Hancock Whitney Corp (HWC) 2013 Q1 法說會逐字稿

Good morning and welcome to Hancock Holding Company's first-quarter 2013 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. During today's call we may make forward-looking statements. We would like to remind everyone to review the Safe Harbor language was published in 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, 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. 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 those slides in today's call. I will now turn the call over to Carl Chaney, President and CEO.

Thank you, Trisha, and good morning and thank you for joining us today. Yesterday we reported first-quarter earnings and we also announced an efficiency in process and improvement initiative, which I'm sure many of you will have questions about and we'll get to that topic in just a few minutes, but before we do I'd like to go over the results of the quarter.

Earnings for the first quarter came in at $48.6 million, or $0.56 per diluted share. On an operating basis ROA was 1.03% for the first quarter compared to 98 basis points in the fourth quarter and 85 basis points a year ago. In today's banking environment having an ROA of over 1% with an ROE of over 12% and a TCE ratio of over 9%, well, those are all very solid operating results. But, we are not satisfied with those results and are taking steps to further optimize the Company given this low-rate environment.

In our release we talk about no longer being all things to all people. Let me tell you what that means. It does not mean that we are exiting any lines of business. What it does mean is that we will strategically align our products and services with the strengths of the markets in which we operate. Are we exiting any lines of business? No, but we are operating more strategically and efficient in each market. The results do include some special items, which are noted in our release, but these items basically wash for the most part.

Positives from additional accretion and tax credits were offset mainly by higher provision for the FDIC-covered portfolio. Our asset quality metrics improved and the bulk sales strategy we implemented last quarter worked. We continue to build upon strong capital levels and our expenses were in line with previous guidance. However, revenue challenges were remain and our balance sheet decline reflected the seasonal trend in loans and deposits. While we are pleased with these results, our earnings did miss current Street estimates.

Although we do recognize that our Company's earning components are rather complex, we believe the current Street estimates do not accurately reflect the reality of today's operating environment, and so we are providing a bit more specific guidance in the release for near-term earnings. Due to continue rate pressure on earning assets and other economic headwinds impacting overall revenue, we expect near-term earnings to remain flat to slightly down from current levels. Our accretion levels, as noted previously, remain volatile and the economy, interest rate and regulatory environment today are not at all what we envisioned in 2010 when the Whitney transaction was announced.

While it is appropriate to look back on the past year and recognize our associates' hard work in completing the core systems conversion and achieving our merger cost synergies, we must now focus on Hancock's future as one strong combined Company. We expect the pressures and headwinds I noted above will continue into the foreseeable future. Therefore, as part of our ongoing planning process, we have been reviewing our long-term strategic plan to determine the most effective way of operating the consolidated Company. We recognize that in order to overcome the challenges of both the current and expected future operating environments, we must make strategic decisions that could involve a change in direction in certain markets.

These changes include improving the Company's profitability through short-term efficiency improvements and longer-term process improvement and reengineering efforts. Our efforts include reviews of both front and back office areas, a review of the current branch footprint and network, as well as a review of business models across our footprint within certain markets. For example, we are asking if some markets are more commercially focused and not as much retail focus, or vice versa. Can other markets operate as both?

The Company is committed to reducing non-interest expense over the next seven quarters and we expect to achieve 50% of this reduction by the end of the first quarter 2014 any remainder by the end of the fourth quarter of 2014. When fully implemented are analyzed non-interest expense be $50 million lower than the annualized level of non-interest expense for 2013, using our first-quarter 2013 results as a base. What these expense reductions and a combination of revenue improvement and balance sheet growth we have set a long-term sustainable efficiency ratio target of 57% to 59% beginning in 2016. We do expect to incur certain one-time costs, such as severance, professional fees and lease buyouts, in implementing the efficiency initiative.

So this time I'll turn the call over to our CFO, Mike Achary, who will review some of the quarter's results in more detail. Mike?

Thank you, Carl, and good morning, everyone. As Carl noted, net income for the first quarter was $48.6 million, or $0.56 per share, and that was up from $47 million, or $0.54 last quarter. Included in the Company's first-quarter results were several one-time items. First, $7.5 million pretax, or $0.06 per share, a higher than expected loan accretion related to cash collected on zero carrying value acquired loan pools. Also $6.6 million pretax, or $0.05 per share of net loan loss provision taken on the FDIC-covered portfolio. This additional provision expense was related to the timing of expected cash flows on certain pools of covered loans and was not additional credit losses. And finally, $1.1 million, or $0.01 per share of one-time tax benefits related to specific tax credits.

