Hancock Whitney Corp (HWC) 2021 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Hancock Whitney Corporation's Third Quarter 2021 Earnings Conference Call. (Operator Instructions) As a reminder, this call may be recorded. I would now like to introduce your host for today's conference, Trisha Carlson, Investor Relations Manager. You may begin.

Thank you, and good afternoon. During today's call, we may make forward-looking statements. We would like to remind everyone to carefully review the safe harbor language that was published with the earnings release and presentation and in the company's most recent 10-K and 10-Q, including the risk and uncertainties identified therein. You should keep in mind that any forward-looking statements made by Hancock Whitney speak only as of the date on which they were made. As everyone understands, the current economic environment is rapidly evolving and changing. Hancock Whitney's ability to accurately project results or predict the effects of future plans or strategies or predict market or economic developments is inherently limited.

We believe that the expectations reflected or implied by any forward-looking statements are based on reasonable assumptions but are not guarantees of performance or results and our actual results and performance could differ materially from those set forth in our forward-looking statements. Hancock Whitney undertakes no obligation to update or revise any forward-looking statements, and you are cautioned not to place undue reliance on such forward-looking statements.

Some of the remarks contain non-GAAP financial measures. You can find reconciliations to the most comparable GAAP measures 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 Chris Ziluca, Chief Credit Officer. I will now turn the call over to John Hairston.

Good afternoon, everyone, and thank you for joining us. We're pleased to report another solid quarter despite the impact from the COVID-19 Delta surge and Hurricane Ida. Net income of $130 million or $1.46 per share was up $41 million or $0.46 linked quarter. After adjusting for nonoperating items in both the second and third quarter's results, EPS for the third quarter was $1.45, up $0.08 linked quarter. The primary driver of the quarterly increase was a $27 million negative provision in the third quarter compared to a negative provision of $17 million in the second quarter, substantially due to less than $2 million of net charge-offs.

Our asset quality metrics have continued to improve and are now among the best in the mid-cap group. Criticized and nonperforming loans continue to improve and are down 29% and 65%, respectively, from 1 year ago. Our ACL coverage remained strong at just under 2% of total loans. With outperforming asset quality ratios and certainly an adequate loan loss reserve, we are positioned well on credit. At this point, we do not anticipate any significant pressure on credit from Hurricane Ida or the remnant Delta surge.

Stimulus funding and other programs designed to help businesses navigate the pandemic have worked and the recent storm was mostly an insured event, thankfully, much different than Hurricane Katrina 16 years ago. I should mention my appreciation for the incredible efforts of our team during the Ida recovery as we reopened locations and storm-impacted areas on a very rapid basis while simultaneously feeding nearly 40,000 people in our impacted communities. That only happens with commitment and with teamwork, both of which were strongly exhibited by my colleagues at Hancock Whitney.

Before I turn the call over to Mike, I'd like to note that this quarter's results and our near term guidance are the building blocks for our plans in 2022. Slide 17 and 18 in the investor deck provide a good background of our path to a 55% efficiency ratio. Today, we reported another good quarter of organic loan growth in line with guidance and expect another quarter of solid growth to end the year. We kept expenses flat linked quarter despite inflationary pressure and are committed to hitting the $187 million target for the fourth quarter as well as the $750 million target for 2022.

Deployment of excess liquidity into loans and then modestly into securities as rates begin to rise is key to our continuing success. We expect to harvest additional efficiencies via strategic procurement and operational effectiveness gains due to technology deployment and as a means to offset wage inflation and the addition of new bankers.

As shown in the top right quadrant of Slide 18, we are hiring bankers in new and in growth markets across our footprint and have recently added 15 new bankers in those markets with more to come in 2022. And finally, we are able to execute from a position of strength with TCE projected back to 8% or better by year-end, a derisked balance sheet, successful results from efficiency efforts and hopefully, with economic and biological challenges in the rearview mirror.

I will now turn the call over to Mike Achary for further comments.

Thanks, John. Good afternoon, everyone. Third quarter's results were in line with our guidance and some areas exceeded consensus expectations.

Core loan growth continued in both our markets and specialty lines across the footprint with net growth in the Central and Western regions as well as continued increases in equipment finance and health care. In total, core EOP loans grew $220 million, partly offsetting $482 million in PPP forgiveness during the quarter. As a result, total reported loans were down $262 million and ended the quarter at just under $21 billion. Similar to last quarter, improvement in economic activity across our operating regions led to increased loan pipeline, pull-through rates and coupled with fewer payoffs and a slight uptick in line utilization rates resulted in 4% linked quarter annualized growth for the quarter.

