Hancock Whitney Corp (HWC) 2014 Q4 法說會逐字稿

Good morning and welcome to Hancock Holding Company's fourth-quarter 2014 earnings conference call. As a reminder, this call is being recorded.

I would now like to turn the call over to Trisha Carlson, Investor Relations Manager. 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, or predict market or economic developments is inherently limited.

We believe that the expectations reflected or implied by any forward-looking statement are based on reasonable assumptions, but our actual results and performance could differ materially from those set forth in our forward-looking statement. Hancock undertakes no obligation to update or revise any forward-looking statement, 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.

Participating in today's call are John Hairston, President and CEO; Mike Achary, CFO; and Sam Kendricks, Chief Credit Risk Officer. I will now turn the call over to John Hairston.

Thank you, Trisha, and good morning, everyone. We certainly appreciate you taking the time to join us today. I'm very pleased to represent 3,900 colleagues who make up the Hancock Holding Company team. We did exhibit solid results in the fourth quarter. We continue making demonstrable progress in improving the Company's core earnings stream.

And I was asked to -- in recent investor meetings during my first tour -- if I or the Board of Directors plan to change the Company's strategic direction, given the recent changes in executive management. And the short answer to that is no. The strategic initiatives we began over a year ago are working, as evidenced by continued growth and improvement.

We continue to successfully replace declines in purchase accounting income with quality core results. We do expect to continue growing the balance sheet organically. We maintain good liquidity, and we are growing core revenue. So we feel comfortable that we are able to do that while still responsibly managing our expense levels.

So while reported operating EPS has been flat to down over the past several quarters, we hope you appreciate -- core EPS continues to improve. This quarter marks the fifth straight quarter of core EPS improvement. We initially made those improvements, the quarters' improvement, based on expense reductions; but in the second half of 2014 we began to see complementary improvements in core revenue. So as the headwinds of accretion wind down significantly in 2015, the pace of core earnings is expected to grow and reported EPS should begin to grow.

So the tone for the fourth quarter, folks, is similar to previous quarters. The quality of earnings continue to improve as core earnings rise and accretion revenue diminishes. And I recognize this call is about the fourth quarter, but given we just wrapped up 2014 -- we had lots of activity in it -- I would like to provide context around the full-year 2014 as compared to 2013.

One of the drivers for needing to do that is the accretion diminishment. It was simply a breathtaking headwind throughout 2014, and we believe it's helpful for investors to see the context of that run rate and why the diminishment of that run rate makes us feel a bit more confident in 2015.

So while operating results may only look slightly improved year over year, when you compare the core results for 2014 versus the year earlier, the story, we believe, is much more impressive. Core income increased $38 million or 31%. EPS grew $0.47 per share or 33%, both as compared to 2013. The team achieved this as pretax purchase accounting income declined $50 million over the same period.

So we more than replaced the purchase accounting run-off through successfully reducing and then controlling expenses while simultaneously investing in revenue-generating initiatives that are now showing some healthy returns. The balance sheet obviously grew well. Our loans were up $1.6 billion or 13%. Deposits funded most of that growth at $1.2 billion; that would be 8%.

The core margin for the year was stable, with only 6 basis points of compression. And credit metrics improved; capital remained solid; operating efficiency ratio improved over 300 basis points.

Now, the team is extremely proud of these results, and we expect 2015 to reflect similar progress towards achieving those goals. Today the gap between operating and core results has narrowed to $0.06 a share compared to $0.22 of a gap eight quarters ago. The gap in net income is less than $5 million, and the difference between core and operating ROA has now diminished to only 10 basis points.

So the team is invigorated. The team is confident. We are growing the balance sheet at an impressive rate. Our bankers are winning in a very competitive banking environment, and they are doing so through attracting business that we believe will be even more attractive in a rising rate environment, whenever that finally occurs. They see the gap between core and reported earnings narrowing, and we all expect to reach that inflection point in 2015.

As you might notice in the investor deck on slide 19, we show, as we always do each quarter, the forecast for the impact of purchase accounting on a quarterly basis in the future. And on the bottom right you'll see that the impact of that number over the next several quarters really begins to reach a degree of immateriality by the time we get to 2016.

Now, Mike will focus a few more comments later on the decreasing impact of purchase accounting. But I can't emphasize enough how pleased we are to be near the time when our income statement is relatively simple and the efforts of our team begin to manifest themselves more visibly in reported earnings.

Before I turn the call over to Mike to review the quarterly results, I would like to take a minute to address the recent decline in oil prices and the potential impact on our energy loan portfolio. For those of you that I haven't had an opportunity to visit with, it was in 1985 that paved the way for me to enter this business. My background was in chemical engineering. I was a consulting engineer back in the late 1980s and found my time directed more and more to assisting banks and the Resolution Trust Corp -- assess their energy holdings due to the failed banks, primarily in Oklahoma, and Texas, and a few in Louisiana.

The business was fascinating. So now we go back full circle to -- the first banking clients I had then were Whitney and Hancock. And so with today's earnings call, it's somewhat of a return to that same topic. The good news -- and this is really good news -- is our Company, and you will hear more about this from Sam, we believe is very well prepared to power through this cycle due to well-managed risk; long-term disciplined, conservative underwriting; and what we believe to be a top-notch clientele.

