Hancock Whitney Corp (HWC) 2016 Q1 法說會逐字稿

Good morning, and welcome to Hancock Holding Company's first-quarter 2016 earnings conference call.

As a reminder, this call is being recorded.

I will now turn the call over to Trisha Carlson, Investor Relations Manager.

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 release and presentation, and in the Company's most recent 10-K and 10-Q.

Hancock's ability to accurately project results or predict the effects of future plans or strategies, or predict market or economic development, is inherently limited.

We believe that the expectations reflected or implied by any forward-looking statements are based on reasonable assumptions.

But our actual results and performance could differ materially from those set forth in our forward-looking statements.

Hancock 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.

The presentation slides included in our 8-K are also posted with the conference call webcast link on the investor relations website.

We will reference some of these slides in today's call.

Participating in today's call are John Hairston, President and CEO; Mike Achary, CFO; and Sam Kendricks, Chief Credit Risk Officer.

I will now turn the call over to John Hairston, President and CEO.

Thank you, Trisha, and good morning, everyone.

We certainly appreciate you joining us today.

As I hope you noted from yesterday's release, we are continuing to make progress in improving performance of the Company's P&L not tied directly to energy.

I'm sure you also gathered that our first-quarter provision for loan losses more than offset continuing improvement in revenue and expenses, and we will comment on both of those topics in today's remarks.

Core pre-tax pre-provision earnings grew over $8 million, a 12% linked quarter, and almost $13 million, or 20%, from last year's first quarter.

As shared in previous calls, we chose this measure to monitor our progress in 2016 since it eliminates the noise from purchase accounting and nonoperating items.

It also provides a methodology of assessing earnings expectations as energy pressure subsides.

Loans grew in line with our guidance at 7% linked quarter annualized.

As noted on slide 6, the growth was across all markets within our footprint, also in equipment finance, and an unexpected but modest increase in energy.

Early in the quarter, we received energy payoffs and paydowns that were greater than expected, and therefore we adjusted the guidance in the 10-K.

We did not anticipate, however, late-quarter well-publicized draws on the available lines from a few large public energy companies.

For our Company, this accounted for approximately two-thirds of the growth in energy for the quarter.

Otherwise, we would have reported approximately $85 million in payoffs and paydowns, with limited increases from other credits.

We continue to expect $200 million or more in energy portfolio reductions through 2016.

We are maintaining our 5% to 7% annual end-of-period loan growth guidance and expect to continue non-energy growth across our footprint.

Our core revenue improved $4 million linked quarter, and almost $19 million from the first quarter of 2015.

For linked-quarter comparisons, most of that improvement was a net interest income as we grew the balance sheet and enjoyed improvement in both core loan and securities yields.

Noninterest income was down slightly in the quarter and reflects normal seasonality, and a touch of decline in trust revenue from the overall market decline in January.

However, when you compare to a year earlier, you can see the growth and progress we're making to generate additional fee income, and we expect those trends to continue improvement and trajectory throughout 2016.

We brought expenses back in line this quarter and remain focused on limiting growth to no more than 2% for 2016.

Now, a few comments on the energy provision.

As noted in the guidance update, we booked a provision for loan losses of $60 million in the first quarter.

This was changed from our $11 million to $15 million quarterly guidance noted in our fourth-quarter 2015 earnings release.

The change in guidance reflects challenging conditions in the energy, E&P and service sectors, as these categories were the primary source of downgrades to criticized of over $300 million.

Many downgrades occurred late in the quarter following the Company's receipt of the March 15 Shared National Credit exam results.

These results reflected new regulatory guidance released in March and were applied in connection with the SNC exam.

Approximately 75% of the increase in the criticized category were from RBL credits identified in that exam or based on the new regulatory guidance.

Several credits totaling about $80 million in outstanding balances were moved to nonaccrual status by way of the exam, none of which are past due.

Because of these developments and the impact (technical difficulty) of the energy cycle, we updated our guidance and booked a $60 million provision in the quarter.

Approximately $50 million of that provision, or $0.41 of EPS, is related to energy.

After energy charge-offs of about $17 million in the quarter, the reserve for the energy portfolio increased approximately $33 million and now stands at almost 7% of the energy loans.

