Good day, ladies and gentlemen, and welcome to the Hancock Whitney Corporation's Third Quarter 2019 Earnings Conference Call. [Operator Instructions] 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 good morning everyone. Our third quarter earnings were solid despite noise from the late quarter closing and simultaneous integration of MidSouth. We also noted positive operating leverage, reduced NPLs specifically TDRs, outperformed in fee income, controlled expenses all leading to a top line driven beat to Street consensus. EPS for the quarter was $0.77. This included almost $29 million or $0.26 per share, our merger-related expenses. Operating leverage was better by almost $6 million with revenue up $7 million linked quarter and operating expense by up only $1.2 million. Again, there were only 10 days of MidSouth included in our results, so no significant operating earnings impact in third quarter. While our NIM narrowed 4 basis points in the quarter, a recovery from a support services energy credit and a proactive stance from reducing deposit costs 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 MidSouth and the recent SNC exam. MidSouth added $82 million 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 energy 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 MidSouth Bancorp closed September 20, effective September 21st. During that same weekend, we also converted MidSouth 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…

Thanks, John. Good morning to everyone. Earnings for the third quarter excluding the merger-related expenses associated with the MidSouth acquisition were $1.03 [ph] 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 million net of $41 million or 5% loan mark. As a result of an extensive cleanup process by MSL, only $48 million 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. MSLs deposit portfolio fits nicely as well. The $1.3 billion 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 about what we had guided with lots of moving pieces and parts. Slide 14 details the major items driving the change. As we reported for several quarters now that once again interest recoveries were part of our results. In the third 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 increase the bond purchases this quarter in anticipation of the MSL acquisition, our mix of earning assets suffered a…

Thanks, Mike. Catherine, let's just go straight to questions.

Thank you. [Operator Instructions] Our first question comes from Michael Rose with Raymond James. Your line is open.

Hey, good morning everyone. How are you?

Good morning, Michael.

Hi, maybe we can just start on the margin, Mike. I appreciate the 2 basis points 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 one 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? Thanks.

Sure, we'll be glad to Michael. So as we think about the fourth quarter, 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 recovery this past quarter. Certainly, we continue -- can continue to have some level of interest recoveries, but certainly not expecting that level or magnitude. The other items, of course, would be the full quarter impact, 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 -- on the positive side, of course, we'll have a full quarter's impact with MSL. We're kind of calling out the impact of MSL on our NIM at around 4 basis points as opposed to the 3 basis points we had kind of talked about in the announcement. And then finally in the fourth quarter, we usually have a pretty nice inflow of DDA deposits, plus we did pay down some of our borrowings, specifically brokered CDs, in the third quarter. 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 cost this past quarter. I think there is a slide in the chart in the materials that really kind of call that out and as we mentioned in the prepared comments, we will continue to be proactive in reducing our deposit costs. So that's something that we did last quarter and will 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 appeared to have pretty healthy reserves, but can you just give us high level outlook for energy migration from here? Thank you.

We do. We actually built those reserves a little bit this quarter. But I'll turn it over to Chris, to look at and give some -- some color around the energy book.

Yes. So, during the quarter, obviously we had 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 increase in 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 -- 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 -- are they marginally 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 were -- that we booked in the past year or two 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 booked through the quarter and without the migration. And I'm -- within MSL from [indiscernible] comment, we would have actually had a fairly healthy reduction in criticized net of the RBL migration that was really more centered in the SNC exam. And to be specific about the credit, these were not new credit issues, these were more organizations that have been grappling with issues for some time and with the lack of liquidity available, specifically areas they were dependent on in the past, they went into bankruptcy and ended up actually showing up in -- the NPLs. This was it --.

Okay. So that -- it is and this SNC exam helped, drove some of the increase. Okay. Thanks for taking my questions guys. I appreciate it.

Yes. And as a reminder, I think we put in the deck 100% of the SNC exam downgrades reflected in the numbers. So, there is -- there is no trailing of items from the SNC exam we expect to bear in Q4.

Got it. Thanks, again.

You bet.

Thank you. And our next question comes from Brad Milsaps with Sandler O'Neill. Your line is open.

Hey, good morning. Mike, maybe I wanted to start with expenses. Your 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 MSL [ph] coming into the fold?

Sure, absolutely Brad. So, so, yes, a good quarter in terms of our ability to control expenses, expenses only up about $1.2 million. We kind of called out the biggest negative for the quarter and that was the $1.7 million 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 currently that we're doing is we're doing a good job of creating opportunities to reduce costs, so that we continue to invest in the Company. In the 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 fourth quarter, one item I'll call out is, we will 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 environment is such that it will make it more challenging?

