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 has and may continue to 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 credit losses may be inadequate or may be
negatively affected by credit risk exposure;
• loan growth expectations;
• the impact of Paycheck Protection Program (PPP) loans on our results;
• management's predictions about charge-offs;
• the risk that our enterprise risk management framework may not identify or
address risks adequately, which may result in unexpected losses;
• the impact of 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, including the impact from the Voluntary Early
Retirement Program;
• improvements in expense to revenue (efficiency ratio);
• success of revenue-generating and cost reduction 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,
heightened by the increased use of our virtual private network platform,
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;
• a material decrease in net income or a net loss over several quarters could
result in a decrease in, or the elimination of, our quarterly cash dividend;
• 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, including costs and effects of litigation related to
our participation in stimulus programs associated with the government's
response to the COVID-19 pandemic;
• the financial impact of future tax legislation; and
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Table of Contents • changes in laws and regulations affecting our businesses, including
governmental monetary and fiscal policies, legislation 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.
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, 2020 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 the provisions of subpart 229.1400 of theSecurities and Exchange Commission's Regulation S-K, "Disclosures by Bank and Savings and Loan Registrants," 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. 37
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Ongoing Impact of COVID-19 and Economic Outlook
The COVID-19 pandemic continues to impact economic conditions throughoutthe United States and globally. While infection rates abated considerably during the first quarter of 2021, the virus is not yet fully contained and there is continued uncertainty related to mutated variants of the virus that, in some cases, may spread more easily between humans, have more severe symptoms, require different treatments, or could change the effectiveness of current vaccines. Vaccination rates have ramped up considerably inthe United States since the end of 2020, with theCenters for Disease Control and Prevention (CDC ) reporting more than 43% of the population receiving at least one dose and 30% of the population fully vaccinated throughApril 28, 2021 . The various measures from the federal government to deliver temporary economic aid to individuals and businesses financially impacted by COVID-19 continue to have a stabilizing impact on economic conditions. National economic activity accelerated to a moderate pace from late February to early April, and consumer spending strengthened during the same period. Reports on tourism were more upbeat, bolstered by a pickup in demand for leisure activities and travel, largely attributed to spring break, an easing of pandemic-related restrictions, increased vaccinations, and recent stimulus payments among other factors. National economic metrics showed meaningful signs of recovery through the latter half of 2020 and continued to do so in the first quarter of 2021, although have not yet returned to pre-pandemic levels. After peaking at 14.8% inApril 2020 , the rate of unemployment has declined steadily and reached 6% inMarch 2021 , and Real Gross Domestic Product (GDP) showed gains, on an annualized basis, of 33% and 4% in the third and fourth quarters of 2020, respectively, and 6% in the first quarter of 2021, after falling precipitously in the second quarter of 2020. The pandemic remains a significant headwind to both our local and the global economy. While we expect that the worst of the economic fallout from the virus is likely behind us, risks to travel, tourism and trade will remain until effective vaccines are widely adopted or the virus is otherwise contained. Impact to Our Business While our results for 2020 were significantly impacted by the economic slowdown, we began to see improvement in the latter half of the year. During the first quarter of 2021, there were signs of cautious optimism across our footprint as vaccinations ramped up, restrictions were decreased or eliminated, and businesses were allowed to increase capacity. We saw growth across most revenue streams and remained focused on expense management, leading to an increase in earnings compared to the prior quarter. We were pleased to participate in the second round of forgivable loans to qualifying businesses under theSmall Business Administration's Paycheck Protection Program (PPP), now extended untilMay 31, 2021 . During the first quarter of 2021, we originated$836 million in new PPP loans, had$496 million of PPP loans forgiven, and ended the quarter with$2.3 billion PPP loans outstanding. PPP loans have provided loan growth and contributed favorably to our net interest income and margin amid the low interest rate environment, while delivering much needed assistance in the communities we serve. However, muted demand continued for most other forms of commercial and consumer loan products, resulting in a net decline of core loans (excluding PPP loans) of approximately$465 million in the first quarter of 2021. We, along with many in our industry, again experienced significant deposit growth during the quarter, largely from the extension of PPP and a new round of stimulus payments. Our end of period deposits grew over$1.5 billion during the first quarter of 2021, and combined with PPP loans forgiveness and lack of core loan demand, was the source of over$2 billion of excess liquidity. The excess liquidity provided net interest income, but also contributed to the contraction of our net interest margin during the quarter. Despite the challenging economic environment, our overall asset quality metrics continued to improve with both commercial criticized and nonperforming loans down compared to the prior quarter. A significant portion of our loan portfolio is concentrated in geographic areas and/or business sectors that have been disproportionately impacted by restrictions on movement, such as hospitality, retail and certain healthcare and social assistance services. Many of our customers have benefited from the various stimulus programs intended to provide assistance until full economic recovery, which has not yet been achieved for many. We continue to monitor these loans closely. We continue to focus on expense control initiatives in light of the current economic environment. These initiatives included closing 12 financial centers in the fourth quarter of 2020 and eight in the second quarter of 2021. Our full time equivalent headcount has decreased by 270 sinceJune 30, 2020 via attrition and other initiatives. In addition, during the first quarter of 2021, we offered a voluntary early retirement program to certain associates meeting age and service requirements; most associates electing the benefit retired onApril 30, 2021 . We continue to explore other cost saving opportunities. Despite the challenges we have faced, our balance sheet remains strong and both the Company and Bank remain well capitalized with capital ratios well in excess of required regulatory minimums. 38
