Hancock Whitney Corp (HWC) 2013 Q3 法說會逐字稿

Good morning, and welcome to Hancock Holding Company's third-quarter 2013 earnings conference call.

Participating in today's call are Carl Chaney, President and Chief Executive Officer, Mike Achary, Chief Financial Officer; Sam Kendricks, Chief Credit 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, 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 the slides in today's call.

I will now turn the call over to Carl Chaney.

Good morning, and thank you for joining us today.

Our third-quarter results reflect the nice progress we are making in implementing our current strategic initiatives. We reported a stabilization of the core margin and net interest income, better loan pricing, improved asset quality, reduced operating expenses, and an ongoing focus toward becoming more efficient; all keys to achieving the goals set for 2014 and beyond. Our Associates are working diligently to implement the efficiency initiative, and we are confident we will meet the targets set earlier this year.

Yesterday, we reported operating earnings for the quarter of $46.8 million, or $0.46 per share, $0.01 above consensus. Operating expenses reflect approximately $21 million of adjustments mainly related to one-time items such as personnel, professional services, and real estate costs related to the efficiency initiative. Our core net interest margin of 3.37% was down only 1 basis point from last quarter, while core net interest income was down only $500,000. As Mike discussed last quarter, we believe we are close to an inflection point in these measures where we could begin to see an increase in core net interest income even with slight core margin compression.

Loan growth started off the quarter strong. However as we move closer to the end of the quarter, we began to see more payoffs and paydown activity on certain credits. This was mainly due to customers refinancing into the capital markets, customer M&A, and seasonality. While it is not uncommon for bank loans to be refinanced with capital markets, or for our customers to participate in M&A, this activity can be lumpy, however. For example, during the third quarter, we had two E&P clients go to the capital markets on the same day repaying our debt.

Seasonality also plays a big part on our quarterly trends. For example, we currently expect to see certain large customers fund commitments during the fourth quarter, and then those same lines will pay down in the first quarter. This activity, coupled with a slowdown in originations toward the quarter-end, resulted in approximately $92 million in net loan growth linked quarter. Or, 3% annualized excluding the FDIC-covered portfolio. Based on what we know today, we do expect loan growth to continue into the fourth quarter.

We continue to report overall improvement in our asset quality metrics, including a reduction in nonperforming and criticized loans, net charge-offs, and provision. We did see a decline in operating expense linked quarter. And, we remain on track to meet our first-quarter '14 expense reduction target. One of the first steps in meeting that target was a previously announced closing of 26 banking locations on August 30. We will close two additional branches in the fourth quarter and also expect to finalize the sale of seven small retail Houston branches announced in late July. The sale of the three branches announced in central Louisiana is expected to close in the first quarter of 2014.

At this time, I will 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 just noted, operating earnings for the third quarter was $46.8 million, or $0.56 per common share. This was in line with last quarter's $46.9 million, or $0.55 per share. In the third quarter, we did had $7.7 million pretax, or about $0.06 per share, of excess cash recoveries in our accretion totals. This was up a bit from the first quarter of 2013, but was $4.6 million pretax, or about $0.04 higher than last quarter; showing once again the volatility related to this item.

I would like to direct your attention to slide 17 in the earnings deck for a moment. This slide was designed not to introduce a new EPS measure, but instead to point out the volatility in our results related to the level of excess cash recoveries in our accretion numbers. Because this item is virtually impossible to predict, we do not include this aspect of accretion revenue in our projections or guidance. So, with operating income essentially flat, and EPS up $0.01, we are once again guiding investors to expect flat to slightly down operating earnings over the next quarter. However, we do expect an increase in operating results in the first quarter of 2014 as our expense and efficiency initiative begins to significantly impact our overall results.

I will now briefly cover a few balance sheet and income statement items. As Carl also noted, while we did grow loans during the quarter, it was not at the same pace as last quarter. Total loans at September 30 were $11.7 billion, up $53 million from the end of June. We back out the FDIC-covered loan portfolio which did decline $39 million during the quarter. Total loans actually were up $92 million, or about 3% linked-quarter annualized. The comparable year-over-year total showed loan growth up 4%.

