Hancock Whitney Corp (HWC) 2014 Q1 法說會逐字稿

Good morning and welcome to the Hancock Holding Company's first-quarter 2014 earnings conference call. Participating in today's call are Carl Chaney, President and CEO; Mike Achary, CFO; and 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 these 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. Let me start today's call by saying how proud I am of our associates and our management team. We set some very aggressive goals early last year, and as we noted in our release yesterday, we met both of our expense targets for 2014. Not only did we meet the first quarter's target, we also met the fourth quarter's goal three quarters ahead of schedule.

But as I noted in my quote in the release, we are not done. We still have work to do to meet the second part of our initiative, a sustainable efficiency ratio for 2016 of 59% or lower. With expenses in line, in order to meet our goal, we will need to generate additional revenue. That means that over the next couple of quarters, you may see expenses rise slightly as we reinvest in higher return revenue-generating lines of business.

We will use some of the savings from the divestiture of our P&C and Group Benefits insurance lines we announced a couple of weeks ago. And as we noted in the release, we are continuing our branch rationalization program and closing more locations across our footprint.

But at the same time, we are closing branches, we are also opening new locations. We just opened a regional headquarters in Lafayette, Louisiana, a significant market for the oil and gas business. And in a few weeks, we'll be opening business financial centers in Houston, Texas and Jacksonville, Florida to support our strategic business focus for those markets. And we have plans on the table to open additional branches and BFCs in more markets during 2014.

While you'll see us investing, it is also important to note that we remain committed to keeping expenses under control and in line with our stated goal for the fourth quarter of 2014.

Yesterday, we reported first-quarter earnings of $49 million, or $0.58 per share, and an ROA of 1.05%. We continue the trend of replacing purchase accounting income with core earnings. A combination of lower operating expenses and stability in the net interest margin helped to improve the overall quality of our earnings.

Operating expenses declined $10 million linked-quarter and compared to our starting point a year ago, operating expenses are down almost $13 million or 8%.

The efficiency ratio improved to 62%, down from 66% last quarter. Core net interest income was flat linked-quarter while the core net interest margin narrowed 3 basis points. We had over $230 million in linked-quarter net loan growth, or 8% annualized, and approximately $1.2 billion, or 11%, year-over-year loan growth, each excluding the FDIC covered portfolio.

There was continued improvement in our overall asset quality metrics. And as I noted earlier, our ROA improved to 1.05% and our return on TCE was over 12%. With purchase accounting continuing to run off, it is important for us to continue our efforts to replace it with core earnings, and we are committed to doing just that. While we work on revenue-generating products, EPS may remain flat in the near-term, but the quality of our earnings will continue to improve.

At 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.

Thanks, Carl, and good morning everyone.

Total loans for the company at the end of the first quarter were $12.5 billion. That was up just over $200 million from year end. If we back out and exclude the covered loan portfolio, total loans were actually up $231 million, or 8% linked-quarter annualized.

We are pleased with the quarter's loan growth, which exceeded our own seasonal expectations of flat growth. The loan portfolio increased in most of our markets across the footprint with the majority of that growth in Houston, southwest Louisiana, Mississippi, and central Florida. The growth was diversified across all of our product lines, and we are encouraged by the activity in all of our markets.

While C&I was the biggest driver of the dollar increase, the mix continued to improve with CRE loans making up almost 20% of new loan originations. Construction lending was also up with residential mortgage loans increasing slightly. As a result of the first quarter's activity, we have increased our outlook for loan growth in 2014 from a mid-single-digit increase to an upper single-digit increase.

The first quarter also saw higher levels of payoffs and paydowns with also very healthy levels of new loan origination activity. While new loans were booked at levels just under 4%, the runoff rate was higher, compressing the core loan yield by 7 basis points and in turn causing a slight 3 basis point compression in the core NIM. However, the additional loan volume during the first quarter did help offset the loss in net interest income from two fewer accrual days this quarter.

Nonperforming assets, net charge-offs, criticized loans, and classified loans were all down linked-quarter. The total provision for loan losses was virtually unchanged from last quarter. The change in the allowance for loan losses reflected a net reversal of previous impairment on FDIC covered loans partly offset by an increase in the allowance on the noncovered loan portfolio. With continued loan growth in the future, the natural migration of some acquired loans to the originated portfolio and the accretion of the remaining discount, we do expect to continue to build the allowance on the noncovered loan portfolio.

