HWC
#Thank you and good morning.
During today's call we may make forward-looking statements.
We would like to remind everyone to review the safe harbor language that was published with yesterday's release and presentation and in the Company's most recent 10-K and 10-Q, including the risk 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 <UNK> <UNK>, President and CEO; <UNK> <UNK>, CFO; and <UNK> <UNK>, Chief Credit Risk Officer.
I will now turn the call over to <UNK> <UNK>.
Okay.
Thanks, <UNK>, and good morning, everyone.
Overall we had a good quarter, stable earnings that put us on track to beat our core pre-tax pre-provision goal for 2016.
Our revenue was stable, and given the seasonality that typically impacts certain line items in the third quarter, stable was good.
Our revenue-generating initiatives remain a focus and we are planning on restoring growth in the fourth quarter.
Some of those initiatives were reflected in this quarter's results.
Within fees, the mortgage area improved again, up $700,000 from last quarter, and based on the third-quarter results, that line item is now close to a $20 million annualized run rate compared to $12.5 million last year.
We believe the turnaround in secondary mortgage is a win with more good news to come.
Moving to the balance sheet, loans were up 3% linked-quarter annualized, excluding the energy portfolio.
As you can see from the waterfall graph on slide 6 of the investor deck, the areas that contributed to the growth were mortgage, equipment finance, and the Nashville healthcare team.
All of these areas are either new to the organization or targeted as part of our revenue generation initiatives.
On the expense side, we once again found efficiencies across the organization and were able to report a lower level of expense for the third quarter.
These cost savings, along with a lower level of taxes, helped offset a slightly higher provision for loan losses.
In last quarter's earnings call we shared how we expect the recovery in the current energy cycle to play out.
Even with improving oil prices, we expected a lag in the recovery of energy services credits.
This is reflected in our third-quarter criticized energy portfolio, where the majority of risk rating downgrades, $84 million, were in non-drilling support credits.
The numbers also reflect the impact from the recent Shared National Credit review, 100% of which was reflected in our third-quarter results.
Accordingly, the provision of $19 million was up about $2 million linked-quarter.
As a reminder, our expectation is that reserve-based lending credits will show signs of improvement first, and in fact already are, followed by land-based services and finally non-drilling services in the Gulf of Mexico.
Let's go back to my opening comment.
Overall, a good quarter and it positions us to handily beat our core pre-tax pre-provision expectations for 2016, but we still have work to do.
This quarter we established a new base to grow from and we are committed to restarting growth in the fourth quarter.
Admittedly, there are headwinds along the way, particularly the energy cycle, general economic malaise, and a continued low-rate environment.
But that said, we also have had successes in expense control and in growing revenue to a new level while dealing with energy.
These achievements will be our tailwind to restoring growth, even if modest, in the fourth quarter.
I will now turn the call over to <UNK> <UNK>, our Chief Financial Officer, for a few additional comments.
Thanks, <UNK>.
Good morning, everyone.
EPS for the quarter was $0.59 per share.
That was flat versus last quarter, but a slight beat to Street expectations.
But as importantly, EPS was up some 13% from the same quarter a year ago, reflecting the improvements <UNK> just mentioned.
Net income for the Company was almost dollar for dollar in line with second quarter at $46.7 million.
It's just how we got there this quarter, as <UNK> noted, that's a little different.
Total loans for the Company at quarter-end were $16.1 billion.
That was up about $35 million from June 30, but up $1.3 billion, or 9%, versus a year ago.
Our energy loans were down about $81 million linked-quarter and totaled $1.4 billion at quarter-end, or 8.7% of total loans.
Excluding the energy portfolio, loans would have increased 3% linked-quarter annualized.
The growth this quarter was modest and consistent with what you hear from others.
Our C&I portfolio, which includes energy loans, was virtually unchanged on a reported basis and growth was limited in our operating regions, but we did enjoy success in several specialty areas as noted earlier.
This modest growth did impact our net interest income and margin in the third quarter, along with impacts from an increased level of premium amortization on the bond portfolio and interest reversals on nonaccrual loans.
But even with some slight narrowing this quarter, if you look at slide 17 in our investor deck, you see our core NIM, loan yield, and cost of funds all have ranged only a few basis points over the last five quarters.
Stability in our core NIM has been an important focus point over the last six or seven quarters, and certainly we have achieved success in that regard.
The Company continues to remain focused on controlling expenses and so expenses were down almost $2 million linked-quarter.
Personnel expense, which is 56% of total expense, was down just over $1 million.
There were a couple of unusual items in other expense this quarter which are not expected to repeat in future quarters.
Over $5 million of ORE gains related to one property were more than offset by $2.5 million in bank property losses from the August flooding in south Louisiana and by a $4 million charge related to an early contract termination.
The Company's tax rate for the quarter came in at 20%.
This reflects a lower level of earnings for the year as a result of the first quarter's elevated provision.
We expect a similar rate in the fourth quarter, which should return to normalized levels in 2017.
Our TCE ratio of 7.93% was up 12 basis points, which is almost back in line with our internal target of 8%.
However, before we look at whether we will exceed that level next quarter and are asked about excess capital, I would like to remind everyone about the annual pension valuation review coming up in the fourth quarter.
And so we expect TCE at year-end to come in a little under the current level.
And, finally, while this quarter is about stability, I would like to review two slides in our deck that shows just where we have been and really how far we have come.
So slides 28 and 29 show the challenges from the early years post merger and the progress made to get where we are today.
Like <UNK> said earlier, stable is good in today's environment, but it's not where we want to be.
I will now turn the call back over to <UNK>.
Thanks, <UNK>.
Well done.
I'm glad you wrapped by pointing out those two slides.