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Table of Contents Economic Outlook We utilize economic forecasts produced byMoody's Analytics (Moody's) that provide various scenarios to assist in the development of our economic outlook. These forecasts are anchored on a baseline forecast scenario, which Moody's defines as the "most likely outcome" of where the economy is headed based on current conditions. Several upside and downside scenarios are produced that are derived from the baseline scenario. This outlook discussion utilizes theMarch 2021 Moody's forecast, the most current available atMarch 31, 2021 . In theMarch 2021 baseline forecast, the near-term economic recovery was assumed to be somewhat faster compared to the assumption included in the December forecast. Key underlying assumptions in the baseline forecast are that (1) there will be no new widespread economic shutdowns; (2) herd immunity will be reached by the summer; (3) the unemployment rate continues to decline, and at a faster rate than the prior forecast, with fourth quarter of 2021 forecasted at 5.0% and fourth quarter of 2022 at 4.2%; (4) gross domestic product will increase an average of 5.7% in both 2021 and 2022; (5) the$1.9 trillion American Rescue Plan stimulus package, as well as infrastructure and social legislation forecasted in the second half of 2021, will both provide an additional boost to the economy; and, (6) theFederal Reserve will continue to respond to the economic impact of COVID-19 by maintaining rates at or near zero until the first quarter of 2023. The alternative Moody's forecast scenarios have varying degrees of positive and negative severity of the outcome of the economic downturn, as well as varying shapes and length of recovery. Management determined that assumptions provided for in the downside slower near-term growth (S-2) was reasonably possible, and as such, the S-2 scenario was given consideration through probability weighting in our allowance for credit losses calculation atMarch 31, 2021 . The S-2 slower near-term growth assumptions (compared to baseline) include slower than expected distribution of vaccines, with fewer people electing to receive it; a slower return to consumer spending on air travel, retail and hotels, and stimulus is less effective due to slower return to spending; a near-term rise in unemployment; and smaller infrastructure and social benefit legislation, which further impedes growth. We believe this alternative scenario is less likely to occur than the Baseline and have weighted it accordingly in developing our economic forecast. The extent to which observed and forecasted economic conditions deteriorate or recover beyond that currently forecasted may result in additional volatility and allowance for credit loss builds or releases in the future. As the gradual return to pre-pandemic conditions continues, we expect pressure on loan demand and earnings to remain in the near term, the extent of which is difficult to estimate. We have implemented several strategies to effectively manage our asset/liability mix, to maximize our resources, and reduce costs until the economy returns to a more normalized level of activity in our region. The timing of such return to pre-pandemic activity levels in our region remains uncertain. Forward looking information based on management's expectation of near-term performance is provided in several sections that follow. Given the ongoing and dynamic nature of the circumstances, it is not possible to accurately predict the extent, severity or duration of these conditions or when normal economic and operating conditions will resume. The continued success of government initiatives in stimulating economic activity, societal response to virus containment measures, and the availability, efficacy and satisfactory rate of vaccination that will meaningfully reduce infection rates are critical to the resolution of the crisis.
Highlights of the First Quarter 2021
We reported net income for the first quarter of 2021 of$107.2 million , or$1.21 per diluted common share (EPS), compared to$103.6 million , or$1.17 EPS in the fourth quarter of 2020 and a net loss of$111.0 million , or$(1.28) EPS in the first quarter of 2020. The first quarter of 2020 net loss reflected a provision for credit losses of$246.8 million related to the sharp decline in market conditions at the onset of the pandemic.
First quarter 2021 results compared to fourth quarter 2020:
• Net income of
or
• Pre-provision net revenue (PPNR) totaled
or 1%
• Negative provision for credit losses of
reserve release, $18.3 million in net charge-offs
• Allowance for credit losses remains elevated at 2.11% of total loans
• Improved asset quality, with declines of 20% in nonperforming loans and
11% in criticized commercial loans
• Net interest margin was down 13 basis points (bps) to 3.09%, mainly from
the impact of excess liquidity
• Capital levels improved with common equity Tier 1 (CET1) ratio of 11.00%,
up 39 bps
• Tangible common equity ratio was 7.26%, down 38 bps, reflecting our
balance sheet growth, largely in low risk excess cash and PPP
loans
• Total loans declined $125 million , or 1%, with a net decline in core
loans (loans excluding PPP loans) of
net PPP loan growth of $340 million
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• Noninterest-bearing deposits increased
increased
activity
Strong first quarter performance was the result of a more positive economic
environment and improved asset quality metrics. We were able to release a modest
amount of loan loss reserves this quarter while maintaining solid capital ratios
and reporting improved operating leverage. We experienced improving levels of
noninterest income across most fee categories as the local governments in the
areas in which we operate continue to ease business and social restrictions. The
increase in noninterest-bearing and other low cost deposits related to stimulus
activity and limited loan demand has resulted in excess liquidity on our balance
sheet, carried largely in interest-bearing bank deposits with the Federal
Reserve and securities. The excess liquidity was a factor in net interest margin
compression for the quarter, but also contributed to stable net interest income,
when adjusted for the two fewer accrual days. We remain focused on managing our
balance sheet mix and expense levels as the economy returns to a more normalized
level of activity in our region.