Total deposits for the company at March 31 were $15.3 billion. That was down $86 million from year end. The decline was mainly related to seasonal public fund balances which were down $121 million linked-quarter.

We report continuous stability in our core and reported net interest income and net interest margin. On a reported basis, net interest income was basically unchanged from last quarter despite a decline of $600,000 in loan accretion. Core net interest income was also flat linked-quarter. The Company's average earning assets were up $364 million linked-quarter, reflecting a significant loan growth at the end of the fourth quarter and into the current quarter.

The reported margin and core net interest margin both narrowed 3 basis points in the first quarter. The core loan yield at 4.02% did decline 7 basis points and reflects the comments in repricing we mentioned earlier. This compression was partly offset by an improvement in the yield on the bond portfolio of 4 basis points. Our funding costs were flat at 23 basis points.

Noninterest income for the company totaled $56.7 million. That was down $2.3 million from the fourth quarter. Amortization of the indemnification asset totaled $3.9 million in the first quarter compared to $1.6 million last quarter. This increase reflects a lower level of expected future losses on covered loans. We do expect continued IA amortization through 2014, but at a slightly lower level.

Service charges and card fees together were down about $1.6 million from last quarter partly due to the shorter quarter. Trust, investment, and insurance fees totaled $18.9 million and were up $800,000 linked-quarter. Included in that total was $3.7 million of insurance revenue.

As a reminder, we announced the divestiture of our P&C and Group Benefits insurance lines a couple of weeks ago. Insurance related revenue and expense are both expected to decline by less than $2 million per quarter beginning in the second quarter.

Operating expenses for the first quarter totaled $147 million. This was also our targeted goal for expenses in the fourth quarter of 2014. So, as Carl mentioned earlier, we were able to achieve our expense goal three quarters early.

Expenses were down just over $10 million linked-quarter, excluding $17 million of one-time costs last quarter. The expense reductions were broad-based and reflected the culmination of our efficiency activities, which we've been sharing with the market the last few quarters. These activities included a full quarter's impact from recent branch sales and closures, reorganization market leadership, procurement activities, as well as process improvement and enabling technology initiatives. All of these aforementioned items will not stop now that we've achieved our expense goal early.

For example, branch rationalization is an ongoing process where we continue to open, close and consolidate branches when warranted. Yesterday, we announced we will close an additional 16 branch locations in Mississippi, Florida, and Louisiana in early third quarter 2014. However, as Carl noted in his comments, we also are opening new branches and business financial centers at the same time.

So, the take-away here is that while most of the heavy lifting in terms of expense reductions is now in the rear view mirror, we will continue with our efficiency efforts to create funding for revenue initiatives. So ahead of us is continued investment in revenue initiatives and revenue growth, all with a focus on achieving our stated goals.

I will now turn the call back over to Carl.

Thanks, Mike. Before I open the call for questions, I'd like to end on capital. Our TCE ratio was 9.24% at March 31, up 10 basis points from where we were a year ago, even with $115 million of capital spent on the current 5% buyback program. The current ASR transaction will be completed in May, and based on current stock prices, we expect to receive approximately 600,000 additional shares to close the transaction. We will continue to review future opportunities to manage our strong capital position in the best interest of our shareholders, including additional stock buybacks, organic growth, acquisitions, and increased dividends.

We will now open the call for questions.

(Operator Instructions). Michael Rose, Raymond James.

As we think about going into 2015 with 2014 being kind of a transition year and as you get towards your or move toward your longer-term efficiency target of 57% to 59%, should we think about more the efficiency improvement in 2015 coming from revenue as opposed to expenses?

And then what are some of the areas outside of some of the new branches that you're going to open that you would invest some of the cost savings into? Thanks.

Thank you, Michael. This is Mike Achary. Again, I think you hit the nail on the head. Certainly, 2015 -- or 2014 again is a bit of a transition year as we harvested our expense savings as we've done but then also continue the good work to create opportunity to invest in revenue initiatives. That's happening now. That will continue as we move through 2014, and we are really looking for 2015 to be the year where we really begin to show that incremental revenue growth that helps us achieve those targets for 2016.

So, we've talked a lot about I think some of the efficiency improvements that we've made in the company, some of the things that help our lenders and relationship managers create more opportunities to be face-to-face with their customers. That's also involving things that help us remove some of the burdens of the day-to-day operations that those folks have, so again that they can focus on good customer contact time with their customers.

