Hancock Whitney Corp (HWC) 2012 Q3 法說會逐字稿

Good morning and welcome to Hancock Holding Company's third quarter 2012 earnings conference call. Participating in today's call are Carl Chaney, President and CEO; Mike Achary, CFO; Sam Kendricks, Chief Credit Officer; Steve Barker, Chief Accounting Officer; and Trisha Carlson, Investor Relations Manager. As a reminder, this call is being recorded. I would now like to turn the call over to Trisha Carlson. 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 and 10-Q.

Hancock's ability to accurately predict results or predict the effects of future plans or strategies is inherently limited. We believe that the expectations reflected or implied by any forward-looking statements are based on reasonable assumptions but actual results and performance could differ materially from those set forth in the 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.

Beginning with yesterday's earnings release we have added presentation slides to our 8-K and also posted them on the conference call webcast link on the Investor Relations website. We will reference some of those slides on today's call. I will now turn the call over to Carl Chaney, President and CEO.

Thank you, Trisha and good morning. Thank you all for joining us today. I hope everyone has had a chance to review the results we reported yesterday for the third quarter. It was a solid quarter and we continue to make progress on several fronts.

For the third quarter operating earnings of almost $50 million or $0.58 per diluted common share were up 5% on a per share basis from $47 million or $0.55 for the last quarter. The results are additional evidence of the momentum that began in the second quarter after the completion of the core systems conversion and branch consolidations. I would like to commend our associates for the good work they are doing with some areas even exceeding our own expectations.

During the quarter we generated over $350 million in net new loan growth. The increase represents a slowdown in the pace of loan payoffs, the addition of several strategic new hires and an energized group of lenders who are now fresh off the systems conversion.

Loan growth mainly in commercial, or C&I, reflected activity in Houston, greater New Orleans, Tampa, Western Louisiana and Jacksonville -- a significant portion of the new business was related to the energy sector with the total portfolio up $125 million from June 30.

Pricing remains competitive across loan categories and across our footprint. As a result, the new loans we are generating are being booked at somewhat lower yields than those that are maturing. However, while the current rates are low the new loans are at yields higher than what we were earning at the Fed on any excess liquidity or the reinvestment yields for the securities portfolio. And of course we are building new and adding to current customer relationships.

Our current loan pipeline remains strong, but, as I just noted, the market for new loans remains highly competitive. While we currently expect continued loan growth in future quarters, it could be at a more modest pace than the third quarter.

During the quarter we continue to work on efficiencies and on generating additional merger synergies. Operating expenses, excluding amortization of intangibles, was $156 million for the third quarter. We remain committed to additional cost savings in the fourth quarter and to our operating expense guidance of $149 million to $153 million excluding amortization of intangibles.

In the third quarter we announced the closing of several branches as part of our ongoing branch rationalization process. These branches will close later this month and, as we noted in yesterday's release, we are continuing to review the entirety of our current branch network for effectiveness. Late yesterday our Board approved the closure and consolidation of an additional seven branches which will be effective in the first quarter of next year.

Our reported net interest margin increased by 6 basis points in the third quarter. While our core margin did compress a few basis points, the strong performance of the Whitney acquired loan portfolio allowed us to accrete more of the loan mark back into earnings offsetting the compression. Aside from future changes in purchase accounting results, compression in the reported margin is anticipated in the near term.

Asset quality, while somewhat mixed, was in line with previous quarters' results and we are continuing to focus efforts on lowering the overall level of non-performers.

With an improved operating ROA of 1.07% we continue moving forward towards meeting our goals, maybe by a slightly different path than we originally expected nearly two years ago. We remain committed to further improving upon these quarterly results and growing our Company. At this time I will turn the call over to our CFO, Mike Achary, to review the results in more detail.

Thanks, Carl, and good morning, everyone. The Company's operating income for the third quarter of 2012 was $50 million or $0.58 per diluted common share and excludes $5.3 million of Whitney Bank subordinated debt redemption costs we noted last quarter. The $5.3 million includes the premium paid on the repurchase and related tender cost. The tender offer was completed in July and we repurchased approximately $52 million, or about one-third of the debt outstanding.

