Hancock Whitney Corp (HWC) 2012 Q4 法說會逐字稿

Good morning and welcome to Hancock Holding Company's fourth-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 project 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 that 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. 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 those slides in today's call. I will now turn the call over to Carl Chaney, President and CEO.

Good morning and thank you for joining us today. While the fourth quarter's results were admittedly a little noisy, I am happy that the results continue to reflect strong overall operating fundamentals and the full realization of the cost savings targeted with the Whitney transaction.

Also included in the quarter's results was a bulk loan sale of mostly nonperforming loans that was completed close to year-end. The reduction of about $40 million in problem loans and the associated $14 million in provision expense was a prudent and effective use of the Company's strong capital. I realize it cost the Company $0.10 per share in EPS; however, by addressing these problem credits today, we have eliminated the long-term cost and distractions associated with carrying these assets. We will continue to aggressively address moving problem credits and ORE out of the bank and will consider NPL and ORE sale opportunities as part of that review process.

Our fundamentals remain strong. During the quarter, we generated over $500 million in net new originated loans. The growth, mainly in commercial or C&I, reflected activity in most markets across our footprint. Houston, greater New Orleans and western Louisiana performed the best as these markets are home to a significant part of the Gulf's energy sector. We also continued to see impressive C&I loan growth in Florida as well. Our current loan pipeline remains solid and we currently expect net loan growth to continue in future quarters.

Our balance sheet grew almost $1 billion during the quarter. We did not experience any outflows of deposits related to the expiration of the TAG program and actually saw our deposits increase by $1 billion this quarter. While some of the deposits are temporary in nature, I believe the increase reflects a positive view of the strength and stability of our Company.

The reported and core margins did compress during the quarter reflecting the continued low rate environment and high competition for business. Until those things change, we remain subject to the same headwinds and challenges as others in our industry.

Our fee income to total revenue ratio, as noted on slide 12, did take a hit from the impact of Durbin. However, we continue to focus on cross-sell opportunities and other fee income areas such that our ratio is now back up to pre-Durbin levels.

We successfully hit our target on cost savings from the Whitney merger this quarter and so, now, I believe we have fully addressed the three main questions that surfaced when the Whitney transaction was announced. First, could a slightly smaller bank successfully acquire and integrate a larger commercial bank? Well, yes. With the successful core systems integration in mid-March and no significant loss of customers, you can check that box.

Secondly, was the loan mark enough given the Whitney credit-impaired book? Well, I think if you look at slide 11, it says it all. We have a 60% discount remaining on the credit-impaired portfolio. Check that box.

Number three, could we achieve the cost savings we announced with the transaction? Well, not only were they achieved, but we actually came in at the lower end of the targeted range. Our new base includes the $134 million of projected annual cost savings.

We have proven we are building an organization well-positioned and fully focused on our future as one strong consolidated company. Our ROA for the fourth quarter was approximately 1%. We remain committed to improving this ratio and growing our Company. At this time, I will turn the call over to our CFO, Mike Achary, who will review the results in more detail.

Thank you, Carl and good morning, everyone. Net income for the fourth quarter was $47 million, or $0.54 per diluted common share. That was flat with last quarter's $47 million, but a penny under last quarter's EPS of $0.55. Included in the Company's fourth-quarter results are $14 million pretax, or $0.10 per diluted common share, from the bulk sale loan loss provision Carl just noted; $3.2 million, or $0.04 per diluted common share, of one-time tax benefits; $600,000 of pretax security transaction gains; and the realization of the remaining cost synergies related to the Whitney acquisition.

The Company's pretax preprovision profit for the quarter was $89 million, up almost 14% from $78.5 million in the third quarter. Total loans at year-end were $11.6 billion, up $143 million, or 1%, from September 30. Excluding the FDIC-covered portfolio and the reduction from the bulk loan sale, total loans were up $223 million, or about 2% linked quarter. That compares to an increase of $388 million, or 4%, during the third quarter.

Excluding, the Company's covered loan portfolio, we reported net growth in C&I loans of 5% while residential mortgage loans were up 2% linked quarter. As was the case last quarter, a significant portion of the current quarter's loan growth was from the energy sector. The Company's energy portfolio totaled $905 million at December 31, up from $758 million at September 30.