Total loans for the Company from March 31 were $11. 5 billion. That was down $95 million, or less than 1% from year. Excluding the FDIC-covered portfolio total loans were down about $56 million on a link-quarter basis. New loan activity was solid across many markets in the Company's footprint, especially in Houston, parts of Florida and Louisiana. The largest component of new activity was in the C&I portfolio with additional growth from smaller commercial real estate lending activity. Based on what we see today we do expect some success in achieving net loan growth over the next two quarters.

Net interest income for the Company for the first quarter was $177 million, that was down from $183 million in the fourth quarter. $3 million of that decline in net interest income was due to two fewer accrual days on a linked quarter basis. Average earnings assets for the Company were $16.5 billion in the first quarter, that was up $272 million from last quarter. Our net interest margin was 4.32% for the first quarter, down 16 basis points from 4.48% last quarter. Our core margin of 3.4% compressed 20 basis points during the first quarter from a continued decline in asset yields, both in the loan and bond portfolios. As we discussed last quarter, new higher-quality loans are being priced at lower yields.

For the first quarter that rate was about 3.5%. While that rate is somewhat better than last-quarter's rate, it is still not enough to reverse the trends shown on slide 9 and still lower than what is maturing or paying off. So, we do expect some level of compression in the margin in the near term. All else equal and adjusted for the volatility related to loan accretion, we expect the Company's reported margin to compress as much as 10 to 20 basis points, with of most of that coming from a lower than expected accretion level. We expect the core margins to compress somewhere in the 5 to10 basis points over the same time.

Shifting gears a bit I would like to now review the efficiency and process improvement initiative Carl discussed at the beginning of the call. As you can see on slide 5 of our supplemental presentation, we are taking first-quarter total non-interest expense of $160 million, annualizing it for a total of $640 million. We expect to reduce that by $50 million, or by $12.5 million per quarter by the time we get to the fourth quarter of 2014. We expect to achieve 50% of the quarterly run rate expense reduction, or $6.25 million by the first quarter of 2014 and the full 100%, or $12.5 million by the fourth quarter of 2014.

I'd also like to spend a minute to review slide 12. This is new information we're providing to give more transparency around a level of purchase accounting tied in to impacting our results and the expected life of these items. The chart to the left -- on the left side of the slide shows the actual impact of purchase accounting items for 2012 and the expected impact of these items for the time period 2013 through 2015. The orange bar shows the revenue impact from purchase accounting items, namely loan accretion, offset by bond portfolio amortization.

The green bar shows the purchasing accounting impact on non-interest expense, mainly from amortization of intangibles added in the Whitney transaction. The cream-colored bar is the pretax net impact of those revenue and expense purchase accounting items. Please note, these items are subject to volatility and will be updated on a quarterly basis. We have not provided estimates in the past due to this level of volatility; however, we did feel it was important to show the level of our expected impact from these items.

The chart on the right repeats, in the cream-colored bar, the pretax impact of purchasing accounting items. The blue bar layers on the impact of the efficiency initiative that we announced this quarter. As noted on this chart, the cost savings from the initiative are expected to replace a diminishing level of purchasing accounted related net income over the next three years. There will still be significantly diminished levels of net purchase accounting income in the years past 2015. We hope this chart provides additional transparency and clarity behind the purchase accounting impact to our results. Finally, in order to provide additional information on our accretion as a relates to the FDIC-covered portfolio we have added a table on the Peoples First loan mark, which you can find on slide 11.

At this point I will now turn the call over to Sam Kendricks, our Chief Credit Officer.

Thanks, Mike. Before I begin my review of asset quality, I would like to remind everyone that at the end of last year we completed a bulk sales of loans with a net book value of approximately $40 million. The sale added approximately $14 million to the provisional loan losses and approximately $16 million to net charge-offs in the fourth quarter. Non performing assets, which excludes acquired credit impaired loans from our acquisitions, totaled $209 million at March 31, that's down $27 million from year end. The decrease an NPAs reflects a net reduction of over $22 million in ORE during the quarter, a $6.5 million reduction in non-accrual loans with a slight uptick in restructured loans. We continue our success in moving ORE out of the bank, with almost $40 million sold this quarter.

