Hancock Whitney Corp (HWC) 2015 Q4 法說會逐字稿

Good morning and welcome to Hancock Holding Company's fourth-quarter 2015 earnings conference call. As a reminder, this call is being recorded.

I will now 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 development is inherently limited.

We believe that the expectations reflected or implied by any forward-looking statements are based on reasonable assumptions, and our actual results and performance could differ materially from those set forth in our forward-looking statements. Hancock undertakes no obligation to update or revise any forward-looking statements, and you are cautioned not to place undue reliance on such forward-looking statements.

The presentation slides included in our 8-K are also posted with the conference call webcast link on the Investor Relations website. We will reference some of those slides in today's call.

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.

Good morning, everyone. We appreciate you joining us today.

We have noted since the beginning of the energy cycle that we expected the impact on our Company would depend on the depth and duration on the cycle, and any impact would be an earnings event but not threaten our solid capital. This quarter, our earnings results reflected that scenario. The depth and expected duration of this cycle has continued to deepen and lengthen from original expectations.

As detailed in the presentation deck, the fourth-quarter build in our allowance for loan losses of $43 million or $0.35 per share was mostly qualitative and based on the expectation for a prolonged period of oil and gas oversupply and potentially declining demand, indicating a longer and deeper cycle. The action we took in the fourth quarter to build our reserve for energy was proactive, and it moved to address this change in outlook. We did not see in the fourth quarter a continued negative migration in risk ratings criticized or non-accruals, and we were pleased to see a large energy non-accrual payoff during the quarter with only a relatively small charge-off.

Our coverage ratios improved. However, I expect that if we continue with oil prices at levels of the past few days or lower, we could see additional stress in the portfolio. With that said, based on what we currently know about our customers and their outlook for the cycle, the reserve build we took in the quarter should provide adequate coverage to address the losses we currently expect.

As noted in the pre-release, our current expectation is that those losses could approximate $50 million to $75 million over the duration of the cycle. Since the current cycle began in late 2014, we have reported only $3.75 million of energy-related charge-offs.

While earnings were negatively impacted this quarter -- again, the build cost about $0.35 per share, our capital remains solid, and we remain focused on achieving our strategic goals. We expect to manage capital with a top focus of funding organic growth and maintaining quarterly dividends. We have temporarily tabled our buy-back program until we see reasonable evidence of an emergent recovery in energy, and given our stock price, M&A remains on hold.

Outside of energy, we continue to grow the balance sheet organically and added over $1.2 billion in total assets. Loan growth was 25% linked quarter annualized, 31% excluding energy and funded almost dollar for dollar by deposit growth.

The granularity of loan production in the fourth quarter of 2015 versus fourth quarter of 2014 was also encouraging. Every segment of our lending production activities with the deliberate exception of indirect energy and corporate banking reflected production improvement in fourth quarter 2015 versus the same quarter a year ago. Core net interest income for 2015 was up 5% versus the 2014 number of 3%.

We said fee income would be a player for us, and it was disappointingly flat on a linked quarter basis. That said, we are making continued progress and have seen success in several lines of business. Core fee income in 2015 was up 1% versus a shrinkage of 3% in 2014.

Mortgage was a success story in 2015, and we expect continued improvement this year in 2016. We expect card-related revenue inclusive of merchant services business to be a tailwind in 2016. Headwinds to success in growing fee income include the understandable pressures on investment, annuity and trust fees should the surprisingly weak market start to 2016 continue through the year.

Expenses were up more than what we expected as we were able to successfully hire revenue producers, particularly in mortgage and merchant services, and we invested in promoting new and enhanced products. Given our aggressive goals to reduce energy concentration, we did hire more bankers in late third quarter and fourth quarter than we earlier planned, but the positive impact is notable in the improvements achieved in reducing our exposure to energy portfolio.

With those hires generally in place, we are focused on execution in 2016 using all the resources acquired or implemented in previous quarters. That brings us now to a point where we expect to grow revenue while holding expenses rigid, which means as we invest further, we will have to harvest those expenses from elsewhere.

