Hancock Whitney Corp (HWC) 2012 Q2 法說會逐字稿

Good morning, and welcome to Hancock Holding Company's second-quarter 2012 earnings conference call. Participating in today's call are Carl Chaney, President and CEO; Mike Achary, CFO; Sam Kendricks, Chief Credit Officer; Steve Barker, Chief Accounting Officer; and Trisha Carlson, Investor Relations Manager. As a reminder, this conference call is being recorded. I would now like to turn the call over to Trisha Carlson. You may begin.

Thank you, and good morning. During today's call, we may make forward-looking statements. We would like to remind everyone to review the Safe Harbor language that was published with yesterday's press release. Hancock's ability to accurately project results or predict the effects of future plans or strategies is inherently limited. We believe that the expectations requested in the forward-looking statements are based on reasonable assumptions that actual results and performance could differ materially from those set forth in the forward-looking statements. Hancock does not intend and undertakes no obligations 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 Carl Chaney, President and CEO.

Thanks, Trisha, and good morning. Thank you for joining us, today. Yesterday, we reported second-quarter operating earnings of $47 million, or $0.55 per diluted common share, up 17% on a per share basis from $40.5 million, or $0.47 per share, last quarter. The fundamentals of the Company remain solid, and the results were in line with our expectations and guidance. We are committed to enhancing our 1% operating ROA as we move into the third quarter, and we will continue to focus on loan-growth opportunities, developing revenue synergies and becoming more efficient even with the projected impact of both industry and Hancock-specific headwinds.

The environment to generate new loans remains competitive. With that said, during the second quarter, we funded over $400 million of new loans throughout the Company's footprint from both existing and new customers. During that same period, however, we had an equal amount of payoffs and scheduled repayments, including approximately $106 million with credit quality concerns, of which $46 million were related to the FDIC covered portfolio.

If you look at loans year over year, we are down $171 million in total. However, $445 million in credit-impaired loans moved off our balance sheet over that same time period. Included in that number were payoffs and paydowns of $285 million from the Whitney-acquired impaired portfolio and approximately $160 million from paydowns, charge-offs and foreclosures in the People's First FDIC covered portfolio. And while these expected portfolio reductions put a drag on our ability to generate net loan growth, the result is a better-balanced, less-risky loan portfolio.

This map suggests that even though loans were down $171 million year over year, if we adjust for the credit-impaired loans that left the balance sheet, then we would have reported net loan growth of about $274 million, or 2%. We remain cautiously optimistic that there will be net loan growth in the second half of 2012. Our pipeline is healthy and filled with good credits. And we have been hiring additional producers in markets where we see the greatest opportunity, such as Houston, Tampa and New Orleans.

The reported net interest margin was a strong 4.48%, up a few basis points from last quarter. We continue to believe the reported margin will remain relatively stable in the near term. Our core margin was virtually flat, linked-quarter, as the opportunity to, once again, lower funding cost all set the headwinds from the repricing of loans and securities at lower yields. Looking forward, the opportunities for favorable repricing deposits and investing our excess liquidity have diminished.

Asset quality improved during the quarter while charge-offs ticked up slightly, the provisions for the People's First and the originated portfolio were both down. The level of legacy MPLs has stabilized, and we were successful in selling ORE and other foreclosed assets during the quarter, including some recently closed branches. I expect that our provision and other asset-quality measures will remain within the range we have reported over the past few quarters.

Fee revenue increased during the quarter as the Company began offering new and standardized products and services across the footprint after the system's conversion in March. While the conversion has enhanced the opportunities for cross selling, the Durbin Amendment restrictions became effective for Hancock Bank on July 1, and as a result we expect overall fee income to decline about $2.5 million during the third quarter.

As we stated last quarter, merger synergies will be realized in the second quarter after flattening out earlier in the year due to the system's conversion. Total operating expense declined $3.5 million in the quarter, the largest component from personnel reductions. There is still more synergies to achieve, and we remain committed to the fourth-quarter expense guidance we provided last quarter. This guidance equates in a reduction in operating expense from current levels of about $7 million to $11 million over the second half of 2012, excluding the amortization of intangibles.

