Good day, ladies and gentlemen, and welcome to Hancock Whitney Corporation's First Quarter 2019 Earnings Conference Call. [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.

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, including the risk 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-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.

Thanks, Trisha. And thanks, everyone, for joining us today. As noted in yesterday's press release, we are pleased with results for the first quarter. And what can typically be a seasonally low quarter, our bottom line was only slightly down from the fourth quarter, after taking into consideration unusual items in both periods. On a reported basis, EPS for Q1 was $0.91, down $0.19 compared to $1.10 in Q4. The majority of that $0.19 difference was due to the $0.11 favorable impact of certain tax reform strategies we executed last quarter. Then in the next quarter we added $10 million or $0.09 per share to the provision for loan losses for the alleged fraud associated with that DC Solar lease. In January, we communicated our updated corporate strategic objectives, or CSOs, and have been discussing how we plan to achieve those goals. We have noted 2 key areas of focus for 2019: narrowing the GAAP to peers on net interest margin; and improving asset quality metrics, specifically criticized loan and the NPL ratios at least to peer levels. During Q1, we made progress on both fronts. Criticized commercial loans declined $41 million or 7% linked-quarter with a $15 million reduction in energy criticized and a $26 million reduction in nonenergy criticized credits. While we won't have 1Q '19 peer results for a few weeks, the gap has narrowed significantly as shown on Slide 9. We are nearing the Q4 peer average for commercial criticized as a percent of commercial loans and remain focused on narrowing the gap further. Nonperforming loans were also down in the quarter about $4 million. Reductions of $15 million in energy NPLs was partially offset by an $11 million increase in nonenergy NPLs comprised of one credit downgrade as part of a recent SNC exam. On…

Thanks, John, and good morning, everyone. Operating income totaled $87 million for the quarter, down $10.6 million from last quarter. Operating EPS was $1 compared to $1.12 in the fourth quarter. As we noted in the release, we took a $10.1 million charge through the provision for the previously disclosed alleged fraud on the DC Solar equipment lease. We have that noted in our tables as a nonoperating item for the quarter. The quarter-over-quarter reduction in operating results was related to the $10 million or $0.11 per share benefit of certain tax reform strategies implemented in the fourth quarter. PPNR of $118 million was down just $600,000 on a linked-quarter basis. John concluded his comments on NIM, so let me start there. The chart on the bottom right of Slide 13 details the drivers of our 7 basis point increase from last quarter in our NIM. The margin expansion was mostly related to the full quarter impact of the portfolio restructuring we executed late in the fourth quarter. We had said the restructuring would add 7 basis points to our NIM spread over 2 quarters; so 2 basis points last quarter and 5 basis points this quarter. In addition to the restructuring, the December rate hike helped increase the overall NIM by approximately 3 basis points, with nonbasis points of loan yield improvement offset by about 6 basis points of higher funding cost. A change in the funding mix compressed the NIM 2 basis points, while the change in the mix of earning assets, John noted earlier, helped improve the NIM by 1 basis point. We expect our NIM to be flat to slightly down in the second quarter as headwinds from the recent yield curve shift and the potential seasonal change in our deposit mix offset the positives related…

Thanks, Mike. And with those comments, let's open the call for questions.

[Operator Instructions] Our first question comes from Michael Rose with Raymond James.

Hey, just wanted to dig into the fees a little bit, understand that you're going to be expecting a big pick up in the back half of the year. I assume a lot of that is going to come in the trust business given the acquisition. But if you could just give us some color on where you expect to really see the ramp? I mean, is it kind of across the board? Just want to get comfort with the guidance you guys reiterated.

Yes, Michael, I'll go ahead and get started. So as you know, we're expecting for the full year 5% to 7% growth year-over-year. And that year-over-year guidance hasn't changed. For the second quarter we think it'll be flattish, so certainly a ramp for the second half of the year. And you're right, we will be converting the Capital One trust and asset and management acquisition at the end of May, so that will certainly be helpful in the back half. But really when we look at the areas that we're counting on, certainly wealth management, I think card fees are the areas that we're looking to kind of help carry that load in the second half of the year.

Okay, that's helpful. And I'll let somebody else ask the loan growth question. Maybe we just switch to capital. So you guys have talked about potentially getting back in the buybacks in the back half of the year once capital rebuild. Obviously, a nice build. This quarter looks like it should continue to build from here. Can you just remind us again of your capital priorities, and if they've changed in light of the BBT SunTrust deal in terms of potentially looking at deals or your organic growth opportunities?