Total deposits at year-end were $15.7 billion, up $1 billion or almost 7% from September 30. DDAs totaled $5.6 billion and were up $473 million, or 9%. DDA deposits comprised 36% of total period-end deposits at year-end. Interest-bearing public fund deposits totaled $1.6 billion at year-end, up $259 million, or 20% linked quarter. DDA public fund deposits typically reflect higher balances at year-end with subsequent reductions beginning in the first quarter.

CDs totaled $2.5 billion at December 31, up $78 million or 3% from last quarter. During the fourth quarter, $492 million of time deposits matured at an average rate of 38 basis points, of which $380 million renewed at an average cost of just 18 basis points.

The quarter's increase in CDs was driven by the issuance of $200 million in brokered CDs in November. While we didn't expect deposit outflows related to the expiration of the TAG program, these CDs were issued as a temporary source of liquidity in the event we saw any activity. Half of the deposits issued for three-month CDs at a cost of 50 basis points. The remaining CDs were six-month maturities issued at a cost of 65 basis points.

As Carl noted, our banks have not experienced any material outflow of deposits as a result of the TAG expiration. In fact, we believe we may have actually attracted some deposits from other institutions. As we noted last quarter, the opportunity to reprice CDs at significantly lower rates over the near term has largely run its course. The Company's total cost of funds now stands at just 28 basis points as of the fourth quarter.

Net interest income for the quarter was $183 million, up from $180 million last quarter. Average earning assets were $16.2 billion in the fourth quarter, up $416 million from last quarter. The Company's net interest margin was 4.48% for the fourth quarter. That was down 6 basis points from 4.54% last quarter. The Company's core margin of 3.61% compressed approximately 14 basis points during the fourth quarter mainly from a decline in asset yields both in the loan and bond portfolios.

Our loan growth is being funded through excess liquidity or runoff from the bond portfolio. The new loans, which are higher quality, are priced at thinner margins and lower yields of about 3% to 3.5%. Those rates are lower than what is maturing or paying off. However, while the current rates are low, the new loans are at a significant yield advantage to liquidity kept at the Fed for reinvestment yields for the bond portfolio. In addition, we are building new or adding to current customer relationships. We feel the tradeoff is an acceptable one for the long term.

We define our core margin as annualized reported net interest income reduced by Whitney and Peoples First net purchase accounting adjustments as a percentage of total earning assets. Purchase accounting adjustments impacting the margin include loan accretion, bond premium amortization and a small amount of CD accretion.

Whitney's acquired loan portfolio continued to perform better than expected during the fourth quarter. As a result, reprojections of expected cash flows from the acquired portfolio led to approximately $4 million of additional loan accretion during the fourth quarter. The increase favorably impacted both net interest income and the Company's net interest margin.

We do expect continued compression in the core margin in the near term as earning assets continue to reprice at lower rates and the opportunity to significantly lower funding costs remains diminished. All else equal, there would be compression in the reported margin as well.

Accretion levels, which had historically helped mitigate compression in the reported margin, can be volatile due to items such as payoffs and prepayments in the acquired portfolio. Noninterest income for the Company totaled $65 million for the fourth quarter. That was up $1 million from last quarter. Included in the fourth and third quarters respectively were $600,000 and $900,000 of gains on security transactions.

Service charges on deposits totaled $20 million, slightly down from the third quarter. Fees from secondary mortgage operations totaled $5 million for the fourth quarter, up $800,000 or about 20% linked quarter. The increase reflects a higher volume of mortgage production during the fourth quarter mainly related to refinancing activity. The linked-quarter changes related to trust, insurance and investment and annuity lines of business all reflect the volatility and seasonality of those productlines.

As Carl noted earlier, we have met our guidance for operating expense for the fourth quarter. We have completed the cost savings associated with the Whitney transaction and can now move forward using the fourth quarter of 2012 as a base for the consolidated company.

Please note, as in previous years, we do expect total noninterest expense will increase in the first quarter of 2013 due to the seasonal nature of certain line items. Operating expenses for the fourth quarter totaled $158 million and again, that was down $6.5 million, or 4%, from last quarter. Operating expenses exclude merger-related costs and for the third quarter, $5.3 million of subdebt repurchase expenses. There were no merger-related costs in the third or fourth quarters of 2012.

