Q3 2019 Earnings Call
Good day, ladies and gentlemen, and welcome to the Hancock Whitney corporations third quarter 2019 earnings Conference call. At this time all participants are in listen only mode. Later, we will conduct a question and answer session and instructions will follow that Todd.
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As a reminder, this call may be recorded I'd now like to introduce your host for todays conference 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 then the company's most recent 10-K, including the risks and uncertainties identified there in Hancock whitney's ability to accurately project results.
Our 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 are forward looking statements Hancock Whitney 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.
In addition, some of the remarks. This morning contain non-GAAP financial measures you can find reconciliations to the most comparable GAAP measures in our earnings release and financial tables.
Presentation slides included in our 8-K are also posted with the conference call webcast link on the Investor Relations website.
We were reference some of these slides in today's call.
Participating in today's call or John here, Stun, President and CEO , Mike Achary, CFO and Crystal Luca Chief Credit Officer, I will now turn the call over to John Harris done.
Thanks, Tricia and good morning, everyone, a third quarter earnings were solid despite noise from the linked quarter closing and simultaneous integration of myself. We also noted positive operating leverage reduced NPL, specifically TD ours outperformed in fee income control expenses, all leading to a topline driven b to street consensus.
EPS for the quarter was 77 cents. This included almost 29 million or 26 cents per share our merger related expenses.
Operating leverage was better by almost 6 million with revenue up 7 million linked quarter and operating expense up only 1.2 million again, there were only 10 days of mid South included in our results. So no significant operating earnings impact in third quarter, while our NIM narrowed four basis points to the quarter a recovery from a support.
Services energy credit and a proactive stance from reducing deposit costs helped offset a fed cut in rights granted results were a bit mixed with higher charge offs related to a one off RBL bankruptcy and criticized loans were up due to the addition of itself and the recent snick exam, Michelle added 82 million of energy loans most Lisa.
Port services to our portfolio, while this added to our overall energy exposure, our organic reductions in energy exposure resulted with total energy remaining below 5% of total loans, we expect to see continued reductions in our energy exposure through the next several quarters as previously announced our acquisition of mid South Bancorp close up.
For Twentyth effective September 21st during that same weekend, we also converted Ms South class to our technology systems close to indoor consolidated 20 branches and welcome to MSL employees as new Hancock wouldn't you associates I want to take this opportunity to congratulate the teams on both sides of the transaction.
And for an on time under budget integration with exceptional quality and attention to client experience. Our capital remains strong with T.C. up seven basis points from June thirtyth, ending the quarter at 8.82%.
<unk> declined 15 basis points from the mid South acquisition due to a higher level of goodwill booked with the transaction. However, net retained earnings were strong enough to help offset that and still build capital. We believe this acquisition is a good example of our overall M&A strategy infill markets with a high level of cost saves Adam.
Heatedly accretive to EPS. It also gives us opportunities for growth in new markets in North, Louisiana, and the Dallas Metropolitan area.
With a solid stream of earnings and strong capital late in the quarter. Our board authorized an increase to buyback authorization of 5.5 million shares. This authorization is good through 2020, if we expect to apply it to repurchase stock when the timing as appropriate as a reminder, we issued just over 5 million shares to former mid south shareholder.
And we welcome those new shareholders to handcuff with.
With regards to see as soon as we do acknowledge the operating environment, especially the interest rate environment has significantly changed since January our goals do not include today's rate environment, which is negative but they also did not include any M&A or stock repurchase activity mid south as a positive to operating leverage and will partially offset.
The impact of lower rates during the fourth quarter, we will finalize our updated business plan and will reset any of these metrics as appropriate during the process. As we do every January we will announce new see assos and discuss positive and negative variances during our January call with that I'll turn the call over to Mike for a few additional common.
Yes and details.
Thanks, John Good morning, everyone earnings for the third quarter, excluding the merger related expenses associated with the mid South acquisition four dollarsthree up two cents from last quarter.
I'll start off by first running through an update around what we acquired with MSL. The acquired loan book totaled 785 million net of a 41 million or 5% loan Mark.
As a result of an extensive cleanup process by MSL only 48 million of the acquired portfolio came over his criticized.
