Hancock Whitney Corp

NASDAQ:HWC

Earnings Call Transcript 2018-Q2

[Operator]

Good morning, and welcome to Hancock Whitney Corporation's Second Quarter 2018 Earnings Conference Call. As a reminder, this call is being recorded. I will now turn the call over to Trisha Carlson, Investor Relations Manager. You may begin.

[Trisha Carlson, executive]

Thank you, and good morning. During today's call, we may make forward-looking statements. We would like to remind everyone to review the safe harbor language that was published with yesterday's release and presentation and in the company's most recent 10-K, including the risks and uncertainties identified therein. Our ability to accurately project results or predict the effects of future plans or strategies or predict market or economic development is inherently limited. We believe that the expectations reflected or implied by any forward-looking statements are based on reasonable assumptions, but our actual results and performance could differ materially from those set forth in our forward-looking statements. We undertake no obligation to update or revise any forward-looking statements, and you are cautioned not to place undue reliance on such forward-looking statements. In addition, some of the remarks this morning contain non-GAAP financial measures. You can find reconciliations to the most comparable GAAP measure in our earnings release and financial tables. The presentation slides included in our 8-K are also posted with the conference call webcast link on the Investor Relations website. We will reference some of these slides in today's call. Participating in today's call are John Hairston, President and CEO; Mike Achary, CFO; and Sam Kendricks, Chief Credit Risk Officer. I will now turn the call over to John Hairston.

[John Hairston, executive]

Thank you, Tricia, and good morning, everyone. We are pleased to introduce ourselves on this morning's call as Hancock Whitney. Many of our team members worked tirelessly on the brand combination for many months so that effective May 25th, we officially became Hancock Whitney Corporation. We opened trading that day with a new ticker of HWC and also changed the bank name to Hancock Whitney Bank with new signage across our physical and virtual footprint. The brand consolidation cost is about $10 million or $0.09 this quarter and is included in total nonoperating items.

Moving on to overall second quarter performance, I hope you will agree, the company delivered another good period of continuing progress. Results exceeded expectations in many areas and reflect the continued improvement in operating measures with EPS of $0.96 up 7% linked quarter, ROA of 1.22%, up 5 basis points and improved efficiency ratio of 57.4% and ROTCE of 16.12%, up 56 basis points. Loan growth was in line with our guidance and the reported NIM expansion this quarter. Our balance sheet grew over $600 million with operating revenue up $7.5 million or 3% linked quarter. The growth did drive both a high level of expense and lower level of TCE.

Expenses were up across-the-board, however, were diversified in various categories of manageable linked-quarter increases. Mike will share details regarding those items in just a moment.

Regarding TCE, we did not close the gap to our 8% target this quarter, but the primary drivers were related to overall asset growth and the impact of OCI. We remain focused on returning our TCE to the 8% level and we'll continue to manage capital opportunistically for our stakeholders. Our priorities have not changed with organic growth as our stop focus. There's no change to our M&A posture with tactical in-market transactions as our primary interest.

Another key positive for the quarter was the improvement in our credit metrics. Total criticized loans declined $187 million or 17% from March 31, with energy criticized down $115 million or 22%, and nonenergy criticized loans down $72 million or 13%. Some of the reduction in criticized loans were from credits which we expected to have resolved in the first quarter but carried into the second quarter. The resolutions did occur albeit a little later than anticipated, and the combination of all that good news led to an outsized improvement in only one quarter. Even with that notable improvement, we remain expectant of additional progress in future quarters toward bringing our overall criticized credit metrics in line with our longer-term expectations. Nonaccrual loans were down $48 million linked quarter, another attractive improvement in credit. And our provision for loan losses nicely outperformed the previous quarter.

Moving on to M&A, we're very pleased to have completed the acquisition of Capital One's trust and asset management business this past Friday, on July 13. With the acquisition close, we now have $26 billion in assets under administration, $10 billion assets under management and expect to add approximately $6 million per quarter in trust fees to our results beginning in the third quarter of this year. As we begin the second half of 2018, operating with a new name, a new logo and ticker, we remain relentlessly focused on our CSOs, maintaining credit performance and being opportunistic with our capital, all with the primary focus of achieving our stated targets. I'll now turn the call over to Mike for a few additional comments.