On last quarter's call, I noted I was reasonably confident in revenue and expenses as we end the year and move on to 2016. That has not changed. I also noted we have a certain level of provision for energy baked into our 2016 EPS outlook and the risk to meeting our EPS goal was related to that energy provision. That also hasn't changed.

Therefore as we begin 2016, we're focused on a goal of 25% growth in core pre-tax, pre-provision earnings compared to 2014, and we will work to accomplish this through continued growth in core revenue, controlling expenses, and managing through the challenges of today's energy cycle. The team is focused on meeting the 2016 target and continue to grow both the Company and the quality of our earnings. I will now turn the call over to Mike Achary, our Chief Financial Officer, for a few additional comments.

Thanks, John and good morning, everyone. I will take just a couple of minutes to go over a couple of our quarterly details.

So John mentioned the strong loan growth we reported for the quarter. Net growth of about $940 million or 25% annualized came from every region across our footprint, with additional contributions from areas such as equipment finance, mortgage, and indirect auto.

We more than covered the $80 million of net reduction in the energy book, which now totals only 10% of our loans. We will continue to reduce that concentration in 2016 and expect to cover what could be at least another $200 million in energy payoffs in the coming year.

In light of the fourth quarter's significant loan growth, we have moderated our guidance for 2016's EOP growth just a bit. That guidance is now for 7% to 9% EOP growth for 2016. We do expect that we might be closer to the lower end of that range based on our expectations for 2016 energy payoffs.

The Company's deposit growth for the quarter was also very strong, with EOP deposits up $909 million or 20% annualized from last quarter, which largely funded the quarter's loan growth. Our margin did not remain stable as we expected, and also as John noted, the mix of growth we added this quarter plus the impact of renewals along with the accounting impact for some of our acquired loans caused the Company's core loan yield to decline 8 basis points.

This led to overall core NIM compression of about 5 basis points for the quarter. However, we are encouraged by what happened to the core loan yield and core margin after the Fed increased rates last month. So between November and December, we saw a 6 basis point expansion of the core loan yield and a 3 basis point increase in the core NIM.

We do expect the tailwind of higher rates will widen first-quarter 2016's core NIM by anywhere from 3 to as much as 5 basis points. The offset to the decline in the core loan yield during the quarter was a 5 basis point improvement in the yield on the Company's bond portfolio. Our funding costs for the quarter were stable, up just 1 basis point, as we did not increase our deposit rates after December's rate increase.

Company's core net interest income increased $3.2 million this quarter, and for the full year of 2015, we grew core net interest income more than $30 million, compared to last year. I would like to note the impact of purchase accounting in 2015 was basically eliminated as the net impact of those items was only $5 million for the year, compared to almost $55 million in 2015. That's been a big hurdle to overcome, and while we didn't replace it dollar for dollar, we did make great progress in improving the quality of our earnings.

Our provision for loan losses by now is pretty much old news, but I just want to remind everyone of a few items. The build of $43 million for the energy portfolio took that reserve for those credits to about 5%.

Most of the build was for credits within the services book and, as John noted, was very much a proactive move based on the recent change in outlook for both the depth and duration of the current cycle. So about $30 million of the $43 million was based on changes in qualitative factors, while criticized energy loans and non-accrual energy loans both declined on a linked quarter basis.

Little bit earlier, John discussed fees and expenses, and I would like to reiterate his comments. So obviously, while not pleased with flat fee income and increased expenses, we are focused on not repeating those trends as we move into 2016.

One item that did positively impact our results in the fourth quarter was taxes. Our effective tax rate for 2015 was 23% compared to an expectation earlier in the year of about 26%. That was obviously the result of the fourth quarter's lower level of income but also from an increased level of tax exempt income. We do expect the Company's effective tax rate to be about 26% to 27% in 2016.

Our TCA ratio of 7.62% was down 62 basis points from last quarter. That reflected not only the lower level of income in the quarter related to the energy reserve build, but also was more significantly impacted by the $1.2 billion in asset growth and in other changes in OCI.

Finally, would like to point out slides 20 and 21 in the slide deck. Those slides provide both near-term and full-year 2016 guidance and targets. Okay, back to John for a wrap-up before we head into Q&A.