Now, our energy portfolio is $1.7 billion. It's about 12% now of total loans as of the year-end 2014. Energy lending, as we've said many times, is a core competency in our organization. It was developed inside legacy Whitney more than 60 years ago. We got in the business after World War II, and in conversations the last several days around that number -- 60 years -- what we discovered was our very first energy loan was actually made back in 1934. So that was a single relationship, so I'm not going to claim core competence in that single one; but just as a matter of interest, that one client today, more than 80 years later, is one of our very most premium clients. And we still bank them. So we are proud of that.

Now, our underwriting, as I said, is disciplined. And we have successfully operated through energy cycles with these same customers through the decades. We believe the risk in the portfolio is quantifiable, and we have details on the energy portfolio and its historical performance in the presentation slides, beginning on slide 10. We offer this detail only to demonstrate that we deliberately built a diverse book by geography, by energy type, and by energy service type.

Now, at this point in the current cycle we are operating with caution -- staying close to our clients and standing ready to make any adjustments should the need arise. The word caution is a deliberate one that we chose because it keeps coming up in the discussions we have between members of management and with our Board of Directors. There is no panic, certainly; no general alarm; just reasonable oversight of a concentration in our book experiencing somewhat of a low end in a cycle.

The potential impact on our results will obviously depend on the overall price reduction and the duration of the cycle. Based on what we know and expect today, we see little or no losses from the current portfolio. We could see some pressure in risk ratings in future quarters, which could impact reserve-driven provision. However, at this moment we do not expect increased provision to lead to significant, if any, losses.

So I will now turn the call over to Mike Achary, who is our Chief Financial Officer, to review more of the quarterly highlights for fourth quarter.

Thanks, John, and good morning, everyone. I'll now cover a few highlights from the quarter. So as John mentioned before, operating in EPS for the Company in the fourth quarter was $0.56 a share. Those results excluded almost $10 million of nonoperating expense items mainly incurred in connection with the Company's ongoing expense and efficiency initiatives, although a portion of these costs were one-time items paid to recently separated executives.

But as John noted earlier in his comments, we do believe the best measure of our continued progress is core EPS, which was up $0.01 to $0.50 per share this quarter. As a reminder, core EPS does back out the impact of our various purchase accounting items.

So over the past two quarters we've seen a steep decline in the levels of purchase accounting. That's about $5 million in both the third and fourth quarters. That's $10 million pretax over the second half of 2014. Those numbers are big, and we were able to replace those declines dollar for dollar with core earnings in the third quarter and saw only a slight drop in operating earnings this quarter.

In addition, higher core revenue of $7 million over the last two quarters, coupled with a $1 million decline in our operating expenses, enabled us to replace about 90% of the purchase accounting runoff over the course of the second half of 2014. So the Company's momentum and organic balance sheet growth continued to build in the fourth quarter. Loans were up $547 million or about 16% annualized and were funded entirely by deposits, which were up about $836 million or 21%.

The growth in loans was reflected across the Company's footprint, with South Louisiana, Houston, and Central Florida all contributing to over two-thirds of that increase. The growth in energy, while still an important line of business for the Company, slowed dramatically in the second half of the year. As a result, our guidance for total loan growth in 2015 is unchanged from last quarter. And we continue to plan for 8% to 12% end-of-period loan growth.

So the Company's reported net interest margin did decline 18 basis points in the fourth quarter, but our core margin declined only 5 basis points. A slight decline in our core loan yield of 3 basis points, coupled with a small increase in the cost of funds -- just two basis points -- did lead to the quarter-end compression. So declining levels of purchase accounting will continue to impact there were ordered NIM going forward, but we do expect to see a stabilization of our core NIM in the near-term, while initiatives are in place for possible NIM expansion in future quarters, most likely in the second half of 2015.

Our operating expenses, as mentioned, did decline $1 million linked quarter and were well below the targeted expense goal for the fourth quarter this year. Our ORE expense did return to a more normalized level, and with our ongoing focus on expense control, we saw declines in all other expense categories. And I think, as we all know, we do have some seasonality built into our first-quarter numbers, such as payroll and other items; but we will continue our investments in revenue-generating initiatives. However, we remain intently focused on continuing all of our expense control efforts and so do not expect significant increase in expenses in 2015.

Our asset quality metrics remain strong. We reported minimum net charge-offs for the quarter, with over $7 million of ALLL build over the course of the quarter. Our nonperforming asset ratio continues to decline and stands at just 110 basis points at year-end. So as John noted earlier, we do not expect significant losses, if any, related to the current energy cycle and no additional reserve build was required for the energy portfolio at year-end. During the quarter management reviewed all energy credits $1 million and greater.

We also recently stress-tested the entire energy portfolio, and the results were positive. As mentioned earlier, should pricing pressures on oil continue, we could see some downward pressure on risk ratings, which could lead to additional provision expense in future quarters. However, this will depend entirely on the price of oil and the duration of the current cycle.

We maintained solid capital levels this quarter, with a tangible common equity ratio at 8.59%. The TCE ratio did decline just 51 basis points linked quarter, reflecting organic balance sheet growth of almost $800 million; $38 million of common stock buybacks; and a decrease in OCI, primarily due to a change in the valuation of our pension liability.

During the quarter we repurchased just over 1.2 million shares at an average price of $30.75. To date we have repurchased over 1.5 million shares at an average price of $31.13. So that's 37% of the current authorization that's in place. Given our current depressed stock price, we do expect that we will continue the buyback when appropriate over the course of the first quarter.

Finally, also impacted by growth in assets was our ROA. For the fourth quarter operating ROA was 0.92%. That was down 8 basis points from last quarter, mostly due to our organic balance sheet growth during the quarter.