Reported net income for the third quarter was $47 million or $0.55 per diluted common share compared to $39 million or $0.46 in the second quarter. Pre-tax earnings for the third quarter did not include any merger costs while the second quarter included merger-related costs of $11.9 million.

Pre-tax pre-provision profit for the third quarter was $78.5 million, up almost 4% from $76 million in the second quarter. As Carl just noted, total loans at September 30 were $11.4 billion, up $356 million, or 3%, from June 30. Excluding the FDIC covered Peoples First portfolio, which declined $32 million during the third quarter, total loans were up $388 million, or about 4% linked quarter.

We reported net growth in C&I loans of 9% while residential mortgage loans were up 3% linked quarter. Consumer loans grew 2% and CRE loans 1%. Again, these results exclude the Peoples First covered portfolio. The decline in the construction portfolio of about 7% linked quarter reflects ongoing pay downs and payoffs of those credits with limited opportunity to generate new business given the economic environment.

Year-over-year results are noted on slide 7 of the presentation deck included with the webcast link. Total deposits at September 30 were $14.8 billion, down $158 million, or about 1% from June 30. Average deposits were down $308 million, or 2% from the second quarter.

The decline mainly reflects the seasonal nature of the Company's public fund deposits which were down $158 million from June 30. Typically these deposits reflect higher balances around the beginning of the year with subsequent reductions beginning in the summer months through year-end.

CDs totaled $2.4 billion at September 30, down $110 million compared to June 30. During the third quarter approximately $600 million of time deposits matured at an average rate of 54 basis points of which 66% renewed at an average cost of just 21 basis points.

As we noted last quarter, while there are opportunities to reprice CDs, the opportunity to reprice at significantly lower rates over the near term has largely run its course. Over the next four quarters approximately $1.5 billion of CDs will mature at an average rate of 50 basis points.

We didn't plan the numbers to fall this way, but the $110 million lost in CD balances is basically the same amount of the increase in DDAs for the third quarter. DDAs totaled $5.2 billion at September 30 and comprised a very strong 35% of total deposits. Interest-bearing transaction and savings deposits were virtually unchanged between the quarter ends.

Now turning to the income statement, net interest income was also unchanged for the third quarter at $180 million. Average earning assets were down $336 million from the second quarter. The Company's reported net interest margin was 4.54% for the third quarter, that was up 6 basis points from the second quarter.

Our core margin did compress approximately 5 basis points during the third quarter. This compression was related to the decline in both the loan portfolio yield, about 9 basis points, and the securities portfolio yield, about 7 basis points. The core margin was, however, favorably impacted by a change in the mix of earning assets, a shift in funding sources and a slight decline in funding costs. The decline in funding costs of 2 basis points was mainly related to the sub-debt redemption.

As you can see from the table on slide 11 of our presentation, Whitney's loan portfolio continues to perform better than expected and we have not experienced a significant level of charge-offs on either the credit-impaired or performing portfolios. As a result, re-projections of expected cash flows from that acquired portfolio led to higher realized deals that favorably impacted both net interest income and the net interest margin and offset the core margin compression.

As earning assets continue to reprice, and with a diminished opportunity to lower funding costs significantly, we expect continued compression on the core margin in the near term. All else equal, this would mean compression in the reported margin as well.

Non-interest income totaled $64 million for the third quarter, up slightly from the second quarter. Included in the third quarter was $900,000 from gains from security transactions. Excluding these gains, non-interest income declined slightly from the second quarter. Service charges on deposits totaled $21 million for the quarter and were virtually unchanged from last quarter.

The Durbin interchange restrictions began impacting Hancock Bank on July 1. As noted last quarter we expected a loss of income of about $2.5 million related to these restrictions. Interchange fees were down about $2 million during the quarter with ATM fees down another $500,000, both impacted from Durbin.

The loss of interchange income was partly offset by a $1.4 million increase in merchant fees during the quarter. The increase in merchant fees is related to the re-acquisition of the Company's merchant business and change in the terms of the servicing agreement. There was also a $500,000 increase in amortization of intangibles related to that re-acquisition.