Okay. Thanks, Mike. I suppose the best way to wrap up the commentary would be to say we believe the Company is well disciplined, well diversified, and in control thus far in the cycle.

The energy issue is certainly there, but it is manageable. Energy is about 10% now of our loan portfolio with a 5% reserve and projected loss outcomes that are manageable. We believe our price today is understated and presents a great value given the earnings goals we expect to achieve.

With that, Andrea, it's okay to go ahead and open up the call for questions.

Thank you.

(Operator Instructions)

Our first question comes from the line of Ken Zerbe with Morgan Stanley. Your line is open.

Great. Thank you. Good morning.

Good morning, Ken.

I guess two questions. I'm certainly not going to press on the energy side too much, but I do have a question.

Just in terms of -- when we think about reserve build, your guidance of ultimate charge-offs over the course of the cycle, the $50 million to $75 million, right now you're at $78 million on the reserve side. When we think about reserve coverage, right, you obviously have enough to cover -- let's say the high end of those losses, but obviously you're not going to bring your reserve down to zero.

So how should we think about the reserve coverage of those potential losses? Meaning if you end up taking the $75 million, do you have to have another $75 million of reserve on top of what you already have just to make sure you have a buffer at the peak of the loss cycle?

Why don't you start that, Mike.

Hi, Ken, this is Mike Achary. There's not an exact answer to that question, but ultimately as we do take losses, we will be very mindful of any need to continue to build our ALLL above those losses. Ultimately, though, as we head into 2016, things like the level of organic loan growth, any risk rating migration related to energy credits as well as other credits, what happens in our local economies as well as the level of charge-offs and the commodity price for oil will all be factors that play into what that ultimate ALLL ends up being as we move through the remainder of the cycle.

Does the $11 million to $15 million provision guidance include some expectation of reserve build, or is it fairly stable?

It absolutely includes, especially in the higher end of that $11 million to $15 million, it absolutely does include additional money set aside to build the ALLL, whether for energy or non-energy.

Got it. Okay. And then the other question I had just in terms of buy-backs, if I heard you right, I saw you bought back shares this quarter, but I thought you stopped buy-backs. With the provision of $11 million to $15 million, you guys are very comfortably profitable.

Just wanted to understand the philosophy of stopping buy-backs. Seems that now would be a fantastic time to buy back assuming you have a reasonable comfort in the ultimate loss content on the energy portfolio. What am I missing?

You're exactly right. We would love to be buying back stock right now at these levels, as John indicated.

He gave our outlook on the price and what value we think it is. But right now, we just view that to be the most prudent thing to do for right now, based on where we are in the cycle, to put the buy-backs on hold for a little while, while we really watch and let things play out a little bit.

Ken, this is John. We believe buy-backs would be a great option right now, but as I mentioned in my script, the word temporarily tabled what was I said, primarily because what we expect and we hope is oil will begin to recover and we will see the emergent outline of a recovery and at that point in time turn them back on. It's a great observation, and it's one we're very mindful of.

To the extent you can answer this, was the decision to stop buy-backs something that was determined internally between management and the Board, or was it more of a joint decision with other outside parties?

No, that was completely management and our Board.

I think it was management's recommendation. Just given what we saw in outlook for energy, we thought it was prudent.

Ken, we promised a year ago when we had a change in temperamental anything, we would do our very best to be transparent. If we're going to stop purchasing our stock back at the price it is now, we think it's a good thing for us to share it. We look forward to maybe giving a change in direction on buy-backs at another time in the future.

Thank you very much.

You bet. Thanks for the questions, Ken.

Thank you. And our next question comes from the line of Kevin Fitzsimmons with Hovde Group. Your line is open.

Good morning, everyone.

Good morning.

Hey, Kevin.

I just wanted to follow up that subject of buy-backs. I understand the whole -- your point about where we are in the cycle. But was there any cause and effect with -- it seemed like the balance sheet growth was very strong this quarter, and that is great for earnings, but it had that negative consequence of taking the TCE ratio down.