Operating expense, excluding amortization of intangibles, was $150 million for the fourth quarter, slightly lower than the midpoint of our guidance of $149 million to $153 million. Total personnel expense was $87 million in the fourth quarter, a decrease of $800,000, or 1%, from the third quarter. The linked-quarter decrease mainly reflects the staff reductions associated with previously announced branch consolidations.

Other operating expense totaled $45 million, down almost $5 million from the third quarter. The linked-quarter decrease was mainly related to reductions in professional service expense, telephone and data processing, advertising and ORE expense. Amortization of intangibles totaled $7.7 million during the fourth quarter. That was down from $8.1 million in the third quarter.

We did see certain tax benefits during the fourth quarter. The effective income tax rate was 20%, down from 26% in the third quarter. The decline is related to additional new market tax credits and historical rehabilitation tax credits added in the fourth quarter. We expect the effective tax rate to return to a more normal level of between 26% to 28% in 2013.

I would like to also reiterate what Carl said earlier on expenses. We are pleased to be able to achieve all the savings we projected when the merger was announced. While we did have a slight increase for strategic initiatives and from normal operating increases, we are very pleased with how hard all our employees worked to achieve this target. And while we can now plant the flag and kind of declare victory on achieving these specific goals, we will not lose sight of becoming a more efficient company and we will continue cutting costs where and when it is appropriate to do so. But don't forget expenses will go up in the first quarter due to the seasonality we have previously mentioned. I will now turn the call over to Sam Kendricks, our Chief Credit Officer.

Thank you, Mike. As Carl noted earlier, near the end of 2012, the Company completed a bulk sale of loans with a net book value of approximately $40 million. Approximately $36 million of the loans sold were previously reported as nonperforming loans. The remaining $4 million of loans sold were acquired impaired credits that were not reported as nonperforming loans under purchase accounting.

The sale added approximately $13.7 million for the provision for loan losses and approximately $16.2 million to net charge-offs in the fourth quarter of 2012. Specific reserves totaling approximately $2.5 million had been previously recorded on loads included in the sale and we had charged down a number of these loans in previous quarters. Before the prior charge-offs, the credits sold had a total of approximately $56 million in remaining contractual principal balances.

As Carl also noted, we felt that this was the best alternative to holding these credits. Our cost benefit analysis considered items such as the cost of litigation, projected hold times for resolution, the impact on the workout area, and the expenses of moving NPLs through the ORE process. In the end, we determined the bulk sale was the least costly option for the Company.

Nonperforming assets, which exclude acquired credit-impaired loans from Whitney and Peoples First, totaled $256 million at year-end. That is down $42 million from the $298 million at the prior quarter. The decrease in overall NPAs reflects both the impact of the bulk sale noted above and a net reduction of $28.5 million in other real estate properties or ORE during the fourth quarter. The net reduction in nonaccrual loans was $14 million. While the bulk sale reduced nonperforming loans by $36 million, we did have a handful of credits mainly in our Louisiana markets moved to nonperforming status.

The additions to (inaudible) accrual made up of CRE credits, our wholesale/retail company and commercial contracting credits. The main driver of the net reduction in the NPAs was ORE. We announced last quarter that we had about $60 million of ORE under sales contracts, which we expected to close during the fourth quarter.

We successfully closed about 70% of the total dollar amount of ORE under contract during the fourth quarter. The remaining contracts plus an additional $15 million in new sales contracts entered into during the fourth quarter for a total of about $33 million are expected to close in the first quarter of this year. There was no material gain or loss in the credits that closed in the fourth quarter and we do not expect any significant gain or loss on the remaining credits closing in the first quarter of this year.

Additions to ORE during the quarter were mainly from the covered portfolio, as well as a handful of branch locations that were closed during the quarter. As part of our normal credit risk management process, we will continue to evaluate the cost and benefits of additional NPL and ORE sales opportunities.

The Company's total allowance for loan losses was $136.2 million at December 31. That is up from $135.6 million at September 30. The ratio of the allowance to period-end loans was virtually unchanged at 118 basis points. The allowance maintained on the originated portion of the loan portfolio totaled $78.8 million, or 111 basis points of related loans at year-end, down from $79.7 million or 1.21% at September 30.

Excluding the reduction in specific reserves related to the bulk loan sale, the allowance on originated loans increased $1.6 million, primarily due to this quarter's strong loan growth. An $800,000 allowance was established in the fourth quarter for acquired performing loans that have become impaired. During the third quarter, the allowance on originated loans had been reduced by $1.6 million, due primarily to charge-offs on impaired loans with specific reserves. The allowance ratio for originated loans is expected to decline as a proportion of this portfolio, representing new high-quality business [grows] other factors held constant.

