Hancock Whitney Corp (HWC) 2008 Q4 法說會逐字稿

Good day, everyone, and welcome to the Whitney Holding Corporation's Fourth Quarter 2008 Earnings Results Conference Call. Today's program is being recorded. Participating in today's program are John Hope, Chairman and CEO; John Turner, President; Tom Callicutt, CFO; Lewis Rogers, EVP of Credit Administration; Joe Exnicios, Chief Risk Officer; and Steve Barker, Controller of the bank.

At this time, for opening remarks, I'd like to turn things over to Mr. Steve Barker. Please go ahead, sir.

Good afternoon. 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.

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.

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

Good afternoon, everybody. Thank you for joining us today. The fourth quarter results, as you saw from our release this morning, almost mirrored the results we reported in the second and third quarters of 2008.

We continue to deal with the challenges being faced in our economy, particularly the real estate markets in our Florida markets. These challenges coupled with the overall economic picture once again led to a sizeable credit loss provision - $45 million for the quarter. However, as we have also seen these past couple of quarters, we were able to pay for the credit costs out of earnings and still report a profit.

Earnings available to common shareholders for the quarter were $8.2 million, or $0.12 a share. This was a slight increase from the third quarter. Results for the quarter did include our acquisition of Parish National Corporation, which was announced on June 9, finalized on November 7, and then the sale of the $300 million in preferred stock and warrants to the US Treasury on December 19. The Parish acquisition added approximately $605 million in loans and $635 million in deposits at period end.

With all the focus this quarter on whether banks are lending or not, I am pleased to report that during the fourth quarter we organically grew loans - approximately $400 million, or 21%, linked quarter annualized. While our reported loan growth for the quarter was $1 billion, about $600 million was related to Parish.

The organic loan growth for the quarter reflects demand from most markets within the Company's footprint. For the quarter, Texas loans grew 10%, Alabama and Mississippi loans grew 4%, and Florida loans actually grew 1%. In Southwest Louisiana our markets gave us 2% loan growth during the quarter. And in the greater New Orleans market, reflecting an improving economy here, loans grew 7%. The quarter's loan growth was funded through deposits and an increase in short-term borrowings. And while the loan growth numbers are a positive sign, our capital and liquidity allowed us to take care of our customers' borrowing needs. We do remain cautious on our expectations for loan growth in 2009. We currently believe that the weakening economy will result in a slowdown in loan demand. And, therefore, we have not built in the fourth quarter 2008 level of loan growth into our projections going forward.

Another challenge we faced during the quarter besides credit was the latest downward movement in rates by the Fed.

At this point I'd like to turn it over to Tom Callicutt, who will get into more detail on this topic, as well as the other financial information.

Thank you, John. Even though we're an asset-sensitive company, we were able to successfully manage rates and maintain a relatively stable net-interest margin. The net-interest margin of 4.49% was down only 4 basis points compared to last quarter, while net-interest income increased 7%, or $8 million. The margin reflects the loan growth noted earlier, a strong level of non-interest bearing deposits - 34% of total deposits on average for the quarter - and another quarter of benefit from high LIBOR rates.

Deposits on average increased approximately $415 million from the third quarter, while average DDA increased $200 million. Approximately $380 million in average deposits were related to Parish. The impact from Parish on the net-interest margin percentage was negligible.

Because of the return to a more normal spread between LIBOR and Fed funds and lower overall interest rates, it would not be unreasonable to expect some net-interest margin compression during the first quarter.

Non-interest income for the fourth quarter of 2008 increased 6%, or $1.6 million, from the third quarter. Approximately $1.2 million of the increase was related to Parish. Non-interest expense for the fourth quarter increased 3%, or $2.5 million from the third quarter. Approximately $6.8 million of total non-interest expense was related to the addition of Parish and included approximately $1.8 million related to conversion costs and $700,000 in the amortization of intangibles. Excluding the costs associated with Parish, total non-interest expense actually decreased $4.3 million, or 5%, from the third quarter.

Employee compensation was down $7 million, excluding $2.2 million in salary and wage expense added from Parish. The decrease was due to a reduction in management bonus and incentive compensation during the quarter. Employee benefits decreased $2.7 million from the third quarter, excluding $400,000 from Parish. This decrease was mainly a result of amendments made to the defined benefit pension plan during the quarter.

