Hancock Whitney Corp (HWC) 2010 Q2 法說會逐字稿

Good afternoon and welcome to Whitney Holding Corporation's Second Quarter 2010 Earnings Conference Call.

Participating in today's call are John Hope, Chairman and CEO; John Turner, President; Tom Callicutt, CFO; Joe Exnicios, Chief Risk Officer and Steve Barker Comptroller of the Bank.

At this time all lines are in a listen-only mode.

Later we will conduct a question and answer session and instructions will follow at that time.

(Operator Instructions).

As a reminder, this call is being recorded.

I would now like to turn the conference over to your host today, Steve Barker.

Please begin.

Thank you and good afternoon.

During today's call we may make forward-looking statements.

Forward-looking statements provide projections of results of operations or financial condition 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.

We believe that the expectations reflected in the forward-looking statements are based on reasonable assumptions, but 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 SEC filings including the risk factors section of the Company's forms 10-K and 10-Q.

Whitney does not intend and 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.

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

Thank you for joining us this afternoon.

Two weeks ago we issued a press release to preannounce some of our credit metrics to let the market and investors know that our view regarding an improving economy had tempered.

We are continuing to feel the effects of the recent recession and the recovery that we were expecting appears to be less immediate than originally anticipated.

I believe over the past two weeks you've heard the same sentiment expressed from others in both the financial industry and in government.

The lack of improvement in the overall economy coupled with the psychological impact and uncertainty as to the longer-term effects of the oil spill on our Gulf Coast communities has tempered our optimism and our customers' optimism for the remainder of this year.

While we are disappointed that this is the case and wish our results reflected and improving economy and a small impact on credit metrics, our view as to overall resolution and loss expectations on many of our credits remains the same.

Our Louisiana portfolio while stressed and adding to some classified totals, does not show a systemic trend in the type of credit impacted and has only had a slight impact on our provision and charge-offs.

In Texas commercial real estate has shown and continues to show the most signs of stress.

However, we continue to believe we will be able to work through these difficult conditions and do not expect the same level of loss in these credits as we experienced with Florida real estate.

We are continuing to see good performance from our core business in light of the environment we are operating in.

We are gaining traction as we implement the initiatives in our strategic plan and our bankers continue to work hard with a focus on the future, while still dealing with the economic challenges we face today.

Our long-term earnings capacity, the underlying strengths of our franchise and certainly our capital all remain strong.

Now I would like to ask Tom Callicutt to discuss some of the quarterly results in detail.

Thanks, John.

Total loans at the end of the second quarter of 2010 were $8 billion, down $94 million or 1% from March 31st, 2010, which compares favorably to the 4% reduction in loans we reported in the first quarter.

Gross charge-offs, foreclosures, and problem loan sales totaled $121 million in the second quarter of this year.

Funding of new relationships, mainly in Louisiana markets, and stability in the existing loan portfolio help partially offset the decline from charge-offs, foreclosures and notes sales.

This growth has been aided by the launch of our new treasury management platform called Whitney Business Network coupled with our state-of-the-art treasury management offering.

Combining the efforts of our commercial bankers and treasury management sales force has resulted in our winning new business across our footprint.

Average deposits in the second quarter of 2010 were $8.9 billion, down less than 2% from the first quarter of 2010.

Total period end deposits of $8.8 billion were also down less than 2% compared to March 31, 2010.

Non-interest bearing deposits of $3.2 billion were down 2% from the end of the first quarter of 2010, while average non-interest bearing deposits were virtually unchanged between these periods.

Non-interest bearing demand deposits comprised almost 37% of total average deposits and funded approximately 32% of average earning assets for the quarter.

The lower level of earning assets was the main factor behind the decrease of less than 1% in net interest income for the second quarter of 2010.

The net interest margin of 4.15% was unchanged from the first quarter with both asset yields and funding costs declining moderately between these periods.

Non-interest income for the second quarter of 2010 was up $3.5 million or 12% from the first quarter of 2010.

Other non-interest income was up $2.5 million and included a $1.3 million insurance settlement gain related to hurricane's Ike and Gustav and a gain of $800,000 from the sale of surplus banking property.

Most recurring sources of income registered increases, reflecting increased activity and the benefit of recent marketing campaigns.

Deposit service charge income was up 2%.

Bankcard fees increased 10% and secondary mortgage market income was up 9% during the quarter.