In closing, I would like to call your attention to slide 25 of our presentation deck, which is our near-term outlook for certain balance sheet and income statement items. At this point, I will turn the call back over to John.

Thank you, Mike. I suspect we will have a number of questions during Q&A regarding the energy portfolio. So it's probably appropriate to add a few comments before we get into questions on revenue-bearing initiatives, in case we don't get enough questions and we would like to make a few points.

Recently, as we went through the management streamlining exercise, we did align the banking organization under a single executive, so decision-making and a focus on revenue is certainly going to be a high point for 2015. We mentioned in the last call a quarter ago that we had recently hired a new middle-market banking team in Houston.

I'm glad to report today at the pro forma we built in adding that team has been outperformed so far. They have closed a very impressive -- about $100 million or so in commitments in loans, and the pipeline remains impressive. So that has turned out to be, certainly, a high-performing initiative. We continue to see progress and are focused on business banking, commercial banking, and private banking segments.

We enjoyed over 50% aggregated loan growth in these three segments in 2014, which we were extremely focused on. So I'm very pleased to see the progress there. The reason those three segments should be important to investors is because, A, they give us better granularity in our loan portfolio. They do help us to stabilize the margin that Mike was visiting about earlier, and they also provide opportunities to build strong core deposits to ensure that as we grow the loan book, we can fund it at a lesser rate.

We're also going to place a huge emphasis on improving loan yield through that mix of loans I just mentioned. But also we've made sizable investments the past three or four months in better pricing tools. Those pricing tools allow our bankers to be in better position to understand competitiveness. They also allow us to see on a forward-looking basis credits coming up that we need to get ahead of in negotiating rates. So we believe our discipline and advanced technology will assist us in stabilizing and improving our core margin.

We also mentioned in past meetings that we had a gap in product offering of equipment finance. So we just didn't have a lot of capital leasing products available to us. So we recently hired a very deeply experienced professional to lead that team. It was something we expected to -- that would be complementary to our C&I client base. We do have a large industrial book, and they do lease equipment. If they are not leasing from us, they are leasing it somewhere else. We'd like to have that wallet share back inside our organization.

So we expect to roll those products out to market sometime in the second quarter of 2015. And we think that will make a big difference toward the back half of 2015 as we continue to grow in areas other than specifically energy.

We also continue to invest in products to deal with processing payments for clients, particularly focused on the small business and commercial banking segments. That would include merchant services throughout 2015 and continuing to build what has been a very successful run in treasury management-related income for business accounts.

So with all that, hopefully those are points that you find interesting and helpful. We'll go to Q&A right now, and we'll tackle the questions. So why don't we open it up?

(Operator Instructions) Kevin Fitzsimmons of Hovde Group.

I'll kick it off. I'm sure there will be a number of questions on energy -- and I appreciate all the color in the slide deck; that's very helpful. When you talk about the process you went through -- that you have reviewed the loans; that you stress tested; and you said a number of times that it's going to depend on the price of oil and the duration of the cycle.

But I think one phrase you said I just wanted to hone in on: you said based on what you expect now, you don't think there's going to be any further reserve build needed, or you don't see any losses. And I just want to get a little more color behind that in terms of -- you know, you made the point of the price and the duration. So what do you all expect? What are you building in -- when you say those expectations, what's your outlook for this cycle in how it's playing into that view on the reserve build?

Kevin, this is Mike. Just one item related to your question. It's not so much related to what we expect; it's based on what we know now around our portfolio. And that's based on the review that was done during the quarter as well as the various stress-testing initiatives and exercises that we go through -- which, as a matter of fact, are really something that the Company has done for quite some time in terms of stressing our capital: things like our energy concentration, and our CRE concentration, et cetera. So those are things that we have been doing for quite some time as a normal course of business.

Sam, you may want to elaborate a little bit more on exactly what we did to assure ourselves.

Be glad to. And when we talk about stressing the portfolio, as it relates to RBL or reserve-based lending, we stressed at several stages in that portfolio. We do it initially in the underwriting process; we do it as we go through the borrowing base re-determinations, typically semiannually each year; and then we have the exercise that we've recently gone through.

And, by the way, just a comment about that -- when we talk about stressing the energy portfolio, this is an initiative we actually started midyear of 2014, not as a reaction to what happened around Thanksgiving to the declining energy prices. But it's part of a sound credit risk management protocol we think important for the portfolio.

So as we started that, we really used scenarios modeled around the last three energy cycles. And frankly, we had to stretch some assumptions because we had a very modest loss history. If you look at page 11 in accompanying deck, you will see there is a chart there that outlines our credit losses from, I think, 1993 through 2014 in the energy book. So we really had to stretch our assumptions and build some of that modeling along the same lines as a DFAST-type modeling process.

So as we went through that process, we also incorporated discussions we've had with every client in the energy book that owes us $1 million or greater. So as we incorporate all that in terms of our view, we didn't see any need to take a specific reserve at this point based on what we know today. But the stress test showed that -- the results showed that we would be quite capable of absorbing the impacts from any of those scenarios that we ran.

So we feel good about where we are today. We recognize, depending upon the level of pricing and the duration, there may be some stress in certain segments of that portfolio. We will continue to stay very close to our clients as we go through this process and determine, based on any risk rating migration that develops, what the necessary adjustments may need to be to the reserve going forward through 2015.