I can assure you we will continue to look for ways to improve and become even more efficient. For example, last quarter, we consolidated about 30 branches between Hancock and Whitney due to physical overlap. But this is an ongoing process where we are continuously reviewing locations for effectiveness, profitability and return on investment. As a result of this ongoing branch rationalization process, we have decided to close an additional eight branches during the fourth quarter of this year.

We strengthened our capital position during the quarter as the tangible common equity ratio improved 8.72%, up 45 basis points. This combined with our strong liquidity position allowed us to initiative a tender offer for a portion of Whitney's 5.875% subordinated notes. As of mid-July, we were able to complete the tender and successfully repurchase $52 million of the total $150 million in subordinated notes. We will continue to look for other opportunities to deploy excess capital and liquidity in the best interest of Company and our shareholders. At this time, I'll turn the call over to our CFO, Mike Achary to review the results in more detail.

Thanks, Carl, and good morning, everyone. Operating income for the second quarter was $47 million, or $0.55 per diluted common share, compared to just over $40 million, or $0.47, in the first quarter. As Carl noted earlier, the return on average assets, excluding merger-related expenses and securities transactions, was an even 1% for the second quarter. That compared to 85 basis points in the prior quarter.

The net income for the second quarter was $39 million, or $0.46 per diluted common share. That compared to just over $18 million, or $0.21, in the first quarter. Pretax earnings for the second and first quarters of 2012 included merger-related costs of $12 million and $34 million, respectively. Pretax pre-provision profit for the second quarter was almost $76 million, up from $69 million in the first quarter. So a respectable 10% linked-quarter increase.

Total loans at June 30 were $11 billion, a slight decrease of $52 million, or less than 1%, from March 31. Adjusting for the $46 million decline in the FDIC covered portfolio during the second quarter, total loans were virtually unchanged compared to March 31. The first quarter loan balances include approximately $60 million of payoffs of loans with credit quality concerns. During the second quarter, net growth in C&I, residential mortgage and consumers loans was offset by net reductions in C&D- and CRE-related credits. The growth in the C&I portfolio reflected activity mainly in western Louisiana, Tampa and greater New Orleans. The increase in the consumer portfolio was related to indirect and home equity lending campaigns that were kicked off during the quarter.

Following up on Carl's earlier comments, if you look at the numbers year over year, we are up $269 million, or 7%, in C&I loans, almost $100 million, or 6%, in consumer loans and $76 million, or 5%, in residential mortgages. That's pretty good growth in a competitive, slow-growth environment. The declines in C&D- and CRE-related credits reflect continued payoffs and scheduled repayments within those portfolios, including some that were problem credits. Year over year, these two categories are down over $600 million, [up] 13%, offsetting the growth we just mentioned.

The Company's total deposits at June 30 were approximately $15 billion. That is down $502 million, or about 3%, from March 31. Average deposits were $15 billion, down to about $159 million, or 1%, from last quarter. DDA deposits totaled $5 billion at June 30, down approximately 200 million, or 4%, compared to March 31. Half of that decline was related to a single customer relationship from which balances were transferred to various trust accounts. Company's DDAs remain a healthy 34% of total period-end deposits.

Interest bearing transaction and savings deposits totaled approximately $6 billion at quarter end, down $120 million, or 2%, linked-quarter. Half of that decline came from one customer relationship who used excess liquidity from a transaction to pay off a commercial loan and then transfer funds to a short-term deposit product. Interest bearing public fund deposits were down $65 million linked-quarter, reflecting the seasonal nature of these deposits. The Company's CD portfolio totaled $2.5 billion at June 30. That was down $116 million compared to March 31.

During the second quarter, approximately $745 million of time deposits matured at an average rate of 1.09% of which 70% renewed at an average cost of just 48 basis points. We've had great success over the past year in repricing our CD book, reducing the rate paid on CDs by 22 basis points since last quarter and by 89 basis points from the same quarter a year ago. However, the opportunity reprice CDs at significantly lower rates over the near term has largely run its course. For example, approximately $1 billion of CDs will mature in the next two quarters at an average rate of 50 basis points. Rest assured that we will continue to work hard and look for ways to further reduce our deposit cost, such as additional reductions in deposit rates where that action makes sense.

