Hancock Whitney Corp (HWC) 2008 Q2 法說會逐字稿

Please stand by. We're about to begin.

Good day, everyone, and welcome to the Whitney Holding Corporation Second Quarter 2008 Earnings Results Conference Call. Today's call is being recorded.

Participating in today's call are John Hope, the Chairman and CEO; John Turner, President; Tom Callicutt, CFO; Lewis Rogers; EVP of Credit Administration; Bobby Baird, EVP of Banking Services; and Steve Barker, Controller of the Bank.

At this time, for opening remarks, I would like to turn things over to Whitney's Manager, Investor Relations, Trisha Voltz Carlson. Please go ahead.

Thank you.

During today's call, we may make forward-looking statements. Forward-looking statements provide projections of results of operations or financial conditions, or state other forward-looking information such as expectations about future conditions and descriptions of plans and strategies for the future.

Whitney's ability to accurately project results or predict the effects of future plans or strategies is inherently limited. Although Whitney believes that the expectations reflected in its forward-looking statements are based on reasonable assumptions, actual results and performance could differ materially from those set forth in the forward-looking statements.

Factors that could cause actual results to differ from those expressed in the Company's forward-looking statements include, but are not limited to, those outlined in Whitney's filings with the SEC. Whitney does not intend and undertakes 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.

On June 9th, Whitney announced its intent to acquire Parish National Corporation. The proposed transaction will be submitted to the Parish National Corporation shareholders for their consideration. Shareholders of Parish National Corporation are advised to read the proxy statement regarding the proposed transaction. The proxy statement will be filed in conjunction with the registration statement, to be filed with the SEC.

I will now turn the call over to John Hope, Chairman and CEO.

Thank you, Trisha. And thanks to all of you for joining us today

We're not going to spend a lot of time on opening comments. There are a few things I'd like to point out to you, and then we'll make ourselves available to answer your questions.

Earnings for the quarter were $12.9 million, or $0.20 per share, reflecting stable core results that were overshadowed by credit. And the credit story is really twofold.

First is the impact on results from our traditional typical long-standing C&I lending portfolio. As noted in our preannouncement, a few commercial and industrial credits, mainly in Louisiana, that had been included in our watch process for a number of quarters, finally came to a head and resulted in an increased level of charge-offs. Four C&I credits in Louisiana added $8.9 million to the quarter's provision.

In addition, one C&I credit in Texas and one in Alabama added $2.3 million to the provision, and those two credits are now completely charged off as of the end of the quarter. These six credits were responsible for $11.2 million of the $35 million provision for the quarter.

Most of these C&I credits have been included in our watch process for several quarters; some for years. The issues associated with C&I portfolio are not systemic and do not have us concerned about a new level of problems. Unfortunately, these events happened at a time when another part of our portfolio was continuing to experience pressure.

The second part of the quarter's credit story involves the newer parts of our franchise, where we continue to see pressure in Florida and coastal Alabama markets, resulting from ongoing deterioration in the underlying value of collateral. The problems and pressures in the real estate markets in Florida and coastal Alabama related to existing watch list credits, added $8.4 million in provision; while new problem loans added $5.6 million. These loans were responsible for $14 million of the $35 million provision. The combination of these two events led to what we believe are appropriately higher allowance provision and charge-off ratios, given current market conditions.

During the quarter, we did not change our reserve methodology. However, we did take a different view of some of the underlying collateral values in several credits. We continued to apply standard discounts to appraisals; however, we were more aggressive in assessing the continued change in values.

We continued to build reserve and added $3.8 million to the un-allocated allowance and qualitative factors. In addition, $4.8 million in provision related to consumer and miscellaneous small commercial to credit charge-offs, and then $1.2 million was added to the provision for additional loan growth.

The provision of $35 million exceeded net charge-offs of $16.9 million, and as a result, the build in reserves led to a reserve-to-loan ratio of 1.38%, up from 1.19 last quarter and 1.02 a year earlier.

So where are we going from here? While we have seen some movement in the level of criticized loans from these markets, it continues at a manageable pace. The overall level of criticized loans was up 19% for the quarter, to $465 million from $392 million last quarter.