Net charge-offs from the noncovered loan portfolio were $28 million, or 97 basis points of average total loans on an annualized basis in the fourth quarter. Excluding the impact of the bulk sale noted above, noncovered net charge-offs for the quarter of 2012 were $11.8 million, or 41 basis points of average total loans, compared to $9.7 million or 34 basis points of average total loans for the third quarter of 2012.

The provision for loan losses for the fourth quarter totaled $28.1 million. That is up $8.1 million from the third quarter. Excluding the impact of the bulk sale noted above, provision expense for the fourth quarter of 2012 was $14.4 million. The provision for noncovered loans, excluding the impact of the bulk sale, increased to $14.2 million in the fourth quarter from $8.1 million in the third quarter. This increase reflects a $2.1 million higher level of net charge-offs in the current quarter and the allowance build activity that was noted earlier. I will now turn the call back over to Carl.

Thanks, Sam. As you may know, New Orleans is hosting Super Bowl XLVII next weekend. A team from the West Coast and one from the East Coast and all the fans, corporate sponsors and media will be in New Orleans and other cities along the Gulf Coast spending money and enjoying some good Southern hospitality. And with Super Bowl sandwiched in between the two weekends of Mardi Gras, many businesses in our markets should be doing extremely well right now.

Before I open the call for questions, I would like to remind everyone about the economic impact these events could have on New Orleans and the Gulf Coast region. A study done by the University of New Orleans commissioned by the Super Bowl host committee indicated that the economic impact from the Super Bowl alone should be over $400 million, not including all of the local improvements and upgrades that occurred in New Orleans recently. The combined economic impact of Mardi Gras and the Super Bowl on the Gulf Coast region is expected to exceed $1 billion. That is a pretty good way to start 2013 in the heart of our franchise. We will now open the call for questions.

(Operator Instructions). Matthew Clark, Credit Suisse.

Good morning, guys. Can you first maybe discuss the bulk loan sale and maybe the characteristics of the types of credits that you sold? I guess what was it about these credits that made it more difficult for them to work out? I mean you have seen a lot of banks avoid bulk sales more recently and just curious what it was about these that made it more difficult.

Certainly. Well, we do an analysis of these credits and I can't characterize them all in one category. Some are related to CRE, some were operating companies, but as we evaluate where we are in our negotiations and workout situation, if we think there is going to be any protracted litigation, bankruptcy resolution and depending on the geography, an extended timeline to move through the foreclosure process, by the nature of the collateral, it appears that we are going to have to hold it for an extended period of time with the associated ownership expenses. We go through that analysis to determine if it is better to offload those and in the case of these particular assets, that was our determination. So it was a variety of credits that we determined were going to be in an extended and protracted workout situation with fairly high expense loads to do that.

And Matthew, just as a follow-up to Sam's comments, this is Mike Achary, and I think we have shared this with folks before, but we remain very focused on reducing our NPAs and we do believe that, in this circumstance, it was a very effective use of the Company's capital to engage in a transaction like this. So again, it is part of what we are very focused on doing.

Okay. And on the accretable yield this quarter, can you just confirm the dollar amount? I know I think you had said it was up $4 million. I assume that is $26.5 million, but -- and maybe also just the three adjustments that you -- quantify the three adjustments to get to the core margin please. The purchase accounting?

Sure. And again, the way that we go about that particular math is to back out basically all the purchase accounting adjustments that impact net interest income and the net interest margin. And so, again, that is any and all loan accretion, premium amortization related to the acquired bonds and then we also have a small amount of CD accretion.

Now what we haven't disclosed is the exact dollar amounts of those particular items and suffice it to say though that the accretion levels on our loans were up about $4 million for the quarter. And then we have kind of counseled people and guided people to expect a little bit of volatility in those accretion levels depending on their performance of the acquired impaired loans.

But I guess that is a dollar figure I think you guys have provided in the past and it has been increasing every single quarter. Is it fair to assume that that will continue though?

Well, again, the accretion level, especially as we go through time, can tend to become a little bit more volatile. And so when we look at the increase of $4 million quarter-to-quarter, we are not necessarily saying that that level is going to stay exactly at that level. It could go up a little bit, could go down.