The Company's net interest income for the second quarter was $180 million. A slight improvement over the first quarter. The $1 million increase is mainly related to the impact of the reduction in overall funding costs during the quarter. The Company's total cost of funds dropped further this quarter down 6 basis points to just 32 basis points. As we said before, our average earning assets were down $74 million, a slight decline from last quarter.

The reported debt interest margin of 4.48% for the second quarter was up 5 basis points from last quarter. The margin continued to be favorably impacted by a shift in funding sources and the aforementioned decline in funding cost, offset by a drop in the securities portfolio yield of 9 basis points, which was largely driven by lower reinvestment yields. In addition, loan accretion from the acquired loan portfolios was also up linked-quarter.

Non-interest income totaled approximately $64 million for the second quarter. That was up $2.1 million, or 3%, from last quarter. Service charges on deposits totaled almost $21 million for the second quarter, up $4.6 million linked-quarter. As we noted previously, the Company began offering new standardized products and services across our footprint in conjunction with the core systems integration in March of 2012. These product changes accounted for the majority of this increase linked-quarter.

As Carl noted earlier, we expect the over all level of fee income to decline by about $2.5 million in the third quarter reflecting in part the impact of restrictions from the Durbin Amendment on Hancock Bank. Operating expenses for the Company for the second quarter totaled $168 million, down $3.5 million from last quarter. Operating expenses exclude merger-related cost. Total personnel expenses drove the majority of that decline down $2.5 million from the first quarter. The linked-quarter decrease reflects a reduction in quarterly payroll taxes and the reduction in force associated with the core systems conversion and branch consolidations in mid-March. These declines were partly offset by the Company's annual merit increases and recent strategic hires. We expect to have a further reduction in personnel expense by the fourth quarter of this year.

Amortization of intangibles totaled $7.9 million down from $8.3 million in the first quarter. This will continue to decline and should approximate $7 million by the fourth quarter this year. Merger-related expenses for the second quarter totaled almost $12 million, pretax. Merger-related expenses incurred to date totaled approximately $133 million. Included in merger-related cost during the second quarter were expenses associated with professional fees, contract cancellations, personnel costs and data-processing expenses. The largest variance in merger cost from our initial guidance of $125 million was $7 million related to the NSF/OD litigation against Whitney Bank, which was booked in the fourth quarter of 2011.

As Carl noted earlier, we confirmed our guidance on fourth quarter 2012 operating expense of $149 million to $153 million, excluding amortization of intangibles. We will continue to gain additional cost savings over the third and fourth quarters of between $7 million and $11 million. In addition to the remaining personnel costs, we expect to see reductions in equipment, data processing, insurance and advertising. The effective income tax rate for the second quarter was 26% and was in line with our guidance. The effective tax rate for the third and fourth quarters should be about 27%, bringing the full-year rate to about 25%.

Finally, I would like to provide some thoughts as to the recent guidance on BASEL III. Based upon our initial analysis, Hancock is well positioned to not only meet the requirements set but to comfortably exceed them, with all of the resulting ratios exceeding the required minimums of 7%, 8.5% and 10.5%. We are currently working to refine our data models to better develop our estimates and expect to provide more-specific guidance later. At this point, I'll now turn the call over to Sam Kendricks, our Chief Credit Officer.

Thank you, Mike. Many of our asset quality measures improved during the second quarter. The allowance for loan losses was $141 million at June 30 compared to $142 million in March 31. The allowance-to-loans ratio was virtually unchanged at 1.27%. We recorded a total provision for loan losses for the second quarter of $8 million, down from $10 million in the first quarter.

The FDIC covered portfolio component was down $600,000 linked-quarter while the provision for non-covered loans was down $1.4 million. The provision level could increase next quarter. However, it should be in the range of provisions reported over the past few quarters. Net charge-offs from non-covered loan portfolio in the second quarter were $10 million or 37 basis points for average total loans on an annualized basis. This compares to $7 million, or 25 basis points, in the first quarter.

A portion of the charge-offs on impaired loans taken in the second quarter had been specifically reserved for in prior quarters The allowance calculated on the portion of originating loan portfolio totaled $81 million, or 1.4% at June 30, down from $84.5 million, or 1.55%, at March 31. As we've mentioned in previous calls, this ratio will continue to decline as the proportion of this portfolio representing new business from Whitney's operations grows, other factors held constant.