During the quarter, we saw solid loan origination activity with commercial customers across the Company's footprint, especially in south Louisiana. But, that was offset by higher than normal paydowns and payoffs, as well as some seasonal net reductions. As a result, C&I loans were down slightly for the quarter. As you can see on slide 4, over 70% of our loan book is comprised of commercial or corporate customers whose quarterly activity trends can vary considerably. These credits are larger by definition, and so unexpected activity from a small number of customers can significantly impact the overall results. All that said, we do expect to see positive loan growth in the fourth quarter.

The largest component of our linked-quarter net growth was in the residential mortgage portfolio, reflecting a strategic decision to retain more of these loans on the Company's balance sheet. I will also point out that average loans were up almost $200 million linked quarter, a key driver for net interest income and margin stability. Our net interest income for the quarter was $174 million. That was up $2.3 million from last quarter. That linked quarter increase mainly reflected the higher level of total purchase accounting loan accretion we discussed earlier.

Our reported net interest margin was 4.23%. That was up 6 basis points from the second quarter. The core margin of 3.37% compressed just 1 basis point during the quarter. Drivers there were a drop in the core loan yield that was offset by improvement in the yield on the Company's bond portfolio, as well as a slight decline in our overall cost of funds.

We did enjoy some good success this quarter with our pricing initiatives, with new loan yields for the quarter up 30 basis points compared to last quarter. And, as Carl noted, we hope to see a trade-off of margin for core net interest income in the near-term. Fee income was down slightly less than $1 million on a linked-quarter basis. That decline was mainly driven by a decision we noted earlier to retain more mortgage loans on the balance sheet. As a result, secondary mortgage fees were down $1.7 million, quarter to quarter.

Excluding one-time cost, our operating expense was down just under $1 million, or about 2% annualized. Decreases in personnel and ORE expenses were offset by a small increase in other operating expense. The decline in personnel mainly reflects a reduction in FTEs related to the branch closures. While the level of expense reduction achieved in the third quarter may have been lower than expectations, we have identified 100% of the efficiencies that will be in place for the first quarter of 2014. We expect to provide more detail on many of these specific initiatives next quarter.

We continue to affirm the commitment around our announced expense targets for the first and fourth quarters of 2014. And finally, a quick update on our stock buyback program. As of today we expect to receive about 900,000 additional shares with this transaction, most likely in the second quarter of 2014.

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

Thank you, Mike.

As Carl mentioned earlier, we are seeing continued improvement in our asset quality metrics. Nonperforming assets totaled $216 million at September 30, which is unchanged from June 30. However, this does not fully reflect the positive activity in the third quarter. As I mentioned last quarter, the branches closed in connection with the efficiency initiative has now moved to surplus Bank property. Just over $16 million was transferred into ORE when certain bank locations were closed in August.

During the quarter, total nonperforming loans declined $14 million, or 10%, with non-branch ORE down about $3 million. Excluding the branch transfers, NPAs totaled $200 million at the quarter-end, down $16 million from the second quarter. Net charge-offs from the non-covered loan portfolio were $5 million, or 18 basis points of average loans. That is down from $7 million, or 24 basis points, in the second quarter.

During the third quarter, we recorded total provision for loan losses of $7.6 million, down from $8.3 million in the second quarter. The provision for non-covered loans was $6.5 million compared to $7.9 million in the second quarter. The allowance for loan losses was $138 million at the end of the quarter, and that is virtually unchanged from the June 30 number. The ratio of the allowance to [purity] in loans was 118 basis points, again, unchanged from June 30. We did report an increase in the allowance on our originated portfolio, mainly related to new loans originated during the quarter.

And now, I will turn the call back over to you, Carl.

Okay. Thank you, Sam. At this time, we will open up the call for Q&A.

(Operator Instructions)

Jennifer Demba, SunTrust Robinson Humphrey.

Good morning. My first question is on loan growth. You said you were impacted by a lot of paydowns this quarter. I am just curious as to what your origination trends were if you look either sequentially or year-over-year? Or, really both would be helpful, if you have that.