Special-mention credits, the least criticized category, increased approximately $4 million, as we saw normal migration from movement both in and out of both real estate and C&I loans. The majority of the increase was in what we call substandard credits, at $275 million, up $73 million from the end of the first quarter. Approximately 80% of that increase came from four credits. Loans categorized as doubtful, the most severely criticized category, were actually down $3.5 million for the first quarter.

As some of you noted after our preannouncement, nonperforming assets did not increase materially during the quarter. Nonperforming loans were up $8 million, while REO increased $2.5 million. We did not sell any impaired loans during the quarter but instead charged down many existing problems. After adjusting for charge-offs, only one loan significantly added to nonperformers for the quarter.

As of the end of the second quarter, 51% of our nonperforming loans are in Florida, 29% in the Panhandle and 22% in the Tampa Bay area; 26% in Louisiana and 21% in Alabama. Additional credit quality information as to geographic breakout by type and criticized by type in geography has been included in our financial tables and can be found in the Investor Relations section of our Web site.

Outside of credit, results for the second quarter held up well, as we continued our focus on controlling expenses, managing the net interest margin and increasing recurring fee income. Total assets ended the period at $11 billion, up from $10.8 billion last quarter. Period-end total loans increased 3% linked-quarter, while total deposits were relatively flat. Average loans were up 2% linked-quarter, while average deposits were down 2%.

Loan demand from the metropolitan New Orleans area, primarily in commercial and industrial lending, was the major contributor to the loan growth linked-quarter, with smaller contributions from Southwest Louisiana and our Texas markets.

The net interest margin was 4.54% for the second quarter, down 10 basis points from the first. The decrease reflects a full-quarter impact from the 75-basis point rate drop in mid-March, a full-quarter impact from our aggressive move in deposit rates in the first quarter and a partial impact of the 25-basis point drop in rates at the end of April.

Fee income increased linked-quarter in sources of recurring income such as deposit service charges, bank card fees, trust service fees and secondary mortgage income. Expenses remained under control. And normalized for the impact of the Visa litigation liability, noninterest expenses were up less than 1% compared to the first quarter.

Through the cycle, Whitney has remained and still remains a well-capitalized institution, and we do not need additional capital. Our ratios remain above those required to be well-capitalized, with leverage of 8.27% and a tangible common equity ratio of 7.86%.

Even after paying our normal dividend, completing the repurchase of shares under the buyback program and anticipating the merger with Parish National, our capital position is strong. Nothing has occurred that has caused us to think differently about our dividend policy or the level of capital needed to operate in this environment. Throughout our capital planning process, we have been focused and will continue to focus on the economic environment and its projected stress-tested effects on our credit quality.

I'd like now to open it up for questions.

(OPERATOR INSTRUCTIONS) John Pancari, JPMorgan.

Good afternoon.

Afternoon.

Can you give us some additional detail on the concentration of your C&I credits that moved on to nonperformer by industry, particularly the credits in the Louisiana markets?

Lewis Rogers, our Credit Officer?

John, you're asking for some more detail in terms of the industries that we -- if there are any industry issues --

Right, if there's any concentration in the C&I nonperformers that moved on in the quarter, and then the progression you're seeing in your watch list. Is there any concentration by industry in the C&I? I'm just trying to --

I think in the C&I side, the answer is generally no -- that there's nothing systemic industry-wise that we see as it relates to the deterioration that we alluded to in the press release and in John's comments.

Okay, so you would characterize the pressure you're seeing there on C&I as just general -- or linked to the economic slowdown in general, then?

They are unique -- most of these are unique industries that these individual credits operate in. And again, there's really nothing systemic. It's not as if we've got six hula hoop manufacturers that are going down. They really are independent and unique -- unique from one another.

Okay.

And in terms of -- outside of credit, actually -- just in terms of the loan growth, I know you indicated that the bulk of the contribution came from some of your core markets there in New Orleans, or actually Louisiana. Just want to get some detail around what type of loan demand you're seeing there. Is it immediate New Orleans markets, or where is it concentrated?

John, this is John Turner.

