Hancock Whitney Corp (HWC) 2017 Q2 法說會逐字稿

Good morning, and welcome to Hancock Holding Company's Second Quarter 2017 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, including the risks and uncertainties identified therein.

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.

Thanks, Trisha, and good morning, everyone.

We certainly appreciate your interest and for joining us for the second quarter call.

As I mentioned in yesterday's release, I'm extremely pleased to report another quarter of progress.

The core fundamentals of our business are becoming more evident: reported and core earnings are improved, the balance sheet is stronger, margin fee income continues to move in the right direction and asset quality is stable.

For the quarter, we reported $52.3 million in net income or $0.60 per share.

And while at first glance that may seem relatively flat to recent quarters, upon closer review, it's a much improved story.

And you can see the value -- the first 2 -- our First NBC transactions have already added.

As a reminder, over the first half of 2017, we acquired approximately $2.6 billion in assets and liabilities, 2 unrelated transactions, which we refer to as FNBC I and FNBC II.

These end-market low-risk transactions have positively impacted our franchise from the first day, and we expect to generate additional value as we move into the second half of 2017.

The 2 transactions also added some short-term noise to our results, and we did include the information in the deck to help investors get a clearer picture of the quarter.

For example, in the second quarter, there were about $4 million or $0.03 per share of both FNBC I and II merger costs in our nonoperating expenses.

We expect to see more of these costs in the third quarter.

Additionally, there are about $7 million or a $0.05 per share of nonpermanent shares in our operating numbers for second quarter.

These are expenses such as operating the 29 branches FNBC had when closed by the regulators in addition to processing work for the FDIC to keep operations going and customers served.

These expenses have been elevated as we work through the conversion of FNBC II but we expect them to decrease through third quarter '17 and be eliminated by the fourth quarter of the year.

As a side note, this past weekend, we executed the final systems conversion for FNBC II.

Here at midweek, it appears we have another smooth conversion event within minimal disruption.

Alongside that conversion, we were able to consolidate the final 25 overlapping FNBC locations into Hancock Whitney offices.

So between the 2 FNBC transactions, we are a net plus 3 in the number of branches across our footprint.

Our board and management are exceedingly proud of the team members who executed 2 excellent systems conversions over a span of just 62 days.

The successful conclusion of 2 quick integration exercises should provide confidence in the organization's ability to manage operational risks associated with future acquisitions.

In the quarter, we also reached a settlement with the FDIC to terminate the loss share agreement from our 2009 Peoples First acquisition.

This settlement was fully accounted for in the second quarter results.

The settlement from the FDIC was $3.2 million, and we wrote off $6.6 million of the indemnification asset.

This $6.6 million or $0.05 per share is included in our nonoperating items for the quarter.

Moving on to our best fee income quarter to date with hard fought wins in every category, but such a high level of performance in a few lumpy categories may be hard to sustain.

We have worked hard to attain a position where we can harvest opportunistic fee revenue when possible.

And for second quarter, performance was very strong.

I'm going to let Mike walk you through some of the successes we had in fee income for the quarter before adding back a full $0.13 to our operating results for these 3 items.

Our core PPNR improved again totaling just under $102 million this quarter.

This is a 9% improvement linked quarter and a 19% improvement from the same quarter a year ago.

And when looking back on Slide 7 to when we started this new journey in early 2015, we're up over 50%.

That's progress we're very proud of, but we are not yet satisfied and we continue to relentlessly pursue attainment of our corporate strategic objectives.

So with that, I'll now turn the call over to Mike Achary, our Chief Financial Officer, for a few additional comments.

Thanks, John.

Good morning, everyone.

It has been a busy quarter for us, but also a very successful one.

So besides the highlights we just covered and the news about terminating our loss share agreement with the FDIC, we also, just this past weekend, as John mentioned, converted the loans and deposits acquired in the First NBC II transaction.

And then we also announced a few weeks ago some significant changes to our pension plan.