Hi, Jennifer. This is Mike. Good morning. Origination activity and production overall was solid quarter to quarter. It was down slightly between the third quarter and second quarter, but still at very strong levels. And as we indicated on the call, a lot of that activity continues to come out of southeast Louisiana, central Florida as well as the Houston market related to energy. So, good overall production and good levels of originations.

And, Carl, could you talk about acquisition interest? I think previously you indicated you'd start to look at deals again next year. Do you still feel that way? And, what kind of pipeline do you have right now?

Sure, Jennifer. We -- yes, we certainly are positioning ourselves to be able to be active in that arena beginning next year. We feel very confident, as you could tell from our prepared comments, about where we are in our expense initiative and the revenue initiatives, CV 5950. Feel very confident of hitting our targets that we laid out for the first quarter as well as the fourth quarter of next year. With that confidence level is our ability to really start to look at the M&A environment, and I can tell you that we are certainly starting to see an increase in the number of books that are coming across our desk. I do not think it is going to just take off, but we certainly have seen an increase here recently of books. And, some of those are in markets of institutions that may have some interest. So, we are -- I think that opportunity will certainly present itself in the coming quarters.

Thank you.

Michael Rose, Raymond James.

Just following up on Jennifer's question, how should we think about future buybacks from here? How does that reconcile with your thought process around M&A?

That is a good question. As we continue to grow capital through our retained earnings, as we close out the stock buybacks that Mike referenced earlier, we will once again look at our options. And M&A is certainly one means of deploying that capital, re-upping the buyback is another option as well. And, of course, looking at our current dividend payout ratio. We have several levers that we can utilize, and as we always do every quarter when we have this discussion with our Board, we look at all three of those levers. Fortunately, we have a very strong capital base and are continuing to build upon that. So that, we are going to be in a very good position to execute on an M&A opportunity should it present itself or even re-up a potential buyback again.

Okay. That's helpful. On the expense front, I'd appreciate the reiteration of the expense goals that you laid out. Is there anything beyond what you've already announced that you're looking at? Or, any other levers that you think could pull should the operating environment remaining challenging here over the next couple of years? Thanks.

Michael, that is something that we will always keep top in mind and certainly look at as we go through the year, but there is nothing really new to add at this point around the initiatives and the targets that we have set out for next year. And, as we kind of indicated earlier, next quarter we will be a position to provide more details around the specific initiatives that we are just now really beginning to execute on in a significant way.

Okay, great. Thank you for taking my questions.

Thank you.

Matthew Clark, Credit Suisse.

Hi, good morning.

Good morning.

On the accretion expectations, I think, going forward, it looks like some of it moved forward here, at least in terms of your guidance. But, as you look out to 2014 and 2015, there is about a $0.25 shortfall relative to your prior expectations. Can you talk to why that -- what changed in your assumptions, and then, any plans to replace that?

Of course, as we go through 2014, we have initially the expense initiatives that are really pointed at replacing pretty good chunks of the accretion that will be rolling off. And then as we go through the rest of our efficiency initiative, really the more significant parts of that point to our ability to generate higher levels of revenue. And so we will begin to put some of those initiatives into place as we go through 2014. So the expectation would be to see the fruit of some of those labors as we plow through '15 and beyond.

Okay --.

Your point, Matt, is well taken that when we have a quarter like the third quarter where we do have more in the way of excess cash recoveries than maybe we were anticipated, that that does pull forward a lot of that accretion revenue from later years.

Okay. And on the branch sales and closures, can you give us a sense for -- and I assume this is dialed in to your expectations on loan growth for this coming quarter and the first. But, as those are sold and shut down, can you give us a sense for what is going away with those branches in terms of the amount of loans and deposits? I'm just trying to get a sense for the drag on loans and deposits in the upcoming two quarters.

First, related to the branches that we closed this quarter, through the 26th. Most of those branches, again, were in markets where we already had a presence. And so the vast majority of those branches and the customers related to those branches were transferred to other facilities. So, really, we saw a very, very minimum impact on our balance sheet related to the 26 that we effected the closure of this quarter. Now, for the 10 that we are selling -- first, the seven in the Houston market, we have about $25 million of deposits related to those branches, and for the three in the Alexandria market, or central Louisiana, it is about $17 million or $18 million. Again, as we talked about before, the branches that we effected the closure around as well as the 10 that we're selling are relatively small branches. Really haven't had and won't have a significant impact on our balance sheet.