In summary, and as reported, the category of bank card fees was down $500,000 from the second quarter. Fees from secondary mortgage operations totaled $4.3 million for the third quarter, up $1.3 million or about 43% linked quarter. The increase reflects a higher volume of mortgage production mainly from higher refinancing activity.

Fees related to our trust, insurance and investments lines of business were all down linked quarter, mainly reflecting the volatility and seasonality of those businesses. We continue to work on developing customer relationships that will generate revenue synergies. However, this will most likely be a longer-term initiative with new business added over time.

Operating expenses for the third quarter totaled $164 million, down $3.6 million from the second quarter. As we mentioned earlier, operating expenses exclude $5.3 million of sub-debt early redemption costs. There were essentially no merger-related costs in the third quarter with almost $12 million of pre-tax merger costs in the second quarter.

Total personnel expense was $88 million in the third quarter, a decrease of $1.2 million from the second quarter. That linked quarter decrease mainly reflects the reduction in staff associated with the core systems conversion and branch consolidations.

As we have discussed on previous occasions, given the size and complexity of this transaction, we elected to keep certain positions a little longer than normal to make sure the conversion impact was seamless to our customers. Linked quarter declines related to the systems conversion and branch consolidations were also reflected in occupancy, equipment and various categories included in other non-interest expense.

Amortization of intangibles totaled $8.1 million during the third quarter, up from $7.9 million in the second quarter. The increase is related to the re-acquisition of the merchant services business I noted earlier. Amortization of intangibles should approximate $7.8 million in the fourth quarter.

The Company's effective income tax rate for the third quarter was 26%, unchanged from last quarter. We expect the full-year 2012 reported tax rate to approximate 25%. At this point I will turn the call over to Sam Kendricks, our Chief Credit Officer.

Thanks, Mike, and good morning. As we noted last quarter, we expected asset quality measures to remain within the range of the results reported over the past few quarters and that is basically what happened. The allowance for loan losses was $136 million at September 30 compared to $141 million at June 30. The allowance to loan ratio was 1.19%, down from 1.27%.

The decline in the allowance was mainly related to the FDIC covered Peoples First portfolio. Charge-offs against a portion of the allowances established were previously identified impairment of certain pools of FDIC covered loans reduced the total allowance by $3.5 million.

There was also no additional impairment on these covered loan pools in the quarterly review as of September 30 and as a result we recorded no provision from loan losses on the covered portfolio for the third quarter.

Keep in mind this portfolio is reevaluated quarterly so new developments and changes in assumptions could cause an increase in following quarters. We recorded a total provision for loan losses for the third quarter of $8.1 million, essentially flat from $8 million in the second quarter. The net provision related to the Peoples First portfolio was $1 million in the second quarter.

Net charge-offs from the non-covered loan portfolio in the third quarter were $9.7 million, or 34 basis points of average total loans on an annualized basis. That compares to $10.2 million or 37 basis points in the second quarter.

As noted in the supplemental asset quality table attached to the earnings release, the allowance on the originated loan portfolio totaled $80 million, or 1.21% at September 30, down from $81 million, or 1.40% at June 30. Non-performing assets totaled $298 million at September 30, up $27 million from June 30.

The increase in overall NPAs reflects an increase in non-accrual loans of $22 million, an increase of $13 million in restructured loans and a decline of $8 million in ORE and foreclosed assets. The increase in non-accrual loans is mainly related to a small portion of the Whitney acquired portfolio that was performing at acquisition date and has subsequently moved to non-accrual.

Out of a $4.1 billion portfolio, only $23 million, or approximately one half of 1% is non-accrual. These credits are mainly smaller dollar, residential mortgage and commercial loans. There was also a slight uptick in the level of Hancock originating non-accrual loans.

The increase in restructured loans or TDRs is driven primarily by three credit relationships that have been modified. Two of these credits were in Louisiana and one in Mississippi and they were each in different industries. Of the total $32 million in total restructured loans, $22 million of that were non-performers.

While the total non-performing loan numbers show an increase linked quarter, what you don't see in our financial tables due to purchase accounting reporting rules are the many dollars of problem credits that have been resolved since acquisition date.