No. No change at all in the way we think about deploying capital. And at the end of the quarter, TCE did get up to 8.36%. So that was up 34 basis points. So obviously we're very pleased with that level of capital build. But in terms of our priorities, having capital ready to deploy to help us with organic growth is number one, really, by far. And then looking at potentially to continue to be opportunistic with buybacks, potentially shifting that to a strategic focus around buybacks maybe in the second half of this year, and then also potentially looking at the dividend. So really no change in how we think about deploying capital or those priorities.

Okay. And then -- yes, I guess as a follow up to that, I think your share buyback expires at the end of the year. I think it equates to somewhere around 4 million shares, if I remember correctly. Any thoughts on -- I know it's hard to predict out, but would you expect to -- given where your stock is, would you expect to use just about all of that before it expires?

Again, that's something we'll consider in the back half. And when we talk about strategic buybacks, it would be in the realm of potentially using up that authority a bit. But again we're not here to signal that. That's something that's in the cards for the second half of the year. The buyback does expire at the end of the year. And all things equal, I would expect us to renew it and always have a buyback of some sort in place.

Our next question comes from Catherine Mealor with KBW.

I want to talk a little bit about the margin and really if you think about that and your path to the CSO goals. So can you help us kind of walk through what other levers you may have within your profitability outlook where you could still reach that 1/4 CSO goal by the end of next year even if the margin remains kind of flat? Or do you feel like you have to have margin expansion really to be able to achieve that goal?

Catherine, this is John. To hit that ROA target margin expansion is a big part of that goal. The yield curve's shape that it's in right now and the amount of pressure that puts on us from a LIBOR perspective is not something we anticipate hanging around in that shape for another 6 or 7 quarters. We don't have any better of a crystal ball than anyone else does, so it's hard to predict. But the -- all of the pressure or a substantive portion of the pressure on our NIM guidance for Q2 is really coming from that LIBOR pressure, and it's impacting our variable book. We don't think that's going to stay that way, at least we hope it doesn't. And as that repairs itself, the ability to take the granular improvements in the loan portfolio with dampening some of the more skinnier portions of loan portfolio simultaneously should lead to some healthy expansions. Obviously, the second quarter guidance is not something we're excited about, but that's just simply the shape of the curve's impact on the LIBOR book. Just in terms of that granular production, without getting too far into the weaves, and just some portions that may be encouraging, if we just look at the same quarter of the previous year, 1Q '18 to '19, that granular loan production improvement is real and it's tangible. Our micro business banking group production's up 22% over the same period. Small business banking up 8%. Commercial banking up 13%. And while those numbers could be overwhelmed by the exits of very large pay downs, particularly in energy, they add up over the time as you go through 4, 6, 8 perpetual quarters. And so the improvement that we should see in loan yield over time, combined with some normalization of the yield curve hopefully would lead to that expansion. Mike, you have anything else you want to add to that?

Yes, just to kind of reiterate. And when we think about the CSOs going forward and kind of our plan or halfway to hit those targets, certainly as John indicated, NIM is a big part of that. And we achieve that through the NIM by growing loans in the segments that offer us the biggest yield pickup or potential. We also will control our deposit costs going forward. So those 2 parts of our plan or pathway really do focus kind of on the NIM. But it's just not completely about NIM, we also are counting on kind of outsize fee income growth, again, in areas like wealth management and cards. And as always, we'll do our diligent best to control expenses, and I think you saw a little bit of that and what we were able to do in the first quarter. So we'll continue to control expenses. But at the same time invest in additional digital capabilities. So those are really kind of the things that constitute our plan or pathway to hit those CSOs.

And that's really helpful. And one follow up on the deposit side, how much of the DDA outflows this quarter were just seasonal versus kind of change in customer behavior? And how should we -- can you remind us kind of seasonality of that and what we should expect in terms of DDA balances for the year?