Subsequent to quarter end, on April 22, 2021 , our Board of Directors approved
the redemption of $150 million in the aggregate of our 5.95% subordinated notes
due 2045 and a new stock repurchase plan of up to 4.3 million shares, both
subject to the regulatory approval of the subordinated note redemption. The
Company received regulatory approval of the subordinated note redemption on
April 26, 2021 and intends to redeem the notes in full on June 15, 2021 . We
expect cost savings from the note redemption of approximately $9 million on an
annualized basis, which is net of associated costs of approximately $4.2 million
to be included in second quarter 2021 financial results. These actions reflect
our focus on effective capital management while improving returns to our
shareholders.
RESULTS OF OPERATIONS
Net Interest Income
Net interest income (te) for the first quarter of 2021 was $237.5 million , a
$3.9 million , or 2%, decrease from the fourth quarter of 2020, and an increase
of $2.9 million , or 1%, from the first quarter of 2020. The linked quarter
decrease was primarily attributable to two fewer accrual days, with the
favorable impacts from a $1.1 billion increase in average earning assets, a
reduction in cost of funds and a higher level of net interest recoveries largely
offset by a decrease in the yield on earning assets due to a less favorable mix.
The increase from the first quarter of 2020 was largely due to the favorable
impact of a $3.4 billion increase in average earning assets, partially offset by
a net unfavorable change in rates and one less accrual day, among other items
discussed in more detail below.
Linked quarter average earning assets increased $1.1 billion , or 4%, with growth
primarily in the investment securities and lower yielding short-term
investments. Average earning asset growth was driven by excess liquidity from a
$1.1 billion increase in total deposits, largely from pandemic related activity
including individual stimulus payments and higher business account balances from
PPP loan funding. Our net deposit growth in the quarter reflects a more
favorable mix, with increased noninterest-bearing and lower-cost
interest-bearing transaction deposits, while higher-cost time deposits were
down. The improved funding mix, coupled with the Company's deposit pricing
strategy, resulted in a 4 bp linked quarter decrease in the cost of funds.
The $2.9 million increase in net interest income (te) in the first quarter of
2021 compared to first quarter of 2020 was largely due to a $3.4 billion
increase in average earning assets, a 46 bp decrease in the cost of funds, and
$5.1 million in higher net interest recoveries, partially offset by a decrease
in the earning asset yield due to a less favorable mix, $3.7 million in higher
securities premium amortization, $2.7 million in lower purchase accounting
accretion and one less accrual day. The $3.4 billion , or 12%, increase in
average earning assets includes a $1.5 billion increase in short-term
investments, $1.3 billion increase in investment securities and $0.5 billion
increase in loans. The increase in average earning assets was funded by a $3.8
billion increase in total deposits, with $3.6 billion from noninterest-bearing
deposits and $0.2 billion from interest-bearing deposits, primarily due to
pandemic-related activity.
The net interest margin for the first quarter of 2021 was 3.09%, down 13 bps
from 3.22% in the fourth quarter of 2020. The compression from the prior quarter
was driven by a reduction of 7 bps related to lower LIBOR and refinancing rates,
and 13 bps related to an increase in average excess liquidity as noted above,
partially offset by increases of 5 bps from higher interest recoveries on
nonaccrual loans and 2 bps from higher purchase accounting accretion. The yield
on earning assets was 3.30%, down 17 bps from the prior quarter primarily
attributable to the less favorable earning asset mix described above, as well as
the lower interest rate environment. Securities purchased and loans originated
in the quarter were at lower yields than the linked-quarter portfolio average.
Cost of funds decreased 4 bps to 0.21% in the first quarter of 2021, due to an
improving deposit funding mix combined with our pricing strategy.
