Hancock Whitney Corporation (NASDAQ:HWC) Q1 2020 Results Earnings Conference Call April 29, 2020 9:00 AM ET

Company Participants

Trisha Carlson - Executive VP & IR Manager
John Hairston - President, CEO
Michael Achary - Senior EVP & CFO
Chris Ziluca - Chief Credit Officer

Conference Call Participants

Kevin Fitzsimmons - D.A. Davidson

Operator

Good day, ladies and gentlemen. And welcome to the Hancock Whitney Corporation’s First Quarter 2020 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 at that time. [Operator Instructions] As a reminder, this call may be recorded.

I would now like to introduce your host for today’s conference, Trisha Carlson, Investor Relations Manager. You may begin.

Trisha Carlson

Thank you, and good morning. During today’s call, we may make forward-looking statements. We would like to remind everyone to carefully 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. You should keep in mind that any forward-looking statements made by Hancock Whitney speak only as of the date on which they were made.

The current economic environment is rapidly evolving and changing. Hancock Whitney’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 are not guarantees of performance or results, and 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-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. 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 Chris Ziluca, Chief Credit Officer.

I will now turn the call over to John Hairston.

John Hairston

Thanks, Trisha. And good morning, everyone. We appreciate you joining us on what we know is a very busy day. I hope all of you and your families are safe and healthy. Before discussing results for the quarter, I’d like to update you on how the company has been operating and addressing the challenges of COVID-19.

As noted on Slides 5 and 6, we have modified our operations with 98% of our financial centers open and operating by appointment only in the lobbies and with fully open drive-up lanes. And approximately 70% of our corporate service area teams are working remotely. We’re also assisting our clients via mobile and online banking and in the contact center.

We have programs in place to help clients with deferrals, waivers and any other type of assistance we can provide. We have funded draws on existing and expanded lines of credits and participated in the SBA’s Paycheck Protection Program Tranche 1, originating almost 4,900 loans for a total of $1.7 billion.

We have donated $2.5 million in direct contributions to communities and associates, including food pantries and personal protection equipment for low-income neighborhoods, defenses for families fighting legal evictions and have partnered with local catering services and nationally recognized chefs and providing meals to health care workers on the frontline.

We’ve been through many environmental challenges in our history, and while this one is different, we are still applying the same core values that have guided our company for over 120 years. Mike and I will make a few comments about the quarter, and then we’ll open the call for questions.

As noted in yesterday’s release, we reported a loss for the quarter of $1.28 per share. We’re not happy to have reported a loss. However, if you look into the numbers, you will see two distinct underlying themes.

First, a blend of solid performance and loan growth with strengthened margin, net interest income and fee income, well-managed expenses and solid capital and liquidity levels. We believe pre-provision net revenue results provide a picture of that performance.

The second theme is the impact on our first quarter provision and allowance for loan losses related to CECL, COVID-19 and energy. Pandemic-related pressure on our remaining energy portfolio and potential pressure on markets and loan segments most impacted by mandated economic restrictions in our footprint led to a sizable provision for credit losses.

Because of the uncertainty related to COVID-19, we built what we believe is an appropriate loan loss reserve for potential problems. We apply specific reserves to credits in our energy portfolio related to both current crude prices and the demand pressure of COVID-19.

We also note on Slide 13 that recent resolution of several RBL credits and bankruptcy resulted in larger than anticipated charge-offs, which, in turn, drove higher reserves on remaining RBL credits.

We believe it’s prudent to recognize the possibility of additional energy company challenges in this unprecedented volatile environment. Thus, we are raising the funded energy reserve to nearly 9%.

Moody’s CECL economic models are predicting a prolonged return to normal economic activity in our region. Those models were used to build collective reserves for our loan portfolio and are detailed on Slides 15 through 18. Despite the loss for the quarter, capital remained solid.

Slide 26 in the deck shows our capital ratios as of March 31. TCE, our internal measure of capital, is at our target of 8%. And you can see on Slide 27 in the deck, we remain well above regulatory minimums, including the capital conservation buffer, despite the first quarter’s loss due to COVID-19 and the associated reserve bill.

