Hancock Whitney Corporation

Ladies and gentlemen, and welcome to Hancock Whitney's Corporation's first quarter 2021 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 call, Ms. Tricia Carlson, Investor Relations Manager. You may begin.

Tricia Carlson Thank you, and good afternoon. 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 the earnings release and presentation and in the company's most recent 10-K and 10-Q, including the risk 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. As everyone understands, 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 developments 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 afternoon may contain nine GAAP financial measures. You can find reconciliations to the most comparable GAAP measures in our earnings release and financial table. The presentation slides included in our 8K 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 Harrison, President and CEO, Mike Ackery, CFO, and Chris DeLuca, Chief Credit Officer. I will now turn the call over to John Harrison.

Thank you, Tricia, and good afternoon, everyone. Thank you for joining us. Today's operating environment is headed in a decidedly more positive direction compared to the end of last year, and as such, 2021 has started off on an encouraging note. Earnings for the first quarter of the year are $107 million, we began to see signs of cautious optimism across our footprint as vaccinations ramped up, markets began reopening, restrictions were decreased or eliminated, and businesses were allowed to increase capacity. See slide eight in our investor deck for information specific to each of our major regions. That outlook, coupled with declines in criticized and non-performing loans of 11% and 20% respectively, and a 30% drop in loans making up our allowed us to release a modest amount, or $23 million, of loan loss reserves in the quarter. We did report $18 million in net charge-offs, mostly from one long-term energy credit. None of that one loss, NCOs were a well-controlled $4 million. Overall, our provision for credit losses was a negative $4.9 million as a result, and we expect similar or better quarterly provision levels as we move through 2021, based on what we know now. Our ACL remains strong at over 2%. Despite this new level of optimism, loan growth remains limited net of PPP. Core loans declined $465 million in the next quarter as indirect loans continue to run off with no new production plan. Residential mortgage payoffs actually increased thanks to a strong surge in March 2021 secondary mortgage transactions. Line utilization slowed amid normal payoffs and elevated levels of loan production altogether led to declines in some of our regions. See slide 7 in the deck for details. You may note on slide 7 that net loan growth is now differentiating across the footprint, with the eastern franchise actually showing growth even as our central area, primarily New Orleans, remains under pressure, but thankfully green shoots are appearing even there. One bright spot for loans was from PPP. During the first quarter, we originated over $800 million in new PPPs. As you all probably remember, midway through the quarter, the SBA put a pause on forgiveness as the new PPP portal was put in place. We expect forgiveness to substantially increase in pace, led by smaller loans, in the second quarter. We're also seeing continued solid results in fee income. Slide 18 shows several categories of our performance in the week and with positive expense run rate impact in May. We maintained solid capital ratios with common tier one up 41 basis points to an estimated 11.02%. Operating leverage improved with pre-provision programs underway throughout the U.S. and the world, we are cautiously optimistic about 2021 and beyond. I will now turn the call to Mike for further comments. Thanks, John. Good afternoon, everyone. As John noted, first quarter's results were a great start to 2021. Both net income and PPNR were up in quarter and for a variety of reasons exceeded street expectations. John's already talked about loans, so I'll jump over to deposits. With the expansion of PPP and a new round of stimulus, we, along with many in the industry, were once again flush with new deposits this quarter. Our EOP deposits grew over $1.5 billion during the quarter, and combined with nearly $500 million in PPP forgiveness, was the source of over $2 billion of fresh liquidity. Compared to what would be normal levels, we're calling out our March 31st level of excess liquidity at about $2.5 billion. So the question becomes, what to do with all this liquidity in an environment where there's little opportunity for core loan growth? The chart at the bottom right of slide 13 in our earnings deck shows part of the story. We typically like to keep our securities and short-term investments at around 20% to 25% of our average earning assets. You can see we were able to maintain that rough mix for most of 2020, but over the last few quarters, it increased our mix of bonds and Fed deposits by a third. So by the first quarter of 2021, over 30% of our earning assets were comprised of bonds and Fed deposits. With that kind of an earning asset mix change, NIN compression is unfortunately inevitable. Our NIN for the quarter was 3.09%. was down 13 basis points on quarter. Our guidance was to be down about 10 basis points. Unless we can deploy some of this excess liquidity into loans, or until it starts to leave the bank, we expect NM could compress a similar level in the second quarter. That does assume no interest recoveries in the quarter. We do see the second quarter with organic loan growth in the second half of 2021. Despite the compression in NIM, our actual level of net interest income is relatively stable as the link quarter decline is entirely due to two fewer accrual days in the quarter. Non-interest expense was flat in the quarter at $193 million, and we remain focused on efficiency and managing expenses. Last quarter, we discussed initiatives we have in place for closing branches, attrition levels, and also announced an early retirement program. The deadline proposed to accept that early retirement incentive was April 15th, but preliminary results were very encouraging with 260 of 647 eligible associates electing to accept the early retirement offer. Most of those associates will depart April 30th. We will invariably need to replace some of those leaving, and have made a conservative estimate of that backfill level. Our estimate of the ongoing impact of the program, which includes estimates for incentives, benefits, and backfills, is $19 million annualized, or about $4.8 million per quarter, and is included in our expense guidance on slide 22. you'll note that we've included an expense run rate estimate for the fourth quarter of 2021 of $187 million. The $4.8 million expense reduction related to the early retirement program is a significant part of how we'll hit that expense target. Our expense guidance on slide 22 for 2021 points to a year-over-year reduction in expenses of as much as $24 million with another reduction of close to $25 million in 2022. We get there by annualizing the guided fourth quarter run rate of $187 million. The 2022 expense level, we believe, provides the foundation for a much improved efficiency ratio of potentially around 55% for next year. With that, I'll turn the call back over to John. Thanks, Mike, and let's open the call for questions.