So, going forward, the things that I think you'll see us invest in will be things that actually help us add where it's appropriate in certain markets, relationship managers that help us with our commercial, middle-market and corporate banking customers. You'll see us add some resources that help us with our mutual fund complex in terms of wholesalers. We have a whole host of initiatives pointed a fee income. Much of that is wealth management, but then also treasury services, and those will be areas that we'll continue to invest in.

Carl talked earlier about the BFCs that we are opening, and look for more to come in that regard as we head down the road. And then finally, I think I already mentioned this, but additional automation that really helps us become a more efficient company again with respect to customer contact, freeing up time for our lenders to spend more face time with good customers.

So that's really kind of how we're thinking about this year and into next year.

Okay. And then as a follow-up Carl, you mentioned the 9.2% tangible common ratio. I know, I think your goal is around 8% where you'd like to optimally operate. Can you discuss the interplay between thoughts on future share buybacks and maybe potential M&A opportunities? Thanks.

Sure, Michael. I can assure you every board meeting that we have, we have a healthy dialogue and discussion about our options. The nice thing is we have ample options to manage our capital down to where it needs to be in the best interest of our shareholders.

So we are continuously looking at M&A opportunities as well as running numbers for additional buybacks. So, we look at that every board meeting. Literally, every board meeting, we discuss it. And the nice thing, as I mentioned, is we have options to feel very confident in our ability to execute on one or more of the options that we have to continue to manage our capital.

Great, thanks for taking my questions.

Jefferson Harralson, KBW.

Thanks and congratulations on the profitability improvement this quarter. I wanted to ask a quick question on a couple of different things. One is your guidance for flat EPS in the near term. When you say that, do you mean Q2 or do you mean a handful of quarters? Because it does seem like you have some purchase accounting headwind affecting you in the back half of the year.

Yes, Jefferson, this is Mike. When we talk about that guidance, it really is for the next couple of quarters, so the next two or three quarters. And you're right. We do have a headwind of a diminishing level of purchase accounting. Between fourth quarter and first quarter, that impact was about $600,000. As we head into the second quarter, probably another $600,000 or $700,000 of kind of projected diminishment. But then as we head into the back half of 2014, those diminishment levels will pick up a bit. So right now, we're looking at somewhere in the neighborhood of about $5 million of purchase accounting diminishment in each of the third fourth quarter. So obviously, we're looking to make that up with all of the efficiency initiatives that we kind of talked about a little bit earlier. So, again, that's a mix of continuing to reduce expenses where appropriate to create funding for revenue initiatives. And then certainly we're looking for some of those revenue initiatives to begin a payback period a little bit later this year.

All right, thank you. And then I'll just ask on the revenue initiatives will be a key to getting where you want to be I think in 2016. You mentioned better loan growth. Where is that coming from and what are you seeing there? And what are the other maybe one or two main revenue initiatives that need to occur for you guys to meet your 2016 goals?

Well, for the loan growth -- Jefferson, this is Carl. Our loan growth we expect to continue to originate where we've had recent success, which is really all across our footprint, all five states generating nice loan growth.

So, we are fortunate to be operating in markets that are doing very well economically, from the thriving oil and gas industry in Texas as well as south Louisiana to the nice recovery we are seeing in central Florida from Tampa to Jacksonville, and then on the Mississippi coast we had some nice loan growth. So we really do expect to see continued growth in those markets as those economies continue to grow and improve.

And yes, Carl, just to add to that, we saw that the last two quarters again with a pretty broad-based increase in lending activity really across our footprint and we certainly expect that to continue going forward. We also have the initiatives that I kind of mentioned at the onset of the call a few minutes ago, and that's pretty broad-based and involves both our margin business as well as our fee income business.

And on the fee income side, again, treasury services and wealth management are really the two big areas that we are looking to show revenue increases in the future.

In addition to the loan piece.

Right.

Excellent. Thank you guys.

Thank you, Jefferson.

Emlen Harmon, Jefferies.

So, pretty strong loan growth in a quarter where you guys are typically seeing softer growth. Could you give us a sense of what you are seeing on originations in the past couple of quarters, just whether those are picking up or whether the loan growth we've seen is more of an effect of just not as much runoff in some of your loan books?