We believe the reserve is sufficient to cover potential charges in our energy portfolio based on what we know today.

We have provided updated annual guidance for 2016 provision rather than quarterly guidance because we expect lumpiness in provision through the year, as evidenced in the first quarter.

Despite all the activity this quarter, our capital remains strong, and TCE improved 7 basis points.

Stock buybacks do remain on hold until we see evidence of an emerging energy recovery.

Our priorities for the use of capital continue to be supporting current banking activities, especially organic growth, and maintaining our quarterly dividend.

I will now turn the call over to Mike Achary, Chief Financial Officer, for a few additional comments.

Mike?

Thanks, John.

Good morning, everyone.

I will take just a few minutes to go over a couple of our quarterly details.

The reported EPS for the quarter was $0.05 and, as John noted earlier, was impacted by the large energy provision of $0.41.

Earnings also included $5 million, or $0.04 per share, in nonoperating items.

And for this quarter, that was mainly related to separation costs.

So, that brings our operating EPS for the quarter to $0.09.

A small impact from purchase accounting further improved our core EPS to $0.10.

All of these details are included on slide 4 of our presentation deck.

The Company's period-end loans were up $275 million, or 7% annualized.

Adjusting now to the impact of energy noted on slide 11 -- slide 7, the growth of was 6% linked quarter, and so was in line with our updated range of guidance.

We will continue to work hard to reduce our concentration of energy loans during 2016, and still expect to cover about $200 million in energy payoffs during the year.

Also, it's important to note that the loan growth for the quarter was completely funded by deposit growth of just over $300 million.

The Company's net interest margin improved 2 basis points linked quarter for both reported and core.

Drivers were a 5-basis-point improvement in our core loan yields, and a 6-basis-point improvement in the yield on our securities portfolio.

That was slightly offset by a 3-basis-point increase in the Company's cost of funds.

We also had about $900,000 of interest reversals on problem loans in the quarter.

That negatively impacted our margin by 2 basis points.

Excluding these adjustments, our margin would have increased 4 basis points over last quarter, and so was in line with our previous guidance.

Core net interest income increased $5.6 million over last quarter, and was up almost $17 million compared to the first quarter of last year.

John briefly noted the first-quarter seasonal impact on fees.

Rest assured that we remain focused on growing noninterest income as we move through 2016.

Also as noted earlier, expenses were back in line this quarter and were down $5 million from last quarter.

As we noted earlier, the $5 million of nonoperating expense was mainly related to separation costs as we continue to look for opportunities to gain efficiencies across the Company.

Our tax rate was impacted by the lower level of earnings in the quarter, with an effective rate of 23%.

For the rest of 2016, we expect that effective tax rate to approximate 22% to 24%.

Our TCE ratio was 7.69% at quarter-end, and that was up 7 basis points from year-end.

We will continue to work hard to move that ratio back to our 8% internal target as quickly as we can.

Previously, we said the impact of the current energy cycle will be an earnings event for our Company and not a capital event.

We continue to believe that and expect to remain a well-capitalized Company.

Internal analysis shows we take losses significantly greater than our stated expectation of potential losses from the energy cycle to put the Company's capital at risk.

As always, I would like to point out slides 20 and 21.

These slides provide both near-term and full-year 2016 guidance and targets.

And, other than the change John noted for our provision guidance, is unchanged from last quarter.

I will now turn the call back to John.

Thank you, Mike.

The team remains focused and are all vigorously working towards achieving our stated goals, even while progress has recently been overshadowed by the energy cycle.

The metrics for the first quarter outside of provision expense and energy are in line with previous guidance.

And I am proud of the efforts our bankers and support teams have put forth in growing loans and deposits, and controlling expenses and working to generate core revenue.

So with that, Melissa, we can now open the call for questions.

Thank you for moderating.

(Operator Instructions) Jennifer Demba, SunTrust.

On credit quality, just wondering if you are seeing any deterioration of note outside the energy portfolio, whether it be anything energy related or not.

And then secondly, I was wondering if you could give us some color around how you are estimating your provision needs for the rest of 2016.

Thanks.

Good morning, Jennifer.

This is Sam.

As it relates to any spillover related to energy, as we have said before, our consumer metrics continue to hold up very well.