It's mixed. We, for the quarter, saw the majority of the loan growth in our core New Orleans market. And it was across a variety of sectors, both C&I and comprised as well of a couple commercial real estate transactions, both owner-occupied and non-owner-occupied. We continue to see good loan demand in Southwest Louisiana and in our Houston markets, and generally our pipelines are good.

Okay. And then you indicated that Texas was a smaller contributor. Anything you're seeing there -- is it a slowdown that's evident, or is it just a quarterly aberration?

We had some paydowns in the market that were expected as a result of real estate projects that moved to the permanent market. But we still have a very good pipeline in Houston and expect positive things from that market for the balance of the year.

Okay.

That's all I have for now. Thanks.

(OPERATOR INSTRUCTIONS) Brent Christ, Fox-Pitt.

Good afternoon.

You mentioned with -- some of the increased provision this quarter was partially attributable to some of the existing credits in Florida and Alabama, and that you had refreshed your view of underlying collateral values. And was just curious, in terms of kind of a general order of magnitude of change in some of those values that you saw over the past few months, and how that was kind of driving the provisioning in the quarter.

Brent, we continue to see some deterioration in value as we get new appraisals. The magnitude is a little hard to generalize. But we do see values contracting.

I don't know that they're accelerating in terms of the contraction this quarter as opposed to last. But in general, I would tell you that we have seen occasionally values from '05 to now that would be 40 to 50% change for certain property types. But don't mistake that to mean that all property types in these distressed markets are declining by 50%; I don't want to leave that impression.

As our impaired assets are refreshed annually in terms of value, we continue to monitor this on an ongoing basis. But as John indicated, that is a contributor to some of the deterioration we noted -- is the appraisal of issues as we continue to monitor these credits.

Brent, we see -- this is John Hope -- we are seeing only a few encouraging signs as to the market beginning to firm up. There have been some projects where there have been some absolute auctions, and the values have surprised us with their resiliency. But it's way too early to draw any conclusions from something like that.

We're participating in a large condo project that's in the process of closing out right now, and the project's going exactly as planned. But I have to tell you that those are more exceptions than the rule -- the market is still very soft, and there's a lot of volatility in that underlying floor.

Got you.

And then, switching gears for second -- regarding the Parish National deal, could you give us an update as far as where you are with the due diligence on that, and if anything has surprised you through the process?

Sure, Brent, this is Tom.

We announced, when we did our preannouncement, that we had completed the due diligence.

Okay.

I'm not sure we would characterize anything we found as a surprise. We are moving toward doing all the things you need to do to get that deal closed.

We're looking for a fourth-quarter closing date.

Got you.

Okay, thanks a lot.

Bain Slack, KBW.

Hi, good afternoon.

Hey, Bain.

Hey, just a follow-up -- most of my questions were answered. But on the Parish National -- with the move in the stock prices there, can you quantify or give some color on the expected -- I guess that would be an increase in some dilution here, given the extra shares, and how that might impact the deal in terms of the performer numbers?

This is Tom. We have not done that. We've said that the deal is accretive, so I don't think we have any more to add to that.

And I guess that's -- is that still true as of today's -- where the market is today?

As far as we know.

Great, thank you.

David Grayson, SunTrust Robinson Humphrey.

Hi, it's Jennifer Demba.

Hey, David.

How are you?

If you've covered this already, I apologize; I had to jump on a few minutes late. But can you give us a sense of the size of your loan loss reserve for the Florida portfolio?

And also, John, I think you mentioned a couple of minutes ago you had condo project that was going as planned. Is there anything specific about that project that you think makes it unusual -- geography, price point, whatever?

Jennifer, I'm really just giving you an opinion. But the geography is not anything worth drawing any conclusions about. I will tell you the project is -- it's an upscale type of project. It's a very -- it's a really good product. And it seems that the buyers are just not walking away from it, and they're paying what they contracted for. But the only differentiation is it's a quality -- the quality of the project.

Now, back to your other question on the amount of the reserve allocated to Florida. I'm going to let Lewis kind of talk to that.

Jennifer, I don't think we are prepared to give our allowance by geography. I can give you some insight, and we've already given it to you in the backup material here and with regard to John's comments.

But we can break down our reserve in terms of types. We've got about $25 million of our reserves allocated to impaired assets, and we have about -- we've got about 12% related to just qualitative factors. 51% is related to the total criticized -- that's the number I was looking for. That includes that impaired number.