A lot of this is going to depend upon the financial results that start showing up as we receive financial statements from our clients and have discussions with our clients as well. So at the end of 2014 -- those financial statements will start rolling here before long. We frankly don't expect to see a lot of negative financial impact this early. But as we test covenants, as we talk to our clients, as we start getting those quarterly financial statements throughout the year, we will be looking at those cash flows to see where their stresses are and determining what the appropriate risk-rating adjustments may be -- and then, depending upon that, may see some reserve implications later in the year.

And Kevin, this is Hairston. I want to add a couple of comments on top of Sam's -- not to over-talk it, but the energy stress test that we were discussing was one of two items that we expected that was going to be important for 2015 and beyond. Back in the fourth quarter of 2013, we recognize that energy growth had been a big part of growing our loan book over the course of that fiscal year.

And we wanted to do two things that we thought were very important: one of them was we wanted to demonstrate, within a year or so, that we had that ability to grow the loan book without having to be so dependent on energy. At some point in time we and our Board were going to have enough of a concentration that we really didn't want to grow as a percentage of capital or percentage of a loan book any further. So we set a number of the initiatives in place throughout 2014 to grow items other than energy.

And as you saw in the fourth-quarter 2014 breakdown of growth, our growth in energy was very modest relative to the overall growth of the loan book. So that's why we are reiterating the loan growth guidance for 2015, is because we really already demonstrated that ability over the last couple of quarters.

The second point from fourth quarter of 2013 was we wanted to assure that we had a stress test that was sort of an energy stress test that was flexible, so that we could do it relatively rapidly. So when Sam is describing the middle-of-the-2014 exercise, that was not in response to the declining price; that was something that we just felt was prudent given the investments that the Company had made and our ability to execute DFAST.

We wanted to ride that same investment towards being comfortable stressing the portfolio for various sectors beyond just the prescriptive scenarios that were given by the regulators to do each year. So given our concentration in energy, it was fortuitous that we had that framework well underway before the energy cycle really began to cause this much anxiety.

So it's something we expect to do on a going-forward basis, just as a matter of course in running the business. Thanks for the question.

Thanks. That's helpful. Can I just ask you to add a little more color, John, on the point you -- I was just going to ask about loan growth. Because it seems that, looking over the last several orders, when you guys highlight where much of the loan growth is coming from, South Louisiana and Houston are always two of the three or four markets you guys mention.

And I hear your point about you have these revenue initiatives, and it's going to basically backfill -- and I guess that's the idea, right, that any of the energy lending that's gone is going to be replaced in these other areas. Is there a lag period in that happening? Are you starting to see that? I know you said you reiterated the 8% to 12%, but I guess what I'm wondering is: if we didn't have what's happening in energy, would it have been even higher, and so it's a little bit of a lag? Thanks.

Well, it's a great question. The amount of growth that we enjoyed -- and I'm going on a linked quarter basis -- certainly, there was continued growth in Texas. But remember, we began to focus on nonenergy banking in Texas some time ago, accented by the team that we hired a quarter and a half ago. So the growth there in Texas was in work that was not related to energy.

So while energy is obviously a big part of Texas, the economy there is still fairly diverse. So we don't think Texas will perhaps be as hot in the next year or two if the duration of the energy prices continue, but we still think there's plenty of availability, given the talent our team has there and the amount of available market share, especially in the Houston area.

I would also point out, since you mentioned Louisiana in there: if you look at Mississippi and Alabama, our footprint in those two states and along the Panhandle -- it's wide, but it's fairly thin. So we mentioned the states, but the state of Mississippi really only is about four counties deep on a north and south direction. So if you look at that market area of Mississippi-Alabama, along that coastline and down into Florida, we grew as much in that region as we did in Texas or Louisiana.

So we highlight -- we probably should list all those states sometimes. But the bottom line is that every region in the Company actually enjoyed loan growth in the fourth quarter.

Okay, great. Thank you.

I think your specific question was: do we expect to see any lag? The answer to that was although first quarter historically is somewhat of a push, with the exception of the normal seasonality we have in the first quarter, I really don't think the run rate of 8% to 12% is going to be with any lag in it.

Great. Okay, thanks, guys.

Michael Rose of Raymond James.

Just a couple questions -- first, you said you did a review of the entire energy portfolio, specifically with a focus of loans above $1 million. What is the percentage of loans that are less than $1 million, and what does that comprise in a dollar amount as a percentage of the $1.7 billion? Because I would think that those smaller loans are probably more risky, because those companies are perhaps a little bit less diversified asset- and size-wise.

It's very small. I'm sitting here -- without knowing exact information, I'd hazard a guess of, Sam, 5% or less?

It is a small portion of the portfolio. And our focus here is around targeting clients that have the ability to weather these cycles. If you are into the energy or lending space, you expect to have cycles. This Bank has been in the business of lending in the energy sector for well over 60 years.

So our bankers, the credit partners they line up with, have deep experience. The client base has been around for generations. And so our target is around a client profile that's going to have some sustainability and the ability to weather cycles through earnings sustainability; they have accumulated working capital; they have accumulated liquidity; they've accumulated a net worth that will help them weather the inevitable cycles that are going to happen in this industry. So that's really not the focus in the energy segment in terms of those very small-profile clients.

Michael, this is Hairston. You are right that the smaller transactions sometimes would indicate relatively new companies that maybe we financed as a startup. We really don't have much, if any, of that. And as Sam said, most of these companies are larger-ticket items, simply because they've been around a long time and we have banked them a long time.