Then, going forward, you mentioned that you expect to have positive loan growth. Can you give us a sense for any magnitude? Also the source of the growth. Are we going to see more residential mortgage retention? Or, is it going to be elsewhere?

I don't think that you will see additional levels of mortgage retention. I think that we are comfortable with where we are and actually may -- may actually throttle that down a little bit. So, the areas that I think will pick up the slack and contribute to our ability to generate positive loan growth will continue to be areas like C&I and CRE as well as energy. So, Sam you might want to add some color.

We have got some outstanding commitments, particularly in the CRE space, that have been, to this point, injecting their own equity. So, we expect the fundings on the bank lines to start showing up. We are already starting to see some portion of that. So, fundings on CRE commitments that were made earlier in the year, as well as some C&I commitments that were closed during the third quarter that we do expect some fundings on. So, pretty good balance there.

In terms of the cost savings, can you give us how much were realized this quarter? It sound like you were obviously reiterating the overall $50 million with the two milestones in the first quarter and fourth quarter of next year. But just trying to get a sense for how much came out this quarter? And whether or not there is any change in terms of timing and how those are realized each quarter?

We haven't articulated any specifics, Matt, around what we achieved in the third quarter. Again, one of the ways that we are going to be delivering a fairly sizable chunk of the cost savings in the first quarter is related to the branches that we are either closing or selling, as well as many other initiatives that, again, we will give some specifics around next quarter. Overall, expenses were down a little bit less than $1 million between the second and third quarter. And, the biggest chunks of that were, of course, as we've talked about in personnel and ORE.

We do remain committed, though, to being able to hit the target that we laid out for the first quarter as well as the fourth quarter.

Absolutely, and no change in the timing.

Right. No change in the timeline at all.

Thank you.

Ebrahim Poonawala, Bank of America.

Good morning.

Good morning.

Just had a quick follow-up on the loan growth. Can you tell us what the [SNIK] portfolio grew by this quarter?

Let's see. We did have growth in commitments in the SNIK portfolio. I am not sure if I have got that handy here.

I have that. It was actually up a little bit less than $70 million quarter to quarter, Ebrahim. And so, in the third quarter, our total SNIK portfolio was about $1.3 billion.

And, the other question was tied to in terms of -- Mike, your comments about loan yields improving 30 basis points quarter over quarter. I am not sure if I heard that correctly. But, if that is the case, where are we seeing that improvement coming from? Is it because of the mix of the loan portfolio changing in terms of the origination mix? Or, are you seeing better pricing power today than three or six months ago?

Good question, Ebrahim. That is correct. We did see our yield on our new loan production up about 30 basis points quarter to quarter. And, certainly, pricing across our footprint and really across our loan categories remains very, very competitive. So, it is really not that there is additional pricing opportunities out there. For us, and this is something we've talked about for a couple of quarters, the way for us as a Company to really effect an improvement in our overall loan yield, which of course helps us mitigate the margin compression, is through a better mix of the loans that we're putting on the balance sheet. Certainly again, that is an initiative we began several quarters ago. And I think what we are seeing in the third quarter is some results related to that. That really has been key to that increase.

If I can sneak in one last question for Carl in terms of your comments around the M&A? I'm just wondering, do you feel better about your outlook on M&A given where your economic outlook is? Or have you seen pricing expectations from sellers subside over the last year or so? But you think that a deal is more likely doable than it was twelve months ago?

I would say that -- I think we are internally feeling better about being able to seriously look at M&A opportunities. I think the economic environment, while there are certainly many, many questions still looming out there about the overall economy -- I think that in part is driving some of the M&A activity, combined with the continued onslaught of regulatory pressure and regulatory oversight. I think it is driving other institutions to a point where they are just raising their hand. They are looking for quality banks that they believe have a good strategic plan, have good paper that they could exchange for. And, I think that is why we are -- continue to be deemed an attractive partner for banks that are looking to -- for some relief.

Thank you very much for taking my questions.