To illustrate that point I would refer you to the chart on slide 15 in the deck which shows the decline in criticized loan balances since acquisition. These numbers exclude Peoples First and our gross of the Whitney loan mark.

The decline in ORE foreclosed assets reflects the substantial ongoing efforts towards reducing the overall level of non-performing assets. We currently have approximately $60 million of property under sales contracts with deposits scheduled to close during the fourth quarter.

I would like to close by saying that I remain comfortable with the overall credit quality of the Company's loan portfolio and, while we did have a slight uptick in non-performing loans, it reflects business activity in today's environment and is not in our opinion systemic or part of a larger trend. I will now turn the call back over to Carl.

Thanks, Sam. At this time we will now open the call for questions.

(Operator Instructions). Kevin Fitzsimmons, Sandler O'Neill.

Good morning, everyone. I appreciate the color on the credit quality and the increase in non-performers and I see that slide showing criticizeds have come down. But I guess -- I mean I guess what happened this quarter is somewhat was previously considered performing Whitney loans migrated into non-performing.

So the question will be is that a continuing feeder into the criticized loans? But should we -- should the takeaway be at the end of the day that these are all mark to market so hopefully even if you have some lift in problem loans from there the loss content should be relatively low?

What I would say is that I am not surprised to see some loans moving into non-accrual category. What I am encouraged by is that there are no substantial or large transactions moving into that category. As you can expect, there will be a migration in an out of the non-accrual categories. We have seen substantial resolution of loans that were categorized as impaired over the course of the last six quarters.

So again, the portfolio continues to perform better than we expected. But you can continue to see from time to time some accounts that may migrate into the non-accrual category that were performers at acquisition date. So again, we have not seen a trend of concern there, but we will continue to be attuned to the performance of that portfolio.

But this was just more natural timing? It wasn't any kind of deliberate review that went on this particular quarter?

We did not have a specific review that led to an identification of problems. This is just sort of the business environment that you would typically see of normal migration of credits off the balance sheet that, again, doesn't have entire visibility to you. But you will see the performers that migrated to non-accrual show up in the non-accrual numbers.

And Kevin, this is Mike. Just a couple of additional comments to Sam's, a couple of things related to that a little bit of an increase. Again, those loans that comprised that $15 million or so primarily were much, much smaller loans. And so the balances there were generally $500,000 or lower.

Another point is of course that comes out of the acquired performing portfolio, so all of those loans were mark to market or had the discount certainly attached to them. If we look at that discount as it stands right now, as a percentage of those acquired performing loans it is almost 2.5%.

So again, the numbers in terms of that little bit of a movement, probably a little bit in the way of a catch up there for loans that, again, were much, much smaller but needed to be just kind of taken care of. So we do not at all foresee that that is any kind of systematic issue at all with the performing loans that were acquired through the Whitney transaction.

Okay, great, Mike. Just one quick follow-up on the piece of growth that was very strong C&I this quarter and you said how it may slow. Is that due to the economy you have seen a slowness in demand or is it you guys stepping back from the competitive pricing that is out there? Thanks.

No I think there it is the better part of caution. Again, certainly as we came off the systems conversion and began to play offense there was probably a little bit in the way of a catch up there. We have a very, very energized group of commercial lenders, as Carl indicated before, and lots of very, very good things going on there.

But certainly we are cognizant of the competitive pressures. We are very cognizant of the pricing issues and pressures out there. So we are not at all trying to caution folks that the loan growth that we enjoy during the quarter is all of a sudden going to go away, it just may not continue at quite those levels.

Yes, Kevin, this is Carl. The pipeline, I'll tell you, looks extremely strong. But we are just trying to manage the expectations, but I'll tell you, we do generally have a very energized group of lenders and we are seeing great success but you just don't want to set expectations that may not come through. But the pipeline looks very strong.

Okay, great. Thank you very much.

Michael Rose, Raymond James.

Hey, good morning everyone, how are you?

Good morning, Michael.

Hey, just wanted to -- and I'm sorry if I missed this in the prepared remarks, but I wanted to get a little context around some of your efficiency targets that you laid out in the slide deck. And if you could just give some color there that would be helpful. Thanks.