In the RBL portfolio, the reserve-based lending portfolio, too, it may be noteworthy -- I'm not sure we've covered this on a call before -- that when we had -- the opportunity presented itself to acquire energy bankers that were accustomed to larger -- a higher percentage of public companies, much better capitalized; and also, who had holdings spread across a lot of different, diverse basins, so they didn't have their proverbial eggs in one basket. So the reason that the granularity is hopefully low in the RBL book is a deliberate decision, I guess about 2 1/2 years ago, to up-tier the quality in that portfolio by banking many fewer of the smaller E&P companies and a much higher percentage in the upper end.

So that's why the average ticket price is so large in that book, is because we're booking a larger but much higher quality. And we pay for that in skinny yield, but certainly we are pleased to have a better quality in that book.

Okay, that's helpful. And then, as a follow-up, I think when I talk to investors that most people, for you guys, point out a higher-than-average exposure to the service side of the business. But clearly, the service industry is diversified.

Can you talk about where you might see stresses in your services portfolio, and maybe where you would not expect to see stress in the service portfolio? I think everyone just lumps it all into one category when it's really not.

This is Sam. I'll take that one. When we think about the service book, it is, as you said, very diverse. And we have both direct drilling support and non-drilling support. And again, we are talking about a client base that our bankers in the Bank are very familiar with, having banked them for quite a number of years through a number of cycles.

And there's probably a distinction to be made here between onshore and offshore. About 70% of our non-drilling support is for offshore. And those projects are typically more capital-intensive, longer-term projects, longer-term payback, et cetera. So those things don't turn on a dime. They are going to be -- they will move through the short-term volatility cycles in terms of price, because they've got a long-term view.

So while we may see some margin compression for some clients in that non-drilling support segment, a lot of things offshore have to continue to happen. You have to have inspections. You have to have maintenance. There's continuing work to keep production online. So as it relates to offshore, a meaningful segment of our book supports that.

When you get to onshore, those things can turn quicker. So we know clients are making adjustments for general and administrative costs. They are making capital expenditure adjustments. They are making the adjustments, based on our review and talking to those clients, that would be prudent and reasonable in today's circumstance. So they are re-gearing themselves to weather this cycle. I would also comment that as we think about those segments, it's an established book that we have built over years and generations.

And so, again, we remain confident that by and large, these folks are going to weather this cycle. Again, maybe some risk-rating pressure, depending on the duration. But we already know that clients are making the necessary adjustments to weather the cycle.

Michael, this is John Hairston. On page 13 of the slide deck we tried to do our best in giving you enough granularity there to see some of the points that Sam is mentioning. And I will draw your attention to the table on the right side of slide 13 that shows the duration of the years in business and the number of average years we have actually banked that service book, separated by drilling and non-drilling support as well as some clarifying granularity there on the left. So we are hopeful that will be helpful for you in answering questions from your clients.

Yes, that is helpful. Thanks for the extra disclosures. Just one final one from me: if I look at your buyback this quarter, with your dividend it looks like it was about 136% of GAAP earnings. And with total risk-based at about 12.3%, how should we think about your ability and, I guess, desire to repurchase shares at an accelerated rate from here over the next couple quarters?

This is Mike. Again, as we have indicated, our intention is to continue that buyback. Obviously, we are paying very, very close attention to our stock price and believe that there's tremendous value there for our Company in terms of buying back our stock.

As far as the levels and whether we accelerate or not, that's something, again, we're going to pay very, very close attention to. And I think that as we go through the quarter, that will be something that we look at each and every day and assess where we are in terms of our organic balance sheet growth as well as where the stock price is. So, again, look for that to continue as we go through the first quarter.

Great. Thanks for taking my questions.

Ebrahim Poonawala of Bank of America.

So thanks for all the detail on the energy portfolio. Just quick question -- just given the experience Whitney's had through various cycles on the energy side, I understand that you don't expect any growth in that portfolio this year.

But what's the chances of that portfolio shrinking? Or is that not the right way to think about it? As the Company has got CapEx spending, etc., is there downside risk to your loan growth forecast if that portfolio goes the other way through the rest of this year?

It's a great question. Thanks for asking it. I guess the best way to answer it would be: we are not depending on growth in that portfolio in order to reach our 8% to 12%, and we have modeled possibility of some shrinkage in it just from paydowns and not a lot of new activity going on. And if you look at the run rate of third and fourth quarter, you sort of see the impact of that expectation.

That said, if we go back to the last three cycles -- and we have a lot of bankers and credit individuals, some 40 credit and bankers who have been through a couple, and some three, cycles in energy that are actually with the Bank and have been for a long time -- they can make pretty good arguments both ways that if you have a premium book -- and we believe we do, and we know that we do -- then some of those organizations might very well be consolidators. Some may not, but some will.

So it's really hard to handicap whether it will be a net growth or not. If you look at the line utilization in both sides of that book, they are in the high 50s. So there's plenty of room for those folks to invest, either through consolidation or otherwise. History says that the deposits actually increase from those clients during these times. So overall, the value of that look to the Company will continue to be high. It's certainly not something that we are looking away from.

So at this point in time, if I had to give you the best expectation, what I would say is that we have incorporated into the loan growth guidance some modest shrinkage in the portfolio, probably a little bit more than will actually occur. Is that helpful?