Yes, we've had really good production, Emlen, in the last couple of quarters and very pleased with that aspect of our activity. Paydowns have been a little bit uneven quarter-to-quarter, and certainly in the fourth quarter we saw a little bit in the way of lessening of that. And I think, when we get to the first quarter, or as we get to the first quarter, probably back into more of a normalized level of paydowns.

Yes, I would say that in the first quarter, we actually had our typical paydowns. It's just that we were able to have very strong loan originations which allowed that typical first-quarter softening of net loan growth to not occur this time. So originations, to your point, have been very strong for the last couple of quarters in a row.

Got you. And the loan growth that you guys are seeing, is that marketshare driven or do you feel like there's actually the market, the lending market, is actually growing as a whole?

This is Sam. I would put it in both of those categories. We are seeing improvements in economic activity in some of our key markets as well as the fact that we're picking up some relationships that we think are meaningful. And so we are seeing acquisition of relationships as well as a general lift of the tide, so to speak, in some of these markets. So we are very encouraged on both of those fronts.

Got you, thanks. And Mike, just one last quick one, excuse me. You gave us revenue impact from the insurance sale. Is there anything that we should be thinking about taking out on the expense side as well?

Yes, we talked little bit earlier about a $2 million quarterly impact both on the revenue side as well as the expense side.

Got you.

So that would be the way to think about it going forward.

Got you. Perfect, thank you.

Jennifer Demba, SunTrust Robinson.

My questions have really been answered, but I do have a question. On the new offices that you said you plan on opening soon in Houston and Jacksonville, how do those offices -- can you just describe those offices? Are they just a business branch or how does that differ from a regular branch?

Yes, Jennifer, this is Carl. Those are, we call those business financial centers. And I apologize, sometimes we use the acronym BFCs.

Those are commercial oriented branches and so when you walk in, they do not look like a typical retail branch in the sense that you don't see a large teller line. Rather, you walk in, it looks like a business office with professional desks around. We obviously do accept deposits and do transactions, but it certainly doesn't look like a retail branch. It is clearly focused on commercial lending and commercial banking. And they typically located in business complexes, office complexes, oftentimes in the first floor of an office tower. And we have two opening up in a matter of just a couple of weeks, one in Houston and one in Jacksonville. And that represents our strategy for markets like that where we don't have a very large market share. We are going in with a very niche strategy play and going after commercial and high-end private banking. And so that has worked for us in the past and so we're very confident we will be able to continue to lever off of that strategy. As opposed to markets like New Orleans, Baton Rouge, the Mississippi coast where we have large market share, we have your typical retail branches as well as our strong commercial activity.

And Carl, that was actually all part of our strategic realignment that we talked about about a year ago.

Yes.

Okay, and my second question is on M&A. Can you just talk about the pipeline as it stands now and remind us of what kind of deals you are examining and you are willing to pursue? And have you backed away from any opportunities in the last three to six months?

I'd say the M&A markets, our activity is continuing to grow. It is not -- I'm not going to say it's taking off, but it is growing slightly. Gradually maybe is the best way to describe it.

I will say that the quality of the books that we are starting to see continues to improve whereas 18 months ago, I would tell you the quality was significantly less, so that's encouraging.

As far as our sweet spot, we could do up to $10 billion, $12 billion of acquisition fairly easily but that's not our sweet spot. We are going -- I would describe our ideal target being anywhere from $1 billion to $2 billion up to $5 billion or $6 billion. That is our sweet spot. We could do one of those transactions and fold that in very nicely and not have it be a major distraction and continue with our other initiatives which are important.

So while we have -- we're still looking forward to continuing to grow our revenue. We'd like to look at those smaller acquisition opportunities at the same time that could fold in.

Have we backed off? I guess we've passed -- maybe this is what you were referring to. There have been two fairly recent deals that we looked and decided to pass on just because they weren't strategic in our mind.

One nice thing, Jennifer, is we don't have to do a transaction right now, and so that allows us to be patient and be very deliberate in our M&A thoughts. And so we will pull the trigger when the right strategic opportunity presents itself and we are very confident that will occur.

I have one more question, if I can. If you were to look at an opportunity in Texas, would it have to be in Houston or Dallas, and what's your thought on that market in general?

Well, the Houston market is fantastic as far as how the economy is working, and our results in that market have been very, very strong and positive. If something were to come available in Houston and it had also some branches, let's just say in Dallas, that is not a no-go. We could certainly do that easily.