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The net interest margin was down 32 bps compared to the first quarter of 2020 from a lower overall rate environment and a less favorable average earning asset mix, partially offset by a favorable change in the funding mix. The yield on earning assets was down 78 bps from the first quarter of 2020, while the cost of funds decreased 46 bps from 0.67% in the first quarter of 2020, as we aggressively priced downward interest-bearing transaction and time deposits by reducing promotional rates and used excess liquidity to reduce the balance of higher costing brokered deposits. Other short-term borrowing costs were down 46 bps from the prior year as excess liquidity was also used to pay down FHLB advances. The cost of long-term debt was up 72 bps from 4.76% in the first quarter of 2020 due to theJune 2020 issuance of$172.5 million in subordinated debt at 6.25%. We expect the net interest margin to continue to compress as much as 10 to 15 bps in the second quarter of 2021, primarily as a result of elevated levels of excess liquidity and no expected interest recoveries, and to remain relatively flat during the second half of 2021. Net interest income (te) is expected to decline$2 to$4 million linked-quarter and be down 1% to 2% for the full year 2021 as compared to 2020. These expectations include the favorable impact of the previously discussed anticipated second quarter 2021 redemption of subordinated notes. The following tables detail the components of our net interest income (te) and net interest margin. Three Months Ended March 31, 2021 December 31, 2020 March 31, 2020 (dollars in millions) Volume Interest (d) Rate
Volume Interest (d) Rate Volume Interest (d)
Rate
Average earning assets Commercial & real estate loans (te) (a)$ 17,334.3 $ 155.9 3.65
%
2,600.5 24.7 3.79 % 2,732.5 26.6 3.90 % 2,969.0 29.5 3.98 %
Consumer loans 1,810.5 21.4 4.79 % 1,903.2 22.8 4.76 % 2,155.9 29.4 5.48 %
Loan fees & late charges - 13.4 0.00 % - 14.6 0.00 % - (0.6 ) 0.00 %
Total loans (te) (b) 21,745.3 215.4 4.01 % 22,065.7 221.1 3.99 % 21,234.1 240.8 4.56 %
Loans held for sale 111.8 0.7 2.41 % 104.4 0.5 1.99 % 40.3 0.6 6.17 %
US Treasury and government
agency securities 214.5 0.9 1.77 % 196.0 0.9 1.85 % 124.7 0.8 2.37 %
Mortgage-backed securities and
collateralized mortgage
obligations 6,307.9 29.4 1.86 % 5,781.5 30.7 2.12 % 5,139.5 31.3 2.44 %
Municipals (te) 934.5 6.8 2.93 % 934.1 6.9 2.94 % 877.2 6.7 3.07 %
Other securities 11.6 0.1 4.07 % 9.5 0.1 4.20 % 8.0 0.1 4.29 %
Total securities (te) (c) 7,468.5 37.2 2.00 % 6,921.1 38.6 2.23 % 6,149.4 38.9 2.53 %
Total short-term investments 1,690.0 0.4 0.10 % 784.3 0.2 0.10 % 206.9 0.5 0.87 %
Total earning assets (te) $ 31,015.6 $ 253.7 3.30 % $ 29,875.5 $ 260.4 3.47 % $ 27,630.7 $ 280.8 4.08 %
Average interest-bearing
liabilities
Interest-bearing transaction
and savings deposits $ 10,796.0 $ 3.4 0.13 % $ 10,229.6 $ 4.2 0.16 % $ 8,798.5 $ 12.7 0.58 %
Time deposits 1,757.4 3.0 0.69 % 1,890.7 3.8 0.80 % 3,513.2 15.4 1.76 %
Public funds 3,211.1 2.8 0.36 % 3,160.4 3.9 0.50 % 3,252.2 10.8 1.33 %
Total interest-bearing deposits 15,764.5 9.2 0.24 % 15,280.7 11.9 0.31 % 15,563.9 38.9 1.01 %
Repurchase agreements 583.7 0.1 0.13 % 676.4 0.3 0.17 % 515.3 0.6 0.47 %
Other short-term borrowings 1,104.7 1.4 0.49 % 1,103.0 1.4 0.49 % 1,634.9 3.9 0.95 %
Long-term debt 396.7 5.5 5.48 % 385.3 5.4 5.61 % 231.4 2.8 4.76 %
Total borrowings 2,085.1 7.0 1.34 % 2,164.7 7.1 1.30 % 2,381.6 7.3 1.22 %
Total interest-bearing
liabilities 17,849.6 16.2 0.37 % 17,445.4 19.0 0.43 % 17,945.5 46.2 1.03 %
Net interest-free funding
sources 13,166.0 - - 12,430.1 9,685.2
Total cost of funds $ 31,015.6 $ 16.2 0.21 % $ 29,875.5 $ 19.0 0.25 % $ 27,630.7 $ 46.2 0.67 %
Net interest spread (te) - $ 237.5 2.94 % $ 241.4 3.04 % $ 234.6 3.05 %
Net interest margin $ 31,015.6 $ 237.5 3.09 % $ 29,875.5 $ 241.4 3.22 % $ 27,630.7 $ 234.6 3.41 %
(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,
2021, December 31, 2020 , and March 31, 2020 , respectively.