What we call the oil-centric markets have traditionally performed better in the consumer portfolio than the bank as a whole.

We are seeing some movement in a couple of consumer segments that are approaching the norm for the rest of the bank, at least in terms of delinquency.

But no real movements in terms of the losses as yet.

We still think there may be some of that to come, so we and our collection shop are focused very closely on that.

We are watching those markets very closely and adjusting our calling and contact routines accordingly.

We think that is helping.

Outside of consumer, CRE continues to perform very well.

We have talked about Houston CRE before.

Multifamily is an area that we have sort of called out as a potential for some slowdown in the Houston market.

We have talked about that for a couple of quarters now, and we seem to think that, with product delivery for multifamily coming online in Houston, we are going to see some extended lease-up periods.

So, we may see -- haven't seen it as yet -- we may see some interim short-term risk rating pressure as projects come online in the Houston market.

But, those projects remain solid, and we've got good sponsors, good fronting equity, really great long-term projects.

So, we think we have been very selective in terms of projects that have good long-term economics.

We have distribution in the market so that we are not heavily concentrated in one submarket in Houston.

And we don't have any high-end residential towers being financed.

In the Houston CRE portfolio right now, there's about $129 million of outstanding.

Just over a third of that is multifamily.

So, while we think there's going to be a little bit of softness later this year in multifamily in Houston, at this point Houston CRE overall is holding up very well.

Jennifer, this is Mike.

Related to your second question about the provision forecast and the range that we have kind of articulated as guidance, we went through a pretty extensive process to forecast out under a number of different scenarios our provision for loan loss, our allowance.

We used as assumptions the loan guidance that we have given, the 5% to 7%, which was inclusive of any energy paydowns.

But, we forecasted out our expected losses, our charge-offs, as well as additional risk rating migration under, again, really three scenarios.

The first was kind of a base case.

The second was a stressed scenario.

And the third one was a severely stressed scenario.

So, that resulted in, again, the guidance that we gave around the full-year provision for loan losses this year -- so, the 105 to 145.

Does that make sense?

Yes.

Thank you.

Brad Milsaps, Sandler O'Neill.

Just wanted to see if you guys could talk a little bit more about where you were in the spring redetermination process.

And then looking at utilization, I think around 67% this quarter -- just kind of curious where that might head in terms of where those commitments could be cut and how much higher you kind of feel like you're -- maybe some of those drawdowns.

I know you talked about -- still are mentioning $200 million in paydowns, but obviously still got quite a bit of capacity there for potential drawdowns as well.

Sam?

We are currently about 20% to 25% through the spring redetermination process as of last week.

We expect to be about 60% complete by the end of April and probably 90% by the end of May.

We said that we anticipate an average 15% to 20% in line adjustments downward, and we still hold to that estimate.

So, we may find that migrating up to the upper end.

The utilization, as you would expect with the lines becoming compressed, we expect that utilization rate to move up some more.

But, again, we've got a number of clients that are making plans around that.

We've had some additional equity injections show up for some of our clients.

Some nonstrategic asset sales.

We are also seeing some secondary debt placement out there.

So a number of things are being -- are happening because of the clients are trying to maintain their access to that liquidity.

But we do expect to see the utilization to move up some more as those lines continue to be compressed.

Again, we are only about a quarter of the way through the spring redetermination process at this point.

Okay, great.

And then just a follow-up on Jenny's question.

It did look like kind of nonenergy NPLs ticked up a bit in the quarter.

Anything major there?

And then it looks like the reserve, I kind of X out the energy piece of it, you might be somewhere in the neighborhood of less than 80 basis points on the rest of the book.

Just kind of curious as you break down your provision guidance for the rest of the year, would you say much of that is -- may be related to additional energy?

Or are you building in some additional to kind of bring that reserve up on the regular book as well?

As it relates to the nonenergy NPLs, it is just the customary things you see as you go through the course of the year.

So, those, as we said, were nonenergy related.

They actually were in markets that are nonenergy impact, so they are just normal C&I type situations.

One of those specifically is a credit that we've got a workout plan on that we are working closely with the client on, and we think has got -- has a great likelihood of being resolved this year.

So it is just nothing systemic around those, just the normal course of what you would see in a normal economic cycle.

Mike, do you have any color to add to that?