So that will give you a sense. You can then look at what information we've given as to the impaired totals and John's comments by what's impaired by state and began to understand how that might break down. We do have some unallocated, over and above the qualitative factors, of less than 10%. And that really rounds out the totals than of what we've got. The remainder would all be for our past credits, which come from all geographies.

We've never split it down by geography when we add it up. We do it by loan or by classification, not by geography.

And by product type.

Okay.

Again, I'm sorry if you've covered this before, but do you anticipate needing to build the reserves further for the second half of the year?

Well, we're just going to have to take it quarter by quarter. I'd like to say that we're through, but I think it would be a little naïve to come to that conclusion. We're sitting on $150 million, $160 million worth of nonperforming assets, and we've got to work through those. But we have aggressively built the reserve and provided for on this quarter as best as we can, and we'll just have to work through it the third and fourth quarter.

Okay. Thank you very much.

(OPERATOR INSTRUCTIONS) Jeff Davis, FTN Securities.

Good afternoon.

Tom, you may have covered this -- I joined late; apologize if you did. The margin, down 10 -- what are you thinking over the next couple of quarters?

Well, Jeff, we're going to manage it the same way we've managed it. We have allowed CDs to run off, and it will be what it'll be.

Well, are you thinking that that's -- and Tom, I'm not asking --

Right.

-- for BIP. But what are you thinking -- relatively flat? I would characterize it asset-sensitive institution, going from 464 to 454, as relatively flatter.

No.

Are we bottoming out here, or --?

I think it remains to be seen as to how LIBOR behaves; also as to what other space we have to work on deposits. And there are all sorts of factors that go into that.

Well, Tom, was there much impact from movements in the LIBOR prime spread this quarter?

Yes. Most of the rate moves are through the loan book.

Positive to the margin this quarter? You want me to follow up with you?

Yes.

Okay. I'll do so.

And then, Lewis, coming back to Jennifer's question -- or John -- let me ask it a little bit differently. Aside from whether you need to build the reserve further, is it unlikely that we see a quarterly provision again, at least over the next two, three quarters, that's the size of this one?

Jeff --

We'll give you a credit perspective and a CEO perspective.

Jeff, I wouldn't want to venture that --

Optimistic and pessimistic, right?

I think that -- yes, John knows me too well. I would not be willing to venture an expectation of our reserving going forward. We worked very hard to come to the right conclusion. At 6/30 we were -- we looked at and re-looked at a number of assets to make the proper call. And what the future holds is anyone's guess. And it gets back to some of the earlier questions we've had -- what's happening with appraised values, how liquid is real estate becoming, is it becoming more liquid or staying where it is, et cetera?

Well, I think this -- really in a sense, I'd answer that question the same way. We've got to see some buyers go into the market. And the buyers are not going to go into the market until -- I guess what you saw last week with the bank stocks -- and the buyers finally started going into the market, and now look what's happened. The real estate market could turn just like that. And when it does, then you won't see any more of those provisions that you're talking about.

Okay.

Jeff, this is Tom. Let me follow up a little bit on your margin question. The excess LIBOR spread contributed 12 basis points.

Okay. Thank you, Tom.

Yes.

And there are no other questions at this time. I'd like to turn the Conference back to Mr. Hope for any closing remarks.

Just a quick closing comment -- balancing at-risk culture is an important focus as we continue moving forward and taking a more long-term view of things. We recently appointed Joe Exnicios as our Company's Chief Risk Officer. Whitney has never had this position in the past, so we've created the position, and then we've taken one of our own people to fill it in Joe.

Joe has had over 30 years of service to the Bank, mainly as part of the lending group and head of our commercial line of business, and he's very knowledgeable about the Bank's culture. He is responsible for both credit and non-credit risk management. And interestingly, Joe also has a degree in law, and he's a CPA as well as a banker. We think his contribution going forward should be significant to balancing managing risk as we move forward.

Thanks again for your participation. I imagine some of you will have some follow-up questions. And if you'll just direct them through Trisha, we'll do our best to answer them.

Thank you, everyone. That does conclude today's Conference. You may now disconnect.