Legal and other professional fees increased $1.6 million during the fourth quarter, excluding $1.3 million in conversion costs associated with the Parish merger. Increased expenses related to problem loan collection efforts, expenses related to various process improvements and technology projects, and our participation in the Treasury's capital purchase program accounted for the majority of the increase.

Other non-interest expense increased approximately $3.7 million from the third quarter, excluding approximately $1 million related to Parish. The remainder of the increase includes approximately $1 million of higher costs associated with problem loan collection efforts and $1.9 million in costs associated with branch closings scheduled for early 2009.

Speaking of expenses, I want to share with you what we consider to be a real success story. Obviously expense containment is a big issue at all times but especially in these economic and industry conditions. As most of you should know, we started a formal cost containment program in mid 2007 and have continued to implement that program through our planning for 2009. As of the end of 2008, we've specifically documented approximately $20 million in operating expense reductions off our annual run rate with more to come in 2009.

More than half of the savings to date has come from head count reductions and reduced benefits. Based on strategic evaluations, we've closed or will close 14 branches outside of those being eliminated due to overlap with the acquisition of Parish. None of these cost reductions have negative strategic impacts. And they facilitate our ability to make strategic investments in the future.

Now I'll turn it over to Joe Exnicios who will talk about credit.

Thank you, Tom. Our comments on the credit results for the fourth quarter are basically the same as we have made for the third quarter. That is real estate issues in Florida continue to drive our credit metrics and our provision requirement. We are yet to see any signs of systemic credit issues in any of our other regions outside of Florida or in any particular industry segment throughout our footprint. We do, however, see signs of a general weakening in the overall economy.

Given our concentration in the energy sector, we are closely monitoring commodity prices, results posted by our customers, and various other trends in the energy sector. Loans outstanding to oil and gas industry customers represent approximately 11% of total loans at year end. And that's up from 10% a year earlier. About 31% of the loans are related to exploration and production lending, with a balance (inaudible) the industry through transportation, supplies, and other services. Our exploration and production portfolio is approximately 60% gas and 40% oil. A significant percentage of the gas reserves of our customers are hedged.

Continuing weaknesses in residential (technical difficulty) markets, primarily in the Tampa Bay, Florida region, accounted for approximately $25 million of the provision for the fourth quarter of 2008, while commercial real estate, development, and investor credits added $9 million. Problem commercial and industrial credits added approximately $7 million to the provision. Management added another $3 million to the allowance in provision based on its regular assessment of current economic conditions and other qualitative factors.

The quarterly provision also included $3 million associated with changes in non-criticized credits and approximately $4 million related to charge off on consumer and other smaller credits that were more than offset by loses recovered during the period of $6 million. The provision of $45 million exceeded net charge offs of $19.7 million. This brought the allowance to loans ratio to 1.77%, up from 1.55% last quarter and 1.16% a year earlier. The majority of the gross charge offs during the quarter - $19 million - were related to residential related credits, with $3 million related to C&I credits and $2 million from commercial real estate credits.

The total of loans criticized through the Company's credit risk rating process was $770 million at December 31, 2008, which represented 8.5% of total loans and a net increase of $184 million from September 30, 2008. Criticized loans from the merger with Parish National accounted for approximately $55 million of the increase. Over half of the remaining increase came from residential, development, or investment loans mainly in our Tampa market.

Special mention credits, the least criticized category, increased $24 million to a total of $192 million, while substandard and doubtful credits increase $160 million. Included in criticized loans are approximately $301 million of nonperforming loans, up $66 million net during the quarter. Approximately $6 million of the increase came from the Parish National merger, with about two-thirds of the remaining increase related to residential related credits.

At the end of the year, 72% of our nonperforming loans are in Florida, 8% in Alabama, 18% in Louisiana, and 2% in Texas. We did not sell any troubled loans during the quarter and are still managing our problems credit by credit; although, we would consider bulk sales at an appropriate price.

Now I'll turn it back over to John Hope.

Whitney is and has always been fundamentally a good bank. As I mentioned at the beginning of my comments, we again were able to pay for our credit costs out of earnings, report a profit, and, just as important, still make loans.

The addition of $300 million in funds received from our preferred stock sale to the Treasury at the end of the quarter added to our already strong capital numbers and will allow us to weather what looks to be a deeper and longer recession.