As we move into the fourth quarter, we have maintained our guidance for core loan growth of $400 million to $500 million and PPP forgiveness of up to $500 million. We are calling out a risk of higher than normal CRE payoffs in the fourth quarter, but otherwise, our guidance is unchanged. We beat expectations on our NIM guidance with only 2 basis points of compression in the quarter and flat net interest income.

A full quarter's impact from the June redemption of our 2015 sub debt and the impact from a lower cost of deposits added 5 basis points to the NIM, but a continued shift in the overall earning asset mix and yield plus a net change in the quarterly level of net interest recoveries compressed the NIM 7 basis points. The aforementioned all combined to result in the NIM down 2 basis points.

Moving forward, we expect the impact from continued levels of liquidity and lower rates to pressure our margin. We will work hard to offset those headwinds by continuing to deploy excess liquidity into loans, modestly invest in the bond portfolio as rates rise and monitor our hedge positions to improve interest rate sensitivity. We currently expect an additional 4 basis points of compression in the fourth quarter with net interest income down slightly on a linked quarter basis.

The details of fees and expenses are pretty self-explanatory, so I'll just hit a few highlights. Hurricane Ida and the resulting evacuation, which resulted in waivers and loss of activity in certain markets, did impact overall fees in the quarter. We expect those levels to return to normal year-end seasonal levels in the fourth quarter. Secondary mortgage fees were the biggest driver of the linked quarter decline in fees. Both the storm and the second quarter's change in delivery methods were the primary drivers for the decline. Overall, we expect mortgage fees to slow as the boom and refi business begins to subside.

Operating expenses were flat linked quarter as efficiency initiatives announced earlier this year are maturing and are reflected in our results. We are maintaining our guidance for our fourth quarter expense level of $187 million and are committed to that run rate for 2022. As a reminder, both fees and expenses had nonoperating items this quarter and are detailed on Slide 24.

One note for the quarter on capital. We did buy back a modest amount of stock in the third quarter and repurchased just over 56,000 shares of common stock at an average price of $44.49 per share.

In closing, I'd like to call out a few slides in the deck for additional information. Slide 13 has details on our interest rate sensitivity and hedge positions. Slide 17 notes our current near term guidance and Slide 18 helps detail strategies for our path to a 55% efficiency ratio.

With that, I'll turn the call back to John.

Okay. Thanks, Mike. Let's open the call for questions.

(Operator Instructions) The first question is from Michael Rose with Raymond James.

Just wanted to start on the efficiency ratio target. I think what I've heard since the release tonight, it's good to see that you guys are committed to it, but I think people are trying to parse out the revenue side because there is a pretty big delta between where consensus is in the fourth quarter next year and what the guidance would imply in terms of revenue. So I was just wondering if you could give us a little bit more color on maybe the expectations for fee and then NII growth. Thanks.

Yes, Michael, this is Mike. So we haven't given any guidance per se for the 4 quarters of '22 yet. So what I would do is direct you to Slide 18 in the deck, where I think we provided some color around what we're thinking in terms of the kind of loan growth to expect not only for the fourth quarter of this year, but also into '22.

And then in terms of how we're thinking about managing the balance sheet, certainly, we've disclosed in a couple of places, both in the introductory comments as well as the deck, this notion of beginning to go back to reinvesting cash flows and maturities back into the bond portfolio and then also this notion of modestly increasing the size of the bond portfolio over the next 5 quarters. So there isn't an exact amount per se that we're going to increase the bond portfolio by, but certainly, if you use a number like $1 billion or maybe a little bit north of $1 billion as kind of a placeholder that would imply $200 million plus in the next 5 quarters.

I think the exact amount that we redeploy liquidity into the bond portfolio will really depend on what happens with rates next year as well as what happens with our ability to continue the momentum in terms of adding loans to the balance sheet. So I think the recipe for us on the revenue side really boils down to being able to deploy the lion's share of the excess liquidity that we have on the balance sheet into a combination of loans and bonds over the course of next year.

And obviously, I think the guidance around our plans for expenses is pretty self-explanatory. It's the $187 million for the fourth quarter of this year. And in this notion of that being a run rate as we move into 2022. So I think also, certainly, the new banker hires that we've kind of called out, I think, have been extremely helpful to our ability to kind of continue the momentum in terms of growing loans and certainly to increase it as we go into '22. So that's kind of how we think about the efficiency ratio go and I think also the pathway. So John, anything else you want to add?

No, I think you gave some pretty good guidance.