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Table of Contents Provision for Credit Losses In the first quarter of 2021, we recorded a negative provision for credit losses of$4.9 million , compared to a provision for credit losses of$24.2 million in the fourth quarter of 2020, and$246.8 million in the first quarter of 2020. The first quarter of 2021 negative provision included net charge-offs of$18.3 million and a reserve release of$23.2 million . The modest reserve release was largely the result of the net charge-offs, coupled with some improvement in macroeconomic forecasts, and contraction in the core loan portfolio (excluding PPP). The fourth quarter of 2020 provision for credit losses included net charge-offs of$24.3 million and a reserve release of$0.1 million . The first quarter of 2020 included net charge-offs of$43.8 million and a reserve build of$203.0 million related to the increase in expected loss from the onset of the coronavirus pandemic and declining oil prices. Net charge-offs in the first quarter of 2021 were$18.3 million , or 0.34% of average total loans on an annualized basis, compared to$24.3 million or 0.44% in the fourth quarter of 2020, and$43.8 million , or 0.83% in the first quarter of 2020. The first quarter of 2021 included$14.6 million of energy charge-offs, with$13.8 million of the total attributable to a single legacy credit. Energy related net charge-offs were$4.0 million in the fourth quarter of 2020 and$35.9 million in the first quarter of 2020. Fourth quarter of 2020 also included$13.6 million in health-care dependent charge-offs. We expect provision levels in the second quarter of 2021 to be similar to our first quarter results. Should the economy improve beyond current expectations and vaccination rates continue with no new COVID-19 surges or lockdowns, negative provisioning could continue and possibly increase in the second half of 2021. Noninterest Income Noninterest income totaled$87.1 million for the first quarter of 2021, up$4.7 million , or 6%, from the fourth quarter of 2020, and up$2.7 million , or 3%, compared to the first quarter of 2020. The linked-quarter increase was attributable to improvements in most fee categories as economic conditions continued to improve and consumer activity rebounded. The increase compared to the first quarter of 2020 is largely attributable to higher secondary mortgage market fees and derivative income driven by the low interest rate environment and higher income from bank owned life insurance, partially offset by a decrease in service charges. The components of noninterest income are presented in the following table for the indicated periods. Three Months Ended March 31, December 30, March 31, (in thousands) 2021 2020 2020 Service charges on deposit accounts$ 19,146 $ 19,864 $ 22,837 Trust fees 15,003 14,801 14,806 Bank card and ATM fees 18,120 17,590 17,362 Investment and annuity fees and insurance commissions 7,458 5,826 7,150 Secondary mortgage market operations 11,710 11,508 6,053 Income from bank-owned life insurance 7,281 3,968 4,266 Credit related fees 2,844 2,670 3,065 Income from derivatives 5,035 3,096 3,871 Other miscellaneous 492 3,027 4,977 Total noninterest income$ 87,089 $ 82,350 $ 84,387 Service charges are composed of overdraft and insufficient funds fees, consumer, business and corporate analysis service charges, overdraft protection fees and other customer transaction-related charges. Service charges on deposits totaled$19.1 million for the first quarter of 2021, down$0.7 million , or 4%, from the fourth quarter of 2020 and down$3.7 million , or 16%, from the first quarter of 2020. The decrease from both the fourth quarter of 2020 and first quarter of 2020 was largely due to lower overdraft and related fees resulting from higher customer deposit account balances related to economic stimulus and decreased spending. Trust fee income represents revenue generated from asset management services provided to individuals, businesses and institutions. Trust fees increased$0.2 million , or 1%, from both the prior quarter and the same quarter a year ago. The modest increase compared to both periods is primarily due to a continued rebound from the volatility in the markets in 2020 impacting assets under management and related trust fees. Trust assets under management declined$1.1 billion in the first quarter of 2020 to$8.3 billion , and began to increase during the remainder of 2020 to$9.5 billion atDecember 31, 2020 . Assets under management totaled$9.7 billion atMarch 31, 2021 . 42
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Bank card and ATM fees include interchange and other income from credit and debit card transactions, fees earned from processing card transactions for merchants, and fees earned from ATM transactions. Bank card and ATM fees totaled$18.1 million for the first quarter of 2021, up$0.5 million , or 3%, from the fourth quarter of 2020 and up$0.8 million , or 4%, from the same quarter last year. The increase from the prior quarter is due to higher levels of merchant fees as the economic activity continued to improve, and an increase in ATM fees as customers access stimulus funds, including non-customer ATM use. The increase from the same quarter last year was largely due to an increase in debit card activity, as customers continue to shift to debit transactions as a result of the pandemic. Investment and annuity fees and insurance commissions increased$1.6 million , or 28%, compared to the fourth quarter 2020 and were up$0.3 million , or 4%, compared to the same quarter a year ago. Investment and annuity fees and insurance commissions were up from the prior quarter primarily due to a$0.7 million increase in underwriting fees as a result of favorable interest rate movements and corporate financing opportunities, and a$0.6 million increase in annuity fees from higher annuity sales volumes. Investment and annuity fees and insurance commissions were up from the prior year due to an increase in underwriting fees and annuity sales activity, partially offset by a decline in investment commissions as the lower rate environment slowed bond trading activity. Income from secondary mortgage market operations is comprised of income produced from the origination and sales of residential mortgage loans in the secondary market. We offer a full range of mortgage products to our customers and typically sell longer-term fixed rate loans