So again, it has been a busy quarter with many positive items impacting our company.

As John mentioned earlier, there are a few unusual items in our numbers this quarter.

So we've already talked a bit about First NBC and the termination of our loss share agreement, but we also had a few seasonal and potentially unsustainable items we'd like to call out in a bit more detail.

Doing so, we think, gives you a better understanding as to how we view these businesses and future results.

So on Slide 5, you'll see from left to right, first, the termination of the loss share agreement, which was $0.05 per share.

And then the merger costs we've incurred so far for both of the First NBC transactions, so $0.03 per share.

The next item of note is the nonpermanent expenses associated with the First NBC II transaction.

Those extension -- expenses, which we expect to eliminate in the back half of the year totaled $6.7 million or another $0.05 per share.

We also had some seasonal items that positively impacted our second quarter results.

The first is a $1.4 million tax benefit related to option exercises and the vesting of restricted shares in May.

As you probably remember from last quarter, the accounting treatment to these items changed effective January 1. And instead of impacting capital, any benefit from a change between the grand investing price of stock awards now impacts tax expense.

We do expect future impacts from vestings to occur, primarily in the first and fourth quarters of each calendar year.

The activity this quarter was a one-off grant dating back to the Whitney merger.

The amount impacting tax expense will vary depending on the difference in our stock price between grant and vesting dates.

The remaining items on Slide 5 are things we're noting as potentially unsustainable going forward.

We're really not calling them out as onetime because they are part of our business model, but they could be unpredictable as to future timing and amount.

For this quarter, these items include: Additional derivative income of about $1 million above normal run rate levels; additional SBIC income of $700,000 above normal quarterly distributions; and a $1 million co-arranger fee, our health care team in Nashville, earned on a new business loan.

While these items are all normal items earned by the company, as I mentioned before, the future timing and amounts will vary.

Adjusting for all of these items, you can see EPS goes from our reported $0.60 per share to an adjusted $0.69 per share for the quarter.

So a few other positive items related to the quarter include the continued expansion in our net interest margin.

For the quarter, the reported NIM was 3.43% and was up 6 basis points from last quarter.

We do expect to see another 3 to 5 basis points expansion next quarter absent any additional Fed rate hikes.

We also reported growth in loans of $269 million for the quarter.

This included $160 million in mainly performing residential mortgages from the First NBC II transaction.

While we did not meet our original guidance for loan growth this quarter, we did have $60 million of net energy loan payoffs and paydowns and a $48 million drop in our outstanding nonenergy SNC loans.

Deposits for the company were up $1.5 billion from March, of course, mainly related to the First NBC II transaction.

We did use some of the excess liquidity from that transaction to pay down $800 million of home loan debt.

We also used the remainder of the excess liquidity to buy securities during the quarter, and then finally also reinvested First NBC's securities portfolio of $220 million that we acquired back in April.

So before I turn the call back to John, I would like to make a few comments about First NBC I and II.

Last quarter, we provided specific information on EPS for First NBC I along with our expectation for the impact on the second quarter.

At Gulf South, we provide guidance for both First NBC transactions combined for 2018.

So now that we've converted both transactions, it is becoming harder to differentiate the impact separately as they have kind of become co-mingled.

Having said that, we still feel very good about the EPS guidance for 2018 of $0.56 per share.

This means we will achieve a 90% cost savings for both transactions by the end of this calendar year.

I'll now turn the call back over to John.

Thanks, Mike.

And Leanne, let's just go straight to questions.

(Operator Instructions) And our first question comes from Catherine Mealor with KBW.

And your next question comes from Michael Rose with Raymond James.

Leanne, we may be having some technical trouble there with the questions.

(technical difficulty)

One moment.

Jennifer Demba your line is open.

This is actually Kevin on for Jenny this morning.

Let me just start off with -- can you talk about the maybe biggest hurdles you see to reaching that $0.70 to $0.80 EPS run rate you lined out as the long-term goal?

You want to start with that, Mike, and I'll follow?