It's Michael. So again, the efficiency ratio for the quarter -- third quarter, just over 64%. And we have talked an awful lot about thinking around our efficiency ratio in terms of short-term targets and longer-term targets. And certainly on a shorter-term basis, once all of our efficiencies are fully reflected, as they will be in the fourth quarter, we expect that efficiency ratio to be around 62% and on a longer-term basis certainly we would like to get that number below 60% into the high 50s.

So as we move into 2013 has that number potentially moved below 62% will certainly depend a lot on how successful we are in growing our revenue book in 2013. Obviously we are going to continue to work on synergies and certainly we expect to garner additional synergies as we move into 2013 but then we are also mindful of the investments that we need to make in our Company in terms of additional strategic hires and then other investments. So that is basically how we kind of think about it and hopefully that makes sense.

Yes and Michael, this is Carl. You know the continued regulatory oversight and the burden associated with that and the cost associated with that is continuing to be a major headwind I think for every financial institution's efficiency ratio. So that is something that obviously comes into play in it.

Yes, that is great color. And Carl, on that point, as it relates to your appetite for acquisitions, obviously it is impacting all banks, the regulatory costs particularly the smaller you get in size. Any updated thoughts on your views around M&A? Do you still kind of view 2013 as when you're going to start to look maybe a little bit more aggressively?

I think that is accurate, Michael. We continue to see as we've talked to examiners and then talked to fellow CEOs of community banks throughout the Gulf South the burden is just continuing to get heavier and heavier. And so I truly believe you will see, and are starting to see it already, some banks and some boards start to raise their hands looking for strategic partners.

And these aren't necessarily troubled banks by any means. These are many of which are healthy banks that are just realizing that the sheer size of their institution and faced with the increasing regulatory burden that's certainly not going to go away anytime soon, that this is really the best option for them. So I would expect for you to see us certainly be fairly active in '13.

Great, thanks for taking my questions.

Jefferson Harralson, KBW.

Thanks, I was just going to -- I think I may have figured out since I was waiting for my question to come up. But just going to question -- or slide number 11 and just thinking about this credit impaired mark. So on roughly half of the loans so far that have come out we have taken a 5% mark and for the rest we have a 54% set aside.

So it appears that you're way ahead of expectations obviously on the losses there. How should we expect that to kind of play out over time? At some point is there going to be a, I don't know, just a reserve release, if you will, there as the credit continues to happen? Because it looks like that 54% just didn't happen. Or is there something between the first half and the second half but might be drastically different?

Hey, Jefferson, it's Mike. No, I don't think there is anything drastically different. As we have talked about quite a bit over the past couple of months, we have had an awful lot of the acquired credit impaired loans leave the balance sheet over the course of the last 12 months. And again, we have talked about that occurring for lots of different reasons.

But you are correct, here we are at the end of the third quarter with about $427 million of [low] credit-impaired loans left on the balance sheet, but yet have that mark by over 54%.

So again, as we have talked about, those are pretty big numbers and certainly reflect the fact that many of those credit-impaired loans that came over through the Whitney acquisition at acquisition date in a lot of ways really weren't technically credit impaired. And again, Whitney had gone through a lot of things in those years leading up to the transaction, years of charge-offs, bulk sales, and probably most importantly had gone through a process of re-risk rating that entire loan portfolio in a very, very conservative manner.

So again, here we are with the remaining market, over 54%; very cognizant of that over time, assuming that there are not additional charge-offs related to that portfolio or additional asset quality events somewhere down the road, most of that $232 million over time will need to be accreted back into earnings.

And do you think that $232 million kind of comes in as the loans actually shrink, or do you think there is a chunk that comes out here one of these quarters where we just have a catch-up?

I am sorry. Say that part again?

So I guess there is two options here. One is that $232 million comes in kind of slowly over time as these loans shrink and that 54% loss rate is not realized, or is there a point here where just a big chunk needs to come out to catch up?

We don't expect to have a big catch-up or a big chunk of that accretion happen. It will happen over time. And again, the way that we are approaching it is a very, very conservative manner. Again, these are loans that are credit-impaired and are rated substandard or worse.