So other than looking out over the cycle on oil, was there any cause and effect where the TCE ratio got taken down to a point because of that balance sheet expansion? And there is a tradeoff there. Do you focus on earnings, do you focus on preserving TCE and being able to do buy-backs? So I'm just wondering if that played into it at all.

Yes, Kevin, this is Mike. Those were factors that obviously we considered in arriving at that particular decision. But I think the driving factors we mentioned before was really commodity prices and the need really just to be prudent in the face of a lot of uncertainty related to the energy cycle.

We're very, very cognizant as you know of our TCE ratio, and having that number slip below 8% is something we pay very close attention to. And as you know, we're going to work very hard to bring that back up to 8% or higher over the course of this coming year.

Thanks, Mike. And just one quick follow-up, and I know this is probably very fluid. There's no magic number to it. But when you talk about being willing to turn that buy-back back on, and I think what you said, John, was when you see oil starting to recover.

And so is there a way to articulate that? How do you define starting to recover? Because I'm just thinking about, it was just a quarter or so ago, you guys were talking about buying back whenever the stock was below $28.

Like Ken just said, it's a great opportunity right here. I'm just trying to visualize, does that mean oil in the $40s? Does that mean just more of a trajectory over a certain amount of time that you get comfortable that you would step back in?

It's a good question. And I think the best way to answer it would be, we haven't tabled and we won't renew our expectations of buy-backs based on a particular stock price.

The words I used were when we see evidence of an emergent recovery. That doesn't necessarily mean the price of oil has to be at a certain place. We would just like to see the price begin to obey the normal laws of supply and demand.

Right now it's bouncing around, such a volatile price, we just feel it's more prudent from our shareholders' perspective to preserve capital just in the event that we need it. Some of that's for growth like Mike mentioned, but the bulk of it is just being cautious.

I don't know whether that will be a week or a month or a quarter or longer until we resume buy-backs. I just don't know. But you I would like to see a little bit more evidence before we resume repurchase.

John, I think things like risk rating migration and any movement of energy credits to non-accrual or criticized are also things that we're going to keep a close eye on.

You look at the fourth quarter, we didn't have a lot of risk rating in that duration. We recognized a question that -- gee, if we didn't see a lot of deterioration, you just put a very large qualitative reserve in place, and why not take the chance?

And if you notice, we didn't remove the authorization. The Board left the authorization in place, and we can easily restart. But at this point, we just wanted to be transparent that we're not buying for what we believe hopefully will be a short time.

Got it. Okay. Thanks, guys.

Thank you, Kevin.

Thank you. And our next question comes from the line of Emlen Harmon with Jefferies. Your line is open.

Hey, good morning, guys.

Good morning.

On the CV, you've converted the growth guide for 2016 over 2014 to pretax, pre-provision from EPS. Could you give us a sense just what you're starting from -- I guess how you're calculating that pretax, pre-provision number, what your starting point was and where you are in 2015?

Well, the starting point would be, if you look at pretax, pre-provision earnings on a tax equivalent basis, let's use EPS. The EPS number for 2014 would have been $3.15. That's on a pretax, pre-provision basis.

Since you mentioned the goal, I will give you some additional commentary that may be helpful. When we took into account the 25% goal for core EPS, that was with the expectation -- that did not include an expectation of crude being persistently in the $20s obviously. It's really more the volatility of the price that caused us to consider whether we ought to change the goal or not.

So to be straightforward, that left us with a question: do we stick to the 25% core EPS goal and accept the risk of a volatile energy market, or do we convert it to a pretax, pre-provision to make sure that we're showing both the confidence and the commitment to focus on everything other than energy in our book so that when the energy crisis or cycle begins to subside, we're in great place to create as much value as we can as fast as we can. Rather than just withdraw the goal and throw our hands up and say no one knows what provision's going to be and our crystal ball is no better than what anyone else's, convert that to pretax, pre-provision and remain committed.

If you do the math, what you will see is the lower end of our provision guidance with everything else that we gave in forward-looking commentary around 2016 is in the general vicinity of the original goal. If we end up at the high end of that provision or higher, then obviously it would make that goal compromised, but it wouldn't back off and we won't back off the goal on a pretax, pre-provision basis. So that wasn't exactly what you asked, but it was close, so I wanted to share that.