What we acquired fits nicely with our strategy of a more granular and better yielding loan book to that end to yield on the acquired portfolio was a healthy 5.57%.
Slide eight in our earnings deck shows the impact on our loan portfolio all the acquired book as well as this quarter's organic loan production.
And the sales deposit portfolio fits nicely as well.
1.3 billion of low cost core deposits were acquired with a 38 basis point cost, which of course is beneficial to our overall NIM.
We put that money to work right away and pay down some higher cost borrowings late in the quarter.
Changing topics and moving to our operational results a bright spot we think for the quarter was our NIM management. So I reported NIM did compress four basis points from last quarter about where we had guided.
Lots of moving pieces and parts.
Slide 14 details the major items driving the change.
As we report for several quarters now the once again interest recoveries were part of our results into third quarter interest recoveries drove a five basis point positive change in the NIM as a reminder, last quarter, we reported three basis points of recoveries.
As we increase the bond purchases this quarter in anticipation of the MSL acquisition, our mix of earning assets suffered a bit as we increase the size of the bond portfolio that dynamic impacted the NIM by about four basis points.
The size of the bond portfolio will come down to our targeted level of about 6.2 billion early in the fourth quarter.
The lower rate environment drove our NIM to the higher end of our two to four basis point guidance with rate cuts in July and September impacting the quarters NIM.
Also lower mortgage rates led to a higher level, a premium amortization up almost a million and compressing the NIM by one basis point.
Finally, a favorable change in our mix of borrowings help the balance sheet as we paid down some higher costs funding leading to a three basis point impact to the margin.
Looking forward, we will continue to be proactive with our efforts to as much as possible offset the impact of future rate cuts by reducing deposit costs.
As you can see from the chart on the bottom left of Slide 14, we were proactive in lowering deposit costs during the quarter and we'll continue to do so.
Our guidance for the fourth quarter NIM is for additional narrowing of two to four basis points.
Fee income was a bright spot for the quarter.
Specialty fee income continues its positive trends within noninterest income with quarter over quarter increases in syndication fees and derivative income.
The quarter also reflects increases in most other business lines and with only 10 days of MSL in the quarter the impact from that transaction was minimal.
As a result of the continued strong performance of most business lines, we increased our overall guidance for year over year growth in noninterest income to around 10%.
Operating expense was another bright spot for the quarter with reported increase of only 1.2 million.
Main driver. This increase was the higher level of annual valuation adjustments on foreclosed assets, partly offset by gains on sales of properties.
As we factor in MSL for the full fourth quarter, we increased our year over year guidance for expense growth slightly to 7% to 8% we expect to harvest the remaining cost saves by year end and we'll have MSL fully integrated by January 1st of 2020.
As we noted in our guidance when fully reflected next quarter, we would expect that the MSL related merger costs to come in about four to 6 million lower than initially projected.
One final item before I turn the call back to John for Q1 <unk>.
Slide 13 details our current expectations around the impact of Cecil.
Please note that the guidance of 20% to 30% increase any allowance for credit losses does not yet include MSL.
I will now turn the call back over to John .
Thanks, Mike Katherine, let's just go straight to questions.
Thank you as a reminder to ask a question you will need to press star one on your telephone to withdraw your question pressed the bound.
Again to ask a question press star one.
Please standby we've compiled the culinary roster.
Our first question comes from Michael Rose with Raymond James Your line is open.
Hey, good morning, everyone. How are you want to Michael.
Yeah, maybe we could just start on the margin Mike I appreciate the the two to four basis points.
Guidance, what does that assume in terms of potential rate cuts. It looks like it was pretty high probability we got one on October .
As well as you know thoughts around the ability to further reduce deposit costs and if you can remind us.
How much of the book roughly is I exception price. Thanks.
Sure I'd be glad to Michael.
So as we think about the fourth quarter, we certainly have a couple of headwinds to kind of overcome.
We kind of called out in the numbers that we had had five basis points of interest recoveries this past quarter.
Certainly we continue content can continue to have some level of interest recoveries, but certainly aren't expecting that level or magnet.
The other items, a course would be the full quarter impact other September rate.