One of the things that we do every single quarter is go through a complete reprojection of all the cash flows related to the acquired loans and then also review all of our assumptions related to how we believe those cash levels will behave, including discount rates. And so there is the tendency for volatility quarter-to-quarter.

Our objective is to keep those accretion levels as smooth as possible, but as we get further and further into this, especially with the size of the Whitney impaired discount growing and continuing to grow, we are under a little bit more pressure to really look at those accretable levels and move them up when appropriate. So we really do kind of shy away from giving hard and fast projections around where those accretion levels are going to go.

Having said that though, I do not expect a big change quarter-to-quarter. At this point, all things equal, the accretion levels could go down a little bit, but again caution you on the volatility related to those numbers.

Okay. And then just lastly, the discount left on the acquired performing portfolio and the discount on the impaired book in dollars?

Yes, actually that is on I think it is slide 11 --

Okay, never mind then.

-- in the slide deck and those numbers for the credit-impaired for Whitney, it is $212 million at 12/31 and then for the performing piece, $82 million. So that is a total of $294 million.

Got it. Thanks.

Jefferson Harralson, KBW.

Thanks. I wanted to ask about some provision trends. In 2011, you averaged on the provision a little less than $10 million and if we count the $13 million provision this quarter as the core, you are a little under $10 million in 2012 as well, but we also just saw a $13 million number. How should we -- should we think that NPAs are down? It seems like credit should be getting better. How should we think about that provision level in 2013 given we just had a kind of stepup in provision in the fourth quarter?

Yes, Jefferson, this is Mike. Obviously, when you look at the provision levels for the quarter, after backing out the impact of the bulk sale, we are up to $6.3 million, so $6.2 million quarter-to-quarter. About a third of that is obviously related to higher originating charge-offs. The other two-thirds is this phenomenon of additional reserve build.

And as a reminder, last quarter, we actually reversed a little bit of reserve. This quarter, of course, we built reserve and I think that is certainly to be expected given the loan growth that we have been able to book the last couple of quarters.

So going forward in terms of how we think about our provision, again, we are always going to cover our charge-offs and then set aside some level of provision to build our allowance as appropriate with our reserving methodologies. I'll ask Sam maybe to comment a little bit on charge-off trends and related asset quality.

From a charge-off perspective, obviously, we had an anomaly in the fourth quarter that was impacted by the bulk sale. In addition, we did have an uptick, as you noted, in the charge-offs. Don't expect a run rate for 2013 to match what we saw in the fourth quarter of 2012. So additional provisions obviously increase with the loan growth that we continue to expect through the remainder of the year. So that will obviously have an impact on our ongoing provision expenses.

Thanks, guys. On my follow-up, I wanted to ask about the other expense line item at $45 million. Can you just say how much of that was actual OREO expenses and what do you think about that number going into 2013?

For the fourth quarter, our ORE expense was about $2.2 million and that was down from about $4.5 million last quarter. And even if you go back to the first quarter of this year, the third quarter really represents a little bit of an anomaly in terms of that quarter being higher. The two previous quarters were between about $2.5 million and $2.9 million. So going forward, ORE expense is one of those categories that also could be a little volatile quarter-to-quarter just depending on the amount of flow of ORE and the way that we need to write down and actually have expenses related to those items. But, again, we are very focused on reducing our NPAs, including our ORE portfolio and reducing those expenses going forward.

All right. And how about the professional data advertising, the entire -- that entire OREO. Should be kind of stable, less, whatever OREO improvements we get over time or is there an increasing element of that as you guys grow?

Well, again, I think it kind of depends on the volume of inflow of new ORE onto the Company's books and the complexity of that ORE in terms of collecting and disposing of it. So again, there certainly could be volatility in that line item and at this point, really hard to give a hard and fast projection as to exactly where that number is going to go. We don't see it increasing super significantly from where it is now. We don't see it going down a whole lot from where it is right now.

Perfect. Thanks, guys.

Michael Rose, Raymond James.

Hey, good morning, guys. How are you?

Doing well. Good morning.

Hey, I wanted to switch gears a little bit and talk about the loan fundings this quarter. It looks like they were down from the third quarter from about $700 million to about $500 million. I wanted just to see if the fiscal cliff kind of impacted your customer base at all this quarter and kind of how pipelines are shaping up and where they stand at year-end relative to the end of the third quarter.