So again, one of the things that we are very cognizant of is the potential for future asset quality events, a storm or an oil spill or something that could impact the credit quality of that credit-impaired book. Because again, those loans came over as substandard loans and they are credit impaired.

So we are very cognizant of the fact that we need to look at that portfolio in a very conservative manner. So again, we are being careful in how we accrete that discount back into earnings over time.

Okay, thanks, guys. I appreciate it.

Jennifer Demba, SunTrust.

Thank you. Can you give us some details on the branches that you anticipate closing in the first quarter, the additional seven offices? And Carl, do you anticipate just trying to keep your expenses sort of flattish from your fourth-quarter run rate next year, or do you think you can get more improvement?

Well, Jennifer, let me first touch the first part of your question on the branches, the seven branches that we approved with our board yesterday that will be affected in January, the first quarter. Two were in Mississippi on the coast, two in Alabama and three in Florida, one in the Panhandle and then two down in Orlando area. Two of those seven were drive-up facilities, so I mean they are very, very small. And when you look at the total book of these branches, it is extremely small in relation. I mean, total loans were less than $6 million. Deposits roughly around $100 million in total.

So these are very small facilities. And it's part of, again, a part of our ongoing branch rationalization. When you look at -- and that is not to say we will have another seven next quarter. So I am not trying to send a signal, but it is part of our just ongoing rationalization process that we go through every quarter.

Going forward into '13, as far as expenses, I think we certainly will be mindful of that and we continue to watch expenses very, very closely. But as we see opportunities to grow and make strategic investments, clearly you will see the natural progression of expense growth. But, you know, we work very hard to make sure that is associated with appropriate revenue as well.

And Jennifer, the other thing to be mindful of is that typically in the first quarter of every year, we do tend to see a little bit of a seasonal increase in expenses. So again, that is something to be mindful for.

Right. Thank you.

David Bishop, Stifel Nicolaus.

Sort of following up on that side on the revenue side, I think, Mike, you alluded to. Maybe give us an update on what you're seeing on the ability to cross-sell some of the insurance in wealth management products through the Whitney franchise and system.

Absolutely, David. Yes, and we have talked a lot about that, and certainly that is something that we work on every single day and certainly have in a very efficient manner. And we have talked a lot about really the event that needed to occur before we really can start working on those and begin reflecting any revenue synergies was the core system conversion.

That happened, of course, back in March. We continue to work on integrating the two companies and continue to work very, very hard on garnering those revenue synergies. But admittedly, that has been a little bit slower to come than we had expected, but it still is a very important goal to us and an area of revenue expansion that we believe has potential. So as we move into 2013, that certainly is one of the priorities that we are working on.

Great. And then on the sale of the other real estate owned there in terms of pricing there, what should we be thinking in terms of its impact, in terms of OREO costs moving forward?

You are speaking to the net value received relative to book?

Yes, and then just sort of on an ongoing basis into 2013, sort of what the standalone OREO costs were this quarter and what you think that could have an impact moving forward into 2013?

Dave, for the third quarter our total ORE expenses were about $4.6 million. As we move into the fourth quarter, we do expect that category of expense to come down, partly related to the ORE sale, but again, partly related to the fact that we have done an awful lot of work over the past couple of quarters in ensuring that our ORE is appropriately valued on our balance sheet. So again, we do expect those costs to come down in the fourth quarter.

As it relates to the property that we have under contract, we don't expect any significant losses associated with the closing of those, just the normal customary settlement costs. But at this point, I would classify that as sort of a wash transaction.

Great, thank you.

Christopher Marinac, FIG Partners.

Thanks, good morning. You may have mentioned this earlier, Mike or Carl, but I just wanted to ask about the drop in the FTEs we saw again this quarter. Will there be more of that from a headcount perspective in fourth and first, or is this kind of the majority of the move?

Yes. Again, our company's FTEs were down about 166 between the end of the second quarter and end of the third quarter. And Chris, as we move into the fourth quarter, we will not see reductions at that level or to that magnitude. And most of the reductions going forward for the next quarter or two will be related to the branch closures and consolidations that we announced.

Yes. And Chris, those seven that we announced yesterday, seven branches I mean, there are only like 25 FTEs associated with that. So these are very small shops, and so I think Mike is right as far as the future expectations of FTE levels.