And we are assuming an October late October breakout as well so those two cuts the full impact the September partial impact of October is kind of built into our guidance.
Now on the on the positive side of course will have a full quarters impact of MSL, what kind of calling out the impact of MSL on our NIM at around four basis points as opposed to the three we had kind of talked about had announcement and then finally.
In the fourth quarter, we usually have a pretty nice inflow de da deposits plus we didn't pay down some of our bar Wayne.
Specifically brokered Cds in the third quarter. So so that will kind of round out the guidance to the narrowing of tutor for.
You are you also asked about deposit costs.
We have been proactive in reducing our deposit costs. This quarter I think there's a slide nine chart in the the materials that really kind of called that out and as we mentioned in his prepared comments, we'll continue to be proactive entities posit costs. So that's something that we did last quarter and will continue.
Due to do so going forward.
Mike that's great color.
Maybe just as a follow up because we've heard on a couple of calls. This morning can use described just overall the outlook for the energy portfolio. I know there was a charge off this quarter you guys appear to have pretty healthy reserves, but can you just give us a high level outlook for us for energy migration from.
Yeah. Thanks, we do we actually built those reserves a little bit this quarter, but I'll turn it over to Chris looked at it gives them a some color around the energy book.
Yes so.
During the quarter, obviously, we had at a one off charge in the RBL and.
We did have a little additional migration in the criticized loan level.
We don't really see substantial increase migration in that portfolio.
Matter of fact, there is some opportunity for some upside, but you know as the cycle kind of continues to wind forward. We continue to watch for some credits in the portfolio and where they might.
That might help but I don't really see anything dramatic in the near future related to our energy portion of our portfolio.
So the the issues that you're seeing or they are they largely unrecovered.
Our credits from from years ago on the on the service side or are these really new issues kind of popping up at this point or is it just kind of legacy issues that are just resolving themselves out.
Yes so.
Most of them are more legacy related credits.
None of the newer credits that were that we booked in the past year or two.
Really presenting issues for us. So we're just continuing to kind of work through some unique issues with those individual credits.
Michael This is John just to give you a little more called it may be helpful. The the migration that Chris mentioned earlier was actually now RBL side not the services.
We actually saw improvement and the service through the quarter without the migration.
Yes.
Women I myself in just a comment.
We would have actually had a fairly healthy reduction in criticized net of the RBL migration that was really.
More centered in the second.
Tim.
To be specific about the credits.
We're not new credit issues these were more.
Organizations that had been grappling with issues for sometime and with a lack of liquidity available.
Specifically areas they are dependent on in the past they went into bankruptcy and ended up actually showing up enough and npls.
This is that okay. So that it is and this this next example.
Drove some of the increase okay.
Thanks for taking my questions guys appreciate it and as a reminder, and I think we put in the deck.
100% Snick exam downgrades reflected in the numbers. So there's there's no trailing.
Comes from the stick exam, we expect to bear in Q4.
Got it thanks again.
You bet.
Thank you and our next question comes from Brad Milsaps with Sandler O'neill. Your line is open.
Hey, good morning.
Mike maybe I wanted to start with expenses.
You really good cost control this quarter, obviously fee income continues to do really well for you guys, which typically also.
Some higher expense quarters, but I didn't play out that way this quarter just kind of curious.
You know kind of the puts and takes on the expense side and kind of how.
You guys, you're thinking about controlling those costs going forward, particularly with with missile coming into the fold.
Sure absolutely, Brad so well see a good quarter in terms of our ability to control expenses.
Expenses only up about $1.2 million, we kinda called out the biggest negative for the quarter and that was the 1.7 million dollar increase in whole or re expense and I think the materials.
Good job of kind of calling out in explaining what would that difference was.
But I think the other things certainly that we're doing is we're doing a good job of creating opportunities to reduce costs. So that we continue to invest in the company.
Last quarter, we talked about some of the digital and other related.
Investments that we're making we're continuing to make those investments.
They don't show up this quarter in the.
On the list of variances because again I think we were able to create some room for those investments in expenses.
But those items will continue going forward now certainly in the fourth quarter.