[Michael Achary, executive]

Thanks, John, good morning, everyone. Reported earnings for the second quarter were $71 million or $0.82 per share. That included about $16 million or $0.14 per share of nonoperating items. Those nonoperating items include cost of about $10 million related to our brand change. We also had the nonoperating cost in the quarter related to the Capital One trust and asset management purchase of about $2 million as well as a $3 million charge for restructuring a portion of our bank-owned life insurance investments.

Finally, we also had another $1 million or so related to a few other miscellaneous items. So excluding those nonoperating items, earnings for the company were $84 million or $0.96 per share, so that's up about $5.4 million or 7% from last quarter. As John just mentioned, the quarter saw a pretty sizable growth in our balance sheet and revenue, along with a higher level of expenses, which all drove a nice increase in the company's operating leverage.

Operating revenue increased about $7.5 million from last quarter, with expenses up about $3.7 million. So our balance sheet growth was led by a nice increase in EOP loans, which totaled about $278 million or 6% annualized for last quarter.

Growth was reported in all regions across our footprint and in many lines of business. As noted on Slide 7 in our earnings deck, the only segment showing a decline was energy, which was down about $69 million and brought us to our 5% targeted level. We do expect additional payoffs and paydowns in the energy portfolio as the cycle nears its end and remaining issues are resolved.

For the third quarter, we expect net loan growth of $250 million to $300 million with year-over-year guidance unchanged at 5% to 6%.

Deposits for the company declined about $250 million from last quarter with much of that drop related to typical seasonality. Our cost of deposits came in at 54 basis points for the second quarter, so an increase of only 4 basis points. That drove our deposit betas lower to about 17% compared to 29% last quarter. As mentioned last quarter, the controlling deposit cost was and continues to be a focus point and with our great core deposit franchise will continue to be so. As a result, we reported expansion in our NIM of 3 basis points this quarter to 3.40%. The wider NIM was largely in line with our guidance of a 1 to 3 basis point increase for each 25 basis point rate hike. We also had 2 basis points of positive impact from interest recoveries this quarter versus 3 basis points of reversals last quarter. So that's a 5 basis point change quarter-to-quarter.

As expected, the full quarter impact from the sale of HFC did compress the margin an additional 5 basis points, so basically offsetting the activity from nonaccrual interest recoveries and reversals. Going forward, we expect the NIM, all else equal, to remain stable. We also expect any additional Fed rate hikes will drive a 2 to 4 basis point expansion in the margin. As expected, the impact of deposit betas will be a driver. Our fee income was up about $1.4 million or about 8% annualized from last quarter, after adjusting for the $1.1 million loss from the sale of HFC in the first quarter. Seasonal increases in trust and mortgage contributed to the higher level, along with increased card activity, driving higher bankcard and ATM fees. As John mentioned earlier, we closed the Capital One trust and asset management transaction this past Friday. We expect that transaction will begin adding about $6 million per quarter to fee income starting in the third quarter.

Operating expense was up about $3.7 million linked quarter with much of that net increase related to our previously mentioned balance sheet and revenue growth. The drivers of the expense increase are detailed on Slide 17 in our earnings deck.

We still expect year-over-year expense growth to come in between 3% and 4%, again with the bias closer to 3%. The Capital One closing will add about $5.5 million to $6 million in quarterly expenses beginning in the third quarter. And we are focused on getting cost saves once we operationally convert.

John touched on our TCE ratio earlier. It came in at 7.76% at June 30, so down about 4 basis points from March. Growth in assets and the impact of OCI offset the increase to capital from earnings. We are focused on getting the TCE back to the 8-plus percent range and continue to manage capital prudently. Our near-term guidance on Slide 19 remains relatively unchanged. And we continue to work on achieving our CSOs as noted on Slide 20. I'll now turn the call back over to John.

