2019 and $0.4 million , or 8%, from the first
quarter of 2019. The increase from both the prior quarter and the same period in
2019 is primarily due to an increase in the risk-based assessment fees over
prior periods.
Corporate value and franchise tax expense for the first quarter of 2020 totaled
$4.3 million , up $0.7 million , or 20%, compared to the prior quarter and $0.3
million , or 6%, compared to the same quarter last year. The increase from both
the prior quarter and the first quarter of 2019 is primarily attributable to the
impact the acquisition of MidSouth had on our operations and the corresponding
effect on our corporate value and franchise tax calculations.
Business development-related expenses (including advertising, travel,
entertainment and contributions) were
Other real estate and foreclosed asset expense was$10.1 million for the first quarter of 2020, compared to income of$0.8 million in the fourth quarter of 2019 and income of$1.0 million in the first quarter of 2019. First quarter of 2020 expense includes a non-cash write-down totaling$9.8 million of equity interests in two energy-related companies received in borrower bankruptcy restructurings. Gains on sales exceeded expenses in both the fourth and first quarters of 2019.
All other expenses, excluding amortization of intangibles, totaled
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Income Taxes
The effective income tax rate for the first quarter of 2020 was approximately
17.5%, compared to 15.5% in the fourth quarter of 2019 and 17.6% in the first
quarter of 2018. The current quarter's net loss resulting from economic
conditions attributable to the pandemic has significantly reduced our estimated
annual effective tax rate. The tax benefit recorded to date is comprised of a
10.4% estimated annual effective tax rate in addition to discrete items
predominantly related to the settlement of tax matters and the anticipated
impact from the net operating loss carryback provision granted under CARES Act.
Refer to the table below table for details.
The CARES Act provides relief for individuals and businesses that have been
negatively impacted by the pandemic. The business-specific relief granted is
broad-reaching and ranges from operational relief (e.g., liquidity through
payroll tax credits or deferrals) to income tax provisions. The income tax
provisions that would impact the effective tax rate include relief related to
net operating loss carrybacks to a 35% statutory tax regime, interest
deductibility enhancements, accelerated alternative minimum tax credit refunds,
and a technical correction to the qualified improvement property classification.
We are still reviewing and quantifying the extent of the impact from the CARES
Act. As of first quarter 2020, the only impact from the CARES Act reflected in
our effective tax rate relates to our intent to carryback the net operating loss
attribute that we inherited from an acquired entity.
Our effective tax rate has historically varied from the federal statutory rate
primarily because of tax-exempt income and tax credits. Interest income on bonds
issued by or loans to state and municipal governments and authorities, and
earnings from the life insurance contract program are the major components of
tax-exempt income. The main source of tax credits has been investments in
tax-advantaged securities and tax credit projects. These investments are made
primarily in the markets the Company serves and are directed at tax credits
issued under the Federal and State New Market Tax Credit ("NMTC") programs,
Low-Income Housing Tax Credit ("LIHTC") programs, as well as pre-2018 Qualified
Zone Academy Bonds ("QZAB") and Qualified School Construction Bonds ("QSCB").
These investments generate tax credits, which reduce current and future taxes
and are recognized when earned as a benefit in the provision for income taxes.
We have invested in NMTC projects through investments in our own Community
Development Entity ("CDE"), as well as other unrelated CDEs. Federal tax credits
from NMTC investments are recognized over a seven-year period, while recognition
of the benefits from state tax credits varies from three to five years. Our
LIHTC investments to date are through variable interest entities for which the
Company is not the primary beneficiary and, therefore, are not consolidated.
LIHTC credits from the affordable housing projects are recognized over a
ten-year period, beginning with the year the rental activity begins, as a
reduction of income tax expense.
Based on tax credit investments that have been made to date in 2020, we expect
to realize benefits from federal and state tax credits over the next three years
totaling $7.8 million , $8.6 million and $8.5 million for 2021, 2022, and 2023,
respectively. We intend to continue making investments in tax credit projects.
However, our ability to access new credits will depend upon, among other
factors, federal and state tax policies and the level of competition for such
credits.
The following table reconciles reported income tax expense to that computed at the statutory federal tax rate for the indicated periods.
Three Months Ended
March 31, December 31, March 31,
(in thousands) 2020 2019 2019
Taxes computed at statutory rate $ (28,256 ) $ 22,904 $ 20,163
Tax credits:
QZAB/QSCB (572 ) (710 ) (710 )
NMTC - Federal and State (1,258 ) (1,851 ) (1,402 )
LIHTC and other tax credits (125 ) (500 ) -
Total tax credits (1,955 ) (3,061 ) (2,112 )
State income taxes, net of federal income tax
benefit (1,972 ) 2,024 1,905
Tax-exempt interest (2,756 ) (2,863 ) (2,417 )
Life insurance contracts (560 ) (1,030 ) (678 )
Employee share-based compensation (43 ) (411 ) (272 )
Impact from interim estimated effective tax
rate 20,390 1,038 (776 )
FDIC Assessment Disallowance 584 528 545
Impact from CARES Act (7,128 ) - -
Impact from tax settlement (3,690 ) - -
Return to provision adjustment - (1,459 ) -
Other, net 1,866 (734 ) 492
Income tax expense $ (23,520 ) $ 16,936 $ 16,850
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Selected Financial Data
The following tables contain selected financial data as of the dates and for the
periods indicated.