Non-performing assets totaled $271 million June 30, down $17 million from March 31. The decrease in overall NAPs reflects the net reduction in ORE and foreclosed assets during the quarter, including $11 million in sales of surplus bank property. The trend we reported in legacy Hancock MPLs has stabilized, and I continue to be happy with the performance of the Whitney-acquired portfolio.

I would like to make one other comment in line with Carl and Mike's earlier comments on loans. If you look at the total [criticized] portfolio over the last five quarters, we are down $390 million or 31% since June 30 of last year. That is significant in looking at the performance of the Whitney portfolio against the loan mark and the offsets to quarterly loan growth. As Carl noted earlier, we expect asset quality measures to remain within the range other results reported over the past few quarters. And, Carl, I'll now turn the call back over to you.

Okay. Thanks, Sam. At this time, we'll now open the call up for questions.

Thank you. (Operator Instructions)

Jefferson Harralson, KBW.

Thanks. Good morning, guys.

Good morning.

I want to ask you a question on the loan growth you gave guidance for. The roughly flat growth the next couple quarters. Can you just talk about the underlying economic drivers that is going on here? It just seems like over the last year or so the loan growth hasn't been what we wanted it to be. And, what would it take to move this number higher besides just simply the non-covered offsets?

Well, Jefferson, this is Carl. I tell you we've had actually tremendous loan origination. It's just that when you look at the paydowns and payoffs and principally with credit-impaired or certainly from our perspective concerned loans, we actually had pretty respectful, in fact very respectful, I would say, loan growth. But, because of the payoffs and paydowns, it does work against the actual net loan growth abilities.

We continue to see real growth opportunities in markets like Houston, greater New Orleans and Tampa, specifically, but many customers that we talk to, particularly in the C&I arena, do have projects that are on the board, and they're ready to start the draw down on lines. But, many are still a bit concerned about the economy. I can't tell you the number that have said we really want to wait and let's see how the elections turn out, so there's quite a bit of business customers that are still on the sidelines waiting just to see how the latter part of this year plays out from a political standpoint, as well as global economic issues.

Okay.

Yes, Jefferson, this is Mike. I just want to kind of re-hit the point that Carl made earlier, also, around the fact that we have had a lot of credit-impaired loans that have left the balance sheet over the course of the past year. Some $450 million. So, even though we are down the $171 million, if you kind of back out that $450 million, we're actually up about $274 million, or about 2%. But probably the bigger point is that the loan portfolio we have now is much less risky than before because of the removal of all of those credit-impaired loans.

Okay. Thank you, guys. That's helpful.

Okay. Thank you, Jefferson.

Michael Rose, Raymond James.

Hey, good morning, guys. I just want to start off with a housekeeping question. Mike, I think you said that the amortization expense was going to trend down to about $7 million in the fourth quarter. Do you have an outlook for what it's going to be in 2013 relative to what's in your K?

Yes. Not on an annualized basis, Michael, but it will continue to trend down through 2013 by a couple hundred thousand dollars per quarter. So, it should be down maybe a little bit less than $1 million by the time we get to 2013.

All right. Then, how should we think about the size of the balance sheet from here? I know it's obviously a little bit lower than you would have anticipated relative to your initial expectations with the Whitney deal. Thanks.

Well, the size of the balance sheet, again, will be very dependent upon our ability to grow loans. But, that's the key. We've shrunk the balance sheet, of course, quarter to quarter, by about $500 million, which was largely deposits that ran off the balance sheet. And, again, those end-of-period balances based on the balance sheet as of the end of the quarter. But going forward, the size of the balance sheet will be very dependent upon our ability to grow loans. And, again, we see a little bit in the way of progress there. And look toward having that loan growth in the second half of 2012.

Yes. This is Carl. If you look at the pipeline, it's actually very robust right now with good, strong credits. The one thing that we can't control and certainly can't forecast exactly is what the economic future is going to look like. But, I can tell you we're starting to see the pipeline continue to grow.