The tangible capital ratio increased to 8.95% from 7.89% last quarter. And the leverage ratio improved to 9.87% from 8.14%. During the quarter tangible capital was reduced approximately 100 basis points for completion of the transaction with Parish.

The funds also strengthen our ability to continue to provide both lending and deposit services to customers in communities across our footprint as our Company and the entire nation faces the challenges that we have and will have coming from these unprecedented economic times.

I'd now like to open it up for questions. If we can do our best-- And I'll try to be the moderator and direct the question to the appropriate person to answer.

And, ladies and gentlemen, the question-and-answer session will be conducted electronically. If you would like to ask a question, please do so by pressing the star key followed by the digit one on your touchtone telephone. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, please press star, one to ask a question.

And we'll go first to Kevin Fitzsimmons with Sandler O'Neill.

Good afternoon, everyone.

Hey, Kevin.

John, a couple questions-- First, can you-- I didn't get all the numbers. I apologize for this. --when you were going through the energy exposure. If it's possible-- If you can just give the oil and gas and the exploration, production-- some of those numbers if you don't mind. And then can you take a step back and talk about more indirect exposure to energy? So in other words, that's more direct, but that whole region of the country - that gulf coast and out in Texas-- What kind of things are you looking at in terms of just the regions? And are you seeing any weakening due to what's happening in energy? Thanks.

Sure. I'm going to ask Joe Exnicios, our risk officer, to address the answer.

Kevin, what we said was that loans outstanding to the oil and gas industry represent approximately 11% of our total outstanding loans. That was up from 10% a year earlier. What we also said was about 31% of the loans are related to the exploration and production lending, with the balance really spread out between transportation, supplies, and other services. We also said that our exploration and production portfolio is approximately 60% gas and 40% oil.

Great. Thank you. And if you could address the more broad question of indirect exposure to energy--

If I can even add to that a little bit, Kevin, briefly-- I'll ask Joe to comment about, overall, what we're seeing in terms of any developing credit issues or just overall what we assess our credit situation is within the energy sector.

Kevin, our energy portfolio is performing very well. Now we are well aware of the changes in commodity prices. We follow that very carefully. But that portion of our portfolio is performing well as we speak.

But are you beginning to see small businesses or businesses you wouldn't think of as directly related to energy-- just in that area-- that are beginning to feel any effects of that?

No, Kevin. Can't say that we have.

Okay. Just one quick follow-up, John-- With your capital level, with what's going on in the industry, and if we have some kind of rationalization here, can you talk about-- assuming you were brought some kind of situation of some-- in terms of being able to consolidate another entity, what would appeal to you? What would you really be staying away from these days?

Let me start off by saying right now we would stay away from just about anything. You got to know what you're buying. And it is just so difficult in today's environment to even think about buying a bank. Now, if we were given an opportunity to acquire some meaningful deposits, then we would consider that. But acquiring any loans right now, I think, would have to be a stretch. It would have to have some awfully strong government support. We have taken a look at many of the failed institutions so far, where there were deposit acquisition opportunities, and we just really didn't see a quality deposit base. There were a lot of broker deposits, a lot of high-priced CDs. So we have yet to see anything that we felt like was an opportunity.

Okay, great. Thank you.

And we'll go next to Jeff Davis with Howe Barnes.

Good afternoon. Question for Lewis-- In terms of the commercial real estate market, which has virtually disappeared in much of the country-- maybe that's a little strong-- how do you evaluate the collateral values on commercial real estate? And I know cap rates vary by product and by location. But is it something where you're just adding 300 basis points? --or just a little bit of color in terms of how you're thinking about underlying values for commercial real estate.

Jeff, we've always done some stress testing that would imply a rate environment that's less attractive than when we make the loans. So, I guess, the answer is yes. But that's always been our discipline as it would relate to CRE. The market is volatile. Values are volatile. For certain types it's a cash flow lending issue, so you are looking at the lease payments - discounting those sometimes at different rates depending on market environment. I think all bankers are extremely careful as it relates to the CRE book. We are a short-term lender. We construct loans and then length to be paid out, construct facilities. And we are aware that the permanent market is changed. And we're having to adapt to that.