Yes, Brad, this is Mike.

On the provision forecast, again, under all of our scenarios we did build in a fair amount of deterioration on the nonenergy side.

So that's covered in our provision guidance.

The other thing I would point out is if you do back out our energy ALLL from the Company's total ALLL, we are at about 74 basis points at the end of the first quarter.

But I would point out that 74 basis points really doesn't include the fact that we have about $170 million of loans that are still covered by loss share -- by a loss share agreement.

And we have a combined $62 million of marks left on the Whitney acquired portfolio as well as the People's First acquired portfolio.

So those are two, I think, important mitigants that help us understand that 74 is a conservative number.

No, that is helpful.

Thank you, guys.

Emlen Harmon, Jefferies.

Mike, could you give us some color on the nature of the efficiency opportunities that you guys are seeing this year and when you expect -- or what the timing is in terms of when you expect to see those in the earnings run rate?

In terms of expense efficiencies?

Correct.

You guys talked about efficiencies in the prepared remarks.

And then we did see some severance charges this quarter.

So I am assuming there is something to come on the expense-save side.

Yes, we continue to look at that, as we have talked about many times.

So we are constantly looking at strategic opportunities to save expense and to continue to make our Company more effective and efficient.

There is really nothing that we would call out right now that is coming down the road other than a continuation of those kinds of activities.

We would point out, though, that the expense run rate after we back out the nonoperating cost is a good run rate to use going forward.

So, from this point forward on a net basis, we will see our expense saves grow, but only modestly from this point forward.

So, that is a combination, again, of realizing strategic opportunities to become more efficient, as well as continue investment into the Company.

Emlen, this is John.

Just to add some color to Mike's comments, if you look at that 2% expense guidance on expense growth for the year, it includes really two moving parts, one of those for continued expense efficiencies.

And the second is the continued investment in revenue-bearing initiatives.

So, we continue to hire good bankers where they become available.

We hired one team in the first quarter, which included a President and our Baton Rouge market and some good talent with him.

And we continue to add both mortgage and merchant bankers throughout the footprint as part of that going-forward initiative.

So the 2% is really a net of a continued somewhat vigorous approach of hiring talent for the future with the construct of efficiency initiatives like the severance that you saw in the announcement.

I hope that is helpful to you.

Yes, that is helpful.

Thanks.

And then, just two quick follow-ups here -- unrelated.

But -- I'm sorry -- did you provide the specific oil price you were assuming in each of your scenarios?

And then just on the lower tax rate guide, I am presuming that is just an effect of the lower expected profitability for the year.

Is that a fair assumption?

Yes, Emlen, this is Mike.

That is correct on the tax rate question.

On the oil price question, we did not provide any specific guidance, but certainly willing to share the fact that when we look at the guidance we have given around both expected loss related to energy and our provision guidance.

What we are looking at is assumptions around oil at a level of low $30s and below.

Then we can assume that the upper end of our expected loss in provision range would come to pass.

If oil is at $40 or higher, then you can point to the lower end of those ranges.

The duration of those cycles really assumes through the current level of 2016.

So, again, if oil is $30 or below through the end of this year, upper end of our range; if it is $40 or higher, then the lower end of our range.

Again, through 2016.

Got it.

Thanks, guys.

Jefferson Harralson, KBW.

I wanted to ask you about the draw this quarter.

I think it was 155.

Can you just talk about the process that occurs when a draw request is made and, I guess, on how you feel about the credit quality of the draws that are made?

Good morning, Jefferson.

This is John.

Sam will handle that question.

Good morning, Jefferson.

When we take advances on credits, those credits are performers and in compliance with the loan agreements.

So, while we had some accounts that accessed their lines during the quarter, those are going to be performing lines.

And as you would expect in the energy space, you have read quite a bit in the press about the movement from some of those energy-related companies going ahead and drawing on their lines as they were in the negotiation process with their banks.

And so, we saw some of that activity as well.

Now, we have already had conversations with clients.

We expect some of that money to come back in as they pay down.

So, we saw some RBL advances occur in the quarter in the RBL space for those.

The clients were in compliance -- the clients that were in compliance with their covenants.

We also saw some support segments that made advances on their lives as well.

But we remain confident that there is not a significant potential for loss in those groups of accounts.