[John Hairston, executive]

Thanks, Mike. Sabrina, let's go ahead and open the call for questions.

[Operator]

[Operator Instructions] And our first question will come from the line of Michael Rose with Raymond James.

[Michael Rose, analyst]

Just wanted to get some color and some greater detail on credit. You mentioned at the outset that there were some paydowns that you might have expected in the first quarter that came through in the second quarter. And we finally did see trends reversing nonenergy, nonaccruals and then criticized classified. Is this the beginning, do you think, of a trend? Or should we think about credit as maybe stabilized from here? I know that coming into the quarter, there's a lot of concerns around healthcare and some energy credits. Just how do you think about the general credit landscape at this point?

[Sam Kendricks, executive]

Michael, this is Sam. I'll start it off. As you know, we've been working on the energy book for quite some time, so we're continuing to see some improvements in cash flows and risk profiles there. So we're not surprised to see that resolution on the energy book continue, despite some of the challenges as we've talked about in the offshore segment, that we'll continue to deal with. As it relates to the nonenergy book, we've been talking about that trend since third quarter of last year. So between the identification of those credits articulating resolution plans, et cetera, and then putting those plans into action, we've been about that business for 3 quarters now. So as John said, the expectations for activity in the first half of this year have panned out, although the timing bled over into the second quarter from the first quarter. So we will continue to have, as John likes to say, relentless focus on improving all our asset quality metrics. That does not mean that from time to time, we might have some bumpiness here and there because resolutions are not linear. But we do not see any systemic issues. We will continue on the resolution path for credit. So I can't promise you that we'll see the same level of resolution in the third quarter that we saw in the second quarter, but we will continue to focus on that. And we will from time-to-time, see hiccups here and there. But I do not expect to see a return to that elongated upward trend that we saw through 2017.

[Michael Rose, analyst]

Okay, that's helpful. Maybe, just to follow on that. If I look at your provision guidance for the back half of the year at $8 million to $10 million, that would imply that you come in at the lower end of what you had previously laid out for the year, which was $39 million to $46 million. So does that imply, I guess, more confidence that things are perhaps a little bit better than you might have thought?

[Michael Achary, executive]

Michael, this is Mike. And I think what it means is obviously, we feel good about our credit. As Sam indicated, it's something that's been a focus point for quite some time. And again, I don't think going forward, we're going to show a 17% drop each and every quarter in our total criticized loans. But I also think we would be disappointed if we didn't continue to show a positive trend in that regard. So I think all that plays into our outlook and tone certainly, on credit, which I think is good.

[Michael Rose, analyst]

Okay, maybe one more from me, just as it relates to capital. And you guys did announce the share repurchase plan but your TCE ratio is still below your target. Would you need to get there to that target before you would look to repurchase shares?

[Michael Achary, executive]

I don't think, all things equal, we necessarily have to be exactly at 8% before we consider buybacks or even a dividend increase. But as of right now, buybacks are really something that's not on the table. It's something we review and look at certainly, each and every quarter but right now, it's not a priority. I think as John mentioned in the opening remarks, we're focused as our number 1 priority on funding organic growth in the company going forward.

[Operator]

The next question comes from the line of Jennifer Demba with SunTrust.

[Stephen Stone, analyst]

It's actually Steve on for Jenny. Just kind of 2 questions here, first, just following up on some of the credit stuff. Can you go into a little more detail on your nonenergy NPL book? Any trends or granularity in that book still out there worth calling out?

[Michael Achary, executive]

No, we saw a little bit of an improvement there in the nonaccrual level in the NPLs for the nonenergy book. As we've said, we've been in the resolution process for the better part of 3 quarters now and we'll continue on that track. So those that are in the NPL category, we fervently pursue a resolution and mitigation strategy on each of those. We have strategies articulated for every one of those. And so we'll continue down that path of resolution. So again, nothing systemic there where we expect to see any building issues. We're just about the business of resolving problem credits and working with those clients.

[Stephen Stone, analyst]

Perfect. And then, kind of moving over to your forward NIM guidance for rate hikes. Are you seeing less pressure on deposit cost? Or was there something else for the reason for the increase there?