while retaining the majority of adjustable rate loans, as well as loans generated through programs to support customer relationships. Income from secondary mortgage market operations was$11.7 million in the first quarter of 2021, up$0.2 million , or 2%, from the fourth quarter of 2020 and up$5.7 million , or 93%, from the first quarter of 2020. As interest rates remain low, origination volume continues to be strong, and secondary market activity levels remained steady during the first quarter of 2021, with production falling less than 3% from the prior quarter. Compared to the first quarter of 2020, secondary market loan production is up 75% as the low rate environment continues to drive a surge in both refinance and home purchase activity. Secondary mortgage market operations income will vary based on origination volume and the timing of subsequent sales. To the extent low interest rate trends persist, mortgage loan production may remain elevated in the near term, but is expected to return to more normal levels in the second half of 2021. Income from bank-owned life insurance (BOLI) is typically generated through insurance benefit proceeds as well as the growth of the cash surrender value of insurance contracts held. Income from bank-owned life insurance was$7.3 million in the first quarter of 2021, up$3.3 million , or 83%, from the fourth quarter of 2020, and up$3.0 million , or 71%, from the first quarter of 2020. The linked-quarter and year over year increases are attributable to$4.4 million of nonrecurring income received in connection with the purchase of policies in the first quarter of 2021, partially offset by$1.0 million of mortality benefits received in the prior quarter and$0.8 million received in the first quarter of 2020. Credit related fees include unused commitment fees and letter of credit fees. Credit related fees were$2.8 million for the first quarter of 2021, up$0.2 million , or 7%, from the fourth quarter of 2020 and down$0.2 million , or 7%, from the first quarter of 2020. The linked quarter increase was due to higher unused commitment fees, as line utilization declined, partially offset by lower letter of credit fees. The decrease over the same quarter last year is primarily due to lower unused commitment fees, as many customers drew on lines of credit near the end of the first quarter of 2020 amid pandemic-driven uncertainty. Income from derivatives is largely from our customer interest rate derivative program and totaled$5.0 million for the first quarter of 2021 compared to$3.1 million in the fourth quarter of 2020 and$3.9 million for the first quarter of 2020. The increase compared to both the previous quarter and the first quarter of 2020 reflects an increase in customer demand for interest rate swap arrangements, resulting in a higher transaction volume, due in part to the increasing long term rate environment. Derivative income can be volatile and is dependent upon the composition of the portfolio, volume and mix of sales activity and market value adjustments due to market interest rate movement. Other miscellaneous income is comprised of various items, including income from small business investment companies, FHLB stock dividends, and syndication fees. Other miscellaneous income totaled$0.5 million in the first quarter of 2021, down$2.5 million compared to the fourth quarter of 2020 and down$4.5 million compared to the first quarter of 2020. The changes compared to both periods was largely driven by an approximately$4.7 million pandemic related write-down of investments in an SBIC in the first quarter of 2021. Compared to prior quarter, the decline was also partially offset by a$0.8 million gain on termination of a former Midsouth leased property and other smaller items. The decrease compared to the prior year also reflects a$1.5 million gain on the sale of historic tax credits recorded in the first quarter of 2020 as well as other various smaller changes. Management expects fee income to be flat to down slightly in the second quarter of 2021, and improve on a full year over year basis in the range of 4% to 6% with increases expected in most fee categories with the exception of service charges and secondary mortgage fee income. 43
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Table of Contents Noninterest Expense Noninterest expense for the first quarter of 2021 was$193.1 million , down$0.1 million , or less than 1%, from the fourth quarter of 2020, and down$10.3 million , or 5%, from the first quarter of 2020. The linked quarter decrease is largely due to hurricane related expenses and expenses related to branch closures incurred in the fourth quarter of 2020, as well as an enhanced focus on expense control with initiatives put in place to improve overall efficiency as discussed in more detail below, partially offset by an increase in incentive and payroll tax expense. The net decrease over the same quarter last year reflects changes in various categories, but is primarily due to write downs of$9.8 million on energy-related equity interests recorded in the first quarter of 2020. The components of noninterest expense for the periods indicated are presented in the following tables. Three Months Ended March 31, December 31, March 31, (in thousands) 2021 2020 2020 Compensation expense$ 95,846 $ 92,805 $ 91,071 Employee benefits 23,769 19,440 22,478 Personnel expense 119,615 112,245 113,549 Net occupancy expense 12,910 13,317 12,522 Equipment expense 4,781 4,488 4,617 Data processing expense 22,947 22,638 22,047 Professional services expense 11,251 14,431 9,741 Amortization of intangible assets 4,419 4,614 5,345 Deposit insurance and regulatory fees 3,395 3,765 5,815 Other real estate and foreclosed asset expense 6 367 10,130 Advertising 2,486 2,922 4,234 Corporate value, franchise and other non-income taxes 4,464 2,929 4,296 Telecommunications and postage 3,318 3,509 4,065 Entertainment and contributions 1,448 2,719 2,447 Travel expense 357 481 1,111 Printing and supplies 978 1,057 1,108 Tax credit investment amortization 1,112 960 961 Other retirement expense (6,545 ) (6,337 ) (6,122 ) Other miscellaneous 6,130 9,039 7,469 Total noninterest expense$ 193,072 $ 193,144 $ 203,335 Personnel expense consists of salaries, incentive compensation, long-term incentives, payroll taxes, and other employee benefits such as 401(k), pension, and medical, life and disability insurance. Personnel expense totaled$119.6 