Kevin Fitzsimmons, Sandler O'Neill.

Good morning.

Good morning, Kevin.

Mike, I know you mentioned that the next leg of the efficiency program, you are still really just starting to go through that. But, is it fair to say that this first leg was much more focused on the branch closings, and the second leg is going to be much smaller pieces of many different things? Is that a fair way to put it? Or, are more branch sales still possibly on the table for that next leg?

Yes, and you're talking about the fourth quarter targets, I presume, Kevin.

Exactly.

As we go through this initiative, you are correct that a lot of what we are doing in the first quarter is going to be related to the branches that we are closing. And then, other aspects of how we make our front office much more efficient than we have been in the past. And, again, more details about that as we get to next quarter. And then, as we get through the year, the initiatives that we will be putting in place that will bear fruit in the fourth quarter -- potentially, it is a lot of smaller initiatives around introducing enabling technologies and things that will help us, across the Company, become much more efficient. But, certainly, and we have been asked this question in the past, branches and how we deliver our products and services across our Company to our customers is always something that we are going to be looking at. So, no, I wouldn't say that is off the table. But, at this point, there are no plans for additional branch closures.

Okay, thanks. And, just a follow-up and more of a top level question on the -- I know the accretion income is very difficult to predict quarter to quarter, but looking at the big delta between the reported margin and the core margin and eventually those have to -- that delta has to narrow. Is the way to think of it how you are trying to navigate this is that over time that reported margin is going to come down closer toward the core, but in the meantime, you are going to have a larger balance sheet, and you're going to have a smaller expense base and also a lower share count? And, I do not know if I am leaving anything out. But, is that really the game plan over the next two-plus years as you see it?

That is correct, Kevin. And a great way to articulate how we are thinking about those aspects of profitability. The only thing that I would add to that is, and this is a big initiative of ours is, continued improvement in the overall mix of earning assets that we have on the balance sheet. So, not only more loans, but more higher-yielding loans.

Which would mean that the core margin doesn't say static. In theory, it should improve?

That is correct. Over time.

Emlen Harmon, Jefferies.

Good morning. I was hoping to drill down on the mortgage growth a little bit. Mike -- I heard your comments loud and clear that this quarter's pace isn't something that run rates, but the deck does note that you made a strategic decision to add more mortgages. I guess, one, should we expect the pace of mortgage growth to be greater than it has historically as we look out over the last couple of years. And, could you give us a characterization of what mortgage types you're putting on the balance sheet?

Yes, taking a step back -- and again, from a big picture point of view. If we look at the percentage of our mortgage production that we placed on the balance sheet going back a couple of quarters, it was probably in the 50% to 60% range. In fact, second quarter was right at 65%. In the third quarter, we moved that up to about 78%, and I think that going forward what you will see eventually that percentage moderate down, probably to something closer to our historical norm which is in the 50% to 60% range. So, that was a big factor that, of course, drove the reduction in our non-interest income related to mortgage, and then, the loans that we saw added to the balance sheet. The overall mortgage production quarter to quarter was down slightly, so there wasn't a big change there. But, we did see a pretty sizable change in the purchase-to-refi mix. Last quarter, it was more -- pretty close to 50/50. This quarter, it really has moved up to almost two-thirds purchase and one-third refi. Again, as we go forward, I think you will see the percentage of purchase continue to remain at the levels we saw in the third quarter, and then, the level of our production that we retain on the balance sheet probably come down just a little bit, again, closer to historical norms. Sam, you might want to add a little color around the kind of mortgages.

I will say that one of the things that we have seen is in our private banking space, in terms of relationship build, that we are having some continued success there. So, we typically retain those mortgages on the balance sheet. They traditionally have an acceptable yield, a shorter duration, and the quality of those we have found have held up relative to the vanilla mortgages, so to speak. So, we continue to add some mortgages in that relationship-building, private banking space.

In terms of, if I think about the -- what has gone on the balance sheet, it sounds like jumbo is a portion of that. And then, I guess the rest of the production is in ARMs. Is there any 15-year paper in that? I'm just trying to understand how that affects your [ALCO] mix, I guess.