Well, we did have, in the third quarter, significant loan growth and I think at that call we talked about that was an extraordinary quarter and to expect for the fourth quarter, while we were expecting to have nice loan growth, it would not be likely it would not be at that same run rate, which it didn't. But still we are extremely pleased with that and I think looking at the pipeline going forward into 2013, we still are forecasting net loan originations.

Okay. And then if we can just switch back to the expense side, obviously, it looks like most of the Whitney impact is in there. But given the continued pressure on both the core and reported net interest margin, are you taking any steps to further reduce expenses from here and what steps might those be? Thanks.

Nothing specific, Michael. Again, we've worked awful hard over the past year and a half, two years to bring our expense base in where we were able to report in the fourth quarter. And we are very, very cognizant of -- we are really moving forward from where we are right now and beginning a process of, while we are always going to be extremely diligent and focused on expense control, as we indicated on the call and in our comments a little bit earlier, we are also very focused on the need to continue to reinvest in our Company in terms of new people where that is appropriate, new systems and things of that nature.

So we really are I think kind of cautioning folks and giving guidance to the market that the fourth-quarter expense base is really an appropriate expense base for the Company for the size we are right now and going forward, obviously, we will continue to work on controlling expenses and keeping that expense base in line. But we do expect some modest increases in expenses going forward.

And Michael, this is Carl. One of the drivers of that is to keep in mind in the last two quarters, we have had pretty significant branch rationalization and while we will continue to look at that, that is an ongoing process. That clearly affected our numbers the last two quarters. But as Mike said, as we continue to invest in our Company as we grow, you will logically see a reasonable increase in that level going forward.

Okay, and then, Carl, one final question for you. Any updated thoughts on M&A at this point? Thanks.

We continue to look at opportunities. We feel very good about where we are with the Whitney transaction having, as Mike said, planted the flag and so I think 2013 is the period in which we will be open to look at opportunities. I would think that probably around the summer time is probably a good point in the year when I think we will start to see some things maybe break free. And so we are positioning ourselves to take advantage of opportunities that may present themselves while continuing to focus on just good organic growth for the Company.

Great. Thank you for taking my questions.

Sure, thank you, Michael.

Kevin Fitzsimmons, Sandler O'Neill.

Good morning, guys.

Good morning.

Just a couple quick questions. First, Mike, I was wondering if you can give a little more -- put a little more numbers behind the outlook for the core margin to compress. We saw 14 bps go down this quarter. Are you talking a similar pace or did this quarter get hurt a little more than it otherwise would by the CD funding that you put on and you would expect that to ease up a bit going forward? If you can just give us a sense. Thanks.

Sure, I would be glad to. Yes, Kevin, if we look at the last couple of quarters and we look at our core margin contraction, it has ranged between about a basis point or 2 to as much as maybe 5 basis points. The only exception to that as we go back to the fourth quarter of '11, we were down about 10 basis points. So the 14 that we reported in core margin contraction this quarter is a little bit outsized compared to that five or six-quarter run rate. And certainly the quarter's 14 basis points was impacted by the dynamics related to our loan yield, our bond portfolio yield, the sheer mass of having higher yielding earning assets roll off the books and being replaced by lower yielding assets. But probably the other dynamics that impacted this quarter and inflated that core margin contraction a little bit was the $200 million of CDs that we put on the books. That will be rolling off in February and May and at this point, we have no intention of renewing those CDs.

But then also if you look at our balance sheet at year-end, you will see that our excess liquidity really did balloon up pretty significantly. We went up from about $300 million or $400 million in the third quarter to about $1.5 billion at year-end. And as we have kind of given guidance to folks, we do normally see an increase in deposits at year-end. A lot of that is temporary or seasonal and we do expect much of that deposit inflows that we experienced in the fourth quarter to roll off as we head into the first quarter.

So certainly part of the 14 basis points in margin contraction really also can be attributable to a little bit of a wave in unfavorable earning asset mix in the fourth quarter related to that excess liquidity. So hopefully that makes sense.

Yes, understood. That's very helpful. Just as a quick follow-up, if I could ask, I know there was a question before about other expenses. Can I ask about other noninterest income of about $10.8 million, which ticked up about 10% I think linked quarter? What is included in there and what drove the increase and is that a decent run rate to think about going forward?