Kevin, this is Mike.

I think that in terms of achieving those goals, certainly the hurdles that we probably encounter include getting the end-of-period loan growth that would be necessary to leverage our balance sheet a bit to hit those levels.

The other thing I think that represents a little bit of a challenge is to ensure that we're able to control our deposit cost and don't let those get too far ahead of us.

Finally, with the kind of controlling or not controlling, but managing the runoff related to both First NBC transactions to levels that help us achieve those kinds of targets.

Those would be the main things, I think, I would kind of point out or call out as the big challenges.

And Kevin, this is John.

I'm sorry, I stepped on you.

This is John.

I would just add that the -- those are the same challenges that we face every quarter, is ensuring that we grow an incrementally more profitable balance sheet growth section every quarter as time goes by.

And that's a little bit more challenging simply because we've done 2 transactions recently.

The only real lumpy caveat I think I'd add is energy continues to be a challenge, and while we may have no charge-offs in one quarter and a little more charge-offs another, that could make the overall EPS complement a little higher or lower.

We feel like we've adequately reserved for the remaining damage in the energy cycle at least based on what we know right now, and we anticipate continuing the relentless pursuit of the overall objective.

So I feel pretty confident that we'll attain that 70% to 80-plus range and perhaps even beat the fourth quarter '18 time line for doing that.

And then maybe 2 kind of small ones related to that.

Upon deposit costs, have you seen any uptick in competition there?

Any issues with controlling those?

And then off of the energy NCOs, I know there are none this quarter, but you still haven't changed your guidance for $65 million to $95 million for this cycle.

Just wondering if we're looking maybe more at the lower end or the higher end or when you think the cycle is going to end with that.

Kevin, this is Mike again.

So again, we've talked a lot about this notion of deposit betas and how and when they may normalize.

I think that's really probably the crux of your question.

So certainly, we've had 4 rate hikes so far.

And again, pretty safe to say through 3 rate hikes at least, there really hasn't been any kind of material change whatsoever on deposit betas.

With the rate hike that we saw in the middle of June, I think that's beginning to change just a little bit.

And again, future rate hikes I think will change even a little bit more in terms of our ability to kind of control those deposit betas.

So it is becoming I think a little bit more of a challenge and certainly will become I think a bigger challenge as we kind of experience additional rate hikes down the road.

And then the second part of your question was related to energy.

Yes, energy through the cycle, guys.

And as you picked up, we didn't have any energy charge-offs for the quarter and we're now at the low end of the guidance of roughly $65 million cycle to date.

At this point, we think the guidance remains appropriate given what we're hearing from our clients, what we're seeing in the industry and the way the portfolio is performing.

We think that we're going to have the potential for both some level of recoveries over the next few quarters as well as the potential prospect for some additional losses, but we've already provided those -- for those in the loan loss reserves.

We'll continue to monitor the portfolio and the market and assess the environment for additional loss potential.

But at this point, we think the guidance remains appropriate.

Having said that, we offered that guidance back in the first quarter of 2016 and we feel like we did a pretty darn good job with that.

If things change, we'll continue to assess.

But at this point, we think the guidance remains appropriate, but we are at the low end of that guidance at this stage of the cycle.

Our next question is from Catherine Mealor with KBW.

I jumped on late so I really apologize if this question has already been asked.

But wanted to ask about fees.

You say in your slide deck that you expect modest growth in your fee income.

Are you talking about that from second quarter levels?

Or are you more looking at the upside from fee growth as we look at kind of 2017 as a whole versus 2016?

Catherine, this is Mike.

I think really from both of those contexts.

So as John mentioned in kind of the opening remarks, we had an absolutely tremendous quarter in the second quarter related to fee income growth.

And certainly, admittedly, a couple of those items kind of fall into the category that we're calling potentially unsustainable.

But when we look at the second half of the year, what we're not saying is that all of those potentially unsustainable items won't occur at some point during the back half of the year.