Management expects the new consumer protection regulations that are being implemented in the third quarter of 2010 and the expiration of the Federal Tax credit for new home buyers could result modestly lower levels of fee income for the remainder of 2010.

Total non-interest expense for the second quarter of 2010 increased less than 1% from the first quarter of 2010.

Just as a reminder, other non-interest expense in the first quarter of 2010 included an estimated $4.5 million loss resulting from repurchase obligations on certain mortgage loans originated and sold by a recently acquired entity prior to our acquisition.

Total personnel expense for the second quarter of 2010 decreased less than 1% from the first quarter of 2010.

Employee compensation increased $1.7 million, mainly as a result of the Company-wide annual merit increase and final adjustments to 2009 annual sales-based incentive plan compensation in the first quarter of 2010.

No management cash bonus was accrued during the first half of 2010 or during all of 2009.

Employee benefits declined $2 million during the second quarter on reductions in the annual cost of retirement benefit plans and a normal decrease in payroll taxes from beginning of year level.

Loan collection costs, together with foreclosed asset management expenses and provisions for valuation losses, totaled $6 million in the second quarter, down from $6.3 million in the first quarter.

Legal and other professional services were up $4.1 million during the second quarter and included services associated with collection of problem credits, technology initiatives and compliance and other regulatory [problems].

I'll now turn over to Joe Exnicios where he'll discuss credit.

Thanks, Tom.

Before I begin my discussion, I'd like to note that we have begun reporting classified and special mention credits separately this quarter to provide more detail as to the split between our watch credits and those credits with well defined weaknesses.

In my discussion I will focus on the classified portfolio.

Addition details can be found in the supplemental slides that are on our website.

We provided $59 million for credit losses in the second quarter of 2010.

That was an increase of $21.5 million from the first quarter and down $15 million from a year ago.

As was the case in the past several quarters, the majority of the current quarter's provision, $35 million or 60%, came from the Florida portfolio and was predominately related to credits in our impaired portfolio and well documented issues in the real estate markets.

Almost $6 million of the Florida provision was related to problem note sales.

The second quarter provision also included $5 million based on our current assessment of the impact of the recent oil spill on tourism in Gulf Coast beach communities.

An increase in a level of criticized loans, mainly in Texas, contributed to the remainder of the second quarter's provision.

The special mention portfolio or watch credits was up $75 million from March 31st.

Classified loans net were virtually unchanged from the first quarter.

While our portfolios outside of Florida, mainly Louisiana and Texas, remain under some stress and added to classified loans this quarter, we continue to expect a different resolution and loss expectation from what we experienced in Florida.

The properties being identified as impacted today have not had the run-up in valuation that we saw in the Florida markets.

The types of credits stressed in Texas are mainly related to commercial real estate, where many of the projects remain viable in our view, but they are just being delayed by economic and market conditions.

The lack of improvement in the economy is lengthening the completion of projects, hampering the ability of borrowers to refinance projects in the secondary markets and is stretching the financial capacity of the developers.

The split between classified and watch commercial real estate credits in the Texas portfolio if 60-40.

As John mentioned earlier, the increase in classified credits in the Louisiana portfolio is mainly C&I and has not shown signs of being systemic with respect to the type of credit impacted.

Net loan charge-offs in the second quarter of 2010 were $53.3 million, or 2.65% of average loans on an annualized basis, compared to $37.1 million or 1.81% of average loans in the first quarter of 2010.

Approximately 63% of the total gross charge-offs came from credits serviced in the Florida market, mainly commercial and residential related real estate.

Non-performing loans, a subset of classified loans, totaled $451 million at June 30th.

That's a net increase of $15 million from the end of the first quarter.

Slightly over 50% of non-performing loans came from Whitney's Florida markets with 21% from Louisiana, 16% from Texas and 11% from Alabama and Mississippi.

Impaired loans, a subset of total non-performing loans, totaled $376 million at June 30th, 2010.

Cumulative charge-offs and the current impaired loss allowance on these loans represented approximately 37% of the original contractual principle balances on these credits.

A geographic break down of charge-offs and reserve within our impaired portfolio can be found in the supplemental slides on our website.

Foreclosed assets totaled $92 million at June 30, 2010.

It's a net increase of approximately $31 million from March 31st.

During the second quarter we added $43 million in loans to the ORE portfolio and sold almost $8 million.

As the foreclosure process on many credits in Florida is coming to an end, we have been and will continue taking possession of properties allowing us more opportunity to resolve or dispose of these problem assets.

