Good day, ladies and gentlemen, and welcome to the Hancock Whitney Corporation's Third Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time. As a reminder, this call may be recorded. I would now like to introduce your host for today's conference, Tricia 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 published with yesterday's release and presentation and in the company's most recent 10 ks, including the risks and uncertainties identified therein. Hancock Whitney's ability to accurately project results or predict the effects of future plans or strategies or predict market or economic developments 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 Whitney undertakes no obligation to update or revise any forward 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. The presentation slides included in our 8 ks 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 Acree, CFO and Chris DeLuca, Chief Credit Officer. I will now turn the call over to John Hairston.
Thanks, Tricia, and good morning, everyone. Our 3rd quarter earnings were solid despite noise from the late quarter closing and simultaneous integration of Mid South. We also noted positive operating leverage, reduced NPLs, specifically TDRs, outperformed in fee income, control expenses, all leading to a top line driven beat to street consensus. EPS for the quarter was $0.77 This included almost $29,000,000 or $0.26 per share of merger related expenses. Operating leverage was better by almost $6,000,000 with revenue up $7,000,000 linked quarter and operating expense up only 1,200,000 dollars Again, there were only 10 days of Mid South included in our results, so no significant operating earnings impact in 3rd quarter.
While our NIM narrowed 4 basis points in the quarter, a recovery from a support services energy credit and a proactive stance on reducing deposit cost helped offset a Fed cut in rates. Credit 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 Mid South and the recent SNC exam. Mid South added $82,000,000 of energy loans, mostly support services to our portfolio. While this added to our overall energy exposure, our organic reductions in energy exposure resulted with total 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 closed September 20, effective September 21. During that same weekend, we also converted Mid South clients to our technology systems, closed and or consolidated 20 branches and welcomed MSL employees as new Hancock Whitney Associates. I want to take this opportunity to congratulate the teams on both sides of the transaction for an on time under budget integration with exceptional quality and attention to client experience. Our capital remains strong with TCE up 7 basis points from June 30, ending the quarter at 8.82%. TCE 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 and A strategy. Infill markets with a high level of cost saves and immediately 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 increased buyback authorization of 5,500,000 shares.
This authorization is good through 2020, and we expect to apply it to repurchase stock when the timing is appropriate. As a reminder, we issued just over 5,000,000 shares to former Mid South shareholders and we welcome those new shareholders to Hancock Whitney. With regards to CSOs, 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 and A or stock repurchase activity. Mid South is a positive to operating leverage and will partially offset the impact of lower rates.
During the Q4, we will finalize our updated business plan and we'll reset any of these metrics as appropriate during the process. As we do every January, we will announce new CSOs and discuss positive and negative variances during our January call. With that, I will turn the call over to Mike for a few additional comments and details.
Thanks, John. Good morning, everyone. Earnings for the Q3, excluding the merger related expenses associated with the Mid South acquisition, were $1.03 up $0.02 from last quarter. I'll start off by first running through an update around what we acquired with MSL. The acquired loan book totaled $785,000,000 net of a $41,000,000 or 5% loan mark.
As a result of an extensive cleanup process by MSL, only $48,000,000 of the acquired portfolio came over as criticized. What we acquired fits nicely with our strategy of a more granular and better yielding loan book. To that end, the yield on the acquired portfolio was a healthy 5.57%. Slide 8 in our earnings deck shows the impact on our loan portfolio of the acquired book as well as this quarter's organic loan production. MSL's deposit portfolio fits nicely as well.
The $1,300,000,000 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 paid 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 our reported NIM did compress 4 basis points from last quarter, above what we had guided, but with lots of moving pieces and parts. Slide 14 details the major items driving the change.
As we report for several quarters now, but once again interest recoveries were part of our results. In the 3rd quarter, interest recoveries drove a 5 basis point positive change in the NIM. As a reminder, last quarter, we reported 3 basis points of recoveries. As we increased the bond purchases this quarter in anticipation of the MSL acquisition, our mix of earning assets suffered a bit as we increased the size of the bond portfolio. That dynamic impacted the NIM by about 4 basis points.