Just to put that into actual dollars of earnings, so in 2014, the Company had core pretax, pre-provision on a tax equivalent basis of about $258 million. So 25% growth from that number puts us at about $324 million or so. So that's our goal for 2016.

Got it. So that $258 million is -- looks like the core pretax, pre-provision. So that backs out -- I think you guys had about $26 million in non-operating items in 2014, so it backs that out. And it backs out the -- all of the purchase accounting adjustments that you gave us.

That's correct. It really is just to put it on apples-to-apples with where we are in 2016. As you know, we have very little impacts from purchase accounting now, and again, just to put it on apples and apples, we backed that out of both numbers.

Perfect. And then for both that expectation, and I think you told us the NIM was going to be up I think it was -- you're hoping the NIM to be up 3 to 5 basis points in 2016. What are you including in terms of Fed fund hikes and those expectations?

Great question. The only thing that we've included in terms of the impact of higher rates is really what's already occurred, and that is the rate hike that happened last month. So in the deck we call out an impact, a potential impact in 2016 of anywhere from $5 million to as much as $10 million related to just that particular rate hike.

And what's loaded into the goal for 2016 is really the lower end of that range, and the lower end of that range does include an assumption that some of our deposit rates would need to rise as we go through 2016. And again, that's all related to the one rate hike that's already occurred.

Got it, great. Thanks for taking those questions.

You bet.

Thank you. And our next question comes from the line of Ebrahim Poonawala with Bank of America-Merrill Lynch. Your line is open.

Good morning, guys.

Good morning.

I guess just first question, I think as we even begin to think about an emerging recovery at some point, can we talk about what's the impact you're seeing in your markets and some of the legacy markets from the fallout of the slowing energy sector? How do you think that playing out over the next 12 months as we see the job layoffs, CapEx spending cuts flow into these economies? And within your footprint, what are the markets where you're already seeing this or the most focused on the look at weakness across economies over the next few quarters?

Okay, Sam, you want to take that?

Sure, be glad to. At least to date, our consumer and CRE metrics really are performing better in the energy-impacted geographies than we might have expected given some of the pressure we're seeing on the industry as a whole. But as you would expect, we're continuing to watch that very closely.

We track consumer delinquencies in heavily energy-dependent counties and parishes in Louisiana. Those metrics in terms of past dues have typically been better than the overall consumer portfolio. We're starting to see a bit of a lift there, but they're just now approaching the overall portfolio average.

So in that respect, we're seeing some impact, but it's not significant. We do expect we will see some performance degradation in consumer starting to show up in 2016 in some markets. So there's a likelihood we might see some charge-off activity percolating that to date has not occurred.

As we think about 2015 and the growth, we continue to have good growth, improved granularity and the bulk of our growth in non-energy markets. So we're continuing to be encouraged there. But to date, we're starting to see some early signs. Frankly, we've been a little bit surprised that we haven't had more performance degradation in some of those impacted geographies.

As we think about Texas, the Houston market is a large market. So there's a bit of diversification there. So we expect some of the impact to be muted there.

But our CRE book there continues to perform very well. The overall health of Houston CRE has not declined, but we think we're going to see some softness in the Houston market for CRE.

Multifamily is an area that has performed very well. The vacancy trends are starting to trend up just a little bit, starting to see some rent concessions in terms of lease-up.

But our projects have good, strong equity investment on the front end that were underwritten at lower rent rates than developers projected. So we think we're going fare well there. We do expect as delivery of new product comes on in 2016 to see a little softness in multifamily.

Retail is continuing to do very well in Houston. Office space is the big bogey out there right now. We've got very limited exposure in office space. But at least in Houston, the sublease market for office space is the one that's having particular difficulty right now. So all in all, we expect to see some degradation as we move through 2016 given the pressures on the industry, but to date, it's been somewhat muted.

Ebrahim, this is John. It's a reasonable question, why has that been so muted. And comparing these markets' performance here in the last several months to what happened in the very difficult times of the 1980s, the only reasonable answer would be that diversification of those economies really has been very helpful. And that doesn't apply everywhere in the country.