million for the first quarter of 2021, up$7.4 million , or 7%, compared to the prior quarter and up$6.1 million , or 5%, compared to the same quarter last year. The increase from prior quarter was primarily due to higher performance based incentives, and related benefit costs, and seasonally higher payroll taxes. The increase over the same quarter last year is primarily due to higher incentives and benefit costs, partially offset by lower salary expense. The decrease in salary expense compared to the first quarter of 2020 is due to one fewer payroll day and 222 fewer employees on a full-time equivalent bases (FTE) in the first quarter of 2021, partially offset by the increase related to annual merit raises. During the first quarter of 2021, management announced a voluntary early retirement package available to 647 associates that was accepted by approximately 40% of those eligible. The one-time costs associated with this offer, currently estimated at$15.3 million , will be reflected in our second quarter 2021 earnings. Management expects the annualized net reduction of personnel expense from this program to be approximately$19.0 million , which includes estimated incentives and benefits and is net of backfill costs. Occupancy and equipment expenses are primarily composed of lease expenses, depreciation, maintenance and repairs, rent, taxes, and other equipment expenses. Occupancy and equipment expenses totaled$17.7 million in the first quarter of 2021, down$0.1 million , or 1%, from the fourth quarter of 2020 and up$0.6 million , or 3%, from the first quarter of 2020. The linked-quarter decrease was largely due to a decrease in occupancy expense due in part to lower maintenance cost, partially offset by a modest increase in equipment expense. The increase from the same quarter last year is primarily related to increases in both occupancy expense and equipment expense, largely due to higher pandemic-related cleaning expenses, maintenance costs and software amortization. Data processing expense includes expenses related to third party technology processing and servicing costs, technology project costs and fees associated with bank card and ATM transactions. Data processing expense was$22.9 million for the first quarter of 2021, up$0.3million , or 1%, compared to the fourth quarter of 2020, and up$0.9 million , or 4%, compared to the fourth quarter of 2020. The 44
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increase over the fourth quarter of 2020 and the first quarter of 2020 is largely due to expense associated with investments in new technology.
Professional services expense for the first quarter of 2021 totaled$11.3 million , down$3.2 million , or 22%, compared to the previous quarter and up$1.5 million , or 16%, from the first quarter of 2020. The decrease from the fourth quarter of 2020 is primarily attributable to lower fees related to PPP support and legal fees. The increase over the first quarter of 2020 is largely related to PPP consulting support which we expect to continue to incur during the PPP forgiveness period. Deposit insurance and regulatory fees totaled$3.4 million , down$0.4 million , or 10%, from the fourth quarter of 2020 and down$2.4 million , or 42%, from the first quarter of 2020. The decrease from the prior quarter is largely due to the favorable effect that excess liquidity and continued asset quality improvement has on the risk-based assessment rate. The decrease from the same quarter last year is also due to a lower risk-based assessment rate resulting from an improved liquidity position and improved asset quality, particularly as a result of theJuly 2020 energy loan sale. We expect our deposit assessment fee to return to a more normalized level as excess liquidity declines. Corporate value, franchise and other non-income tax expense for the first quarter of 2021 totaled$4.5 million , up$1.5 million , or 52%, compared to the prior quarter and up$0.2 million , or 4%, compared to the same quarter last year. The increase from fourth quarter of 2020 is primarily due to a$1.2 million termination penalty on a BOLI transaction in the first quarter of 2021. The variance to last year reflects the first quarter 2021 termination penalty, partially offset by a decrease in bankshare tax as a result of the net loss in 2020. Business development-related expenses (including advertising, travel, entertainment and contributions) were$4.3 million for the first quarter of 2021, down$1.8 million , or 30%, from the fourth quarter of 2020 and down$3.5 million , or 45%, from the first quarter of 2020. The linked-quarter decrease was largely due to expense control initiatives. The year over year decrease was largely due to expense control initiatives as well as lower travel expenses in response to the pandemic. Other real estate and foreclosed asset expense was less than$0.1 million for the first quarter of 2021, compared to$0.4 million in the fourth quarter of 2020, and$10.1 million in the first quarter of 2020. The first quarter of 2020 included a$9.8 million write-down of equity interests in two energy-related companies received in borrower bankruptcy restructurings. All other expenses, excluding amortization of intangibles, totaled$5.0 million for the first quarter of 2021, a decrease of$3.2 million , or 39%, from the fourth quarter of 2020 and a decrease of$2.5 million , or 33%, from the first quarter of 2020. The linked-quarter decrease was primarily due to hurricane-related expenses and financial center closing expense incurred in the fourth quarter. The first quarter of 2020 included write-down of former branch locations moved to held for sale. Management expects second quarter 2021 noninterest expense, excluding expected non-recurring costs, to be flat to up slightly compared to the first quarter of 2021 and down 2% to 3% for the full year of 2021 compared to 2020. Expected non-recurring costs include$15.3 million for the voluntary early retirement program and$4.2 million for the redemption of the subordinated notes.
Income Taxes
The effective income tax rate for the first quarter of 2021 was approximately
19.7% compared to (0.29%) in the fourth quarter of 2020 and 17.5% in the first
quarter of 2020. Comparability of the effective income tax rate is impacted by
the pre-tax loss in 2020. The increase in the first quarter 2021 effective
income tax rate is due to an improved projected annual pre-tax income forecast.