The CMBS market has virtually collapsed. If we extrapolated cap rates from at least observable yields in the CMBS market, you'd say that we're back in the double digits again. Lewis, is there a point for Whitney or maybe the industry as a whole where assessing collateral values on commercial real estate, if not this quarter or later in the year-- where Whitney or the industry has to come back and simply say - We need another layer of reserves just to cover the drop in values on underlying collateral?

Jeff, the whole issue of impact of appraisals on our business is what all bankers are going through. Yes, those rate changes will impact us. I wouldn't be to the point where I think bankers are going to need to add a whole new level of reserves. Again, let's assume you've got loans in (inaudible) that went through construction-- they're in a (inaudible)-- generally if the loans are performing, we're not prone to be adding a lot of reserves just because we assessed that cap rates have changed. --if I'm making sense to you. So the issue would be more in your [impaired] analysis not on an ongoing basis, where (inaudible) bankers are going to be adding a good bit of reserving or performing commercial real estate.

Okay. Thank you.

We'll go next to William (Inaudible) with Stern Agee.

Hey, everybody. Another credit question-- Your charge offs were down considerably, whereas your nonperformings were, I guess, up by a similar amount. And I was just wondering if you could give us a little granularity as to what drove that difference?

The [NPAs] are up. They're continuing to rise. Charge offs are lumpy at times depending on what's causing them. A lot of the charge offs in each quarter is driven by appraisal issues. And so I'm not contradicting what I just told Jeff, but as you get an impaired loan, you get them reappraised with frequency. We have said and I have said continuously for well over a year that as we've added reserves, we expect there are charge offs when we add them, often that we can't identify at the point in time we add the reserves. They're beginning to manifest themselves. I wouldn't-- I'd like to be able to tell you you could read a lot into the lower charge offs. But I don't want to imply that. I think charge offs can be lumpy and just depend on the point in time that you're getting appraisals and making other assessments. We added reserves over and above our charge offs. That implies that we think that there's still a growing inherent loss in this portfolio. I think that's the message I would send to you.

Okay. And one other quick one-- On your OCI loss, you had a little increase there quarter over quarter. What drove that?

I'm sorry. Would you repeat the question?

Oh, I'm sorry. Your OCI loss increased by about $13 million from last quarter. And I was just wondering what drove that mark.

(Inaudible) the pension plans loss of market value assets versus the liability.

This is Tom. I thought that's what you were asking. We lost value in the plan assets. And that's what really drove it versus the liability.

Okay.

If that's the question you're asking.

Yes. That is what I was asking.

That's it.

All right. Well, thank you very much, gentlemen.

As a reminder, it's star, one for questions. And we'll go to Jennifer Demba with Sun Trust-Robinson Humphrey

Hi. Good afternoon, everyone. This is David Grayson, Jennifer's associate, filling in for her real quick. I just had one question about homebuilder exposure on the north shore and maybe even (inaudible) nonaccruals in that (inaudible) portfolio?

We have not seen a run up in nonaccruals for our homebuilders on the north shore. We did a pretty thorough due diligence with Parish National. And I think we could say there were no surprises coming out of that acquisition with respect to that. So the homebuilding activity on the north shore really slowed down early in 2008. So there really hasn't been a lot of new homebuilding over the last year.

Yeah. I would just add we have modest exposure there and Parish did as well. They actually quit making spec loans about six to eight months before we closed on the transaction. So our exposure up there is pretty modest.

Okay. I appreciate it. Thank you so much.

Well go next to Bain Slack with KBW.

Good evening. Just a quick question on the tax rate, I'm not sure if I missed it. I guess looking in the last two quarters it's been running a little bit low. And I'm just kind of wondering if there's anything unusual there and what (inaudible) and maybe looking forward how you guys are planning for it.

Well, obviously it's been looking low because of the relationship of nontaxable income to total income. If you had a more normal relationship, it would be a-- A nontaxable piece would be a smaller percentage. And you'd have a higher tax rate. Does that make sense?

Yes. I guess (inaudible) is the rate?

All year we have had tax credits - new markets tax credits and things. But that's built in our entire year.

Can you break that out if possible - the dollar amount?

No. Not at the moment.

I know-- obviously just kind of looking forward trying to figure out what (inaudible)--

The tax credits will continue forward. So if you go back and look at earlier quarters where we might not have had quite as much provision and more net-interest income, you might get a better idea of how to build that.