Okay.

Thanks.

I will pass it on to someone else.

Michael Rose, Raymond James.

Just a follow-up on the scenarios that you gave, and really this quarter is $17 million in losses.

If you were to break that out by sector -- I did not see it in the materials, but how does that breakout between upstream, midstream and the support?

We did not take any charges in the upstream space.

These charges were in the support segments.

Okay.

So as I look at the upstream, criticized that -- about two-thirds of the book, how should we think about the loss severity in each of your three scenarios?

I would assume more of the loss content would be in the oilfield services space, but that will come a little bit later as those companies are still kind of hanging on.

So hopefully we will get a recovery in oil price.

So if you can just kind of break out those two components and what your expectations are relative to your scenarios for loss content, that would be great.

Thanks.

Well, we obviously -- as we went through the scenarios, we took a look at our impairment analysis.

And while we have a range of losses there in the upstream space, our impairment analysis reveals that we have very modest potential for loss in that segment.

So, as we have said for some period of time, we think the loss content is largely in the support segment.

So, that was a big driver of our overall analysis.

And in the ranges that we have said is that we are going to see prolonged impact on the cash flows for the support segments than we were for the RBL when we see a price recovery.

And so that was a heavier weighting in terms of our overall projections and analysis within the support segments.

Okay.

And then maybe just a follow-up to your scenarios.

If oil were to move closer to $50 by the end of the year, do you actually have a provision that would be less than your range?

This is John.

We would never say never, Michael.

Certainly, the better oil recovers, the faster RBL recovers.

And you would ostensibly presume that we would see some reserve release from upstream to get applied to services.

And if the amount of drilling activity picks up as we hit $50, then obviously the service sector would recover, too.

But, just to be clear, given that services typically follows two to three quarters behind RBL and recovery -- and this cycle is different than ones in the past.

In the past, it was two or three quarters, then we would expect some pressing issues into the middle of 2017.

But Michael, suffice to say obviously if oil does reach that level and we were able to come in below our provision guidance, then obviously we would be thrilled with that.

But, again, the scenarios that we are looking at, we really don't contemplate that particular scenario.

Yes, I think we would all be happy.

Thanks for taking my questions, guys.

Matt Olney, Stephens.

I want to ask about the capital.

You are still below that 8% TCE threshold we have discussed on the call before.

I think you said previously that you expected to be below that just briefly.

And I believe the K had some language about perhaps getting above that threshold in the back half of 2016.

So, from where we are at today, when should we expect to be above that 8% TCE threshold?

Matt, as we said a little while ago, we are working very hard to get that particular ratio back up to that 8% level.

As we go through 2016, we can see scenarios where we get darn close to it by the end of the year.

And obviously the mitigants there are going to be the further risk rating migration and charge-offs related to energy and really which one of our scenarios comes to pass.

But it continues to be a focus for our Company and something we are working very hard to achieve, and believe that we can get close to that number as we close out the year.

Okay.

And then kind of a related question as far as the strategy on the securities book, that has grown at a pretty nice clip last year and again the first quarter.

Can you just remind us what the strategy is in the securities book in 2016?

What have you been buying?

It looks like it has been a lot of municipals more recently that are higher-yielding.

Could that continue through the rest of 2016?

Yes, you hit the nail on the head there.

We are really trying to deliberately affect the mix of the securities portfolio by including more munis.

And, for example -- this quarter was a good example.

We grew the total size of the bond portfolio by about $200 million.

But we had inside of that number about $400 million of purchases, most of which were in munis.

So we are cognizant of the opportunity there right now to add a little bit more yields through improving that mix.

I don't know that you will see a big change from this point forward, though, on the size of the bond portfolio.

We sit at right around $4.7 billion.

And we will probably keep the bond portfolio in that range of, say, $4.7 billion to maybe as high as $4.8 billion or $4.9 billion.

Okay.

Thank you.

Thank you.

And I am showing no further questions.

I would now like to turn the call back to John Hairston for any further remarks.

Thanks, Melissa, and we appreciate you moderating today.

Thanks, everyone, for attending the call and for your interest in Hancock Holding Company.

Take care.

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

This concludes today's program.

You may all disconnect.

Everyone, have a great day.