On slide 16 of the deck you can see that our criticized loans, excluding the covered portfolio and gross of the loan mark continue to trend down, with a balance at March 31 of just over $700 million. That's almost a 45% decline since the Whitney merger date of June 2011. The allowance of loan losses was $138 million at the end of the first quarter, that's up from $136 million year end. The ratio of the allowance to period-end loans was 1.20%, up slightly from 1.18%.

The allowance on the originating portion of the loan portfolio totaled $75.5 million, or 1.02% of related loans at March 31, down from almost $79 million, or 1.11% of December 31. The decline in the allowance on originating loans was primarily due to charge-offs taken from impaired loans reserves. Additionally, the movement of problem credits and into impaired status slowed during the first quarter, partially the result of the bulk sales strategy executed at year end.

Net charge-offs in the first quarter from the non-covered loan portfolio were $6.6 million, or 23 basis points of average total loans on an annualized basis. Excluding the impact of the bulk sale, non-covered net charge-offs for the fourth quarter were $11.8 million, or 41 basis points of average total loans. The $5 million reduction reflects both a lower level of gross charge-offs and a higher-than-normal level of recovery. We do not expect this higher level of recoveries to continue.

The provision for loan losses for the first quarter was $9.6 million down from $14.4 million in the fourth quarter, excluding the impact of the bulk sales. The provision for non-covered loans was $3 million compared to just over $14 million in the last quarter of 2012. This decrease mainly reflects the lower level of non-covered net charge-offs I just discussed and the impact from the decline in new impaired loans discussed earlier. We do not expect to maintain this lower level of the non-covered in the near term.

The provision for FDIC-covered loans totaled $8.5 million in the first quarter. As we do with both acquisitions each quarter the pool is reviewed and discounted cash flow models are run for each pool of loans. This quarter the model for covered loans indicated an impairment of approximately $6.5 million related to changes in the expected timing of cash flows, which do not benefit from a corresponding increase in the loss share receivable or indemnification asset. An additional $2 million of impairment was reported for increased credit losses in the covered loan pools, mostly offset by increases in expected FDIC loss share claims.

As Mike noted earlier, we added a new slide, slide 11 of the deck, to our presentation with information on the Peoples First loan mark and lost share receivable. The Peoples First portfolio is performing as expected and the loan mark is being used mainly for charge-offs on that portfolio. I will note that charge-offs can be taken against the mark and the reserve. Of the $387 million in total charge-offs noted in the slide, $40 million was taken against the reserve. These losses are now covered by the FDIC at 95% with a loss share receivable of $153 million at March 31.

I'd also like to make a quick comment related to a couple of questions we have received recently related to the adoption buzz of a new accounting standard related to FDIC loss share agreements. In summary, we do not expect to have any significant impact from this new accounting standard. Our loss share receivable balance only reflects what we expect to collect from the FDIC based on our agreement and coverage period. As a reminder, the Peoples First acquisition closed in late 2009. The first portion of coverage period with a non-residential piece of the portfolio has just under a two-year remaining life.

I'll now turn the call back over to Carl.

Thanks, Sam. At this time we'll open up the call for questions that you may have.

Thank you.

(Operator Instructions)

The first question will be from Kevin Fitzsimmons of Sandler O'Neill. Please go ahead.

Good morning, guys.

Good morning.

Carl, is the way to think about this that the falloff from accretion income is not necessarily or shouldn't necessarily be a surprise but it -- I guess what you would have thought was that you would be offsetting or cushioning the blow with better revenue, better margin, a better amount of loan growth, so is that really what's happening and why we're going to the efficiency plan is that the core environment is not helping replace what's going away in terms of purchase accounting. Is that how to look at it?

Yes, Kevin, I think you're exactly right. It's not a surprise that the accretion is going away and due to the -- just the operating environment we operate in, the low rate environment, if you look at the large commercial C&I book of Whitney, actually the first quarter is very cyclical and so you can -- you look back over many years and see how that portfolio has operated that way in the first quarter and as we go into the second and third quarters those large commercial customers typically start to draw down on those lines, and so we feel optimistic about future loan growth. But still, even though we have, as I mentioned, very strong underlying fundamentals of over 1% ROA and a strong ROE and as long as we have a strong capital position, you just heard Sam's asset quality report, extremely strong, we feel optimistic about the future. But we're not satisfied with those strong metrics and hence the need for this efficiency and we've had an opportunity now after the integration of the Whitney transaction to look at our operating model going forward and so it was -- it made good business sense to us to make these strategic decisions and moves so that we can operate even more efficiently in these key markets.