Additionally, many factors impact the effective income tax rate including, but
not limited to, the level of pre-tax income and relative impact of net tax
benefits related to tax credit investments, tax-exempt interest income,
bank-owned life insurance, and nondeductible expenses. Based on the current
forecast, management expects the effective income tax rate for 2021 will be in
the 19%-20% range, absent any changes in tax law.
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 we serve 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 Entities ("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. We have also invested in affordable housing projects that generate
federal LIHTC
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tax credits that are recognized over a ten-year period, beginning in the year the rental activity begins. The amortization of the LIHTC investment cost is recognized as a component of income tax expense in proportion to the tax credits recognized over the ten-year credit period. Based on tax credit investments that have been made to date in 2021, we expect to realize benefits from federal and state tax credits over the next three years totaling$10.2 million ,$10.0 million and$10.1 million in 2022, 2023, and 2024, respectively. We intend to continue making investments in tax credit projects. However, our ability to access new credits will depend upon, among other factors, federal and state tax policies and the level of competition for such credits. Selected Financial Data The following tables contain selected financial data as of the dates and for the periods indicated. Three Months Ended March 31, December 31, March 31, 2021 2020 2020 Common Share Data Earnings per share: Basic$ 1.21 $ 1.17$ (1.28 ) Diluted$ 1.21 $ 1.17$ (1.28 ) Cash dividends paid$ 0.27 $ 0.27$ 0.27 Book value per share (period-end)$ 39.38 $ 39.65 $ 39.65 Tangible book value per share (period-end)$ 28.57 $ 28.79 $ 28.56 Weighted average number of shares (000s): Basic 86,752 86,608 87,186 Diluted 86,805 86,657 87,186 Period-end number of shares (000s) 86,777 86,728 86,275 Three Months Ended March 31, December 31, March 31, (in thousands) 2021 2020 2020 Income Statement: Interest income$ 250,785 $ 257,253 $ 277,343 Interest income (te) (a) 253,707 260,368 280,791 Interest expense 16,198 18,967 46,155 Net interest income (te) 237,509 241,401 234,636 Provision for credit losses (4,911 ) 24,214 246,793 Noninterest income 87,089 82,350 84,387 Noninterest expense (excluding amortization of intangibles) 188,653 188,530 197,990 Amortization of intangibles 4,419 4,614 5,345 Income before income taxes 133,515 103,278 (134,553 ) Income tax expense (benefit) 26,343 (297 ) (23,520 ) Net income (loss)$ 107,172 $ 103,575 $ (111,033 ) 46
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Three Months Ended
March 31, December 31, March 31,
2021 2020 2020
Performance Ratios
Return on average assets 1.28 % 1.25 % (1.46 %)
Return on average common equity 12.63 % 12.10 % (12.72 %)
Return on average tangible common
equity 17.38 % 16.74 % (17.51 %)
Earning asset yield (te) (a) 3.30 % 3.47 % 4.08 %
Total cost of funds 0.21 % 0.25 % 0.67 %
Net Interest Margin (te) 3.09 % 3.22 % 3.41 %
Noninterest income to total revenue
(te) 26.83 % 25.44 % 26.45 %
Efficiency ratio (b) 58.12 % 58.23 % 62.06 %
Average loan/deposit ratio 77.28 % 81.60 % 87.28 %
FTE employees (period-end) 3,926 3,986 4,148
Capital Ratios
Common stockholders' equity to total
assets 9.74 % 10.22 % 10.77 %
Tangible common equity ratio (c) 7.26 % 7.64 % 8.00 %
(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) 2021 2020 2020
Asset Quality Information
Nonaccrual loans (a) $ 108,434 $ 139,879 $ 254,058
Restructured loans - still accruing 6,320 4,262 34,251
Total nonperforming loans 114,754 144,141 288,309
ORE and foreclosed assets 9,467 11,648 18,460
Total nonperforming assets $ 124,221 $ 155,789 $ 306,769
Accruing loans 90 days past due (b) $ 5,090 $ 3,361 $ 17,790
Net charge-offs 18,254 24,330 43,764
Allowance for loan losses $ 424,360 $ 450,177 $ 426,003
Reserve for unfunded lending commitments 32,559 29,907 48,992
Allowance for credit losses $ 456,919 $ 480,084 $ 474,995
Total provision for credit losses $ (4,911 ) $ 24,214 $ 246,793
Ratios:
Nonperforming assets to loans, ORE and
foreclosed assets 0.57 % 0.71 % 1.42 %
Accruing loans 90 days past due to loans 0.02 % 0.02 % 0.08 %
Nonperforming assets + accruing loans 90
days past due to loans, ORE and foreclosed
assets 0.60 % 0.73 % 1.51 %
Net charge-offs to average loans 0.34 % 0.44 % 0.83 %
Allowance for loan losses to period-end
loans 1.96 % 2.07 % 1.98 %
Allowance for credit losses to period-end
loans 2.11 % 2.20 % 2.21 %
Allowance for loan losses to nonperforming
loans + accruing loans 90 days past due 354.09 % 305.20 % 139.17 %
(a) Included in nonaccrual loans are nonaccruing restructured loans totaling
million,
respectively.
(b) Excludes 90+ accruing troubled debt restructured (TDR) loans of
at 3/31/21, which are already reflected in total nonperforming loans above.
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