ORE sales during the second quarter continued to be mainly single family residences, condos and individual lots and were sold close to the current appraised value.

Loans past due 90 days or more and still accruing interest are down 40% from the end of the first quarter, while loans past due 30 to 89 days are down 26%.

The allowance for loan losses was 2.88% of total loans at June 30th, up from 2.77% at March 31st and 2.5% a year earlier.

As I noted earlier, based on information currently available, we established a reserve of $5 million for the potential impact of the oil spill on beach communities.

I'm now going to turn the presentation over to John Turner to discuss what we are seeing in those markets and how we went about reviewing our portfolio.

As you know, on April 20th, 2010 the deepwater Horizon drilling rig, which was operating in the deep waters of the Gulf of Mexico, exploded and sank resulting in a substantial oil leak from the wellhead.

The spill has caused and continues to cause significant disruption in the Gulf's fishing and tourism industries.

In addition, a six-month drilling moratorium on deepwater rigs was imposed by the Government directly impacting 33 rigs and indirectly impacting numerous others.

BP has committed to compensate those impacted by the oil spill and has established a fund to pay any valid claim and a number of our customers are currently receiving funds from that payout.

We'll have to wait and see how this reimbursement compares to the losses that these businesses are experiencing.

Following the spill we began to review credits in the geographies and industries impacted and we began talking to both our customers and industry experts to determine the potential impact of the spill on the Company's loan portfolio.

This review focused initially on three areas; identifying and evaluating our direct exposure to fishing, seafood processing and marinas, assessing the short-term and long-term impact on the oil and gas industry, including the impact of the moratorium, and finally evaluating the impact on our customers in coastal communities that rely heavily on summer tourism.

As we've stated from the beginning, we currently do not believe our exposure is material but we're constantly monitoring it.

Our direct exposure to fishing, seafood processing and marina industries total approximately $35 million in loans outstanding at June 30th and we expect minimal economic impact to these businesses of our customers within this sector.

Loans outstanding to the oil and gas sector totaled $762 million, or approximately 10% of total loans at June 30th.

A more detailed breakout of the portfolio by sector can be found in the supplemental slides on the website.

Based on discussions with customers in this industry, again, we expect minimal near-term impact to their business operations and to the performance of these loans in our loan portfolio.

The overall impact on this portion of our portfolio could change in the future depending upon the length of the moratorium and the ultimate impact of the disaster on the cost of future drilling operations.

During our review of credits in beach communities that rely on summer tourist season, we identified approximately $270 million in loans outstanding that could be impacted both directly and indirectly by a downturn in tourism and we're closely monitoring this portion of the loan portfolio.

These credits include hotels, real estate brokers, restaurants, retail shops, recreation and amusement parks and those supporting the fishing and marina industry.

We stressed these loans and that review led to the establishment of a $5 million reserve noted earlier.

We will continue to monitor the progress being made on the cleanup and hope the well is permanently shut in in the next few weeks.

We'll continue to talk to our customers and industry experts to monitor the impact that the current moratorium is having on deepwater drilling and, as importantly, we'll want to understand the longer-term implications of what will likely be a more intense regulatory environment.

And we'll now open the call for questions.

(Operator Instructions).

Our first question comes from Jon Arfstrom with RBC Capital Markets.

Couple quick questions for you, maybe, Joe, first to you.

You talked a little bit about in the OREO increase that the foreclosure process was coming to an end in Florida.

I am assuming you're referring to primarily the OREO increase; is that right?

That's correct.

Jon, as we've discussed in the past, the foreclosure process in Florida has been more lengthy than what we've experienced in other markets, so what we're seeing now is we're getting near the end of the line on many of those foreclosure proceedings, so we're actually in a position to take those properties in the ORE and hopefully sell them as quickly as we possibly can.

Okay and you talked a bit about Florida note sales and obviously now you have possession of some of this property.

How aggressive do you think you can be or how aggressive would you like to be to move some of these non-performers out?

Well, we are interested in disposing of the problem assets in any way that we possibly can.

Now, we have to be opportunistic in that and I would say that the opportunities that we have seen with respect to selling notes has run the gamut from being individual note sales; we have had notes as large as $15 million that we've been able to sell.

And we have been in contact with any number of investors and we have sold pools of notes that range from five to seven assets.