The context of really kind of casting it that way is around the challenges in predicting the exact timing of when some of these additional--some of these items may reoccur.

So having said that, again, we're very pleased with the growth that we experienced in all of our noninterest income categories.

And again, there's a slide in the deck that kind of highlights those categories and every single category was up quarter-over-quarter, and we certainly would expect to be able to continue that kind of momentum going forward in that overall income statement category.

I was just going to add a little bit more color to the fee income dialogue.

There's a slide in the investor deck, Slide 5, that calls out the fee income categories that we view as lumpy.

Those are the ones that had a more impactful opportunistic revenue performance for the quarter.

The remaining fee income categories you'll see in a slide, I believe it's back at the Appendix slide, which one?

Slide 17.

Slide 17 in the deck shows all the fee income categories.

So the ones not called out on Slide 5 are the ones that we expect to see continuing improvement throughout the rest of the year and into 2018.

The ones that are in the Slide 5 of the deck are the ones that we consider lumpy.

And so as Mike said, I mean, the second quarter fee income number just was superb and we were -- I mean every category outperformed first quarter.

The work our teams have done for the past couple of years have made that sort of outcome possible.

And there really was very little gifted revenue, if I call it that, to the impressive $8 million increase quarter-to-quarter.

And if you remember, we had a $4 million handicap ready made because of the gains we had on the sale of the Hancock Horizon mutual funds that were sold in the first quarter.

So it really was a great performance.

So we're sincere in our efforts to be transparent, so we decided to quantify the outperformance portions of those lumpy fee income categories to set a more fair expectation going forward.

So when we say modest fee income improvement the rest of the year, we're talking about the categories that were not called out on Slide 5. Although as opportunities arise, we'll certainly be in position and vigorously pursue those in the third and fourth quarter.

Does that help?

It helps, that's perfect.

And then one I'll follow up on expenses.

And again, if this was asked, I apologize.

But if we think back to the slide you had out at the Gulf South Bank Conference, you talked a little bit about the outlook for 2017 expenses to be in the 4% to 5% range with FNBC.

And then if you look at this quarter's expense run rate and granted there's a lot of nonpermanent expenses in the energy as you work through the FNBC branch footprint.

But if you look at -- even if you strip those out and you look at your expense cash at the back half of the year, it looks like you're closer to about a 8% expense growth rate for this year.

So can you talk a little bit about the difference there?

And were there additional branches that you added on that you didn't expect to?

Or are there more expenses that we -- that could come out of the run rate as we move into next year?

Yes, Catherine, this is Mike again.

So no change in the number of our branches that we're consolidating related to the transaction.

Again, for the First NBC I transaction, we acquired 9 branches and we consolidated 10.

The First NBC II, we brought on 29 and then we're consolidating 25.

So the net increase in branches between the 2 transactions is we're up 3. So no change in terms of what we've already kind of done in that particular item.

So again, if we look at expenses in total, and as best we can -- again, we kind of talked about with the transactions being converted, how difficult it's become really to kind of parse out I from II and there's certainly some aspects of the 2 together that are hard to kind of parse out from everything else going on.

But as best we can, if you kind of go back and look at what we're looking at for 2017 and back out as much as we can First NBC transactions, then we're looking at expenses up year-over-year, probably about 6% to 6.5%.

And previous guidance before either the First NBC transaction was expenses up around 4% or so.

So the question really is, what's the difference between that 6.5% -- or 6.5% or so and 4%.

And a couple of items that are impacting that in the second half of the year include a higher level of incentives that we're looking at, again, mainly related to overall performance.

We're also looking at overall lower vacancy rate in the second half of 2017.

Certainly some of that is at least somewhat related to First NBC as we're using some of those folks that were acquired in that transaction to fill vacancies that we have elsewhere in the company.

And then finally, and this is not an insignificant item, but we are looking at the increased staffing in our call center again in the second half of the year, partly related to First NBC I and II, but then also related to the rollout of a new online banking platform, primarily in the August, September time frame.