As you said, both are graphical evidence of the progress we have made and our commitment to the future.
I opened with the comment on track to beat our core pre-tax pre-provision goal and I'm very confident we will get there.
We are up almost $16 million, or 22%, from the same quarter in 2015.
To meet the goal, we need $75 million, so if we are flat in the fourth quarter from third quarter, we beat the goal by about $10 million.
But that's not the plan; not what we would like to see.
Our plan is to restart growth and build upon successes of the last several quarters.
So with that, Charlotte, let's open the call to questions.
No, that's a net number, Brad, and thanks for the question.
We expect we will have some pay downs, not really sure what they will be.
October has not been very challenging so far.
In fact, the October numbers, net, are up I guess yesterday around $60 million, so that would put us on track for ---+ just extrapolating ---+ maybe 2.25, 2.5.
But you know, energy is really lumpy, and so it's somewhat unpredictable; but still our assessment is that we should be somewhere in $200 million to $300 million net.
Brad, this is <UNK>.
That will put us in about the 3.5% to just over 4% range year over year, end of period.
And of course, that's down a little bit from the previous 5% to 7%.
But look, as <UNK> just noted, we have already gotten off to a pretty good start in the fourth quarter, so at this point we feel pretty good about those numbers.
Since <UNK> shared that, just some additional editorials about the third quarter.
We were disappointed with the net number for the third quarter.
We did anticipate energy paydowns to be somewhere in the range they were at, and it wasn't a lack of production.
Consumer production was up around 9% over second quarter.
Wholesale was up 17% over the second quarter, and the pipeline wrapped up at about 20% higher than the previous quarter.
All good numbers.
And so when you sort of run through the math, it's like, what will happen ---+ and the answers are pretty straightforward.
Beyond just the normal amortization, we had an unusual number of clients that were acquired during the quarter and took the numbers down a little bit.
Then we had energy, of course; and then we had line utilization that was down around ---+ I think the number was 1.3%.
We usually have a little bit of a decline in the third quarter in line utilization, but that number ---+ just comparatively, last year that number was about 0.3% down.
This year, same quarter, 1.3%.
That doesn't look like a really big number, just only an additional 1%, but on that big variable portfolio we have, it can have a pretty big impact.
So that left us, as <UNK> said, a little short of the 5% goal projected for the year, really all entirely based in the failure to get the $250 million or $300 million we expected in the third quarter.
But it wasn't production, it wasn't pipeline; it was just primarily line utilization and energy.
I think the other important thing related to the quarter is ---+ and certainly, <UNK>, you called this out in the prepared remarks ---+ but the benefit and the results that we got from some of our specialty lending areas.
So these are investments that the Company made last year in those areas that are really beginning to again pay off and show some tangible results.
So that's something that we are proud of and look to grow more as we go down the road.
As we move into 2017 ---+ and we are not at the point where we are ready to give any kind of tangible guidance for that year yet; that will come next quarter.
But, yes, I think as we look at 2017 and we look at our goals that are beginning to come together and are in place, revenue improvement and continuing to build upon the revenue momentum that we have enjoyed so far this year are really kind of the main pathway to us hitting our goals.
Close attendant to that is continuing to control expenses.
And when we talk about controlling expenses, it's not just cut, cut, cut; it's making enough room through strategic reductions in expenses to give us the capital to reinvest back in the Company.
And so again, if you think about 2015, that's exactly what we did; and those investments, we believe ---+ and certainly there's tangible evidence of that ---+ are really beginning to pay off.
We've talked about the improvements on the fee income side.
Mortgage lending is a sterling example.
And then on the operating leverage side, certainly the specialty lending areas are included in that equation as well.
<UNK>, a cousin to the expense question is how much relief will we get in conventional expenses from improving our digital delivery.
Online account opening for deposits was rolled out a couple of months ago with very promising early results.
And that was a soft delivery, without really advertising it or anything other than just making it available, and the returns were good.
We're not ready to give any hard numbers on that, but probably will as we get into the fourth or first quarter.
And those are extremely inexpensive to load or to get benefit from versus conventionally branch open accounts.
The replacement of online banking, which is scheduled for the middle of next year, will be a significant upgrade to what we deliver today.
And that will offload some of the maintenance costs for just normal deposit account maintenance from the back-office and from branches onto the web tool.
We haven't really sized all that positive impact.
We have some internal estimates, but not that we would want to put out there quite yet.
But I don't think we will ever be in a position that we will stop looking for creative ways to reduce expenses and, therefore, improve operating leverage.
That may have been more than you asked for, Brad, but that was kind of what's been on our mind.
That's exactly what we mean, <UNK>.
This year it's going to be about 20% or so.
Next year we expect it to return to what we kind of call normalized levels, and for us that's 25% to 27% or so.
Yes, it's been creeping up over the past couple of quarters, and probably the main driver for us is going to be looking at something like the 10-year Treasury.
That rate is up a little bit compared to where it has been, so assuming that continues for the rest of the quarter, I would expect the premium amortization to not grow anywhere near as much as it has grown in the third quarter over the second.
This is <UNK>.
<UNK> can address the CRE points, and I will add some additional Texas color.
I guess just to ---+ when we talk about Texas, or specifically Houston, typically it's really around what the risks are relating to energy slowdown, specifically in real estate.
But everything outside of CRE, which really hasn't been (technical difficulty) so far, has been very positive.
We have added talent in the Houston market of late and expect some really good continuing returns in non-energy.
And the reserve-based lending group, which is housed in Houston, continues to see zero past dues despite the ratings on the book there.
The portfolio is really performing quite well, so we are bullish on Houston; continue to be really for overall Texas.
Thanks, Charlotte.
Thanks for taking care of our call today.
Thanks to everyone for your interest and have a great day.