The size of the bond portfolio will come down to our targeted level of about $6,200,000,000 early in the 4th quarter. The lower rate environment drove our NIM to the higher end of our 2 to 4 basis point guidance, with rate cuts in July September impacting the quarter's NIM. Also, lower mortgage rates led to a higher level of premium amortization, up almost 1,000,000 dollars and compressing the NIM by 1 basis point. Finally, a favorable change in our mix of borrowings helped the balance sheet as we paid down some higher cost funding, leading to a 3 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 will continue to do so. Our guidance for the 4th quarter NIM is for additional narrowing of 2 to 4 basis points. Fee income was a bright spot for the quarter. Specialty fee income continued its positive trend within non interest 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 non interest income to around 10%. Operating expense was another bright spot for the quarter with a reported increase of only 1,200,000 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 4th 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 1, 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 $4,000,000 to $6,000,000 lower than initially projected.
One final item before I turn the call back to John for Q and A. Slide 13 details our current expectations around the impact of CECL. Please note that the guidance of a 20% to 30% increase in the allowance for credit losses does not yet include MSL. I will now turn the call back over to John.
Thanks, Mike. Catherine, let's just go straight to questions.
Thank you. Our first question comes from Michael Rose with Raymond James. Your line is open.
Hey, good morning, everyone. How are you?
Good morning, Michael.
Hey, maybe we can just start on the margin, Mike. I appreciate the 2 to 4 basis points guidance.
What does
that assume in terms of potential rate cuts? It looks like there's pretty high probability. We get 1 in October, as well as thoughts around the ability to further reduce deposit costs. And if you can remind us how much of the book roughly is exception price?
Sure. I'd be glad to, Michael. So as we think about the Q4, we certainly have a couple of headwinds to kind of overcome. We kind of called out in the numbers that we had, had 5 basis points of interest recoveries this past quarter. Certainly, we continue can continue to have some level of interest recoveries, but certainly aren't expecting that level of magnitude.
The other items, of course, would be the full quarter impact of the September rate cut, and we are assuming a late October rate cut as well. So those two cuts, the full impact of September, partial impact of October is kind of built into our guidance. Now on the positive side, of course, we'll have a full quarter's impact of MSL. We're kind of calling out the impact of MSL on our NIM at around 4 basis points as opposed to the 3 we had kind of talked about at announcement. And then finally, in the Q4, we usually have a pretty nice inflow of DDA deposits, plus we did pay down some of our borrowings, specifically brokered CDs in the Q3.
So that will kind of
round out the guidance to the narrowing of 2% to 4%. You also asked about deposit costs. We have been proactive in reducing our deposit costs this past quarter. I think there's a slide and a chart in the materials that really kind of call that out. And as we mentioned in the prepared comments, we'll continue to be proactive in reducing our deposit costs.
So that's something that we did last quarter, and we'll continue to do so going forward.
Mike, that's great color. Maybe just as a follow-up because we've heard on a couple calls this morning. Can you just describe 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 high level outlook for energy migration from here?
We do. We actually built those reserves a little bit this quarter. But I'll turn it over to Chris to Luca to give some color around the energy book.
Yes. So during the quarter, obviously, we had the one off charge in the RBL, and we did have a little additional migration in the criticized loan levels. We don't really see substantial increased migration in that portfolio. Matter of fact, there is some opportunity for some upside. But as the cycle kind of continues to wind forward, we continue to watch for some credits in the portfolio and where they might head.
But I don't really see anything dramatic in the near future related to our energy portion of our portfolio.
So the issues that you're seeing, are they largely unrecovered credits from years ago 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 now?
Yes. So most of them are more legacy related credits. None of the newer credits that we've booked in the past year or 2 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 color that may be helpful. The migration that Chris mentioned earlier was actually in the RBL side, not the services side. And we actually saw improvement in the services book through the quarter and without the migration
and I'm
moving MSL from this particular comment, We would have actually had a fairly healthy reduction in criticized net of the RBL migration that was really more centered in the snaking sand. And to be specific about the credits, these were not new credit issues. These were more organizations that had been grappling with issues for some time. And with the lack of liquidity available, specifically areas they depended on in the past, they went into bankruptcy and ended up actually showing up in NPLs. Does that help?