We are also exploring and actively engaging loan brokers, who are placing loans on their auction blocks and advertising them for sale, so what we're trying to be is opportunistic and, to the extent that we have opportunities to dispose of these notes before they go through foreclosure, we're going to certainly do that.

And then just to follow-up on a comment that Joe and John had made about the increase in classifieds in Louisiana, is there any theme there or does it just seem to be Company specific driving that increase.

Jon, I think I went out of my way to say that we really haven't seen anything that we could classify as systemic.

It's been just a variety of credits that, for whatever reason, they're all very unique but nothing systemic.

Okay thank you.

Steven Alexopoulos, JPMorgan.

Joe, I know you broke out the loan amounts for marine related and tourism industries but could you break out how much of the loans might be in coastal MSAs, maybe give us a sense of what might be a risk indirectly from the oil spill?

Well, I think what John referred to, the $270 million what we did we took the coastal zip codes because there are, particularly in Alabama we have operations in Mobile; we have operations in Central Alabama.

So we tried to focus on the coastal Alabama zip codes and we looked very closely at NXX codes and tried to determine the type of credit and tried to do some sort of an analysis on what type of impact they might likely have but that's basically how we did our stress test.

There are many credits in our Florida market.

For instance, I don't think we can claim any impact from the oil spill in Central Florida at all but you've got several communities, the coastal communities, those that primarily have relied on summer tourism as a large part of their economy.

Those are the ones that seem to be having the most difficulty right now.

I'll tell you this.

In Louisiana and also I think in Alabama and Mississippi the remediation effort that's under way has provided a lot of opportunity for people that have vessels and marine equipment to deploy those assets and many of them are doing quite well right now.

If I might, I'll just add a little bit of color.

We had almost $800 million in loans in zip codes and in NXX codes that might be impacted by the oil spill.

We went through an analysis of all those exposures in excess of $1 million on a case-by-case basis and arrived at the conclusion that there might be as much as $270 million in outstandings that would be impacted potentially by the oil spill.

Then we stressed that $270 million to get to our reserve today.

One other thing I'll point out is we are tracking very carefully any credits that we have to downgrade the risk rating as a result of the oil spill and, at this point in time, we have had minimal downgrades.

We have had only five that we have identified and so we continue to monitor it but we have not sustained any loss and we haven't had any risk rating downgrades to speak of.

Yes the total exposure related to those credits Joe referred to is right at $10 million.

Maybe actually to follow up on that previous point, as your borrowers in these industries like marina tourism trip covenants is a claim they might have into BP sufficient for you to hold off on requiring more equity or moving it to non-performer or do you just move forward with normal remediation efforts?

A lot of what's happened so far, I mentioned BP making payments and our customers benefitting from that.

Many of our customers' cash flows are being supplemented by payments they are receiving from BP, so we're not seeing any really current performance issues.

What we're anticipating is performance issues later in the year when the normal cash that will have been accumulated because of a very good summer carries a company through or an entity through the winter may not be available.

So the today, to answer your question, we're really not having to confront that issue and we'll have to deal with it when the time arises.

Embedded in your question were some comments about accounting.

We would still have to comply with any accounting rules relative to determining what a non-performing asset is or a 90-day past due.

We certainly couldn't ignore those rules.

However, I think it would be obvious to say that our collection efforts would clearly be tempered by whatever is going on with BP.

Maybe just one final one, what were inflows into non-performer in the quarter?

We've got it.

We're looking for it.

The new non-accruals during the second quarter amounted to $153 million.

The net increase in non accruals for the quarter from period end 3/31 to 6/30 was only about $19 million.

At that $153 million compared to last quarter, do you have that handy?

I don't know what the first quarter was.

Steve, we can get back to you with that.

Okay thanks, guys.

Jennifer Demba, Suntrust Robinson.

Tom, just wondering if you could give us some thoughts about your expectations for the new interest margin going forward.

You were able to hold it flat this quarter.

And then I have a follow-up question.

Okay well, as long as interest rates remain at historic lows, there will be some downward pressure on the margin, just like we said last time but we're going to work to control it within as tight a band as possible.

We reduced our funding costs in the second quarter and while most rates are at historic lows, we'll continue to reduce deposit rates where we can.

Loan spreads have held up pretty well but we'll continue to see pressure from decreasing securities portfolio yields when we reinvest because we are not tempted by going out longer.

Are you guys seeing increased price competition out there on commercial loans?