We have stressed our capital levels through year-end 2020 under baseline, stressed and highly stressed scenarios. And in all cases, we have over $200 million to as much as $450 million of capital over and above regulatory minimums, inclusive of the capital conservation buffers.

While the economic environment is changing rapidly, even hourly, and we don’t know what the future holds, we can say with confidence that we have every intention of maintaining the common dividend at the current level going forward.

As noted in the release and deck, we did complete the ASR announced last October. And while we do have some remaining buyback authority, for now, we have put any buyback plans on hold.

With that, I will turn the call over to Mike for a few additional comments and details.

Michael Achary

Thanks, John. And good morning, everyone. As John noted, we reported a loss of $111 million or $1.28 per share for the first quarter. Included in those results was a provision for credit losses of $247 million or $2.24 per share. We also wrote down $9.8 million or $0.11 per share of equity interest in two energy credits the company received and bankruptcy restructurings.

As mentioned, PPNR, excluding aforementioned equity write-downs, was flat from fourth quarter 2019 but was up nearly 6.5% from the same quarter a year ago. Also a reminder that the first quarter of every year seasonally is usually our lowest earning quarter, so flat PPNR in the first quarter is actually a pretty good performance.

One of the drivers of that stability from last quarter was our NIM. The reported NIM was down 2 basis points from last quarter. However, the decline was related to expected accretion runoff, much of which was related to the recent merger with MidSouth.

Purchase accounting accretion was down $2.5 million linked quarter or about 4 basis points. The impact of the Fed rate cuts in March on our loan yield was a NIM headwind and clipped by about 7 basis points our first quarter NIM.

However, proactive deposit pricing and changes in wholesale funding levels offset most of that damage and positively impacted our NIM by about 8 basis points. If we back out the impact of accretion, then our core NIM expanded 1 basis point from last quarter.

Fee income was another bright spot for the quarter. Fees were up $1.5 million from last quarter, mainly related to $1.5 million in tax credit sales and $800,000 in BOLI income.

Offsets in areas such as service charges, card fees and trust fees were all impacted in March as the impacts of COVID-19 became more significant with fee waivers and other accommodations.

The company is providing fee waivers for certain products such as penalty-free CD and money market withdrawals, as well as other transaction account fees. Depending upon the duration of the impact of COVID-19 on our customers, fee waivers will impact our results in future quarters.

Expenses for the company were up $5.5 million linked quarter and include the $9.8 million in equity write-offs noted earlier. After adjusting for those write-offs and the $3.9 million of merger costs for MidSouth in the fourth quarter, expenses were flat linked quarter.

John went through a summary of the provision, but let me provide just a little bit more color. We ended the quarter with an ACL at $475 million or 2.21% of period end loans. Like most others, we did adopt CECL effective January 1, 2020.

Certainly, a large linked-quarter increase of $280 million or 144% of the ALLL at year-end under the old incurred loss model, the one we believe is prudent given our exposures in energy and especially in the New Orleans hospitality market.

About $77 million of the $280 million increase was taken on January 1st with the adoption of CECL and was booked through capital. The remainder was covered by our first quarter provision for credit losses of $247 million.

Given the size of our ACL and provision, we have beefed up our disclosures around our loan portfolio. You can see those on Slides 8 through 14 in the earnings deck. The same applies for our CECL methodology and provision. Those disclosures are included on Slides 15 through 18.

I wanted to call out Slide 17, which is an easy to grasp waterfall of our ACL journey during the quarter, while Slide 18 walks through the components of our first quarter provision. I think it’s noteworthy that nearly $50 million of our provision is related to reserves we are building for specific credits with another $154 million set aside collectively for certain customer segments. That’s nearly $204 million of reserves being built this quarter.