Well, certainly it's a challenging with the rate environment and we kind of talked about. Our NIM guidance for the fourth quarter, we have again a full quarter's impact of 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 revenue. We also, as a reminder, typically have one of the better quarters for loan growth in the fourth quarter from the seasonal point of view. So when we put all that together, certainly we're looking to continue to generate positive operating leverage into the fourth quarter and kind of beyond. Certainly the operating leverage that we generate in the third quarter was significant. I don't know there will [indiscernible] same level in the fourth quarter, 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 MidSouth or any recovers there? Would that be above and beyond, kind of that 2 basis points to 4 basis points of compression?

No. We have some level of accretion kind of built into the fourth quarter numbers. At this point, no specific recoveries though for the fourth quarter.

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. I want to start on the fees. Obviously, good quarter on fee income. I think MidSouth will bring over a few million dollars of fee income in the fourth quarter. 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 forward in the fourth quarter and are there any lines in there that you think could be sequentially lower in the fourth quarter?

Matt, this is John. I'll start and then Mike can add some commentary, if he would like to. The fourth quarter -- lets first talk about those things that have the potential to diminish and it's purely seasonal. Once you get past the middle of November through about the end of January, typically mortgage transactional business tails off a bit, as do, even in this environment, the swap, it's not because of any appetite changes just things get a little bit busy in 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 yes 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, fourth quarter dips a little from Q4, tied primarily to mortgage, and re-fast specifically. If the right cut stimulates production then that diminishment may not occur.

And...

So that -- the 10% 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 MidSouth? I know that the 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 MidSouth?

There is a couple of moving parts. It's a good question. It's worth noting the -- the Hancock Whitney's fee income penetration of revenue is right at 27%, where MidSouth's at least for the second quarter, which was the only close quarter we've got to refer to was 23%, so there's a fair number of products that have not yet become over at least not from the core bank to the MidSouth clientele. That's not going to all materialize immediately because there is always some distraction. The team members get comfortable and reach a cadence and offer in that type of product lines. So there is a good fee income potential to come forward. Note that MidSouth really didn't have a mortgage business to speak up, 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 third quarter to cause it to diminish, if that makes sense. And the derivatives and swaps were certainly not part of that blockade or 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 talked about the remix of the loan portfolio. 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 are somewhere close to that. Is that the right way to think about the new loan yields as we move forward in the next few quarters in a lower interest rate environment if the pipeline is 25 bps?

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 two or three 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 two or three month rate increases are certainly our challenge to that.

And Matt, this is Mike. I think I would add to that. The fact that the correlation was primary for the kind of loans we're making around our remix focus, I think it's pretty coincidental. I don't know if that's the real cause…

[Indiscernible] is a big driver for the 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. And I wanted to ask a question on growth. It feels like we were expecting kind of mid-single-digit growth rate, excluding MidSouth going into the back half of the year, and now we've got mid-single digit even with MidSouth. 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 fourth quarter? 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 some color. But specifically for the fourth 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 as probably something between 4.5% and 5.5%. So right at about 5% or so. And that should translate into fourth quarter in the period growth of about $275 million to $325 million. So, as you know -- as mentioned earlier, the fourth quarter tends to be a 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 fourth quarter just yet related to that book. So if we're able to grow the acquired book and certainly that's some upside to those numbers as well. So hopefully that makes sense.

Okay. So on a dollar basis you're saying fourth quarter end of period growth should be between $275 million and $325 million?

That's correct. Yes.

That's right. Okay, that's a big jump than what we've seen in the past couple of quarters.

It would be in and this is John, and in addition to the [indiscernible] did a good job given that kind of -- the only thing I would add is that the pipeline before end of 3Q is, call it 27% better than the end of quarter June. So the pipeline improvement coupled with some possibility, it's not factored in the number might gave about MSL, recovering some business that may have dwindled to add 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 that we weren't kidding around having at 5% loan concentration in energy, being a high watermark and bringing that total down. So the reduction of about $60 million 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 MidSouth acquisition. And so, that was a constant growth too. So that the story line for 3Q, while growth was not impressive, spreads remain good and the mix change was good and it also allowed us to reduce the energy number down below what we have as towers. So there were a few moving pieces there, but it wasn't a lack of production. It was more the mix changes we were 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 MidSouth has closed, can you talk a little bit about how aggressive do you feel, like you'll be on that buyback? Is it more managed with 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 $5.5 million 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 -- coming months.

Great. All right, thank you.

You're welcome.

Thank you.

Thank you. [Operator Instructions] I'm showing no further questions in the queue. I'd like to turn the call back to Mr. John Hairston 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.

Ladies and gentlemen, today's conference is being -- ladies and gentlemen, this does conclude today's conference, thank you for participating. You may now disconnect.