[Michael Achary, executive]

Well, again, as we talked about last quarter, controlling our deposit costs have absolutely been a focus point for us. And we believe and think it should be given the quality of our deposit franchise. So we were able to affect that decrease in our deposit betas. And I think going forward, while certainly there is some potential for volatility, as rates continue to rise and customers react to those increases, we feel good about where our deposit beta is and certainly would not expect a sizable increase therein.

[Operator]

The next question will come from the line of Kevin Fitzsimmons with FIG Partners.

[Kevin Fitzsimmons, analyst]

Just a few quick questions. I know there's been a lot of attention on deposit beta and deposit costs. One thing I noticed is service charges within fee income declined linked quarter. And I'm just curious, is there any -- are there any leverage getting pulled behind the scenes there in terms of cutting or waiving maintenance fees in order to make some of your commercial deposit customers happy and help in terms of keeping deposit costs where they are?

[Michael Achary, executive]

No, no accommodations in that regard, Kevin. I think more than anything else, the drop in service charges was, in some part, seasonal. And probably in bigger part, just related to the number of our processing and statement days that we had during the quarter. So absolutely, no effort on our part to trade service charges to get people to not move their deposits or look for a rate increase.

[Kevin Fitzsimmons, analyst]

Okay, great. And just one quick follow-up on the question before about the TCE ratio and the target. With buybacks being, it sounds like, further down the priority scale now, in terms of capital levers, is that more a reflection of the organic growth or deal opportunities you see out there or where the stock is trading today or a combination of both?

[Michael Achary, executive]

Well, I think as much as anything else, again, as John mentioned, we're focused on organic growth. Certainly, M&A is a strategy that we employ to grow our company and it is certainly something we look at and would be open to opportunities. But no, there is nothing that should be read into those priorities or guidance other than a focus on organic growth.

[Kevin Fitzsimmons, analyst]

But I guess what I'm asking, Mike, is the focus kind of implies you feel good about that opportunity based on what we see.

[Michael Achary, executive]

We do, we absolutely do. Yes, we do.

[Operator]

And the next question will come from the line of Casey Haire with Jefferies.

[Casey Haire, analyst]

Wanted to touch on the M&A strategy. You mentioned in your prepared remarks that tactical in-market transactions will be of interest. When I hear tactical, I hear, sort of -- I equate that to a bite-size or a smaller-sized transaction. There is a lot of chatter about you guys potentially going after a larger transaction. So just wondering if you could potentially size what tactical means in terms of target size?

[Michael Achary, executive]

Sure, Casey. This is Mike. I would be happy to. So I think one of the bigger takeaways here related to M&A is that we've effected no change in our strategy or tactics. And again, we describe those in terms of really priorities. And so the top priority is what we refer to as infill transactions. Infill transactions by their nature are more tactical or financial opportunities, and so tend to be on the smaller size. So think of the 2 First NBC transactions, while certainly unique in the way those came about, what would really kind of fit the criteria if we think about in terms of an infill opportunity. So let's call it maybe, $2 billion on the low end to as much as maybe, $4 billion or so on the high end. And again, that remains kind of our priority for right now. The second priority would be opportunities in our book in-markets. And again, we define our book in-markets, on the western side of our franchise as Houston. And then, on the eastern side, places like Tampa, Jacksonville. So we certainly would be open to kind of rationalize or growing our presence in those very large markets. Those transactions again, just by their nature, could be a little bit bigger than what are articulated around kind of the infill. So instead of $2 billion to $4 billion, they could be a size maybe $5 billion, $6 billion, $7 billion, somewhere in that range. And then, the third property, which really is kind of a distant priority, truly tactical deals which again, by definition would be much larger. So having said that though, we are focused on the infill transactions first, and there's really nothing that we're looking at or working on that would fall into the tactical category right now.

[Casey Haire, analyst]

Great, thanks for -- thanks for that clarification. Switching to sort of the Cap One transaction. You mentioned I think there are some opportunities for cost saves down the line. Could you just clarify the magnitude and what the timing might be on that?