Yes, that's great color, Michael. No, that was great. Thank you. Just one follow-up. Just credit another positive quarter, criticized classified down, NPAs down, big -- not that big, but I guess, negative provision again this quarter. Any reason to think that assuming credit remains benign, and you continue to cure some credits that we would see the reserve level come down and we're likely to see negative provisions for at least the next couple of quarters? Thanks.

Yes. I think certainly, if you go back to the guidance slide, we are calling out the fact that, at least on a go-forward basis through the fourth quarter to look for reserve releases in the magnitude of what we've done in the last couple of quarters, so call it $27 million, $28 million or so. And I think certainly, we have some potential to continue that into 2022. So there's no end point out there that we have in mind right now in terms of a level to bring the ACL down to. But just for context, if you go back and look at our day 1 ACL percentage, it was about 128 basis points. And if you back out the energy portfolio that we largely sold last year, that brings it down to just under 1%. And I mentioned those numbers not as a target for us to reduce our ACL to, but just for context. So the actual end point, I think, will depend on a lot of things, including how we grow our loan book and then certainly also how the pandemic finally ends. And we see our economies, our local economies restored to where they were before.

The next question is from Brett Rabatin with Hovde Group.

Good. Wanted to first ask on the fee income guidance. Could we just talk about that for a second in terms of expecting flattish trends in the fourth quarter following some disruption in 3Q? Obviously, mortgage volumes are somewhat difficult to predict. Seasonality is obviously going to be an impact in 4Q, but you obviously had lower numbers this quarter. Can you just talk about how much mortgage plays into that fourth quarter guidance around fee income and other things that might be affecting seasonality in terms of the fourth quarter versus a rebound in activity given the lack of the hurricane this quarter?

Yes, yes, sure, Brett. This is John. I'll start, and Mike can add color on. I mean, obviously, the secondary mortgage fee reduction was the heavy detractor from fee income for the quarter. And then Ida, I think Mike shared in the prepared comments around $1.2 million estimated impact. So outside of that, the quarter actually had pretty much every category as an improved net of the Ida damage to it. So for example, service charge fees were sharply up, both for business and for consumer, which was our first material increase of the year all the liquidity that was out there. And I think that number is around $3 million up from the same quarter previous year. So a healthy increase.

Card fees, which were one of the more heavier fee impacts from Ida just given the transactions happening due to power shortfalls were relatively flat quarter-to-quarter. So on a net basis, we're up a push. Trust and investments were similar given the closures and some of the pushed-off transaction work that would have normally happened in September that didn't, plus the second quarter has the tax prep fees and trust that are pretty good. So push was a win there. So really, every category is firming up and doing better to the point that I think as we go into '22, we have some confidence that outside of secondary mortgage fees, we should see some year-over-year improvement.

Yes. Brett, the other items I would kind of add to that in a way of just a little bit additional color is if we think about the impact that the storm had on our third quarter fees, we're roughly estimating that to be between $1 million and about $1.2 million. Certainly unsure around how much of that will kind of recapture in the fourth quarter. I think safe to say certainly some of that, I think, could be recaptured. How much of it though is really uncertain.

I think the other thing to look to for the fourth quarter is our specialty line. So things like BOLI and venture capital income and some lines similar to that, we can already have a little bit of a line of sight to seeing some increases that we'll be able to show in the fourth quarter related to, again, that of aggregation of different lines of business that we call specialty lines. So certainly, I think if you look at headwinds, mortgage fees, I think, is going to be a headwind, but there are also some tailwinds that we think will pick up the slack and offset the further decline in mortgage fees.

Okay. And then the other big thing I wanted just to make sure I cover it was just around the margin, and I know there's a lot of -- it's difficult to parse all the things that might impact that. But as I think about the 4 basis points of pressure in 4Q. There's definitely a better tailwind with the yield curve, possibly. Do you think you're getting close to the bottom on the margin? And do you think it bumps along here if you can deploy some liquidity? Obviously, you mentioned $1 billion in securities, but it seemed like there could be some opportunity for it to improve over the next few quarters. And I just wanted to see if you might take a stab at maybe some thoughts around that.

Yes, I think that's absolutely the case. I mean we're guiding to the 4 basis points of compression in the fourth quarter, and that really is centered around as much as anything else the drag on the NIM related to the cash we have on the balance sheet. So to the extent that we're able to deploy more of that cash into a combination of loans and bonds, certainly, that helps out the NIM and alleviate some of that pressure. We're also kind of projecting a continuation of our ability to reduce our cost of deposits by around 1 basis point over the course of the fourth quarter. So certainly, if we're able to do that, I think that will be helpful. The kind of on a go-forward basis, given the pathway to the efficiency ratio that we kind of talked about earlier, we certainly would expect our NIM to bottomed out and potentially be increasing as we go through '22.