Three Months Ended
March 31, December 31, March 31,
2020 2019 2019
Common Share Data
Earnings per share:
Basic $ (1.28 ) $ 1.03 $ 0.91
Diluted $ (1.28 ) $ 1.03 $ 0.91
Cash dividends paid $ 0.27 $ 0.27 $ 0.27
Book value per share (period-end) $ 39.65 $ 39.62 $ 37.23
Tangible book value per share (period-end) $ 28.56 $ 28.63 $ 26.92
Weighted average number of shares (000s):
Basic 87,186 88,188 85,688
Diluted 87,186 88,315 85,800
Period-end number of shares (000s) 86,275 87,515 85,710
Three Months Ended
March 31, December 31, March 31,
(in thousands) 2020 2019 2019
Income Statement:
Interest income $ 277,343 $ 285,957 $ 276,283
Interest income (te) (a) 280,791 289,537 280,107
Interest expense 46,155 52,801 57,029
Net interest income (te) 234,636 236,736 223,078
Provision for credit losses 246,793 9,156 18,043
Noninterest income 84,387 82,924 70,503
Noninterest expense (excluding amortization
of intangibles) 197,990 192,086 170,562
Amortization of intangibles 5,345 5,770 5,138
Income before income taxes (134,553 ) 109,068 96,014
Income tax expense (benefit) (23,520 ) 16,936 16,850
Net income (loss) $ (111,033 ) $ 92,132 $ 79,164
For informational purposes only
Nonoperating items, pretax
Merger-related expenses $ - $ 3,856 $ -
Three Months Ended
March 31, December 31, March 31,
2020 2019 2019
Performance Ratios
Return on average assets (1.46 )% 1.20 % 1.13 %
Return on average common equity (12.72 )% 10.52 % 10.30 %
Return on average tangible common equity (17.51 )% 14.62 % 14.38 %
Earning asset yield (te) (a) 4.08 % 4.20 % 4.35 %
Total cost of funds 0.67 % 0.76 % 0.89 %
Net interest margin (te) 3.41 % 3.43 % 3.46 %
Noninterest income to total revenue (te) 26.45 % 25.94 % 24.01 %
Efficiency ratio (b) 62.06 % 58.88 % 58.10 %
Average loan/deposit ratio 87.28 % 88.22 % 87.08 %
FTE employees (period-end) 4,148 4,136 3,885
Capital Ratios
Common stockholders' equity to total assets 10.77 % 11.33 % 11.20 %
Tangible common equity ratio (c) 8.00 % 8.45 % 8.36 %
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(a) Taxable equivalent (te) amounts were calculated using a federal income tax
rate of 21%.
(b) The efficiency ratio is noninterest expense to total net interest (te) and
noninterest income, excluding amortization of purchased intangibles and
nonoperating items.
(c) The tangible common equity ratio is common stockholders' equity less
intangible assets divided by total assets less intangible assets.
Three Months Ended
March 31, December 31, March 31,
($ in thousands) 2020 2019 2019
Asset Quality Information
Nonaccrual loans (a)(b) $ 254,058 $ 245,833 $ 204,831
Restructured loans - still accruing 34,251 61,265 117,578
Total nonperforming loans 288,309 307,098 322,409
Other real estate (ORE) and foreclosed
assets 18,460 30,405 27,148
Total nonperforming assets $ 306,769 $ 337,503 $ 349,557
Accruing loans 90 days past due (c)(d) $ 17,790 $ 6,582 $ 20,308
Net charge-offs 43,764 9,503 17,869
Allowance for loan losses 426,003 191,251 194,688
Reserve for unfunded lending commitments 48,992 3,974 -
Allowance for credit losses 474,995 195,225 194,688
Total provision for credit losses 246,793 9,156 18,043
Ratios:
Nonperforming assets to loans, ORE and foreclosed assets 1.42 % 1.59 % 1.74 % Accruing loans 90 days past due to loans 0.08 % 0.03 % 0.10 % Nonperforming assets + accruing loans 90 days past due to loans, ORE and foreclosed assets 1.51 % 1.62 % 1.84 % Net charge-offs to average loans 0.83 % 0.18 % 0.36 % Allowance for loan losses to period-end loans 1.98 % 0.90 % 0.97 % Allowance for credit losses to period-end loans 2.21 % 0.92 % 0.97 % Allowance for loan losses to nonperforming loans + accruing loans 90 days past due 139.17 %
60.97 % 56.81 %
(a) Included in nonaccrual loans are nonaccruing restructured loans totaling
31, 2019 and
(b) Nonaccrual loans do not include purchased credit impaired loans accounted for
under ASC 310-30 that would have otherwise been considered nonperforming,
totaling
respectively. Effective 1/1/2020, with the adoption of ASC 326, such metrics
include both originated and acquired balances.
(c) Excludes 90+ accruing troubled debt restructured loans already reflected in
total nonperforming loans of
(d) Loans past due 90 days or more do not include purchased credit impaired loans
accounted for under ASC 310-30 that would have otherwise been considered
delinquent, totaling
3/31/2019, respectively. Effective 1/1/2020, with the adoption of ASC 326,
such metrics include both originated and acquired balances.
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