Item I'll call out is we'll have some what we call temporary expenses related to MSL as we kind of complete our process of harvesting the cost saves.
So again.
You know reaffirming the previous guidance that we've given around the 50% to 55% cost saves and having that fully reflected in place by year end. So we can.
Walk into 2020.
With an efficient operations related to that transaction.
And maybe bigger picture do you think with the NIM compression that that you expect you'll be able to continue to generate positive operating leverage as you move out over the next several quarters or is the revenue environment is such that it will make it more challenging.
Well certainly it's a challenging with the the rate environment, and we kind of talked about our NIM guidance for the fourth quarter. We have again, a full quarters impacted September rate Cod and there were assuming the fed does move in October has a right now we have no additional rate cuts projected for the rest of the.
Year, so certainly.
If if that happens in that manner that will be helpful to revenue.
We also as a reminder, typically have from one of the better quarters for loan growth in the fourth quarter from the seasonal point of view so.
We put all that together certainly we're looking to continue to generate positive operating leverage into the fourth quarter and kind of beyond.
Currently the operating leverage that we generated in the third quarter was was significant.
Don't know that we'll be at that same level in the fourth quarter, but certainly positive going for.
Okay, Great and then one last follow up does your NIM guidance does that include a impact from.
Any additional accretion from mid south or any recoveries, there would that be above and beyond.
You know kind of that that two to four basis points of compression.
We have some level of accretion kind of built into the fourth quarter numbers.
At this point no specific recoveries so for the fourth quarter.
Great all right. Thank you guys.
Thank you and our next question comes from Matt Olney with Stephens. Your line is open.
Hey, Thanks, good morning, guys.
Matt.
Wanted to start on the the fees obviously good quarter on fee income.
I think mid south will bring over a few million dollars to fee income in the fourth quarter.
You just look like the 10% full year guidance on fee income growth could be a little conservative can you just walk us through some of the various lines.
And help us appreciate that.
What we should be looking forward in the fourth quarter and are there any lines in there that you think could be.
Additionally, lower in the fourth quarter.
Matt This is John I'll start and that Mike can add some commentary if you'd like to.
The fourth quarter, let's first talk about those things that have the potential to diminish and it's purely seasonal once you get passed the middle of November about the end of January typically.
Mortgage transactional business tails off a bit.
As to.
Even in this environment the swaps.
It's not because any appetite changes just things going a little is.
That particular time of the year all other business lines would be expected to perform well and certainly with the right drop in September and yes. The one in October lay doesn't happen.
Our our team expresses some.
Potential thought that mortgage and swap derivative income may actually outperform.
That normal seasonal reduction so it's pretty hard to predict because we don't know what the rate cut may or may not be in October , but generally speaking from a seasonal perspective fourth quarter dips a little from Q4 tied primarily to mortgage and repass, specifically if the right cut stimulates production then that diminishment may not.
Occur.
And so that the 10% basically trying to.
Slit the gap, there and come up with something we think is a reasonable expectation.
That's helpful and then what about the impact from mid South I know that probably that's been shrinking and you've been causing some branches could that fee income run rate. There also slow compared to what we've seen over the last few quarters from itself. There's a couple of move in parks in its a good question.
It's worth noting the.
Hancock Whitney's fee income penetration of revenue is right at 27% where mid south.
Lease for the second quarter, which was the only close quarters got to referred to was 23.
So there's a fair number of products.
That have not yet at least not from the core bank.
To the mid South clientele, that's not going to all materialize immediately because there's always some distraction as the team members get comfortable and reach a cadence and offer in that type of product line. So.
There is a good fee income potential to come forward.
Note that mid South really didnt have a mortgage business to speak of so there really is no downside Q4 to Q3 in that book for fee income.
Related to mortgage because there wasn't any in the third quarter to cause it to diminish if that makes sense and.
Yes derivatives and swaps were certainly not part of that book either so the reasons for a pullback in Q4 for Hancock with not apply to the MSL book.
Got it Okay. That's helpful. And then just as a follow up I. Appreciate the detail that you gave us on slide eight that talks about the remix that the loan portfolio.