Okay. So it is and this SNCC exam helped drove some of the increase. Okay. Thanks for taking my questions guys. Appreciate it.
Yes. And as a reminder, I think we put in the deck 100% of the SNCC exam downgrades were reflected in the numbers. So there's no trailing items from the SNCC exam we expect to bear in Q4.
And our next question comes from Brad Milsaps with Sandler O'Neill.
Mike, maybe I wanted to start with expenses. Really good cost control this quarter. Obviously, fee income continues to do really well for you guys, which typically also means some higher expense quarters, but it didn't play out that way this quarter. Just kind of curious kind of the puts and takes on the expense side and kind of how you guys are thinking about controlling those costs going forward, particularly with missile coming into the fold?
Sure. Absolutely, Brad. So yes, a good quarter in terms of our ability to control expenses. Expenses only up about $1,200,000 We kind of called out the biggest negative for the quarter, and that was the $1,700,000 increase in ORE expense. And I think the materials do a good job of kind of calling out and explaining what 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 can 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 list of variances because, again, I think we were able to create some room for those investments and expenses. But those items will continue going forward.
Now certainly in the 4th quarter, one 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, reaffirming the previous guidance that we've given around the 50% to 55% cost saves and having that fully reflected and in place by year end so that we can walk into 2020 with an efficient operation related to that transaction.
And maybe bigger picture, do you think with the NIM compression 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 is such that it will make it more challenging?
Well, certainly, it's challenging with the rate environment. And we kind of talked about our NIM guidance for the Q4. We have, again, a full quarter's impact of the September rate cut, and then we're assuming the Fed does move in October. As of right now, we have no additional rate cuts projected for the rest of the year. So certainly, if that happens in that manner, that will be helpful to our revenue.
We also, as a reminder, typically have one of the better quarters for loan growth in the Q4 from a seasonal point of view. So when we put all that together, certainly, we're looking to continue to generate positive operating leverage into the Q4 and kind of beyond. Certainly, the operating leverage that we generate in the Q3 was significant. I don't know that we'll be at that same level in the Q4, but certainly positive
going forward.
Okay, great. And then one last follow-up. Does your NIM guidance, does that include impact from any additional accretion from Mid South or any recoveries there? Would that be above and beyond kind of that 2 to 4 basis points of compression?
No. We have some level of accretion kind of built into the 4th quarter numbers. At this point, no specific recoveries though for the Q4.
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.
Good morning, Matt.
Wanted to start on the fees. Obviously, good quarter on fee income. I think Mid South will bring over a few $1,000,000 of fee income in the Q4. It just looked 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 what we should be looking for in the Q4?
And are there any lines in there that you think could be sequentially lower in the Q4? Matt,
this is John. I'll start and then Mike can add some commentary if you'd like to. The Q4, let's first talk about those things that have typically mortgage transactional business tails off a bit as do even in this environment the swaps. It's not because any appetite changes, just things get a little bit busy that particular time of the year. All other business lines would be expected to perform well.
And certainly with the rate drop in September and if the one in October late does indeed happen, 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, 4th quarter dips a little from Q4 tied primarily to mortgage and refi specifically. If the rate cut stimulates production, then that diminishment may not occur. And So that the 10% is basically trying to split 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 portfolio has been shrinking and you've been closing some branches. Could the fee income run rate there also slow compared to what we've seen over the last few quarters from Mid South?
There's a couple of moving parts. It's a good question. It's worth noting the Hancock Whitney's fee income penetration of revenue is right at 27%, where Mid South's at least for the Q2, which was the only closed quarter we've got to refer to was 23%. So there's a fair number of products that have not yet been 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 in offering that type of product line.
So there is a good fee income potential to come forward. Note that Mid South really didn't 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 Q3 to cause it to diminish, if that makes sense. And the derivatives and swaps were certainly not part of that book either. So the reasons for a pullback in Q4 for Hancock Whitney would not apply to the MSL book.