There has certainly been some 15-year mortgages added. I think as Sam indicated, a little bit more of our production the last quarter. So, it has been in the private banking arena as well as with some of the hybrid ARMs, the 5, 7, and 10 balloons.

Got it. Okay, thanks. Just one other question. It is actually on asset quality. It seemed like good progress overall this quarter. You didn't include the non-accrual breakout for us in terms of legacy Hancock versus legacy Whitney. Any differences in just what you saw on credit progress in the quarter?

No, it is steady as she goes relative to what we have been experiencing. So, we continue to have success in that space, and the mix relative to resolution is about the same as it has been.

Okay, great.

Emlen, we have actually gotten a couple of questions about that schedule so that is information that we will add to the Q when we publish that in a few weeks.

Okay, great. I appreciate that. Thank you.

Kevin Reynolds, Wunderlich Securities.

Thanks. Good morning, everyone.

Good morning.

A couple of questions. One, it is a data point here. I was looking for the balance of non-covered, non-accrual loans. I think you had put that in a table on that in prior press releases. I could not find it this morning. Maybe I overlooked that. The second question, while you are finding that one, is more conceptual on the expense space. Correct me if I am wrong, I hear you talk about having made progress. I know you closed the branches down in the quarter. You had -- but it looks like the core, excluding the restructuring charge, it looks like the operating expenses are up from where you were in the first quarter a little bit. You continue to express confidence as you get to your target in the first quarter. Help me understand, not necessarily your confidence in the target, but how the expenses will flow from quarter to quarter as a result of the branch closings? I would have thought we might have seen more of that this quarter and not so much pushed out -- I think I heard Mike say into the first quarter of 2014 before you start to see that. Is that correct?

Yes, Kevin, to answer your first question first on the asset quality data. Again, that is a schedule and information that we will include in the Q. We will get that to you as we approach publishing the Q. Related to the expense saves and the timing, you are right. We are up compared to the benchmark first quarter, but continue to make progress within our Company to achieve those expense reductions as we have committed to. Related to the branch closures, again, we closed 26 of those branches at the very end of August. So, that was very late in the third quarter. And, typically while the branch may close on a certain day, there is usually some period of time where we are still incurring expenses to keep the lights on and to finish the process of actually closing down the facility. So, we will see impacts related to the 26. Of course, you will see a full quarter's impact in the fourth quarter, and then, by the time we get to the first quarter of 2014, we will have the impacts related to the branches that we will be selling. The only exception there is, of course, the closing for the three branches in central Louisiana. That closing has been pushed to the very beginning of the first quarter of 2014. Nonetheless, there are many, many other initiatives that we are working on executing right now. And, again, the commitment is there to produce the expense saves that will be evident in our first quarter 2014 numbers.

Thanks a lot. Most of my other questions have been answered. Good quarter.

Christopher Marinac, FIG Partners.

I'll start asking non-expense-related questions. Something different. This really has to do with deposits and deposit pricing. Are you seeing any rational deposit pricing from either your large or even your smaller competitors? And is that something that you think about into next year?

There is a little bit of that going on with a few competitors, primarily in the New Orleans market. But it really hasn't changed the competitive landscape [total], Chris. Nothing to write home about at all from the some of the bigger banks. Deposit pricing, across the board, with the exception of a few players remains very much under control.

This is Carl. I would say that one of the hallmarks of the Whitney balance sheet are those very attractive deposit relationships, and those are continuing to be very, very strong. We feel very confident about where we are from a balance sheet mix standpoint.

Okay. I know that that liquidity is very, very high for you right now, but are you targeting any -- just a general change of the loan-to-deposit ratio next year? Is that something you are focused on?

Absolutely, we would certainly like to move that loan to deposit ratio even up further as we continue to grow loans.

Very good. Thank you.

Thank you, Chris.

Matt Olney, Stephens.

Thanks, good morning. Carl, I believe you noted in your prepared remarks that the core NIM and core NII were relatively stable from the previous quarter. Can you give us any more color as far as your expectations for that the next few quarters?