Not really, Jennifer, really not seeing a tremendous amount of opportunity but I would say no, not particularly.

Some competitors are eliminating floors to try to win some business.

We have seen a little of that but otherwise no.

Okay and I do have one more follow-up if I could.

John, with a tempered economic outlook and the loan portfolio continuing to contract, how are you thinking about your expense base and any adjustments you may need to make going forward here?

Well, actually we've been managing our expenses pretty aggressively, Jennifer, and I'm not sure exactly where you were trying to go.

We have a number of things that we'd like to be doing right now that we've basically put on hold, renovations to bank facilities, additional manpower.

We've curtailed hirings in certain area, like we've cut back on management trainee hirings.

I mean, we've already made fairly substantial adjustments to expenditures.

In terms of additional expenditure adjustments, I don't think we're quite ready for that right now.

I think we're going to have to wait another quarter or two before we would take on any additional project there.

Kevin Fitzsimmons, Sandler O'Neill.

With just two quick questions, number one, I know you guys when we've asked before about TDRs that's just something you guys haven't done because I think you've just gone right into non-performing if there was some kind of concession but, would given everything that is happening are you thinking about that differently if there's an incentive to be more proactive in going in and making a concession before there's a cash flow issue at the borrower?

And then my second question is just if you can give a little color on how the Reg E efforts are going so far?

I'm sure you all are trying to reach out to your customers on the overdraft opting and what kind of observations you have so far.

Thanks.

Kevin, let me quickly answer with respect to the TDRs.

It's we haven't -- we're obviously keenly aware of when we enter to a restructure and when it crosses the line and becomes a TDR but I wouldn't say that we have been proactively out trying to restructure credits and creating TDRs but it's always possible that that could happen, particularly when we're dealing with a different class of asset in the Houston market, so we'll be keeping an eye on that.

But you're right; in the past because of the collateral dependency of the loans we were dealing with in Florida we went almost immediately into impairment.

But it is possible, depending on the length of the recovery and how much longer we stay in this sort of zone where we are now where there doesn't seem to be a lot of economic improvement, we may be faced with that and if need be we will -- you know, we'd much prefer to have a TDR than an impaired loan.

Joe, can I ask are there any accruing TDRs at this point that aren't -- are within the NPA bucket already?

None that I am aware of

Okay.

As to the question on Reg E, I think we may have said earlier we estimate worst case based upon our current customer profile that we could, at least on an interim basis, experience a loss of between $7 million and $8 million in NSFOD income.

We have been rolling customers now for about two weeks in existing customers in the opt in process and our experience has been very good.

While only penetrating at the moment a fairly modest portion of our customer base, we're experiencing an 85% plus opt in.

I obviously don't expect it to be that high but we think we have a good program and are following that pretty closely.

Okay thank you.

(Operator Instructions).

Dave Bishop, Stifel Nicolaus.

Joe, follow-up question, you've talked about some of the other real estate owned sales there or foreclosures there when you do go to the secondary market hitting pretty close to appraised values or the marked down values there.

What are you seeing in terms of I guess the deviation from those values?

You're talking specifically about ORE sales?

Right.

ORE sales, our net has been very, very close.

Last year I think we were about 95% of appraised value in 2009.

Through the first half of this year we're at about 96%, so we're selling assets that are coming through ORE very close to the appraised value.

Now you have to understand a lot of those appraisals are recent appraisals and we try to make sure when we book the asset into ORE that we have as accurate evaluation as possible, so I think it's what you would expect.

A lot of those assets have already been written down significantly.

Got you, and then a follow-up, I know it's sort of a ways out there but in terms of negative impact there I saw the news about the Avondale facility closing.

Is any sort of impact there direct client base related out of that complex?

I think it's a little early for us to know but we are watching closely the impact that could have on the community and we've got a strong economic development effort focused on trying to re-utilize that facility for some other purpose as well as a lot of activity today concentrated on hoping to retain some of that still.

I don't expect that will occur but I do think there's a lot of activity toward re-utilizing the facility for something else.

Great thank you.

I am showing no further questions in the queue.

I'd like to turn it back over to Mr.

Hope for closing comments please.

Thank you very much.

We appreciate all of your listening in this afternoon and spending some with us.

If you have any follow-up questions please contact Richard Carlson.

Thank you.

Thank you.

Ladies and gentlemen, thank you for your participation in today's conference.

This does conclude the conference.

You may now disconnect.

Good day.