Now, if it were something in west Texas, that's not really in our radar screen right now. That's another thing that we're fortunate about is that we are already in markets that we believe will provide ample opportunities for strategic expansion without having to go significantly outside of our existing footprint.

Okay, thanks so much.

Thank you, Jennifer.

Matthew Clark, Credit Suisse.

I guess first question really on the core margin outlook. I think there had been some expectation for things stabilizing there with the mix change, and I think pricing has incrementally gotten better. That differential has closed.

Can you just give us a sense for how you see that core margin going forward and maybe also what kind of pricing you're seeing quarter-to-quarter?

Yes, Matt, this is Mike. Again, if you look back over the last five quarters especially, our core net interest margin really has been kind of the picture of stability. We've had a quarter or two where we're maybe up a couple of basis points. This quarter, we were down a couple of basis points. And we've been able to achieve that more recently through the volumes that we've been able to put on the balance sheet on a net basis and also an improvement in the mix of loans that we're putting on the balance sheet, so a little bit fuller mix. All of that is taking place in what continues to be a very challenging environment to price loans, and that will continue going forward. So, we're going to have that challenge and we're going to have a little bit of that potential for a little bit in the way of a downward movement in our core loan yield.

So our objective is to obviously maintain that core NIM stability and to continue to grow our levels of net interest income. And we think as we go through the year will be able to achieve that. So, again, we may see the net interest margin, the core net interest margin, trend down 1 basis point or 2 as we go through the rest of the year, but the objective is to increase our level of net interest income.

Got it. Okay. And then as you look beyond, say, the next couple of quarters, I guess I'm just trying to get at maybe the underlying assumptions behind achieving that 57% to 59% core efficiency ratio in 2016.

I guess when we think about expenses beyond this year, is it fair to assume they're going to be flat or down? And I guess what type of -- I understand some of the initiatives that are in place on the revenue side, but also just trying to get a sense for your assumptions on maybe rates and any maybe pick up from the type of growth, the loan growth, that you're putting on today.

Well, going forward on the expense side, again, as we've kind of talked about, we are continuing our efficiency efforts. And we intend to continue to do that to create funding opportunities to invest back in the company.

So, again, going forward, we'll be very careful and transparent to kind of show what those actions and activities have been. And I think what we'll see is, once you kind of back out the investments that we've made, you'll see just kind of a marginal continued increase in expenses somewhere in line with the rate of general inflation. So, there's always going to be a little bit in the way of expense increases that are just kind of baked into the numbers for that reason going forward.

And as far as the second question about the revenue component, again, we've talked a lot about that. We are very focused on continuing the level of loan growth that we've put in place the last couple of quarters, increasing that going forward and at the same time investing in revenue-generating initiatives, many of which are pointed squarely at our fee income lines of business. And again, wealth management, so trust and investments are big areas that we are investing in as well as treasury management.

Okay, but no change in rates in 2016? Do you assume some benefit of higher rates or no?

No, I'm sorry, no. Again, when we set up these targets a year ago, they were under the assumption that while certainly an increase in the interest rate environment would help us, it's not something we're counting on. So, by the time we get to 2016, if we haven't had a rate increase, the goals are still out there and our intent is to achieve those goals.

Okay, thanks. And then just a housekeeping item. How much of that latest increase in C&I came from the shared national credits?

In terms of the total increase in overall loans, it was less than 30%. Total loans on the C&I piece, let me see here. I believe there is -- I'm not sure I've get that number handy here.

I believe it was in the $60 million to $65 million range.

Right.

Okay, thank you.

Matt Olney, Stephens.

I want to go back to Matt's question on the core margin. Can you guys disclose what the average yield is on the new and renewed production for the first quarter and how has this changed from the previous quarters?

Yes, Matt, if we look back over the last couple of quarters, it really is showing a little bit of an upward trend. Again, it's not linear quarter-to-quarter. But the yield that new loans came on the books last quarter was right around 370 basis points, and that has moved up to about 380 or so this quarter.

Okay, thanks Mike. And going back to the sale of the business line within the insurance business, are sales of other businesses still on the table at this point, or would this just be limited to just the insurance business?