Sure, I'll be glad to, Catherine. So again, typically, when we think about deposits, fourth quarter of each calendar year is usually the quarter where we see kind of the seasonal inflows of DDA deposits. And then also the seasonal inflows of public fund deposits as well. And when we get to the first quarter, you begin to see the DDA deposits that really kind of move out a little bit. There's usually another outflow in the second quarter primarily related to tax payments, that occurs. So we do expect to see some additional outflow DDAs in the second quarter for that reason. I don't know that a lot of it was really related to folks moving money out of noninterest bearing and into interest bearing. Certainly, there was probably some of that occurring, but I would not consider that to be a big factor. The other thing that was I think a little bit unique and different about the first quarter is that on the public fund front, you actually saw us increase our public fund deposits instead of beginning to see those trail off. And that was related to a couple of new relationships that we brought into the bank that enabled us to actually grow that category of deposits. So that's something certainly that we're excited about.

Our next question comes from Ebrahim Poonawala with Bank of America Merrill Lynch.

I just had a question, John, with the CSOs and the target to improve the margin higher, I mean, I'm sure you've been asked this before, I apologize if you had to repeat this, but could you just talk through the logic of trying to get higher yielding loans right now? Like, why are we not -- like, should we be as investor be worried about the credit risk that you're taking on when you are pursuing these higher-yield loans, especially given where we are in the economic cycle? Just talk to us in terms of why higher margins, higher yields don't translate into higher credit risk?

Good question. And inside the loan balance sheet, the shift in overall loan yield is not coming from enhanced credit risk appetite, it's coming from a mix change as well as perhaps a little bit better discipline and technology to follow the methodology of our pricing, both from renewal and for new business. So there's no credit risk change built into those yield expectations. It's being a little bit more effective in terms of pricing our deals upon renewal and new business coming into bank coupled with a healthy dose of mix change. And the portfolio production improvements that I mentioned in my earlier answer, I shared that just to provide some tangible numbers around the improvement there. So essentially, a larger, skinnier transactions being replaced by more granular credits that we really don't expect to have any corresponding decay in asset quality. And keep in mind, the bulk -- the vast bulk, a very, very high percentage of both our criticized and our nonperforming loan book are in those very same large, skinnier -- not necessarily skinnier now but energy credits. So as that goes down and asset quality overall improves, at the same time we're having growing yield. So it produces for a year or 2 the interesting phenomenon of improving asset quality by higher yield. So I know that isn't normal and it's not something that will be around forever, but as we improve the overall mix of the book that will happen in the next year or 2.

And just tied to that, you mentioned I think 70 basis points between origination versus what's running off in terms of loan book [ claim ]. Do you expect that 70 basis points to kind of hold in a world where rates are not going higher, if we remain in kind of a static rate environment over the next few quarters? Or do you see that 70 basis points compressing? Just thought process around that?

I would -- I wouldn't venture, I guess, much further than a quarter or 2. It's just part of the tail, given the shape of the curve. And as I mentioned before, we don't think will be sitting on inverted yield curve for forever. But in the near term, I would expect that pricing improvement to continue in the near term.

Our next question comes from Brad Milsaps with Sandler O'Neill.

John, I was going to see if you can maybe just add any more color. I think I heard you mentioned a larger SNC credit that was added. You have a lot of pluses and minuses in nonaccrual. But just any color on that one, if there was any specific industry or otherwise that you can give us additional color on?

Chris, would you like handle that question?

Yes. No, we already had the account in a classified loan status. So it was really more of the SNC exam process, viewing prospects of that credit maybe a little bit more conservatively during this period. It was not in an area that we typically do a lot of business in, and it certainly wasn't in the energy sector.

Okay, great. And I know it's not like an explicit part of your guidance, but just curious if you guys had any loose goals on you kind of where you wanted to see the NPL, TDR numbers end by the end of 2019. I know there's a lot of moving parts, but just kind of curious to kind of what you guys are thinking in that regard?

Well, obviously, the right answer is down, improving to -- continue to improve each quarter. I think we're at 4 or 5 straight quarters of improving criticized commercial credits, and I'd be disappointed if that didn't continue throughout the remainder of this year. If you just do -- and I don't want to get into quarter-by-quarter guidance on that type of a number. But directionally, if you plot the rate of improvement and the size of the book and you look at Page 9 of the investor deck, the shape of that curve would indicate intersection perhaps somewhere around the end of the year or first half of '20. Obviously, it becomes somewhat asymptotic as you approach the median of the peer group and become somewhat irrelevant as a gap. So I'd love to say it'll happen every quarter, and that's certainly what we expect to see, but it should approach our peer levels if you just extrapolate that curve here in about a year. If there's anything we can do to accelerate that, obviously we will.