That's helpful. Thanks a lot. And I guess, moving away from energy for a second -- Mike, you mentioned expenses, not to expect any significant growth. Could expenses actually go down again next year? Or if you can give any color around expenses or the efficiency ratio, that could be very helpful.

Sure, glad to. And again, going into the first quarter, as we mentioned, we have the normal seasonality related to payroll and other related items. So we'll see an increase as we go into the first quarter. And then from there over the course of 2015, expect to see very, very modest levels of expense increases as we go through the year.

As far as actually reducing expenses, again, we continue to invest in revenue-generating initiatives. Those investments will continue. And again, we've given a little bit of guidance toward the second half of 2015 with respect to seeing some real tangible progress there. So again, expenses will follow that a little bit and really not grow very much. I don't expect expenses to actually go down much from where they are as we go through 2015.

The driver for that posture -- this is Hairston -- is we do have a target ER still of 60%. We've left that out there. And the timing is around fourth quarter of 2016. That discipline has been very helpful in assuring that as we consider these various initiatives that are out there, that we are selecting and prioritizing the ones who have the greatest incremental net income, so that the amount of revenue we are getting for an expense buck is maximized. So for that reason -- that's the reason we are giving guidance of light expense increases over time, primarily because we really are continuing to invest. And it's paying dividends.

Understood. Thanks a lot for taking my questions.

Jennifer Demba, SunTrust Robinson Humphrey.

Another question on the energy book: how far down in terms of price did you stress test your energy loans? And can you give us a sense of what your energy loan reserve is at this point as a percentage of those loans?

This is Sam. As it relates to specific reserve for energy, we don't have a specific reserve for the energy book. It is part of our larger commercial and industrial book. So as we look at appropriate reserve levels, we look at our loss history, we look at trending and risk ratings, and we make whatever additional qualitative adjustments we think are appropriate based on what we see coming down the line.

So we do not break out energy reserves specifically, separate and apart from the larger C&I reserves. So it is part of that larger C&I portfolio. As it relates to stress -- on specific price for the stress, as I said, we did more of a macro view of the portfolio, modeling similar scenarios for the last three cycles. So it was not a dollar-specific prediction around the price of a barrel of oil.

It was really around the correlation of energy prices and impact on the book, with some assumptions we had to make because of our lack of losses through those cycles. So it's really more of a macro view. We will continue to refine that process as we go forward. That was part of our target when we started this initiative back earlier this year. So we will continue to improve that process through additional iterations going forward.

It's John. It's good to hear your question. The three specifics in there Sam refers to would be the 1985, the 1998, the 2008 cycles. So the general metrics used were from those stress tests.

Okay, thank you very much.

Matt Olney of Stephens.

On the energy servicing portfolio, I appreciate the details you gave us between offshore versus onshore. We are hearing some of these servicing contracts can be renegotiated pretty aggressively over the last few weeks. Just hypothetically, if your clients did have some kind of material renegotiation of one of their contracts, how quickly would you know about this?

And in what circumstances would that require a downgrade of loan internally? And I realize it's a hypothetical, but if you could just walk us through the process of how you hear about renegotiations of contracts with your borrowers and how the downgrades work, that would be helpful.

Sure. Well, our first line of defense, obviously, are the quality bankers we have out in the field. They are talking to their clients regularly, so they know what's going on. So we have, in fact, relationships here and not transactions.

So the client wants the Bank informed so that we don't react to negative news. We want to be informed of what's going on so we can be an appropriate participant with them through the cycle. We've got clients that have been through these cycles before. And so the banker's charge is to be proactive in terms of portfolio management. They are talking to the clients.

To the extent that we hear about significant negotiation of prices or contracts that's going to impact their cash flow, we will have a discussion about what might that mean. And so we will, again, proactively take a look at what impact that will have on our risk rating. And we will, as we said earlier, be proactive about making appropriate adjustments.

If we know there's going to be a significant impact on cash flow, we're not going to wait two quarters to get the financial statements that show exactly what we expect to happen. We're going to make the appropriate adjustment, work with the clients that deserve that courtesy, and continue to manage through the relationship. So we expect to be pretty nimble in terms of those adjustments when we become aware of the necessity to make them.

Okay. That's good detail. And then going back to the question on capital and the buyback program, I'll ask it a different way. Would you consider dropping below that 12% threshold of total risk-based capital? I went back several years and couldn't find an example where you went below that level. So is there any type of internal guideline regarding the total risk-based capital ratio there?

This is Mike. We do have internal guidelines and internal targets. And for the right reasons in the right circumstances, we have in the past gone below those internal guidelines or targets. And certainly we'd consider so going forward. But as of right now there are no plans to do so. So again, just restating the earlier guidance, we have every intention of continuing our buyback and, again, are paying very close attention to the price of our stock.

Thank you.

Emlen Harmon of Jefferies.

John, you addressed this partially in response to Kevin's question, but I was hoping to get a little bit more color. Outside of direct energy lendings -- so the reserve or servicing -- what are your expectations for how oil prices are going to affect broader loan demand? So obviously, if there is less exploration or less drilling, there can be a knock-on effect in the broader economy. So just curious how you think that affects the broader Louisiana and Texas economies.

Obviously, if we go back in the last three cycles, Emlen, we will see softness in that demand, particularly in those sectors related directly to energy. And we'll see some increases into loan demand for those industries that typically benefit during the lower energy prices. And we are really already seeing that today, where we -- not just in the consumer portfolio, but in the smaller wholesale portfolio.