That really is a hodgepodge of a whole bunch of different income categories, miscellaneous and other income. But specifically one of the things that kind of drove that number up a little bit quarter-to-quarter was some swap fees that the Company was able to book related to our treasury management function. And these are fees that we charge customers who engage in certain balance sheet swaps. So that is a very attractive line of business for us, but can be a little volatile quarter-to-quarter just depending on the activity in that line of business.

Okay. Thank you.

David Bishop, Stifel Nicolaus.

Hey, good morning, gentlemen.

Good morning.

I was wondering if you could provide a little bit more information regarding the trends into NPAs. You noted there was some backfill. Maybe some color surrounding that and what you think about maybe the potential loss content? Are these the types of loans that could also be potentially sold?

Well, as it relates to the additions in the fourth quarter, about 40% of that mix was related to wholesale retail operations, as we've said. A third of it is CRE and the remaining portion related to contractor-related credits. We will be making an assessment as we go through this quarter of potential loss. We think we have those adequately reserved as it stands today. But as part of our ongoing evaluation of potential resolution strategies, as we said, we don't have anything in the works right now as it relates to an NPA sale, but certainly that remains one of the strategies we can consider. So it would be a little premature to say where we are headed specifically with those credits.

Got you. And then in terms of your lending teams, you noted the efforts on the energy side. And any holes or geographies where you think you still need to hire to build out to get critical mass?

Say that again. I am sorry.

Any geographies or segments when you look at sort of your lending staff there, relationship managers? Any need where you see where you sort of look across your footprint where you still need to add at the line level to build to critical mass?

Yes, absolutely. I mean when you look at what I have referred to in the past as the bookends of our franchise, where we are having remarkable success, we clearly could use additional origination staff, that being Texas and Florida. Both markets are doing extremely well for us and from all that we can tell, those are markets that continue to provide and will continue to provide opportunities for us. And so those are markets that we are aggressively looking at opportunities to expand our personnel to continue to grow the balance sheets organically.

Thank you.

Jennifer Demba, SunTrust Robinson Humphrey.

(technical difficulty) million, which if I am calculating right is close to 8% of total loans.

Hey, Jennifer. This is Carl. Do you mind -- we are having a real -- difficult to hear you. Sorry about that.

Can you hear me now?

Yes, that is much better. Thanks.

I'm sorry. Your energy portfolio looks like it is now about 7% or 8% of your total loan portfolio. Just wondering philosophically how comfortable you are, at what maximum concentration level you would be comfortable with over time.

Yes, Jennifer, we would be very comfortable taking that to around the 10% threshold easily. And so you do the math, there are some real opportunities there for us.

Okay.

This is Mike. Just as a reminder, legacy Whitney, their concentration was around 10% or 11% as an independent company. So as Carl indicated, we feel very comfortable with that level.

Okay, okay. And I am assuming most of these credits, of the $900 million right now, are shared national credits?

A good portion of them are, correct.

Okay. Thank you very much.

Matt Olney, Stephens.

Good morning, guys.

Hey, Matt. How are you?

Hey, I'm great. Thanks. Circling back on the margin for Mike, I will try to ask this question another way. It looks like you guys disclosed the core margin and the change sequentially, but can you provide what the core loan yield was in the fourth quarter ex the purchase accounting adjustment and how this changed versus the third quarter?

Yes, absolutely, Matt. In fact, if you had a chance to look at the slide deck, slide 10 includes that information. We actually show about a six-quarter trend for the Company's loan yield ex the purchase accounting adjustments and then also the bond portfolio yield. And so when you look at that information, what you will see is our core loan yield, quarter-to-quarter, was down about 10 basis points from 4.65% to 4.55% and then also the bond portfolio was down about 9 basis points from 2.30% to 2.21%.

So in addition to looking at the two quarters, you can see kind of the trend line and the contraction in our kind of core loan yield. We have had quarters where it has been as much as 20 basis points, other quarters where it has been more moderated in the neighborhood of 8 to 10 basis points.

And if I heard you right in your prepared remarks, it sounds like some of the newer loans are coming on around 3% or 3.5%. Did I hear that correctly?

Yes, that is correct. Absolutely right.

Okay. And then secondly, as far as the securities book, the size of that continues to shrink. What are the overall thoughts on that book in terms of size over the next few quarters?