So having said all of that again related to First NBC, certainly we're reconfirming our overall guidance of $0.56 per share and certainly believe that our expense levels will pare down as we go through the second half of the year as we're committing to removing the nonpermanent expenses, but then also some of these other items that I mentioned will pare down as we head into the first quarter of '18.

And Catherine, this is John.

To be clear, the bubble staffing Mike mentioned in the call center tied to the digital banking improvements that we rolled out in August and September, that begins to draw back down in the fourth quarter.

That's not a permanent expense, it's just a bubble expense for the support of that conversion.

So hopefully that makes sense.

It does.

It helps a lot.

Your next question comes from Emlen Harmon with JMP Securities.

With -- I'll ask the question on expenses a different way.

How does the 90% cost saves tie to the $4.6 million permanent FNBC expenses kind of relative to 1Q?

Because I guess, that implies kind of $180 million to $200 million starting point on the expenses.

So just trying to understand like are there -- is there kind of non-FNBC stuff in there?

Is that bubble expense that you were just talking about included in it?

Just trying to understand kind of how you get to that $4.6 million kind of permanent expense number.

Yes.

So again, combining the 2 transactions and kind of looking forward to 2018, what we're looking at for 2018 in a way where the context of permanent First NBC expenses is somewhere between $20 million and $22 million.

Again, that's both transactions combined.

And as best we can, everything associated with both of those transactions.

What's not included in those numbers are things like a temporary reduction in our vacancy rate, which I just mentioned.

And then also what we're kind of referring to is the up staffing or the bubble staffing in places like our call center.

So that's kind of separate and apart from what we kind of classify and call out as First NBC-related expenses.

So again, the $20 million to $22 million kind of relates back to First NBC's run rate of expenses in 2016 as kind of an independent company.

So that's where the 90% comes from.

Okay.

All right.

And then just on the interest income trajectory, could you -- you gave us the NIM improvement that you're expecting in the second half, could you maybe help us think -- help us -- excuse me, talk through how we should think about the NII because there were just a couple of moving pieces in the quarter with the [flub] paydown and you'd invested some security investments near the end of the quarter as well.

All right, sure.

So 2 big items that will impact net interest income in the back half of the year.

The first is we'll have a full quarter's impact in the third quarter as well as the fourth quarter related to the most recent Fed rate hike that happened on June 15, so that's number one.

And number two would be a full quarter's impact of the deployment of the excess liquidity that we acquired in the First NBC II transaction.

So again, we acquired about $1.2 billion, $1.3 billion of excess liquidity that, by the time we got to the end of June, it had been kind of fully deployed either paying down home loan debt, as we mentioned, or deployment in the bond portfolio.

So we really don't see the full quarter's impact of that item in the second quarter, but you will see that in the second half of the year, of course.

So overall, between those 2 items, we're looking at an expansion in our net interest margin of around 3 to 5 basis points.

And certainly if we're able to control deposit costs, we might have an opportunity to outperform that number a little bit.

Okay.

So I guess the other moving part to that would just be the earning asset, the average earning asset balances quarter-over-quarter.

Could you just help us out, I guess, directionally there because there are a bunch of moving -- again, a bunch of moving parts?

Yes.

So that's going to be certainly related to the loan guidance that we shared in the deck.

So that would be the primary delta or driver of an increase in earning assets aside from the carryover of averages from the second quarter.

Your next question comes from Matt Olney with Stephens Inc.

Matt Sealy on for Olney.

You mentioned controlling FNBC loan runoff as one of the challenges.

Curious if you could share with us the runoff you've seen thus far versus initial expectations and maybe thoughts going forward here.

Yes, Matt, this is Mike.

I'm not going to share specific numbers related to that, but the loan runoff so far has been about what we expected that would occur.

And on deposit side, the runoff also has been about expected, but then was largely kind of offset by our ability to win some of the CD money that was released into the market, again, related to the FDIC paying off the CDs from that company.