So as far as Louisiana goes, in the last cycle there was a lot more energy concentration in New Orleans than there is today. There are a lot of companies still headquartered there, but the economy there is far more diverse than it was back in the challenging times of the 1980s. In Baton Rouge, which is dominated more by chemical, we generally see really great times in Baton Rouge during a low-energy cycle. And then, of course, when you get into the northern part of the state -- and we don't have a lot of business up there, but we do bank clients in the south who have interest there; obviously, agriculture, when feedstock prices begin to decline due to an energy -- low cost of fuel sources, then those economies actually begin to go up.

So I'd guess in Louisiana, presuming the duration is relatively light, generally I would say probably it's a net positive in Louisiana. Other people may think that's going to be a little bit more bearish, but our experience would indicate that Louisiana will generally -- generally, across the board -- benefit.

Texas, somewhat of a similar story it's just a much more diversified economy there than it was in the really difficult times of 1980s. And if you go back in time -- and maybe this is the nature of your question -- the bulk of the banks that failed in Texas wasn't just on energy loans. It was a lot of CRE activity that caused that pain. And there were troubled energy companies, certainly. But the banks that failed had gone all-in.

We've deliberately built a very diverse portfolio, and we are working hard at diversifying it in Houston and made great inroads. In Louisiana our book is extremely diverse, such that there's never really one sector that tanks that will hurt us across the board there. So generally, I know this has been a pain in the neck for us, given our energy concentration in what may be a little bit, I think, and unduly handicapped stock price because of consternation in the energy book -- but in general, we think this may work out to be, in the long-term, a net positive in our Louisiana book.

I was just going to make one additional comment. With energy prices lower, consumer confidence typically impacted -- and as a result of that, some of the travel industry, some of the hospitality destinations, etc., that are part of our footprint may in fact see a little bit of a lift as well. So to the east we might see, in the hospitality and services industries, a bit of a lift as folks feel more confident and prepare to turn loose some dollars as well.

Yes. A $1.80 gas price is big for Florida, particularly in their hospitality sectors. And we are seeing some really good news from folks in the hotel industry and such.

Got it. Thank you very much, I'll stop it there.

Dave Bishop of Drexel Hamilton.

Circling back, I think it was John's comments before -- but I'm just curious in terms of your experience getting back to the last cycle; clearly, we've heard the energy banking competition had gotten pretty frothy here over the past year. Over the course of the last couple of stressed periods, did you actually see an opportunity to gain market share? Do you see some of these other banks, some of the down-market newer entrants sort of retreat and see some of these energy companies actually come back to the Whitney or a Hancock for lending support?

Well, I'll make two points there, and then Sam will probably want to add some color. There will be stressed energy players in this cycle. There already are, depending on where their leases on where their service work is. And if you get into some of the higher-average extraction cost basins, banks that have not been in this business long will react probably very conservatively and perhaps harshly with clients who are less capitalized and more highly leveraged in those higher extraction cost areas. So we expect to see folks walk in the door to banks to accept that credit if it's being treated martially elsewhere.

Our appetite continues to be for very high-quality clients. So where we see new entrants in the banking sector really not know how to handle their energy book when a little bit of stress in the industry shows up, those opportunities could present themselves. And we have the scale and the ability to accept a little bit more. But our appetite is refined to very high-quality businesses, and certainly that on the services side.

So I think the opportunities will come up. How much of it we take advantage of -- we are, again, planning very, very modest growth, if any, in the energy sector for 2015.

Got it. And then just one follow-up question, turning the page a little bit: in terms of the margin outlook and maybe on deposit pricing, on slide 16 it notes that you have conservative DDA attrition for certain increase in rates. Any sort of guidance or outlook there that you are assuming -- any sort of numbers that you are assuming that drive that attrition or conservative assumption?

This is Mike. The comment there -- the bullet point refers to not only our assumptions around DDA attrition in a rising rate environment, but also the way that we lag our pricing of deposits in a rising rate environment. I think the point of the bullet is to really get across the point that we are pretty conservative in terms of how we model those kinds of scenarios.

And so while if we look at up 200 basis points over a two-year period, the disclosure is around 7% asset sensitivity, that if you were to remove some of the conservatism around those particular assumptions, that that asset sensitivity could be 150 to 200 basis points higher. And so I think that's really the point of the bullet. Does that make sense?

Yes, great. I appreciate that update. Thank you.

Peyton Green of Sterne, Agee.

I was wondering maybe, Mike and John, if you all could comment a little bit -- I mean, historically the Company has been loath to use the debt markets to take care of capital. I was just wondering, with the total risk base coming down, would it be a good time with interest rates where they are to maybe use that to build capital levels? Or are you sticking with a simple capital structure?

That's a great question, Peyton, and it's something that we've talked a lot about internally, we've talked a lot about with our Board as well as with our regulator team. And it's certainly something that's under consideration and something, again, that we are paying very, very close attention to.

As you noted, we have a very pure and simple capital stack. And we would like to diversify that at some point going down the road. So short answer is we are looking at it very closely.

Okay. And then is there any opportunity, I guess from an M&A perspective -- I mean, what do you think -- do you think that the M&A opportunities are getting better? Or are you more open to them? Maybe talk about the potential appetite there.

This is Hairston. The opportunities actually do continue to escalate in volume and also in quality. And the folks that have sent in inquiries about potentially acquiring their organization aren't -- they are not distressed. I think much of it is just weariness in the regulatory environment of trying to comply, and the costs of doing that, and just the need for maybe being part of an organization that has a little more scale opportunity.