So, we're certainly -- one thing we're not going to do, though, is load the book or load the balance sheet with sub-par credits. And just as we experienced, we're able to move out a significant number of credit-impaired loans to other competitors over the last four and five quarters. We're not going to reciprocate that. So, we feel cautiously optimistic about our ability to have net loan growth in the second half of this year.

Just real quick - -

Is the pipeline actually up at the end of the quarter relative to the end of last quarter?

Yes.

Yes, it was, or it is.

Okay. Thanks.

Yes.

Emlen Harmon, Jefferies.

Good morning.

Good morning.

Could we kick off -- Mike, could you help us on understanding just the yield accretion in the quarter and just what exactly the impact was of the increase there? And if you had it on hand, what's the accretable yield balance at the end of the quarter? I know you typically provide that in the [Q], but I didn't know if you had it on hand there as well.

We'll provide the information in the Q, not today. Again, if we look at the loan accretion from the two acquired loan portfolios quarter to quarter, we are up about $1.9 million, and that accounted for about five basis points, really, the majority of the margin increase quarter to quarter.

Got you. Thanks. And then, Carl, in the past couple quarters you talked about the opportunity in Florida. Could you give us just an update on what you're seeing in terms of economic improvement, and then, what the opportunity is there? I know you called out Tampa as an area of loan growth in the quarter. Just kind of curious if things continue to get better, if you are seeing a real opportunity here in the next six months or so?

Yes, we do continue to see opportunities in Florida. Tampa obviously is continuing to grow from a loan perspective. The general economy in the Tampa market seems to be looking a little brighter. We're also seeing some success in Jacksonville. When you look at Orlando, that's probably a little less of an opportunity for us as far as just looking at our immediate past results and what the future may hold. But when you look at Jacksonville and Tampa, those two areas are continuing to provide nice particularly C&I-related credit opportunities for us. We have great leadership on the ground in both Tampa and Jacksonville, and those teams are continuing to provide really strong credits moving over to our Company.

When you look at the competitive landscape in those two markets, we're blessed and very fortunate to be one of the regional banks that is strongly capitalized, good earnings momentum and really open for business. Whereas many of our competitors are having to look over their shoulder and deal with asset quality concerns and issues, and as a result, not able to take care of -- one, not able to really focus on growing the portfolio. And secondly, those distractions result in not being able to take care of existing good customers.

And so we're able to step in and really provide topnotch customer service, very competitive products. And, again, I could not be more proud of our scenes, particularly in Florida, as well as across the franchise. But, we're seeing really the growth in the Jacksonville, Tampa, greater New Orleans and Houston markets.

Got you. Thanks. And one quick ticky-tack question, Mike, if you don't mind? The common equity increased maybe a little bit more than I would have expected this quarter. Was there a pickup in OCI in there? Was there some other effect that maybe pushed that a little higher.

On the home equity lines?

No. Just common equity. So, the pickup TCE and the capital ratios was a little greater than I thought just based on the earnings and what comes out for the dividend.

Yes, there was a little bit of an adjustment on deferred taxes that also impact the numbers there.

Got it. Thanks, guys.

Okay. Thank you.

Dave Bishop, Stifel Nicolaus.

Good morning, gentlemen.

Good morning.

I was wondering, you alluded to the pickup and deposit service charges there. A little bit more color in terms of what drove that and is that something that at this level you can expect to carry through into the latter half of the year?

Yes, Dave. This is Mike Achary. Again, last quarter we had talked about [attended] with the systems conversion with some changes in products and services. And one of the major changes that we made was to introduce a new depository account that carried a nominal monthly service charge if the customer doesn't keep a certain level of deposits on balance with us. And so for the second quarter, we had a full-quarter impact of that additional service charge income.

Okay. And did that have any sort of effect in terms of deposit balances? If so, were you able to recapture that? It sounded like some of the deposits remixed over to the asset management side of the business?

Yes. Of course. Any time you make a change like that, you look at the impact of maybe having some customer attrition, and we have modeled that in when we developed that product and have had some customer attrition. But, those levels really have kind of leveled off and have been less than we had modeled or expected.

How about elsewhere in terms of the cross-selling opportunities? Any early indicator of success on the wealth management insurance side.