We are very comfortable with continuing to let the bond portfolio shrink, especially in the context of providing liquidity to fund the loan growth and absolutely taking pressure off any need to raise deposits and to pay up for deposits to fund loan growth. So we are very comfortable with how the balance sheet is positioned.

Okay, thanks, guys.

Peyton Green, Sterne Agee.

Good morning. A couple questions. Mike, with regard to the earning asset mix, I mean would you expect -- I guess looking at 4Q '12 versus 4Q '11, the balances really are down a little bit in terms of total average earning assets. Would you expect that trend to continue in '13 given the amount of liquidity that is on the balance sheet or is there a point where you feel good about keeping the liquidity you have and when rates go up, you will benefit from it, but really driving balance sheet growth with marginal loan growth?

Yes, Peyton, I think when we look at the total size of our earning asset base, there is absolutely no need to increase deposits, but we are very focused on changing -- continuing to effect changes in net earning asset mix by having more loans on the balance sheet. So that is a focus in the way we are managing the Company's balance sheet and believe that we have plenty of liquidity to fund loan growth going forward.

Okay. And then what is the securities cash flow like going forward a year? I mean -- and the roll-off yield versus where the yield is now?

We have about $100 million or so per month of cash flow coming off the bond portfolio and we are getting to the point where we are seeing some of the runoff yields begin to kind of moderate. We saw 9 basis points of deterioration in the yield quarter-to-quarter and that has been consistent over about the last three quarters or so.

An important dynamic that affects this yield also is the level of premium amortization and the premium amortization actually in the fourth quarter slowed just a little bit compared to the fourth quarter. So that is an important potential headwind that, if that continues to abate, that will give us a little bit more yield improvement.

Okay. And then in terms of maybe going on the offensive more versus really getting the integration front and center for the last five or six quarters, I mean is your preference more for organic growth considering all the fun that integration is or are you really ready to get back into the M&A side?

Peyton, this is Carl and I think we clearly are focused on organic growth right now because that is available for us. As you know, in the M&A environment, we are very disciplined and very strategic when it comes to M&A and so often times, you can't control necessarily the timing of M&A. But one thing that we can do right now is take advantage of significant organic loan growth. And so we are going to continue to be focused on that while at the same time look at the opportunities in the M&A environment. And so if those M&A strategic opportunities present themselves, we will be in a great position to take advantage of those, but, in the meantime, we will continue to focus on growing organically our balance sheet.

Okay. And then last question, Mike, this is more specific to the expense side, but as we look at the first-quarter bump, I mean is that in the 3% to 4% linked-quarter range from the fourth quarter or would it be more than that and then subside over second and third quarter?

No, it is not that much. I mean we are not talking about a big increase. It probably is something in the 2% range or so.

Okay, all right, great. Thank you all very much for taking my questions.

Sure, Peyton. Thank you.

Emlen Harmon, Jefferies.

Good morning, guys. How are you?

Doing well, thanks.

Apologies, I just hopped on a little late here, so I apologize if this has been addressed, but you guys provided for us kind of the core NIM versus reported NIM for the first time. And I guess could you give us a sense over what time period you expect that accretable portion of the -- accretable portion of the margin to run off?

Hi, this is Mike. As we look forward, again, if you look at the remaining discounts that we have in our balance sheet, I mean they're pretty significant and substantial. But just as kind of a rough guideline, we certainly expect to have levels of accretion that will decrease as we go through time and that absolutely will happen. But we will still have significant parts of our margin related to this accretable yield for the next three to four years. But, again, it will decrease over time and at some point, it will be gone. So that is something we are very focused on from a strategic point of view in replacing that accretion.

Got it. Perfect. Thank you. That was it from me.

Okay, thanks.

I am showing no further questions at this time. I would like to turn the conference back over to Mr. Carl Chaney for any closing remarks.

Okay, thank you and as we wrap up this call, let me say how pleased we are with all the many accomplishments that took place in the fourth quarter for our Company and I think we are very well-positioned to be fully focused on looking ahead now in 2013 and beyond in growing organically our balance sheet, as well as taking advantage of other opportunities that may present themselves as we move forward in the year. Again, thank you all for being with us on this call today and have a good day.

Ladies and gentlemen, this does conclude today's conference. You may all disconnect and have a wonderful day.