Hey, Kevin, this is Mike, and just add one comment to Carl's comments. Again, with respect to accretion we've included a schedule in the presentation that details of how we view that accretion could diminish or go away over the next couple years. But again, as a reminder, specifically for Whitney, we still have a discount remaining of over $250 million. So, again, while we've always known that the accretion would go away one day, it's not going away today and tomorrow and I think what we've done is develop a plan to deal with the diminishment of that accretion going forward.

Okay. I was just going to follow up real quick with -- just to clarify or drill down a little more your comments on earnings and the margin. How do you define the time period you call near term? Does that mean the balance of 2013, is that how we should look at that? And then if you could give a little more color on the statement of expecting some success in achieving net loan growth in future quarters. Is that -- how does that relate to total loan growth going forward? Thanks.

Yes, the comment about -- the margin comments and the guidance therein and direction of near term really means the next couple of quarters, so really it's the next two to three quarters. And then the comment around the loan growth, based on what we're seeing right now -- and we're just a little bit into the second quarter, but we're seeing some good things with respect to our ability to show net positive loan growth, again, over the next couple of quarters. As a reminder, the first quarter, while loans were down on an end-of-period basis, some of that is due to the seasonality, especially of Whitney's core C&I book in southeast Louisiana. So what we see in terms of the outlook for positive loan growth for the next couple of quarters is a diminishment of that seasonality and then a resumption of our ability to grow our own portfolio.

Okay, thank you.

The next question is from Jefferson Harralson of KBW. Please go ahead.

Thanks. For my first question I was asked about the cost savings initiative and just to make sure that the numbers you gave do not seem -- or seem to be inclusive of any expense -- core legacy underlying expense growth. It seems like you're going to cut even more expenses and it seems almost certain is to keep that number at exactly what you're saying?

That's correct, Jefferson. The guidance that we gave was meant to be simple, straightforward guidance. So we're looking at total expenses, which means that would include amortization of intangibles and things like ORE and then we're giving specific targets that we will reach for expense levels in the first quarter of '14 and then in the first quarter '14.

Got it, thank you very much. For my follow up I wanted to ask you about you have a weapon here in this 13% tier one common ratio. Just by my calculation with a profitable company like yours you're creating a lot of capital, you could buy back just with the additional capital from here that earned 6% or 7% of the Company back a year and not take that ratio down. What is your thinking on capital and why not put in buyback in here?

Jefferson, you make a very good point and I can assure you we cover that topic monthly with our Board of Directors. It clearly is one of the many levers that we have to utilize going forward to manage our capital. Historically we've had a history of maintaining a very strong capital base, it allows us to take advantage of opportunities when the present themselves. But when you look out at the M&A environment, there aren't really any sweet deals that make a lot of strategic sense to us right now. Of course you never know on those things happen but there's nothing that we see on the horizon in the M&A world. So, with that being the case clearly we need to look at the other opportunities to manage and utilize that capital, so I think what you're saying is it is certainly one of the options that we have.

Thank you.

Yes.

The next question is from Emlen Harmon from Jefferies. Please go ahead.

Hey, guys, good morning. Thanks for taking my call.

Sure, absolutely.

As we look at your expense guidance the next couple of years, what do you assume for revenue support to get to a 57% to 59% efficiency ratio by 2016? Specifically within that I'd just be curious in terms of you're expecting from a rate environment?

Emlen, this is Mike. As we model that information going forward what we're really doing is taking a very conservative view of our ability to grow revenue. In other words, the $50 million of expense reductions over this time period, seven quarters, in an of itself if we're able to keep revenues flat will get us to an efficiency ratio right around 60%, 59%. Also, it's important to note that when we talk about this initiative there are really two parts to it. One, of course, is the expense reductions that will come about along the prescribed timeline, but the other important piece of this relates to process improvement and process reengineering. So, there's all sorts of things that we'll be working on that will improve our ability to reduce our efficiency ratio to that target of 57% to 59% and then sustain it going forward, which would include, of course, revenue impacts -- positive revenue impacts.

Got you. So I guess, specifically on the question just on rates, are you're assuming that said funds have started to move at that point?

Excuse me?

Specifically with regard to rates here, is your guidance assuming that fed funds have started to move by the time we get to 2016?