We know that no one has a crystal ball and we can’t sell the future, so we took a proactive approach to reserving in this environment. We took into account our CECL modeling, loss projections and what the outlook for our local economies could be. We believe the impact of COVID-19 in our company and region will play out over multiple quarters. And so while additional reserving could be required in future quarters, it’s too early to know or be in a position to quantify.

Should that be necessary, we have a solid foundation of PPNR at nearly $500 million annualized and ample capital with our common Tier 1 equity at just over 10%.

And finally, before I turn the call back to John, I would like to formally suspend all previous guidance whether near term for 2020 or for our 3 year CSOs. Given the uncertainty related to COVID-19, at this time, we will not provide the level of formal guidance we have given in the past, but we’ll share any expectations as best we can during the remainder of this call.

With that, I’ll turn the call back to John.

John Hairston

Thank you, Mike. Let’s just go ahead and go straight to questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] And our first question comes from the line of Kevin Fitzsimmons with D.A. Davidson.

Kevin Fitzsimmons

Good morning, everyone. How are you?

John Hairston

Good morning, Kevin.

Kevin Fitzsimmons

I guess I appreciate all the detailed disclosure in the deck and your comments this morning. I guess the big question, and it’s admittedly a tough one to answer, is - is this enough, right, Mike? And Mike, I just heard you say that you guys took a proactive approach toward modeling. And maybe a way to couch this is you guys have been through many experiences in the past. You’ve been through reopening an economy and helping out customers with Katrina. You’ve been through energy-related crises in the past.

So maybe if you can talk in terms of lessons learned from some of those experiences and how you applied it to deciding to be aggressive in this reserve build. Or was it more simply plugging in the numbers and the economic forecast, and that’s what it spit out?

Michael Achary

Hey, Kevin. Good morning. Yeah, I think it was really all of those things combined. So it’s kind of in our culture and our DNA, certainly, to be conservative and proactive when it comes to things like this. And we do and have had quite a bit of experience, going back to Katrina, the BP oil spill in 2010, the financial crisis before that and now this particular environment.

So again, we took a proactive approach. We’ve paid close attention to our modeling. We looked at the Moody’s scenarios, used the most recent version of those scenarios, weighted them. We thought appropriately and certainly took into consideration the impact that this is likely to have on the New Orleans hospitality market, as well as other things going on in energy and arrived at where we are now with the ACL being brought up to the $475 million range.

And I think as we’ve said in the prepared comments, we believe that this will play out over multiple quarters going forward. And certainly, I think it’s too early to tell whether additional reserving might be required. We’re prepared to do that, if that’s the case. Again, we have lots of capital. Our common Tier 1 at over 10%, and we have a base of PPNR of nearly $500 million to build from.

We stressed our capital. We’ve looked at our capability and capacity to continue the dividend. We certainly feel good about that and have every intention of doing that going forward.

So again, there’s a lot of unknowns here. And we’re prepared to do what we need to do to the best interest of our company going forward. I think it’s the best way that we can kind of couch that.

Kevin Fitzsimmons

All right. Thanks, Mike. One quick follow-up. You mentioned about capital and the CET1 ratio. How do you look at the TCE ratio sitting here at 8%? Is that - do you guys view that as most likely a bottom for you guys, assuming that maybe there’ll be more reserve building but not to the magnitude of this quarter, and you guys stay profitable, and you’re not using buybacks, and you slowly build that up over time?

Michael Achary

Yeah, I think that’s right. Again, time will tell whether we need additional reserving and whether the TCO might drop below - TCE level may drop below 8%, so we’re prepared to do that. We’ve let that drop below 8% in the past. But again, we feel good about our capital levels going forward. And things will play out as we go forward.

Kevin Fitzsimmons

Okay. Thanks, guys.

John Hairston

Thank you, Kevin.

Operator

[Operator Instructions] And I’m showing no further questions at this time. So with that, I’ll turn the call back over to President and CEO, John Hairston, for closing remarks.

John Hairston

Thanks, Andrew. Thanks for handling the call today. And thanks to everyone for your interest in the organization. We look forward to listening with you next quarter.

Operator

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program, and you may all disconnect.