So I do think that we will continue to see improvement. I think on the last call or two, we made segments around the notion that both our Board and management do have an appetite for acquisition.

That being said, our currency isn't what we would like it to be right now. So I think that probably would be more of a second half of the year sort of activity, presuming that the energy cycle is a cycle, not a collapse. We think it's a cycle.

So, yes, I think we would like to do that. We obviously want to scale and need to scale. If we were able to strike an arrangement with owners who would enjoy the benefit of doing an equity transaction with us, and they ride that price up, as long as it is something that we think is accretive to our investors in a relatively near point, I think we'd still be interested in doing that, but probably in the back half of the year.

Okay, great. Thank you.

Jefferson Harralson of KBW.

I just wanted to ask a couple questions on some specifics of customer interactions, kind of a follow-up on Matt's question. On the reserve-based lending, you guys have put out your price deck from before. And obviously that's going to get lowered. When you lower it -- I guess, have you lowered this price deck? Have you, in turn, cut lines of credit for the reserve-based lending? And has the -- and I would guess that the loan-to-values there have significantly increased as you cut the price deck. Could you just talk about where you are in that process and how that fit into your stress test?

Sure. This is Sam. What we do is we make adjustments to our price deck as appropriate relative to the movement of prices. And so we have made some internal adjustments to the price deck. They are aligned with the NYMEX strip forward look. And we do that throughout the year.

We actually do borrowing base re-determinations typically on a cycle of spring and fall. And I think we recently have done one re-determination at the new price deck. But again, those will start cycling again here in the next 60 days or so.

So what we do is we go through the same process as the original underwriting in terms of having our engineers review the geology reports. We discount back the reserves. We apply a price deck. We apply an advance rate that's typically 60% to 65% on those values. And that determines the borrowing base availability moving forward.

We would expect that some of that availability in this next re-determination cycle is going to be reduced. But again, most of our portfolio has a typical advance rate of -- I'm sorry, typical line usage of about 55% right now. So we expect some compression in that respect, but they have plenty of capacity.

But keep in mind -- we are lending on proved reserves in the ground. All right? So as those lines are redetermined, those clients typically are using those funds to go find and explore for new production. They are replenishing. And so as they cut back on their CapEx expenditure, the need for continued high levels of advance is going to be somewhat reduced. Until they see the economics of going and putting a new hole in the ground to find new production, it's going to be somewhat reduced.

So we do expect to see compression. But we don't expect to see significant out-of-margin circumstances, based on the current line utilization and what we expect is going to be the forward usage on their lines.

And if there is one, is there a capital call? Or is it that it's just such a low cost of -- get the energy out that you just wait it out and downgrade the credit? Or what happens if someone goes above that 60% to 65% on that revaluation?

Well, we have a couple of options. One is we could have a capital call. Some folks have the liquidity to right-size it -- because, again, keep in mind we are financing a larger-profile client that's well-capitalized, has traditionally had access to capital markets, et cetera.

In addition, you've got to keep in mind that a meaningful portion of this RBL portfolio is hedged out on an average tenor of two years. So if the average hedge is in that $85 to $90 a barrel range, then they will continue to reap the benefit of a larger level of cash flow for some forward period, irrespective of what the current price of oil is today.

So they will continue to accumulate liquidity, accumulate capital, have the ability to make appropriate reductions. And so those are the dynamics we typically see in this space -- in addition to the fact that from a cash flow -- average cash flow breakeven price, our clients -- based on the basins, the holdings that they have, the reserves that have -- their breakeven right now is about $25 per barrel.

So they can continue at this point to have incremental additional cash flow even at current prices. But again, a significant portion of this portfolio is hedged at a higher price.

All right, thanks. So it sounds like not a lot of risk there.

My final one is on the -- if you think about your larger syndicated credits, and they may be only partially drawn down upon, when can you -- let's just say a company, one of your larger ones, is maybe having some issues; at what point can you cancel a commitment? Or at what point can you withdraw the commitment? Or is it just in place for a certain period of time, and they can draw it down at will over that period of time?

Well, if we have a covenant bust, obviously that brings everybody to the table to talk about the circumstances and what we're going to do going forward. And those are typically tested quarterly.

In addition, we have a semi-annual borrowing base re-determination, which is another inflection point for a discussion around that. So we have multiple points of contact during the cycle of that line of credit to come back and discuss what's going on; what are the remedies; what are the plans to get us back on track.

Okay. Okay, awesome. Thanks, guys.

I'm showing no further questions at this time. I would like to turn the conference back over to Mr. John Hairston for any closing remarks.

Thank you, ma'am. And thanks to all of you for the patience in a little longer call. We wanted to afford plenty of time to have a robust conversation about the energy book. And I hope that you walk away from the call sharing our assessment that perhaps the stock price has been maybe a little unduly handicapped due to critical speculation in regard to our energy business.

We also hope that you believe us when we tell you we are doing our best to be very transparent and provided information about our energy book so you can build a good, informed opinion. I have met with several folks on the call over the past several weeks, but many more I haven't.

So I look forward to being on the road at an opportunity to visit with investors and a number of analysts in the next couple of months. If you'd like to spend some time together, certainly you know how to find Trisha Carlson. And we will do our best to accommodate you either live or by phone.

On behalf of the management team and the Board, let us express our pride in being able to serve the markets, and our clients, and certainly our investors. We hope you have a wonderful weekend. Take care.

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