It certainly would be nice if that were occur and it would certainly help, but no, we're not assuming a rate increase to achieve those particular targets.

Got it. The guidance to have flat earnings this year, does that include the $13 million in expense saves you hope to achieve in the latter half of this year?

No, it does not. The guidance around flat to downish earnings really relates to the next couple of quarters, again, absent any of the impacts from the expense initiative.

Okay, and just one final one, if I could. Obviously intensified focus on expenses here, do you guys think you continue to maintain two brands just given what appears to be this intensified focus on efficiencies?

Well, I think so. I don't see the branding creating issues or obstacles from an expense standpoint going forward. Both brands enjoy incredible goodwill in their respective markets and so that doesn't create any opportunities, there are no real cost -- any significant cost savings with a consolidation of that at all. We certainly look at that, though. It's a good question, and I can tell you we've been able to wring out just about all the cost savings with the consolidating of the back offices and the separate operations, all just short of having two separate names and that doesn't yield much additional efficiency, particularly when you weigh that compared to the goodwill that those names carry in their respective markets.

And we really don't view the two brands to be an efficiency drag.

No, not at all.

Okay, thanks a lot. Sure, thank you.

The next question is from Ken Zerbe of Morgan Stanley. Please go ahead.

Great, thanks. Just want to reconcile a little bit, because if we read the press release or the language in the press release talking about the big strategic reviews and not operating all banks -- I guess a bank that does all things for all people. It seems that your comments in your prepared remarks are much softer, they're much more, we're not going to do anything, we're going to do anything material, we're going to operate as a -- where we are but just more efficiency more strategically. Are we reading too much into the press release? If not, is the other side of it is, are you missing an opportunity to be much more aggressive? Here's your chance to fix the business, why not cut business lines, why not take some more drastic action to improve the profitability of the business?

Zen, this is Carl, and you're dead on point. Our comments today are directed towards clarifying the comments that we had in our release and so we are making some very tough decisions as far as looking at specific markets and being able to offer -- continue to offer all products in those markets. As I said in my introductory comments, we're looking at those particular markets and determining which products and services we offer that make the most sense for those specific markets that we operate in, and then that goes from looking at the retail branches footprint all the way across other lines of businesses. But having said that, we do not see any specific line of business that it makes strategic sense to just completely exit. However, we are looking very strategically at each market, determining which products and services we can be very successful in continuing to operate and those in which it makes good business sense to pull back in those particular markets because the market simply doesn't provide a sufficient long-term growth opportunity for a certain line of business. So you're exactly right, Ken. The purpose of our comments were to clarify because there seems to be potentially some confusion as to what exactly our remarks in the earnings release meant specifically.

Carl, I think an additional comment to make is, when we look at our lines of business across our Company, they're all accretive, they're just not all accretive in every single market that we're in. So I think this initiative and the comment about being all things to all people addresses that.

Absolutely.

Got you. Sorry if I missed this, but the timing of the strategic part of the transition, at what point do you feel that you should be -- you should have decided on what products and which markets and you're going to be in a good place on a go-forward basis?

Ken, this is Mike, those kinds of decisions are happening right now. This is not a process that we're going to sit around and wait and then pull the trigger on something two years from now. So, as we go through the next quarter and certainly as we get closer to the third quarter, end of the year, those plans I think will become evident and we'll share those as we go through the rest of this year.

And not only become evident, actually be executed --

Right.

-- over that period of time.

Right. Okay, thank you.

Sure, thank you.

The next question is from Matthew Clark of Credit Suisse.

Good morning guys.

Morning.

I think when you're talking about the cash efficiency ratio of 59% to 60% by the end of 2014, did you say that assumes if you keep revenue flat? I'm just curious how that can occur given the accretion that's rolling off and margins coming in?

Hey, Matt, this is Mike. The way we're modeling that is just again looking at our revenue and assuming it's flat, but also we're assuming that we have an ability to grow our earned asset base and put programs in place and things to help mitigate some of the dim compression that's occurring right now. So the net effect of all that ends up being a flattish revenue forecast and, again, we review that as a conservative forecast.

Okay. Then on the loan growth commentary about slightly -- slight improvement or slight growth, can you give us a sense for maybe why the more muted outlook relative to last quarter and maybe talk about pipelines and I assume it's competitive -- it's part of the competition but just curious what you're seeing?