Great, that's helpful. And Mike, just a kind of follow up, housekeeping question on fee revenues. You wish your trust business -- are those typically invoiced based on sort of beginning of quarter equity values or is it kind of invoiced throughout the quarter? Just trying to get a sense of how the movement in the equity market ultimately reflects revenues. In other words, do you have a little bit of a head start going into second quarter, given the kind of the market up at the end of the quarter?

Yes, Brad. It's mostly based on averages. So obviously there was a bit of a hit from the volatility that took place in the fourth quarter of last year, and certainly some of that's continuing to this year. But assuming that the equity markets continue to recover, and we have less volatility, then those results should improve accordingly.

Our next question comes from Jennifer Demba with SunTrust.

Question on the technology investments you mentioned you're making this year mostly in the second half. Could you just give us some details on those investments and what kind of dollar amount we're talking about? And are there any expense reduction levers that can help pay for those?

Thank you. Good question. And I think I've mentioned on several calls or a webcast when we've been on the road that we've been making some pretty sizable investments in technology for some time now. The ones we talked the most about are the digital ones simply because that's where the primary interest has been and that will continue. The lion share of that investment in digital has heretofore been in servicing, which was essentially an account retention activity. This year that begins to convert over more towards account acquisition and eventually in-market credit acquisition, just to make more competitive our value opposition for those more granular credits, specifically consumer. So that -- the probably the big story in technology for the remainder of this year will be automation and improvement and in effectiveness improvement in the more granular credit areas of the company coupled with digital account offerings and then the expense reductions that offset portions that costs will be more inside next year. The expense guidance that we've given for this year and the CSOs for next year encapsulate all of that investment.

Our next question comes from Matt Olney with Stephens.

Want to circle back on the fee income discussion, and Mike you mentioned that card fees and wealth management could ramp the second half fee year and they're also a big part of achieving the CSOs of 2020. On the other hand, it also looks like the service charges are under pressure, I think they're down about 5% year-over-year. Any more details you can give us as far as service charges? Are -- Do you expect these to recover as well the back half of the year?

I think there'll be some recovery around service charges. But again, some of the dynamics that impacted us in the first quarter, first and foremost, you have kind of the normal seasonality and then you have the shorter quarter. So for us that resulted in about 4 fewer processing days. So that absolutely makes an impact. And that part of the dynamic that drives growth certainly will improve in the second quarter of debt. We did experience in the first quarter and have begun to experience some migration of customers moving to accounts that do offer us a little bit of a less chance of securing service charges. So we do have that dynamic. But again, we have good retention of customers and good growth. So putting customers in the right account is something that's good for everyone, both our customers as well as us.

It was also -- this is John. If you look at Q1 '18 versus '19, the deposit picture on the volume of deposits and commercial accounts that yield earnings credit service charges and that's where that accounts in the P&L and the -- they were more in larger balances this time than last quarter. And that did erode some of the earnings credit fee income that we get. It wasn't a big piece of it, it was just something unusual but added to the processing days [indiscernible]. And I think we'll see a better fee income picture in the back half of the year than the first half.

Okay. Very, very helpful, guys. And then going to deposit pricing. I'm curious how the deposit pricing pressure progressed during the first quarter. Did you see any signs of that pricing pressure easing over the course of 1Q or was it pretty steady throughout? And then secondly, I guess on the same token, I think you paid down some borrowings in the first quarter, how much of that was seasonal versus a strategic move?

Yes. So some of the borrowings that were paid down, if you look at the averages, our advances on average were down about $700 million, and part of that was related to the restructuring that we did in the fourth quarter. Also, our public fund -- I'm sorry, our brokered CD balances were pretty much flat quarter-over-quarter. So in terms of reliance and wholesale funds, all things equal, again, down about $700 million or so. And as far as competitive pressure on deposit pricing, I think what we're seeing in our markets, and I think you're hearing kind of the same narrative from most banks, is really kind of the lag effect on deposits from the tightening campaign that the Fed just completed. So we do expect to see some lessening of that impact as we move into the second half of the year. I think towards the end of the first quarter, certainly, we began to see a little bit in terms of a lessening of those competitive pressures, but they're still out there. But all things equal, again, I think we'll see that lag effect lessen as we move to the second half of the year.

Our next question comes from Casey Haire with Jefferies.

Just wanted to touch on the loan growth. It looks like it's going to be weighted towards the back half of the year. Just curious, what's giving you the -- what's the -- what visibility do you have that's giving you comfort that it'll ramp, especially given that pay down seem to be a bit of headwind here in the near term?