So overall, deposit runoff and loan runoff has been really within the parameters of what we expected.

Okay, great.

I saw your expectations for the second half of '17 tax rate, but any insight on the 2018 effective tax rate?

Not at this point, other than absent the noise related to the stock compensation, it will probably be somewhere in the 25% to 26% range.

But again, we'll kind of clarify that or give some more color when we talk about expectations and goals for 2018 in a little bit more specific detail later.

Okay, great.

And I didn't see a table on purchase accounting expectations that I think you've previously published.

How should we be thinking about accretion outlook going forward?

It should be fairly stable.

So the loan discount and the way we're looking at the accretion projection related to First NBC is that loan portfolio is a little bit longer in duration than what we acquired with previous acquisitions.

So it should be fairly stable for the next 3 or 4 quarters.

One other item that's out there certainly related to the termination of our loss share agreement is that we won't have the amortization of the IA going forward.

I think we kind of called that out in the deck as well as some of the comments.

That was about $1.3 million a quarter.

Okay.

And then circling back on expenses, just based on -- or circling back on the outlook being down $3 million to $5 million linked quarter in 3Q.

What's assumed for ORE gains?

I think these are positives in 2Q.

Yes, we're not making any assumptions right now related to any additional ORE gains in the back half of '17.

Okay.

And then just one more, if I could.

On the fee income line item, it sounds like 2Q had some items that were really strong and may not be sustainable.

What's a good run rate?

And how should we think about this for 3Q, especially when you're considering the expected decrease in the IA amortization?

Well, hesitate to quantify a run rate number.

But there's again, if you look at those 4 items on Slide 5 that we kind of called out as potentially unsustainable, what we're not saying is those items won't ever reoccur.

It really is just a little bit of uncertainty around the predictability of which quarter we might get another co-arranger fee income item in or have some ORE gains.

So certainly, we need to be -- I would caution folks to be -- to have that in their mindset when they look at our numbers that these 4 items again a little bit unpredictable around when they will occur in future quarters.

But again, they are part of our business model, and we're not saying that they won't -- never reoccur.

Right.

Okay, that's fair.

And I'm sorry, just one last one, if I could slip in on the FHLB paydown.

I think you called that $800 million paid off in the quarter.

What was the rate on that?

And when during the quarter was that paid down?

Most of those paydowns were completed toward the end of quarter, so the first part of June.

And then the rate that they were paid down at was a little bit less than 80 basis points.

(Operator Instructions) Your next question comes from Christopher Marinac with FIG Partners.

I just wanted to ask a credit quality question or two.

When you look at the nonenergy criticized, the small increase we saw that quarter, is that likely to continue edging higher?

Or is there a reason that, that would back off in future quarters?

Chris, this is Sam.

There's nothing specific or systemic in that increase.

It's -- I would expect just a normal economic circumstances trying to really drive that.

So I don't have an expectation it's going to go higher, but I can't tell you that I have an expectation it's going to go lower either.

It's just sort of the nature of sort of what we see in the normal cycle of things.

So no single credit driving that.

It's just sort of the normal sort of bumps you see as you manage an active portfolio.

Okay.

And then Sam, as we look at Slide 13 about the reserves, is there a mark from FNBC that we should be adding back to kind of look at the whole picture beyond, just what you have in the allowance?

Or how should you think of that?

I don't have that number on the tip of my tongue, but we do have a market.

Yes, here, Chris, on Slide 20 in the investor deck.

You'll see in that lower right-hand corner, we have some information about the specifics related to the 2 transactions.

So the loan mark between the two is about $58 million.

Got it.

So if we think of both of those combined, that really is a broader coverage of the 80 basis points or even high 80s that you're showing there.

That's right.

And I'm showing no further questions.

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

Okay.

Well, thanks, Leanne.

Thanks everyone for attending the call, and we look forward to speaking with you again next quarter.

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

This concludes the program, and you may all disconnect.

Everyone, have a great day.