Matt, this is Carl. I would say that I wouldn't expect any additional sales of lines going forward. I guess it was at our annual shareholder meeting two days ago and I had a question similar to that, and I responded like this. We stack rank all of our lines of business from a profitability standpoint, I mean from a profit margin. And while our commercial insurance line of business was profitable, it was at the very bottom of that stacking. And so we felt very, very comfortable and confident in our ability to sell that for a nice premium, turnaround, and take that investment and reinvest that into higher profit margin lines of business that we are currently operating in that we know we can do very, very well. And so that, in its most simplest terms, that is exactly what we executed and we feel very confident our ability to generate significantly more revenue that flows the bottom line with a similar investment than we were generating with the commercial insurance line.

So, I don't see though, looking at the other stack rankings, I don't see any other lines of business that it would necessarily make strategic sense to exit in order to reinvest as we did with the commercial insurance.

And Carl, that is really kind of what we're doing in a way with our branch network.

Absolutely. We're moving into particularly those markets, large markets, where we have relatively small market share, moving away from the retail strategy in the retail branch and taking that money. And that's not expense play but that's reinvesting that money into more strategic business financial centers where we know we can be much more profitable. So, again, that's a similar concept that we're executing.

Thanks, guys.

Christopher Marinac, FIG Partners.

Given the comment in the press release about the return on assets at 1.05%, I guess I'm curious if directionally we should see this get better next year with these investments, Mike? Is that realistic?

Yes, that's correct.

Okay, great. And then could you or Carl just talk to us a little bit about the priorities between buyback dividends and M&A? Could you rank those or is there sort of one that's preferred over the others?

Chris, I don't know if I could really give you a priority. The priority is we will execute on one if not both of those. I feel pretty confident because we have a very strong capital, as everyone seems to point out, which is not a bad thing. It does create nice options for us, and we will manage that capital in a fashion that we think is in the best interest of our shareholders.

And so to be able to say to prioritize between M&A and stock buybacks, we don't have a deal in hand, and so, no, I'd say I couldn't rank those one over the other. I'll just say we're going to pursue both and make the right strategic decisions.

Okay, great. And maybe just a final point. Where are you on the stress test process and sort of what is coming out, coming forward on that process?

When you say stress test, you mean the DFAS requirements, right, Chris?

Right, yes.

We filed our DFAS results a couple of weeks ago, and so that is done and behind us. And I suppose, like most other banks out there, we are going through a review from our examiners, which is a kind of normal and customary thing. And that will conclude that process for this year. And of course, that's kind of a continuous process not only the DFAS stress testing but our normal stress testing we do as part of our capital management and capital planning process.

And you are still waiting to hear back feedback in terms of what the capital impact there is, if any?

What's that now? From the examiners or --

Correct.

Yes, and again, given the size that we are, the $10 billion to $50 billion banks, I don't know that the examiners are going to come back and give pass or fail grades or anything of that nature. It really is just an effort to comply with the regulations and to help us assess our capital going forward against the different scenarios that have been established.

We don't anticipate any issues coming out of that whatsoever.

No, none at all.

We have a very close relationship with all of our regulatory authorities, and obviously they've been very closely aligned to us as we've been going through this process of the stress test in DFAS and submitting that, and we don't anticipate any issues coming out of that whatsoever.

And just as a reminder also, and again, this is in accordance with the DFAS regulations, or Dodd-Frank, there's no public disclosure of those results for this year. For next year, however, in one form or another, some form of the results all are projected to be or are scheduled to be disclosed, but nothing for this year.

Got you. Very well, that's good. Thank you for all the color on these. I appreciate it.

Mikhail Goberman, Portales Partners.

I was wondering if you guys could perhaps give some color on energy lending and trends in that space in Houston and Louisiana. Thanks.

Yes Sir, the debt segment continues to be very strong. We've had opportunities to continue to expand in that space. It's not the primary driver of our growth this quarter, obviously, but we are seeing continued strength there between the production side as well as the support industries.

So, we've got a broad base of clients in industries that support energy in general whether it's upstream for the exploration and production or its non-drilling support or direct drilling support or just the other support industries, transportation, product transportation, etc. So, we're seeing pretty broad-based opportunities across the whole entire energy segment.

Great, thank you. And if I can just circle back to the insurance divestment. I'm sorry if this is kind of a repetition of maybe something you went over. So you said the insurance fees are going to be down about $2 million beginning in Q2?

That's correct.

From the current level of $3.7 million, is that right?

That's right, yes.

Okay, thank you very much.

You bet, thank you.

Peyton Green, Sterne Agee.

A question, I was wondering, Mike, if you could touch on maybe what the headcount was for the combined company in the first quarter. Maybe if you could frame that in the context of where it was a year ago and a quarter ago.