[Michael Achary, executive]

Sure. So the timing of those cost saves would happen when we effect the systems conversion, which will be at some point in the first half of 2019. So late first quarter into the second quarter, potentially. And we haven't quantified the magnitude of those cost savings at this point. But as we get closer to that date, we'll article that.

[Operator]

The next question will come from the line of Joe Fenech with Hovde Group.

[Joseph Fenech, analyst]

You have now hit your 5% target in terms of energy as a percentage of total loans. You said you expected earlier continued payoffs and paydowns. So assuming we could still see energy decline as a percentage of total, just looking for an update guys, as to when you think that diminishes as a headwind to loan growth for you? And maybe we see a natural lift in that loan growth guidance towards the upper single-digit range or so?

[John Hairston, executive]

Joe, this is John. Thank you for the question. And thanks for recognizing we're at the 5%. We have set that as a target several quarters ago. And it's certainly a good day to finally reach that target. That said, there could be a little bit more decline in that overall concentration as we remix the portfolio a little bit out of the Gulf of Mexico, and into land and more in midstream and reserve-based lending. So we could dip a little bit down into the mid-4s, but I would be surprised and disappointed if it lowered much more than that before it began to tick back up. So I think the range to look at would be somewhere in the 4.5% to 5% on a going forward basis, which would intimate that the net interest income bleed because of the overall energy book diminishment is at or very near an end. So we wouldn't expect to see that as a scale of a contra as we've had the last couple of years. Now that may take a quarter or 2 for that rebalancing to happen. We do continue to see payoffs primarily on the services side, and we're being very selective about accepting new clients in energy space. There are great opportunities out there, but we're being very selective. And so it makes like a quarter of 2 for that balance to be completed.

[Joseph Fenech, analyst]

So I guess the takeaway, John, thanks for that, is that -- would that mean we should have enhanced confidence in that 5% to 6% overall loan growth total? And then, once the energy headwind is behind you, maybe that ticks up a little bit, just given the higher growth rate in the other areas?

[John Hairston, executive]

Well, it's a little too early to tell. I think probably the better way to state it would be -- we've delivered energy paydowns as a caveat to going forward loan growth estimates for probably the last 2 years now. So the size and magnitude of the caveat is dramatically shrinking, if that makes sense. So we just don't expect to see that $100 million or $200 million every half year of energy payoffs, like we've had in the past. There will be a couple more, I expect in the third quarter. And then, it will begin to diminish after that. So I think we -- our confidence in the 5% to 6% is pretty good.

[Joseph Fenech, analyst]

Got it. And then, Mike, on the 2 to 4 basis points NIM guidance with every Fed rate hike. As you look out, do you think we hit an inflection point where it becomes tougher to get that NIM expansion with every rate hike? Or do you still see that as a ways out? And that guidance, you think, would apply to the next several rate hikes?

[Michael Achary, executive]

I think that -- yes, I think that, again, we make that note about all things equal that we're looking at 2 to 4 basis points of benefit from each 25 basis point rate hike. We feel really good about our loan betas in that regard. And I think the wildcard really is what happens with deposit betas. So if we're not able to get to the 2 to 4 basis points, it's probably going to be related to deposit betas and volatility therein.

[Joseph Fenech, analyst]

Okay, understood. And last one from me. I know you guys touched on the capital earlier, dividend payout 26% below the 30% to 40% target. You said you would revisit it around midyear with the dividend. I know that was partially tied into the TCE target, which you're not at yet, and the closing of the Capital One deal. Is TCE still the governing factor at this point? Or any other considerations we should be thinking about, as it relates to the dividend?

[Michael Achary, executive]

The TCE is certainly important to us, I think as everyone knows and realizes. But again, it doesn't preclude us from doing something with the dividend right now. So again, we did say that that was under review at midyear, and that analysis is ongoing right now.

[Operator]

And the next question will come from the line of Matt Olney with Stephens.