Okay, great. And then just another sort of, I guess, color. You mentioned the energy business being one source of strength this quarter. Is that coming from a placement of products in your markets, and does that have the potential to be even stronger once the uncertainty of the election is behind us?

I would think so. We brought in the new energy team to augment what we already had in Houston. They have hit the ground running and are doing extremely well, but we also have seen very strong growth in Southern Louisiana in the energy-related services industry. And I think we will continue to see growth in that area.

Then once we have clarity in the election and start to see some clarity on the fiscal cliff, I can tell you firsthand from talking to many larger commercial customers, they're on the sidelines just waiting for some clarity. Just let me know what the future is so I can prepare for it, and then -- and grow my company the way I need to. So I think you will see -- I certainly believe there is some pent-up demand waiting on those two items and the clarity surrounding those.

And Chris, just as an aside, the vast majority of the growth that we enjoyed quarter to quarter in the energy portfolio really was in the E&P sector. So that is reserved-based and an area that we feel very, very good about; very conservatively underwritten.

Great. Thanks, guys. That is helpful.

Emlen Harmon, Jefferies.

Hey, good morning, guys. I was hoping you could just address the reacquisition of the merchant business. I would just be kind of interested to understand kind of why you sold that business originally, kind of what has changed in your decision to re-acquire that. And actually maybe a third part of that would be just kind of, I guess, confirming that the fees from that business are going to be in the earnings run rate.

Sure. Yes, the original decision I guess to get out of that business was a legacy Whitney decision. So I really can't speak for the reasons why that was done several years ago, but we saw an opportunity with the transaction to kind of get back in that business, and saw a compelling business reason and business plan to do so.

And so, again, we booked the $1.4 million of additional merchant fees during the third quarter. A little bit less than half of that was one-time in nature. So going forward, we do expect to see part of that lift to continue going forward.

Got it. Okay, thank you. And then just on the margin going forward, in your deck I think you call out that you would expect kind of the total margin number. So we have been talking about core compression for a while, but a total margin number to start to drift.

Could you give us a sense of kind of the way that margin pressure comes in? Do you see kind of like a linear drop in accretion from the acquired portfolio, or just how should we think about that as we go forward?

Yes, great question. And again, the way we kind of think about the core margin again is -- and it is no secret. It really is just the sheer math of our earning assets repricing higher-yielding bonds and higher-yielding loans that come off the books and are replaced by much lower-yielding assets in this low rate or no rate environment.

So we have talked a lot about that as a headwind, and certainly every other bank out there has that particular issue as well. So it is not something that we are going to be able to escape from. And we have had some of that going on.

If you look at the last five quarters or so, purely on a core basis and that is backing out really the entire impact of all the purchase accounting adjustments, we probably have had about a 15 to 18 basis point contraction in our margin. Again, that is over about five or six quarters. So what we have had is anywhere from maybe 3, 4, 5 basis points a quarter.

And I would expect from where we are right now, absent any other kind of unusual events with the economy or the interest rate environment, that going forward for the next couple of quarters that is probably about the level of NIM contraction that you could expect from us.

And again, that is all things equal, which means when we talk about the accretion certainly for the last couple of quarters, we have been able to increase our accretion related to the acquired loans from Whitney. And from this point forward, we are not anticipating an increase in the accretion. But certainly that is a process we go through each and every quarter to reevaluate those cash flows and run those numbers through our model and make a determination around how we should handle that future accretion.

So again, from where we stand right now, we are not looking at future increases there. And so as a result of the core margin contraction, that should bleed through to the reported margin.

Got you. That is very clear. Thank you.

Hey, this is Carl. On your earlier question about the merchant business, when you consider the two banks now together as one institution, you have really got some significant scale now that clearly makes sense and is a great opportunity. And that is why we feel like it is important for us to be in that business.

Got it. Thanks for that.

(Operator Instructions). Jonathan Elmi, Macquarie.

Thanks, guys. Actually, my questions have been asked and answered.

All right, good deal. That means the process is working.

Keep it easy for you guys.

Thank you, Jonathan.