Yes, it is very competitive out there, particularly for the stronger relationships that we've valued over time. But I can tell you that looking back as I mentioned earlier particularly the large C&I book, those larger corporate customers, there is somewhat of a cyclical nature to them drawing down on those lines of business but I can -- in the first quarter. But I can tell you that looking at the pipeline, it is continuing to grow and that's where we absolutely feel optimistic about the ability to be able to report positive loan growth in the second and third quarters going out. And I'll let Sam Kendricks speak to this, as well, he sees it day to day.

Yes, thanks Carl. I would say that we are adding clients every quarter, every week, and keep in mind we continue to prune the portfolio as appropriate relative to the riskier assets. Think about this, we have continued to assimilate the combined portfolios through merger M&A activity over the last 3.5 years, we have pruned the riskier assets out, we continue to migrate down the classified assets. We look at the portions, for instance, of CRE that we feel we either have a larger concentration that we're comfortable with, or represent a risk profile that we want to continue to manage down and we continue those efforts, as well as migrating out problem assets. So while we continue to add clients, we are pruning the portfolio to get a more strategically-focused, a strategically-structured balance sheet for the long term.

Yes.

How much more of that you have to do just in terms of size of that pruning process? I'm trying to get a sense for how much that might mask growth?

We have a larger overall level of classified loans that we would like to have so we will continue to work through that portfolio. I can't quantify for you a number, but we continue to uptier the quality of the portfolio through either rehabilitation of those accounts or exit strategies at the same time that we'll continue to add additional clients and credits to improve the overall quality of the portfolio.

As you can see -- this is Carl -- from the asset quality metrics that number is getting smaller and smaller, that number being the number of inhibited credits that we are working to resolve and move out. That number's getting smaller and smaller as evidenced by the significant improvement in our asset quality measures.

Yes, Carl, we look at our criticized loans over the last eight quarters we really have cut those pretty much in half over this time period, so to that's well over $600 million of criticized loans that have left the balance sheet.

Okay, great. Thanks, guys.

Thank you.

The next question is from Jennifer Demba of SunTrust Robinson.

My question was answered, thank you.

The next question is from Matt Olney from Stephens. Please go ahead.

Hey, thanks, guys. Most of my questions have been addressed, but just one more. It seems like you've previously discussed a long-term efficiency ratio goal sub 60% and I think that's the initiative for a few years now and now we're talking about long-term efficiency ratio target between 57% to 59%. Has your long-term targets really change that much on this announcement, or are you trying to reiterate your long-term goals despite these headwinds on the revenue side?

I think it's the latter, Matt, you really hit the nail on the head there. We have talked about on a more longer-term strategic basis looking at an efficiency ratio target or goal of 55%, so the 57% to 59% is just a little bit of a refinement and also bringing in the achievement of that goal a little bit from more of a five year to a three-year target.

Okay. Thanks, Mike.

Okay.

The next question is from Peyton Green of Sterne.

Good morning, a couple of questions. One, I was hoping if you could talk maybe about going back to the Peoples First. I know it's a significantly smaller acquisition than it was relative to the Company back when you announced it, but, what do you think the core portfolio is there if there's $570 million approximately in loans today? How might -- what you think it should be once it's burned out and you've collected everything that you need to and you have a core basis there?

In terms of the loan portfolio, Peyton?

Yes.

Yes, probably $200 million I think we would say.

Okay. And out of the $568 million that's there today how much is residential versus non-residential in terms of the loss share?

I would say about -- it's going to be about $250 million, $260 million, in that range.

Is the residential?

Correct.

Okay. All right, okay. Then, Mike and Carl, when you look at the Whitney transaction going back to a couple of years ago, is this really a situation where the earning asset growth just didn't play out the way you thought it would on the Hancock or the Whitney side and that's really where the problem is, or is this something where you've gotten the cost savings that you targeted and you just feel like as a $20 million asset bank, approximately, you should be at a below 3% non-interest expense to average assets? What's the -- maybe talk a little bit about that.

Sure, Peyton, this is Carl. Your [former] hypothesis is accurate. If you look back two years ago in December of -- 2.5 years ago of December '10 when we announced this transaction, I think we all certainly thought that at this point in time in the game that the economy would be providing us some relief. Interest rates would be higher than they are today and as a result, when you look at our balance sheet you can certainly tell that we benefited significantly in a rising interest-rate environment, particularly when you look at the significant amount of non-interest deposits that we have. So you're exactly right. Going back to that point, December of '10, looking out we certainly thought we would be in an economic environment that did not provide such headwinds, particularly the interest rate environment, so that we could have greater revenue at this point in the game. So, now we find ourselves here with the forecast of continued low interest rates at least through mid '15. While we have a strong overall 1% ROA, strong ROE and a strong capital base we think it's -- while those are all strong, I think fundamentally something to be proud of, we're not satisfied with that and so we feel like we need to go to the next level and take advantage of this opportunity to operate the Company even more efficiently.