And this is John, and while it may be more of a net interest income point than simply with NIM, the bleed we're experiencing now at PPP forgiveness if you just presume $400 million or $500 million or so of that for the fourth quarter and guidance around $400 million to $500 million in organic growth, we're nearing the point to where the impact of the runoff gets a little closer to a push. So on a net interest income basis, as we reach and pass the inflection point to where the runoff gets overcome by the growth, then that will help us on NII moving forward.

The next question is from Brad Milsaps with Piper Sandler.

Mike, I just kind of wanted to follow up kind of on the balance sheet management question again. I appreciate all the color. Just kind of thinking about sort of that mid-single-digit loan growth target would apply maybe $1 billion or so, $1.2 billion of growth over the next 12 months, which essentially kind of replaces a lot of the PPP loans that you have left. You still have upwards close to $3 billion of cash. It sounds like you might put $1 billion to work in the bond book, but it still leaves you with quite a bit of funding assuming deposits don't go higher. Can you kind of talk through kind of what -- how you're thinking about sort of the remainder of the cash, excess liquidity that you have on the balance sheet and sort of thoughts around sort of putting that to work as well?

Yes, glad to, Brad. So again, our goal as we think about the next 5 quarters and kind of marching toward that 55% efficiency ratio was really to deploy as much of that cash as we can again, over the next 5 quarters. And the $1 billion or so that I mentioned related to how we might deploy some of that into the bond portfolio, again, is really kind of a placeholder. So I think we're prepared to think about that number as kind of a minimum over the next 5 quarters and certainly could deploy more into bonds. And that I think is also very dependent upon the rate environment. So if the rate environment next year cooperates, we're looking at better reinvestment yields related to our new bond purchases, then I think we could certainly deploy more in that particular asset category. And again, the loan growth number for '22 is really a jump-off point for where we'll end this year. So again, our guidance for the fourth quarter is $400 million to $500 million and in the mid-single digits would be off that number.

That's helpful. Thank you. And then just as a follow-up, I appreciate all the detail on Slide 13 regarding interest rate sensitivity. It looks like that table is up quite a bit from -- or some from the second quarter disclosure. Just kind of curious what deposit betas you guys are assuming to drive some of those numbers on Slide 13.

Sure. So in the way of deposit betas what I'll share with you is really just kind of what we experienced the last time rates were up and then the last time rates were down. And ironically, both numbers are in the 28%, 29% range, both in an up-rate environment as well as in a down-rate environment. And then on the loan side, in an up-rate environment, it's really close to about 50%, down rate is about 40%.

The next question is from Catherine Mealor with KBW.

Just want to follow up on the margin conversation. First, on the PPP, we've got $17.6 million left in unamortized fees. How much of that do you think comes in next quarter versus trickle -- to trickle in next year? And then a secondary on the margin is how much premium are you assuming for next quarter as well versus the $12 million that you indicated on Slide 10 for this quarter?

Okay. Great. Glad to, Catherine. So you're right, our unamortized fees at the end of the third quarter were just under $18 million. And really just kind of all things equal, we think in the fourth quarter And certainly, this depends a bit on the level of forgiveness that the level of fees that we'll amortize in the coming quarter is somewhere around $8 million or so.

And related to your question about premium amortization in the third quarter that was down about $900,000 or so. And the way we're kind of thinking about the fourth quarter, if we look at prepayments, certainly, the first month of the fourth quarter, they remain elevated, but we could certainly see that moderating a bit in the remaining months of the quarter, especially if we're considering a little bit of a higher rate environment. So I think the conservative assumption around premium amortization is that it would largely be at about the same level as it was in the third quarter, potentially down a little bit.

Okay. Great. And then if we've got $8 million in PPP fees come in the next quarter, then versus $15 million this quarter, then really, most of that 4 bps of compression is coming from just PPP running off, and it feels like your core NIM is really stabilizing probably next quarter, maybe depending on liquidity.

Right. I think that's right. And as I mentioned before, obviously, the amount of cash that we're able to deploy will influence that number a good bit. But you're correct to point out that certainly, the runoff of the PPP loans is having an impact as well. So at the end of the third quarter, our PPP loans stood at about $935 million. Based on the level of forgiveness that we see in the fourth quarter, we think that will be down to something like $400 million, maybe $450 million by the end of the year. And then really by the end of the second quarter, I think the forgiveness gain will be largely played out. So at that point, I would imagine we probably have less than $50 million or so.