Peyton Green, Sterne Agee.

Great, thank you very much. I was wondering, Mike and Carl, if you all could talk a little bit. I mean the preference so far has been to effect by more earning asset mix change the balance sheet growth. How do you view that going forward? I mean what is the optimal mix, I guess, of loans versus bonds?

And then secondly, I mean going back four or five years, I mean Hancock produced an efficiency ratio in the low 60%s with a much lower margin. I was just wondering if there was anything structural that keeps you from getting there with a higher margin.

This is Mike. On the balance sheet management question, our loan to deposit ratio right now is up about 78%, 77%, if you look at the numbers on an end of quarter basis. And certainly, I think you and many other investors know that typically the way we look at managing our balance sheet is very conservatively.

So we have always kind of had a comfort zone of around an 80% or so loan to deposit ratio. Certainly in this operating environment, we are very cognizant of the fact that we would like our balance sheet to be managed as efficiently as possible. And so we are very interested in continuing to improve positive movement in that loan to deposit ratio, and certainly we see that number going up certainly higher than it is right now, into the low 80%s or somewhere in that range.

So we continue to work very hard on improving that earning asset mix through generating more loans and not having to invest any liquidity really in the bond portfolio where the yields are very close to almost nothing these days.

Yes, and we have worked hard on the deposit side of continuing to improve our deposit mix. But, you know, we are getting to a point now with the signs of strong loan growth that we certainly are focused now -- starting to focus more on actually growing the earning asset book.

We have, I think, done an excellent job in making it very efficient, the existing book, particularly on the loan side -- I mean on the deposit side. But now we are at a point where we clearly are focused on now growing that overall pie, the earning asset book.

Okay. And then any thoughts as to what you might do with the capital that is building, in terms of dividend or stock repurchase?

Well, we always are looking at our options. And we are fortunate to have several levers, a couple of which you mentioned. The other, of course, is continued expansion opportunities as I mentioned earlier in the call. I think we will continue to see an increase in opportunities in the M&A world, particularly in '13 and beyond.

So while we are not interested in growing just through acquisition just for the sake of growing, we are going to be very strategic. And having said that, I think there are some very strategic opportunities that will present themselves.

And so as we have, that is one thing that you can look back and you have been following us for a long time, Peyton. And you know that we have, I think, an excellent track record of being able to deploy our capital very strategically, particularly when it comes to M&A. And so we are fortunate to have the strong capital base and are looking at our options as we go forward.

Okay, great. Thank you.

Kevin Reynolds, Wunderlich Securities.

Good morning, everybody. Carl, most of my questions have been answered too, and I didn't want to necessarily drill down into details but to stay sort of high level if we could. I mean you had spectacular loan growth in the quarter, but clearly it is not sustainable at this pace, and I think everybody could have picked that up right out of the gate. So I appreciate you communicating that.

But as we go into 2013, and you start thinking about the future of your combined organization, do you think that we have transitioned now from an expense save merger integration story of these two companies into more of a forward-looking offensive growth story with some loan growth that is probably a little better than what people expected at this point in time? Or do you think that we still need to be focused on getting the integration and the combination of the two companies?

Kevin, that is a great question, and the answer is the first part of your answer that you laid out there. We are clearly looking forward now. We will not take our eye off the expenses by any means, but that is not our primary focus now. We are looking going forward at growing revenue.

And, in fact, we ended our board meeting at the holding company level yesterday with a comment from our Chairman of he is excited because now we are looking forward in the future and not looking in the rearview mirror. So that is exactly where we are headed.

Okay, all right. That is really all I had. I think a great quarter, and keep up the good work.

Appreciate that.

Showing no further questions in the queue at this time, I will hand the call back to Carl Chaney for closing remarks.

Okay, thank you all for joining us today. And as we said earlier, very proud of our quarter, a very solid quarter, and looking forward to a great future. I would like to say to all our good friends up in the Northeast who are preparing for Sandy, I guess making her way up for Halloween, we certainly can understand and appreciate what all you are going through and hope all things go well. Thank you, again, for joining the call.

Thank you. Ladies and gentlemen, this concludes the conference for today. You may all disconnect, and have a wonderful day.