Okay. Thank you.

And, again, that's star, one for questions. And we'll go to Al Savastano with Fox-Pitt & Kelton.

Good afternoon. How are you?

Fine.

(Inaudible) or some color on the expenses. As we look at the fourth-quarter rate, it looked like (inaudible) some reversals of accruals. Can you give us an idea of what those accruals-- the reversals were and just give us some color on the FDIC deposit insurance increase?

This is Tom. The reversals really had to do mostly with management bonuses and other incentives and the accruals around performance-based restricted stock.

And dollar amounts? Is that about the $7 million?

Maybe six of the seven, sure.

Okay.

Something like that. And then what was the rest of your question?

Color on FDIC--

FDIC. Well, as you know, the FDIC reinstated having to pay them for insurance sometime I think in 2007, actually. But all of us had credits that we offset against that-- most of all the banking industry. Those credits ran out in the third quarter. So not only did you see an increase in the third quarter and then a bigger increase in the fourth quarter, but you will see increases all next year.

All this year.

Excuse me, all this year. I'm still (inaudible) in 2008.

Okay. Would you mind telling us how much deposit insurance expense was in the fourth quarter?

Let's see if we have it. Well, it was somewhere around $1.5 million I would think, just from what we have here. We have it included with something else. But that's my guess.

Okay. Thank you.

And we'll go to John Pancari with JPMorgan.

This is Polly (Inaudible) on behalf of John. How are you?

Fine.

I was wondering if you could comment a little on whether you're seeing any signs of weakness or (inaudible) in the C&I sector and more specifically the hospitality sector.

Well, as we mentioned, we really haven't seen any systemic weakening in any particular market outside of Tampa or in any particular industry. With respect to the hospitality industry in New Orleans, there is no doubt that it's been a rough couple of years for the hospitality industry. But other than one particular credit that is currently well collateralized and in bankruptcy, the problems seem to be manageable.

Have you disclosed what you're exposure is to the hospitality sector in New Orleans - like what portion of your loans is tied to that?

Yeah. We have, I think, at some point in our total hotel exposure.

Well, be glad to provide you that if you could follow up with Trisha Carlson.

That's great. And then just another question-- Given that your (inaudible) equity ratio has come down somewhat, owing to the Parish acquisition, do you have a target range of that ratio that you would like going forward?

Yes, we do. But we are not particularly sharing that with everybody.

Okay. That's fair. That's all the questions I have. Thank you.

And, ladies and gentlemen, as a final reminder, it's star, one for questions.

Okay. If there are no other questions, I want to thank everybody. But I want to ask you if you'll just allow me to make a couple of comments as part of our closing. I'd like to address a recent New York Times article-- And this is John Hope-- in which I was quoted. The comments included in the article dated Sunday January 18 were taken from an investor presentation given at a financial services conference in mid November.

The comments were made to an audience of mostly bank analyst and related to a late-October press release regarding why we believed it was important to participate in the TARP program. At that time it was early in the process and the focus and intent of Treasury was still being finalized. Since we were in a normal quiet period, we did not speak with the reporter about the story. And, unfortunately, I believe my comments were taken out of context. Included in the slide presentation, which a company (inaudible), were statements regarding our current capital position and why we felt it was important to take the money even though we were a well-capitalized company. I also made comments about possible uses for the funds and know that the funds would not only allow us to build upon already strong capital levels but would also provide us with the flexibility to withstand a deeper and or longer recession, which obviously would allow us to continue to service our customers.

The comment that I made about not changing our policy to comply with the public sector was not meant to imply we would not lend the funds but more of a statement about my intending to change our underwriting criteria that would lead to more bad loans, which is how this current economic crisis got started.

As you can see from our results today, we are lending money. A 21% increase in our organic loan portfolio on a linked-quarter basis is proof in of itself that we're making loans. We have been taking care of our customers and our markets for 125 years. We've been through the great depression. We made it through the hurricanes, notably Katrina and Rita. And we've been here through those for our customers, and we will be here for our customers throughout the extent of this current crisis, notwithstanding whatever the New York Times article wanted to imply.

Thank you. Any other questions before we go? If you have any, you might check with Trisha Carlson.

And, ladies and gentlemen, that does conclude today's conference. Thank you for your participation. You may now disconnect.