It looks like the last few quarters had a pretty high correlation with the prime rate I'm showing that new loan yields prime minus 25, Bips on average are somewhere close to that.
Is that the right way to think about the new loan yields as we move for the next few quarters in a in a lower interest rate environment Prime minus 25.
Well, that's a tough one.
I think it's fair to say we are still even in Q4 excuse me three and even in late Q3, even with the rate reduction in September we are still booking business add up.
ER positive gap to portfolio.
Get two or three more rate decreases that certainly becomes more challenging and so.
We still believe that the new loan yields have an opportunity together with the re mix to want to help with overall yield but.
Every two or three month rate decreases certainly are challenged.
And that this is Mike I think I.
I would add to that the fact that the correlation with prime rate for the kind of loans were making.
Around our remix focus I think is pretty coincidental I don't know that that's a real costs in the five or is a big bigger driver and proud for us.
Okay. That's helpful. Thank you guys.
You bet. Thanks for the question.
Thank you and our next question comes from Kathryn Miller with KBW. Your line is open.
Thanks, Good morning.
Catherine.
I wanted to ask a question on gross.
Feels like we were expecting kind of mid single digit growth rate, excluding mid south going into the back half of the year end and now we've got mid single digit even with mid South and so can you just kinda talk about some of the growth dynamics in your portfolio, where you're seeing some of the slowdown where you see maybe more opportunity going into the fourth quarter and then.
If you can provide it kind of a growth rate that you would assume the appropriate for us to think about for next year.
Catherine I'll go ahead, and start and then and handed over to John color, but specifically for the fourth quarter. When we think about growth in terms of the guidance that we've given.
Single digits average growth year over year.
We're looking at specifically is probably something between four and a half and 5.5% so right at about 5% or so and that should translate into fourth quarter into period growth of about 275 to 325 million.
So as you know.
As I mentioned earlier, the fourth quarter tends to be or better gross order from a seasonal point of view.
So certainly there could be some potential to outperform that growth a bit specifically related to MSL. We really have assumes no additional growth in the fourth quarter, just yet related to that book. So if we're able to to grow the acquired book than certainly that some upside to those number.
As as well.
So hopefully that makes sense.
Okay. So on a dollar basis, you're saying fourth quarter ended period address it should be between 275 and 325.
That's correct, yes, that's right Okay, that's a big jumps into what we see in the past couple of quarters.
The and this is John is in addition to the coughing module good job given that the only thing I would add as.
Pipeline before into Threeq.
Yes.
Call it 27% better than in the quarter June so the pipeline improvement coupled with.
Some possibilities not factored in the number might gave about MSL recovering some business that may have dwindling path to add in the past couple of years.
With the seasonal line utilization increases we always get.
In Q4 are all tailwinds to growth.
And just as a reminder.
Remember there were we were.
Now working around having that 5% loan concentration energy being a high watermark and bringing that total down so the reduction of about 60 million in the organic Hancock winning book for energy wasn't deliberate actions. We took in Threeq you to make room. If you will for the additional volume coming in from the mid South.
Acquisition and so.
That was a cost for growth too. So the storyline for Threeq you while growth was not impressive spreads remained good and the mix change was good.
And.
And it also allowed us to reduce the energy number down below what we have as our towers. So there were a few moving pieces there, but it wasn't a lack of production. It was more the mixed changes, we're making the balance sheet that we believe are good for value.
In the long run.
That's really helpful. And then maybe one other question on buybacks.
Hi buyback now that mid South has closed can you talk a bit about how aggressive you feel as you will be on that buyback is it.
More than manage the capital levels or how how price sensitive you are like that.
Catherine This is Mike. So so obviously, we disclose at the board increase that authority to the five and a half million and what I'll say about that is certainly we intend to exercise that authority and I think you'll see us do that over the coming coming months.
Great.
Thank you.
Welcome. Thank you.
Thank you as a reminder, if you'd like to ask a question press star one on your Touchtone telephone.
I'm showing no further questions in the queue I'd like to turn the call back to Mr., John Anderson for any closing remarks.
Thank you Catherine and thanks to everyone for your interest Hancock Whitney organization, I know you're busy and we appreciate you dialing in this call have a great.
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