Yes, Matt. This is Mike. I'll make a couple of comments around that. This is the second quarter now that we have been able to introduce that level of stability, mitigating the compression that we were dealing with earlier in the year and late last year. And so, for all practical purposes, our core net interest income was really flat quarter to quarter flat, and of course, we were only down the 1 basis point. Going forward, it certainly speaks to the importance of maintaining our momentum around loan growth and continuing to effect improvements in the mix of loans that we are bringing on to the balance sheet. So, any expectations around the core NIM, we certainly could see that down another couple of basis points over the next quarter or so. I believe we are very soon reaching the inflection point where we should see an actual increase in our core net interest income. And so, we obviously look forward to that.

Mike, what about the average excess liquidity in the quarter, about $430 million? Do you see any material change to that going forward?

Yes, we see that coming down just a little bit, probably quarter to quarter. We are comfortable reducing that level of excess liquidity by probably a couple hundred million.

Thank you.

Jon Arfstrom, RBC Capital Markets.

Thanks, good morning. Question on -- circling back to the paydown comment. You talked about the activity that you expecting in Q4 and Q1. But, in terms of what happened in the end of Q3, was it broad-based? Or was it just a couple of bigger credits that paid off?

Jon, just a little bit of color around the paydowns and the focus on that. And the comments I am going to make are really across the quarter. Although again, we saw a lot of this paydown activity toward the end of the quarter, at least midpoint in the quarter. We had probably the better part of about $200 million of paydowns that were comprised in large loans. And, by large loans, I am talking about loans $5 million or greater. That is a lot of concentrated activity and track back to the comments that Carl and Sam made around some of the different things that were going on. Certainly, the corporate nature of a lot of our C&I book, and how that activity can impact our loan paydowns and payoffs in a pretty significant way.

Very little of that went to other financial institutions. It was going out to the capital markets. We had a couple clients that actually sold their companies, part of the M&A arena. So, it is just part of the nature of the type of book that we have.

Okay. Good color. And then, just a couple of more questions here. A question on Houston, East Texas. I know you're not retreating from that market, maybe refining is a better word. How are you doing there from a credit and a growth point of view? It's obviously a big market with a growth potential, but just curious if you could give us an update on how you are doing there?

In those markets, what we recognize is our strength, and our opportunity really is around growing in the mid-level band -- commercial and mid-level-size companies. And, that includes C&I opportunities and CRE, so what we want to really do is focus on those opportunities. We're in some markets where we have modest market share. But, there are a number of prospects and opportunities that we feel like we can successfully pursue, so we are really going to concentrate in that space.

Okay. How big is that market for you right now?

As I said, we have very modest market share so we think we have a lot of upside potential. We're talking about markets that have, relative to our traditional markets, much larger base of companies in that size band. We think there is significant opportunity. Those do not happen overnight. It takes a strategic plan that we have developed, and so we are marching down the path to pursue that plan that we mapped out earlier this year.

This is Carl. Continuing to attract very reputable lenders in that market as well, to continue to grow that book, because the opportunities are extremely strong in that Houston market.

Okay. Thanks. And then, Mike, maybe just one final question for you. In terms of the excess capital commentary, is there a dollar amount where if you could really put it to work today and not have any capital concerns whatsoever -- is there a dollar amount of excess capital, that you would be willing to share, that you think is maybe being underutilized?

The way that we look at capital, and we have talked about this a lot, certainly, is focusing on our tangible common equity ratio. And our comfort zone that we have articulated by Management as well as our Board to maintain that TC at around 8%. That is our benchmark, and not literally, but figuratively, anything above that 8% is what we consider our [guess] excess to some degree.

You would view that whole 68 basis points as capital that you would like to put to work, maybe in some other way?

That is correct.

Okay, thanks.

I would now like to turn the conference back to Mr. Carl Chaney for any further remarks.

Okay, thank you. Thank you all for joining us today for the call. We are excited about our third-quarter results but even more excited about the quarters that are ahead. We feel very confident in our ability to hit the targets that we had laid out in previous calls, particularly the first quarter and fourth quarter of 2014, and truly believe that through these initiatives that we are rolling out, that the Company is positioned to do extremely well in the quarters to come. So, again, we appreciate your support and appreciate your interest in today's call. Thank you very much.

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