Yes, right now, Peyton, our headcount -- and this is on a FTE basis -- is just under 4,000. So if we go back a year to the first quarter of 2013, we were just under 4,200. So we are down year over year of about 200.

Okay, so that's flat versus the fourth quarter and yet there's a big change in personnel expense. I mean $3.5 million linked quarter.

Yes.

Was there any kind of bonus accruals that got reversed out that maybe you accrued over the last year that was due that didn't get paid in the first quarter or maybe -- because that's a huge change just on a fairly limited headcount reduction in the personnel expense.

No, no significant accruals this quarter or really last quarter or reversals or adjustments. I think what you're seeing here is really the full-quarter impact again of all the activities and actions that we really began executing on as we went through the fourth quarter of last year. So, again, the numbers that I've quoted really were end-of-period numbers and so, again, it really is a full quarter's impact of everything that we've done and put into place. Does that make sense?

Yes, no, I guess just compared to I know back in the old, old days, 12 or 13 years ago, when you all did a 5% reduction in force. I mean the effect of that was not as dramatic on a per FTE basis, I guess is just the way I'm thinking about it. So it just seemed like there might have been something else going on. But all right.

And so you would expect there to be a little bit more downside on that number based on the insurance company being -- I mean the P&C brokerage business moving out plus the branches but the branch closures would be offset by investment in other noninterest income businesses?

That's correct. That's exactly the way we're thinking about it. And again, at the very onset of the call, we mentioned some of the initiatives, and many of those initiatives involve bringing into the company new relationship managers where appropriate and we believe necessary.

Okay, great. Was there anything in the Other line that you might caution us to use the $43 million as the run rate, or is that a good run rate plus a little inflation going forward?

No, it really is a pretty good run rate. And one of the things that we strove for and obviously I think we were able to achieve this quarter is the expense reductions weren't aggregated up into one category or one market or one line item on the income statement. It was pretty broad-based. And so it represented, again, the culmination of all the things that we've been talking about and talked about a little bit earlier in the call, all really manifested itself in a full-quarter's impact in the first quarter, which is, again, the way we had kind of set up the plan of the program.

Okay and then I guess on the personnel, not to be a stickler about this but I guess I've kind of forgotten. When are the merit pay raises that you would normally incur? Was that in the first quarter or is that a second quarter?

No. And again, we do have a merit increase process or salary evaluation process that typically happens sometime in the middle of the second quarter of every year but, again, salary review and salary administration is something that takes place throughout the year. So it's not necessarily like maybe the old days you were referring to where everybody in the company got a raise on a certain day. We have really strove to kind of spread that out and make that kind of a continuous process. Having said that, there will be some salary increases that will be reflected in the second-quarter numbers.

Okay, all right. And then separately, in terms of the deposit growth in the quarter, I know, historically, on your side, on the Hancock legacy side of the business, there was pretty good seasonality --

Yes.

-- on the deposit flows in the first quarter that would roll out by the end of the first quarter. How would you guide us to think about earning asset growth maybe in the second and third quarters in the context of that?

Yes, and you are exactly right. And I think we mentioned a little bit earlier some of the seasonality in the public fund book, which was kind of a legacy Hancock attribute. So sure enough, we're seeing those impacts as we go through the first quarter.

And even on the Whitney legacy side, typically you'd see a little bit of an increase in primarily the corporate deposits that would happen around year end and then a little bit of an outflow as you go through the first and second quarter.

But going forward, to answer your question, I think that, on net-net basis, second quarter will probably be kind of flattish in terms of earning asset growth. But, I think, in the back half of the year, we'll see a little bit in the way of an upward movement in our earning asset base as we strive to fund our loan growth through methods other than just relying cash flow from the bond portfolio.

Okay, so is it dependent on deposit growth being positive, or would you borrow money to fund loan growth and just utilize capital that way?

Really, the answer is all of those things, Peyton. Those are all things that we have done, are considering doing and potentially will do going forward.

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

I'm not showing any further questions at this time. I'd like to turn the call back over to Carl Chaney for closing remarks.

Okay, thank you, and I want to thank everyone for joining us today on this call. We are very, very proud of our associates and all the hard work in achieving our expense goals, particularly the three quarters in advance. And we look forward to continuing to keep the market updated as we continue to focus on growing our revenue and the projects resulting there from. So thank you again for joining us and your support.

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