This is John, good question. The first half of the year was a -- I said, first quarter and our anticipated second quarter, I'll call that first half in total, is a little unusual in that we have two things happening that we don't expect to happen in the second half of the year. One of those are sales in the jumbo mortgage portfolio, which is related entirely to our desire to deploy liquidity into higher-yielding instruments. And the interest income proposition from that jumbo product is not as attractive as we'd like it to be in order to close that NIM gap. So we have been opportunistically selling chunks of that portfolio. And I think that number was $41 million, $42 million in Q1. And if the market is right, we'll anticipate a similar amount, maybe just a little bit bigger in the second quarter. That is part of that loan growth guidance for Q2. The second driver for first half versus second half is CRE pay downs. And if we go way back to the 4Q conversation, we gave guidance for loan growth for the fourth quarter handily outperformed it. And some of that outperformance was the absence of the CRE pay downs that we did anticipate toward the end of Q4. Those pay downs are happening or at least they may happen in the first half of this year. A portion happened in the first quarter, and we expect another portion, a little larger to happen in the second quarter. That number is about $150 million. So when you couple the jumbo portfolio sales, which are NIM accretive and the CRE pay downs that are anticipated but not definite, then that leads to the somewhat muted first half number of guidance. And I've made no secret in…

Got it, thanks. So -- and then just switching to capital management front, the opportunistic infill M&A, is that a robust opportunity for you guys right now? And how do you weigh that with the SunTrust BB&T merger, obviously, in your footprint? And there could be some opportunities off of that? So how do you -- I mean, is the bar for M&A that much higher given the potential disruption benefits coming from a big transaction in your footprint?

Casey, this is Mike. So when we think about the SunTrust BB&T deal, again, in the markets that we in, we don't have a whole lot of overlap. We do have some opportunity in some of our Florida markets and then maybe along the Florida Panhandle as well and into Southern Alabama, but that's not a big opportunity for us in terms of taking advantage of that potential disruption. As far as our overall M&A strategy, really nothing's changed from our perspective. We really have no interest in large bank or strategic deals right now. Certainly, nothing transformational. We are open to this notion of opportunistic infill deals. So that's something that's out there. As far as the potential for those kinds of transactions, there's not a lot of those kinds of opportunities. But certainly there are potentially is a few out there.

Got it, thank you. And just last one for me. Is the purchase accounting -- how much was it in that quarter? I didn't see it in the release.

Yes. So for the quarter, we had accretion at -- right at about $5 million, and that was virtually unchanged from last quarter.

Our next question comes from Christopher Marinac with FIG Partners.

I may have missed it if you had mentioned it earlier. But when you take out the charge-off for DC Solar and look at the kind of core charge-offs, how does this quarter correspond with kind of where you think the CSOs for charge-offs specifically will kind of unfold the next year or 2?

So when we take out DC Solar, Chris, the charge-offs for the quarter were right at about $7.9 million, and that's roughly the amount that we provided. So we covered those charge-offs. But in terms of going forward and hitting the CSOs, that's probably a good run rate for us to use or for folks to use in terms of the assumptions related to credit. We've given forward guidance around our provision to remain kind of in that $7 million to $9 million range. So that's the way we look -- we're looking at it right now.

Okay, great. Just want to reinforce the charge-offs [ itself ]. And I know you talked about DDAs with an earlier question, but with the Fed pausing, to what extent does that impact kind of how DDAs play out? I mean, when you take the seasonality out of it, just kind of look at it in general, I mean, will you still have that big chunk of DDAs to help kind of offset deposit cost and kind of restrain any further increases on funding costs?

Well, we certainly believe that we will. So we have, as a percentage of our total deposits, DDA still standing at 35%, 36%, and that's been in mix that is really done extremely well through kind of this notion of a rapidly rising interest rate environment. So certainly we have no reason to believe that, that would change in any real way, shape or form with the Fed on the sidelines now.

Okay. I was just curious if that would actually help you retain a bigger number over time than you otherwise would if rates were rising.

Thank you. And I'm showing no further questions at this time. I'd like to turn the call back over to John Hairston for closing remarks.

Thank you, Shannon, and thanks to everyone for your interest in Hancock Whitney. Have a great day. We look forward to [indiscernible] with you soon.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation, have a wonderful day.