Hey, Carl, this is Sam, Peyton. Let me correct something gave, that covered portfolio, the single-family residential is $350 million to $360 million, not $250 million to $260 million and I needed to correct that.

Okay, great. In looking at those portfolio, the liquidity, the overnight is consistently averaged around $1 billion, which just seems high given the overall quality of your deposit base and the pressure on the loan side of it, why not manage the bond portfolio little bit more aggressively and keep the cash balance lower, the short-term balance lower and maybe buy some Muni's? That seems like where, compared to peer, you seem to have a lot less Muni's than some of the regionals that I cover that have maintained a stronger core margin.

Peyton, this is Mike, and that's exactly what we're doing. We had deployed during the first quarter about $1.2 billion of that liquidity back into the bond portfolio and the level of overnight bonds is down to a much more manageable level and I think you'll see us maintain that balance sheet management stance going forward. So we're doing exactly that.

Okay, so you would expect the cash -- the overnight cash to average what going forward?

Probably $300 million to $450 million, somewhere in that range. Sub $500 million without a doubt.

Okay. All right, great. Thank you very much.

Sure. Thank you, Peyton.

(Operator Instructions)

The next question is from Christopher Marinac of FIG Partners. Please go ahead.

Thanks, good morning. Carl or Mike, I wanted to ask about the cost initiative as it relates back to the original expense base you inherited from Whitney. Are some of the things that you could have done initially as reintegrated Whitney and just for whatever reason did not, or would these be brand new above and beyond where you thought you would take the organization after integrating Whitney?

No, the is a new cost initiatives, Chris. Again, we achieved the goals that we set out when the Whitney transaction was announced and those were fairly aggressive goals and we marched through that process in a pretty efficient manner. Where we are right now after having completed the course of some conversion and again through a strategic initiative to look at where we needed to focus our efforts, it became evident that there was additional opportunities to reduce the Company's cost base and become more efficient. The initiatives that we're looking are, again, not just simply focused on the back office as this front office aspects to this, as well as back office. So, it is not duplicative of anything we did in the cost synergy process and really is the -- I think we look at it as the next evolution of the kinds of things that we need to do as a Company to become more efficient.

To what extent will this be more processes and just the way you do business, or is it going be -- result in a serious look at headcount, as well?

It'll involve the latter but really the focus is going be what you mentioned earlier and that is process improvement and reengineering, introducing enabling technologies. A lot of things that we would have liked to have done through the core system conversion and the integration process but just didn't have the time to do that at that point because the focus became, of course, integrating the companies and converting those systems. So now that those things are behind us the focus will be on, again, enabling technologies, as well as our process improvement and reengineering efforts.

Okay. Just for a second back to the core business. On the core margin that you have, the $340-ish million or so, can you compare that to what new loans are going on the books for and you incremental margin? I'm just curious if there is a limit to how much downside you could have on the core margin?

We mentioned that, I think, earlier in the comments, but if you just look at the first quarter, new loans, the new production that we put on the books came on at a yield of between $330 million and $340 million. So, again, you can see the need for additional guidance related to potential additional compression of that core loan. Some of the things that help mitigate that, though, obviously is being very mindful of deploying all of our excess liquidity back into the bond portfolio and preferably into the loan portfolio.

Okay, great. Thanks for reinforcing that, Mike.

Okay.

I am showing no further questions in the queue and would like to turn the conference back to Mr. Carl Chaney.

Okay. Thank you, again, for the time to answer those good questions and also we appreciate the opportunity to clarify our marks -- our remarks in the earnings release. And as I said earlier, we are very proud of the fundamentals -- operating fundamental metrics that we have today with a greater than 1% ROA, over 12% ROE and a very strong capital ratio moving forward and I look forward to, though, further enhancing those metrics and being able to further optimize the Company here in this low rate environment. Again, thank you for your time today. Have a good day.

Ladies and gentlemen, thank you for participating in today's program. This does conclude the conference and you may all disconnect. Everyone have a great day.