Yes, progress is starting to being made. Nothing to report in terms of any specific numbers. But we are having some success in beginning to cross-sell things like title insurance, personal lines, especially on mortgage loans. So, we continue to work very hard to effect those revenue synergies and to increase those cross-selling opportunities.

Again, the core system conversion back in March put us all on the same platform and gave us that capability to begin really developing those revenue synergies in earnest. Having said that, it does take time to harvest those revenue synergies and get things in place going forward. So, again, that is absolutely an opportunity for us going forward, and it is something that we'll continue to be mindful of and report on.

Thank you, Mike.

Jennifer Demba, SunTrust Robinson.

Good morning. This is David Grayson from Jennifer's office, in for her today. Thanks for taking my questions. First, just a quick question about the expense reduction guidance in the third and fourth quarter, as you talked about. Does those numbers include the additional branch closures that Carl mentioned at the beginning of the call or is that really more of a first quarter of '13 benefit?

Well, the branch closures that we alluded to in the call this morning will not actually be closed until probably the middle of the fourth quarter. So there will be some impact from those branches, but not a full-quarter's impact, of course. So you're correct, David, that's more of a full first quarter '13 item.

Okay. Thank you. That's helpful. And then a follow-up question. C&I growth this quarter, you talked positively about Houston and New Orleans. Is the energy team that you added recently, are they driving any of that, and can you give an update on their progress?

Certainly. They are absolutely contributing to that, but it's not exclusively that by any means. I tell you, we're very proud and pleased with the results thus far of the new members of our energy team. But, we're also seeing additional growth in other lines of C&I. So clearly, energy is a good piece of that, but it's not exclusively along those lines. Sam may want to add some additional color to that.

We are seeing opportunities and some level of commitments. But, the funding levels have not fully been realized from the impact of that team having joined us. So, we feel very good about those prospects. But, again, we're being pretty judicious in terms of the type of credits that we want to add to the portfolio as we continue to de-risk that portfolio.

And, David, this is Mike. Just as a follow-up, we have had lots of production coming out of our Houston offices. But, that area also really has seen a lot of payoffs and pay downs. And so really on a net basis, it has been kind of flat. But once those paydowns and payoffs begin to abate, we think the net production there will begin to show through and help us grow the balance sheet.

Got it. Thanks so much for taking my questions.

(Operator Instructions)

Christopher Marinac, FIG Partners.

Thank, good morning. I want to ask a little about charge-offs this quarter and if there is noise good or bad in these numbers and how much volatility there might be losses with the rest of the year.

Well, it pertains to net charge-offs. You saw a little uptick in the quarter. But, again, as we said, a good portion of those had already been reserved in prior quarters. We, as I had said before, continue to monitor our credit portfolio very closely to recognize the losses timely. And as we said earlier, we expect our overall provision to remain within the range that you would have seen in prior quarters.

Sam, should we think of the reserve in terms of a coverage of annualized losses, particularly as the reserve changes with the originated portfolio getting larger.

Yes.

Okay. So then, Mike, just a quick one for you. Is there any volatility on the accretion number going forward? It's been on a positive side the last few quarters. Just curious if that may reverse at all in the future?

Yes. There's always a potential, Chris, of volatility with that accretion, as you know. We go through a process each and every quarter to recast those cash flows, [grind] our models and then that helps us to determine what those accretion levels need to be. And so, we did have an increase of about $1.9 million between the first and second quarter. And I do believe that those levels will be able to be maintained where they are right now, but then there is a potential for a little bit up and down. Probably more of a potential for a little bit more accretion in the near term than actually going down. And, again, that tracks back to absolutely outstanding performance related primarily to the Whitney-acquired impaired-loan portfolio.

Good, Mike. That's helpful. Thank you.

Thank you, Chris.

Thank you. I'm showing no further questions at this time. I'll hand the call back over to Carl Chaney for closing remarks.

Okay. Thank you all for joining us today. Again, being able to report operating earnings up 17% linked-quarter and being able to now be back into the 1% ROA arena is something we're very proud of, and we continue to be excited about the future opportunities of this Company as we continue to grow and continue to integrate the Whitney transaction. So, we appreciate your interest and your continued support. Thank you very much.

Thank you. Ladies and gentlemen, this concludes the conference for today. You may all disconnect, and have a wonderful day.