[Matt Olney, analyst]

Just wanted to clarify the margin guidance. We got the Fed rate hike in June. So do you expect 2 to 4 basis point benefit in the third quarter as well?

[Michael Achary, executive]

That's what we're looking at and working on.

[Matt Olney, analyst]

Got it. Okay. And then, going back to the Capital One transaction. Definitely appreciate the fee income guidance, the OpEx guidance, potential for some cost saves down on the road. Is there anything else there that could be a benefit from and specifically, any opportunities to help out on loan growth or deposit growth down the road?

[John Hairston, executive]

This is John, and that's a great question. As we look at the balance sheet and the trends therein, I've said on, I think, a few calls that I believe we can do a better job at overall mix in the loan portfolio by improving the growth we have in the smaller end where the spreads are more attractive. The enhancements that we have made in our digital offerings and continue to make, I believe, will eventually give way to a little bit more impressive growth in the smaller-end segments, which would deliver a little bit better ROE and NIM over time. So I'm not ready to talk about numbers on that at this point in time but it's a keen focus strategically for the company. We believe we're a very good C&I lender, and we believe we have a wonderful deposit in branching franchise. And I would like to see us do a little better job at growing the smaller end of the book for the benefit of ROE overall. So just not satisfied quite yet where we are, and I believe we can do better. And while the growth percentage numbers wouldn't be eye popping simply because of the magnitude of our C&I book. The impact on the P&L would be somewhat more attractive. Does that make sense?

[Matt Olney, analyst]

Yes, John, it makes sense. And could you just clarify, when you said the smaller end of the book, just help us out in terms of what the average loan size would be on that smaller end.

[John Hairston, executive]

We tend to look at that client book in segments and so what I'm really talking about is below-middle market. So in the commercial banking and business banking, and retail banking segments, I think that we can maybe punch a little stronger in those areas given the quality of the branching franchise. And a lot of the dollars that we have been pumping into the digital offerings are targeted toward delivering some additional benefit toward the 2019 and '20 timelines. But it would be premature for me to try to size that for you at this point in time. But it is something that's strategically important to us.

[Matt Olney, analyst]

Okay, I appreciate that those loans could be more profitable. Can you help us understand from a relative yield perspective, what the relative yield would look like on the smaller end of the loan balance as compared to maybe a middle-market loan?

[John Hairston, executive]

Well, it somewhere depends on the collateral methodology and whether we're talking about cards or things like that. But I mean, if you use credit cards as an example, the yields are 3x what you'd expect to see in a business loan. The consumer segments are yielding somewhere around 2.5x. So I think it's not something that we could quantify without looking at the mix overall but it's much better than what we'd have today.

[Michael Achary, executive]

I think also -- I'm sorry, I think also, Matt, it gets into the risk-return dynamics related to your larger loans versus smaller loans. And so certainly, there is a yield trade-off in that regard, right.

[Matt Olney, analyst]

Understood. In this discussion, are we talking about both consumer and smaller end commercial loans, John?

[John Hairston, executive]

Well, the benefit on the commercial side as you're going to get a good bit more deposit inflow and therefore, your liquidity covers a little bit better. On the retail side, it's simply leveraging the deposit franchise more effectively than we are today. We have a really strong deposit franchise in the retail bank. And I think we can do better to loan that money inside the retail segments for the benefit of spread. I believe there's an upside there.

[Michael Achary, executive]

Matt, this is Mike, again. Just one other quick comment. Just wanted to clarify something on an earlier question around our M&A strategy. I may have swapped the words tactical and strategic. So just to clarify, what we're working on is tactical smaller deals. What we're not working on right now is larger strategic deals.

[Operator]

Thank you. And I'm showing no further questions at this time. I'd like to turn the conference back to Mr. John Hairston for further remarks.

[John Hairston, executive]

Great, thank you, Sabrina, and thanks for moderating the call, and thanks everyone for your interest. I -- we look forward to speaking with you again next quarter.

[Operator]

Ladies and gentlemen, thank you for participating in today's conference. This does conclude your program. You may all disconnect. Everyone, have a great day.