Got it. Okay. That's helpful. And then just as a follow-up, I appreciate the details that you gave us on Slide 8 that talks about the remix of the loan portfolio. And it looks like the last few quarters have a pretty high correlation with the prime rate.
I'm showing the new loan yields prime minus 25 bps on average or somewhere close to that. Is that the right way to think about the new loan yields as we move forward the next few quarters in a lower interest rate environment, probably minus 25?
Well, that's a tough one. I think it's fair to say we are still even in Q4 excuse me, Q3 and even in late Q3, even with the rate reduction in September, we're still booking business at a positive gap to portfolio. Get 2 or 3 more rate decreases, that certainly becomes more challenging. And so we still believe that the new loan yields have an opportunity together with the remix to help with overall yield, but every 2 or 3 month rate decrease is certainly our challenge to that.
And Matt, this is Mike. I think I would add to that. The fact that the correlation with prime rate for the kind of loans we're making around our remix focus, I think, is pretty coincidental. I don't know that that's a real cause and effect.
LIBOR is a bigger driver than Prime for us.
Okay. That's helpful. Thank you, guys.
You bet. Thanks for the question.
Thank you. And our next question comes from Catherine Mealor with KBW. Your line is open.
Thanks. Good morning.
Hi, Catherine.
I wanted to ask a question on growth. It feels like we were expecting kind of a mid single digit growth rate excluding mid south going into the back half of the year and now we've got mid single digit even with Mid South. And so can you just kind of 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 Q4? And then if you can provide a kind of a growth rate that you would assume to be appropriate for us to think about for next year?
Catherine, I'll go ahead and start and then hand it over to John for color. But specifically for the 4th quarter, when we think about growth in terms of the guidance that we've given of mid single digits average growth year over year, we're looking at specifically is probably something between 4.5% and 5.5%, so right at about 5% or so. And that should translate into 4th quarter end of period growth of about $275,000,000 to 325,000,000 dollars So as you know, though, as mentioned earlier, the 4th quarter tends to be our better growth quarter 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 assumed no additional growth in the Q4 just yet related to that book.
So if we're able to grow the acquired book, then certainly that's some upside to those numbers as well. So hopefully that makes sense.
Okay. So on a dollar basis, you're saying 4th quarter end of period growth should be between $2.75 $3.25
$3.25 That's correct, yes.
That's right. Okay. That's a big jump from what we've seen in the past couple of quarters.
Well, it would be. And this is John. And in addition to the comp, I think Mike did a good job giving that comp. The only thing I would add is that the pipeline for end of 3Q is, I'm going to call it, 27% better than end of quarter June. So the pipeline improvement coupled with some possibility, it's not factored in the number Mike gave about MSL recovering some business that may have dwindled a tad in the past couple of years with the seasonal line utilization increases we always get in Q4 are all tailwinds to grow.
And just as a reminder, remember there was we weren't kidding around having that 5% loan concentration in energy being a high watermark and bringing that total down. So the reduction of about $60,000,000 in the organic Hancock Whitney book for energy was a deliberate action that we took in 3Q to make room, if you will, for the additional volume coming in from the Mid South acquisition. And so that was a constant growth too. So the storyline for 3Q, while growth was not impressive, spreads remained good and the mix change was good. And it also allowed us to reduce the energy number down below what we have as our tolerance.
So there were a few moving pieces there, but it wasn't a lack of production. It was more the mix changes we're making in the balance sheet that we believe are good for value in the long run.
Okay. That's really helpful. And then maybe one other question on buybacks. You announced a buyback now that Mid South has closed. Can you talk a little bit about how aggressive you feel like you'll be on that buyback?
Is it more to manage the capital levels or how price sensitive you are with that?
Catherine, this is Mike. So obviously, we disclosed that the Board increased that authority to the 5,500,000 dollars 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 months.
Great. All right. Thank you.
You're welcome. Thank you.
Thank you. I'm showing no further questions in the queue. I'd like to turn the call back to Mr. John Harrison for any closing remarks.
Thank you, Catherine, and thanks to everyone for your interest in Hancock Whitney organization. I know you're busy and we appreciate you dialing in this call. Have a great day.