Okay. Great. And then one follow-up on fees. If we look back at service charges pre COVID, you're around an annual run rate of, call it, $86 million, if I look back at 2019. And so as part of the past towards this higher efficiency ratio -- excuse me, lower efficiency ratio, does it factor in a rebound in service charges and some other fees?

It partially does, Catherine, this is John. And some of that is simply because the offset to service charge is through some of the analysis work with our analysis phase that are -- because it's so much of a large balance per account relative to normal, we expect that to begin to bleed off next year as well. So somewhat the stickiness of the deposit size per account will affect how much of a fee increase we actually see in service charges. Now obviously, that all changes if we add more accounts, right? So the pace of adding deposit accounts that render fees next year should pick up as digital solutions are rolled out in Q2. So that would also help for '22 as well.

The next question is from Jennifer Demba with Truist Securities.

Question on loan pricing pressure. I'm just wondering how much loan pricing pressure you guys have seen in the last few months. And are you running any -- or considering running any promotions in the coming months? Thanks.

It's a good question. Thanks for asking it. The -- obviously, every bank that we compete with is rather aggressive right now in pricing particularly in, call it, the 36-month duration and down space. So that would include all the revolving credit as well as shorter duration fixed. And so it's very competitive on price. If Chris wants to add anything about structure competition, then he can do that one. But in terms of price, it is rather aggressive.

So I would say that given our liquidity position, we are meeting that competition at price level with 36-month duration business and down. We've been very aggressive in the consumer space. And actually, even though the consumer whole number shows down, Jennifer. That's really because of the continued runoff in the indirect portfolio and the HELOC portfolio. The HELOC portfolio being totally due to continued pressure on mortgage. So that's leading to wane as rates are going up. And we're actually seeing some good healthy growth in the unsecured revolving consumer book, and that's partly because of the price aggressiveness that we've had in terms of deploying new credit. So -- and that's been an offset to some of the larger credits that are not quite as impressive in yield like health care and equipment plans.

The next question is from Matt Olney with Stephens.

Thanks guys. How are you?

Good.

Good. Thank you, Matt.

Going back to the potential to build out the investment securities portfolio, help us appreciate just how large this could be as a percent of earning assets? Is there any policies you have internally or any guidelines you're working through with that?

Yes. Thanks, Matt. So right now, and by right now, I mean, the end of the third quarter, the bond book is at about $8.2 billion. So that's roughly about 25.6% of earning assets. If you keep the level of earning assets static and we grow it by, say, $1 billion, inclusive of reinvesting cash flows and maturities, then that percentage would increase to about 28.5%. So while we don't have any hard and fast policies or policies around the size of the bond book, I think certainly, once you get to around 30%, that's a level that becomes pretty large for a bank of our size in terms of the mix of our earning assets. But again, one of the implicit assumptions that I'm making is really just kind of keeping the level of earning assets static. So if you apply a little bit of a growth rate to our level of earning assets, then I think we'll stay below that 30% level. Hopefully that makes sense.

Yes. No, that's helpful, Mike. And then going back to the loan growth discussion and kind of, I guess, Jenny's question as well, any more color or any numbers you can give us behind the loan yields on the more recent production? Just trying to appreciate just what's coming on the book at this point and how much slippage there could be on the overall loan yields?

Yes. So certainly, as John mentioned, I mean, I think we and many banks are feeling certainly some pressure around our loan yields. And if we look at the third quarter, our production levels were really good. In fact, they were up a little bit more than 8% quarter-over-quarter. And then when we look at the yield of new loans to the balance sheet, they did drop some this quarter. They were down about 15, 18 basis points or so, somewhere in the 3.15 range. So certainly, there's some pressure on our overall loan yields, and that was built into the guidance that we gave around the fourth quarter NIM.

Okay. And just lastly for me, I think you mentioned in some of the materials anticipate the TCE ratio approaching that 8% level by year-end. I'm curious kind of what that means to the bank? And specifically, does that unlock any ability to get more aggressive on the share repurchase plan?

Not specifically. I think those that know our company know that the 8% threshold is always something that we've kind of looked at as a target, if you will, for our TCE. And there's nothing magical, I think, that happens once we get to that level or exceed it. And by that, I mean the way we think about capital and the way we manage capital really is unchanged, I think, once we get to 8%.

There are no additional questions waiting at this time. I will now pass the conference back to John Hairston for closing remarks.

Okay. Thank you, and thanks for moderating. Thanks, everyone, for your interest, and we look forward to visiting you on the road in the next few weeks. Have a great day.

That concludes the Hancock Whitney Corporation's Third Quarter 2021 Earnings Conference Call. Enjoy the rest of your day.