The United States where you see markets that are still very heavily or communities that are very heavily energy centric, particularly in boom towns, they're really suffering. Fortunately, we just haven't had any of those markets. The highest concentration we have would be around Houma, Morgan City and Thibodaux. We expected by now to see some pressure forming, but as Sam said, so far the expansion of jobs and other industries have absorbed the unemployment created from directly the energy industry, and we really haven't seen much damage yet.

Understood. That is very helpful. And then just going back, and I apologize if I missed it. In terms of the sensitivity to your provisioning guidance for 2016 relative to the oil price, and we heard different things from banks, I was just looking at the decline the last two days, a $10 decline since your pre-announcement in mid-December.

Obviously that wasn't enough to change your reserving on the E&P book. How sensitive is that provisioning forecast if oil went into the low $20s, should we not conclude that should lead to a higher provisioning than what you're guiding for today?

Yes, Sam. Ebrahim, this is Mike. I think overall if you use those kinds of extremes, yes, if oil goes down to the low $20s or God forbid even lower than that, that will have an impact on our provisioning in the form of additional risk rating migration that will drive for additional needs for higher rate LLLs and could push forward some of the losses that we expected related to this cycle.

The biggest things for us that impact that provisioning is going to be things like loan growth, commodity prices, risk rating migration and actual loss content. So it's hard to pin that on a specific price for oil, but if oil does go down to the level that you're describing, that will have a cascading impact that will impact the other things that absolutely drive our provision. Does that make sense?

It makes sort of sense. Just a follow-up on that, so what's the forward curve? And not sure, Sam, if you'd like to address this, but as we think about the year end 2016 or 2017, what are we assuming that oil recovers to which is dictating the provisioning forecast? And I realize it's one of many components guiding that, but what are we assuming there?

We take a pretty close look at the forward strip, but we don't project the price of oil. We listen to all sorts of prognostications and forecasts. We heard a quote the other day that the cure for a low price of oil is low prices of oil. We will see if that prognostication holds out in 2016, 2017.

As we think about our portfolio, we really feel like the mix of portfolio really does matter. We think there's going to be some real pressure on some borrowers. There are going to be some survivors in this business, and we don't think that every energy-related company is going to be a casualty to the cycle.

So it matters in terms of what the client profile looks like, the balance sheet construction, the ability to manage expenses, et cetera, et cetera. So we will continue to watch it very closely. But we don't have our forecast in terms of the provision or ALLL set, pegged to a particular price of oil or certainly not today's price of oil as we continue to look at the forward strip.

Got it. Thanks for taking my questions.

You bet. Thank you.

Thank you. Our next question comes from the line of Brad Milsaps with Sandler O'Neill. Your line is open.

Hey, good morning, guys.

Hi, Brad.

Just a follow-up on the energy topic. This may be too broad of a question to answer, but what do you think -- it may not be just one factor, but what do you think prevented from you not seeing a rise in energy classified loans or energy NPAs this quarter given what all went on at the end of the year?

I understand your decision to increase the provision was more qualitative, but elsewhere we're seeing banks with those numbers rising, and just curious is it time? Is it hedges rolling off that will make those numbers rise in the future? Just curious what led to you actually seeing your classifieds and NPAs go down in the energy book.

This is Sam. We actually did see some migration of energy credits into the classified categories, but the fourth quarter represented a period where we had a number of credits we were working diligently with. Frankly, we had more resolution of credits than additional migration down.

So that doesn't mean that we didn't have any migration whatsoever. We did, but we had more resolution than we had degradation. That doesn't mean first quarter this year, second quarter this year we won't see additional downward migration. We continue to get internally generated financials from clients.

We will be getting audits and reviews as we end the first quarter and move into the second quarter of this year, and obviously we have the covenant test that we're doing. We continue to assess the appropriate risk rating of these clients on an ongoing basis. And so frankly the fourth quarter was a pleasant one in terms of getting a resolution, but we will continue to assess the risk rating profile of our client base as we go throughout the year.

I think it's fair to say that we were pretty proactive in downgrading credits back in the second and third quarter of this year.

Those were the heaviest periods of downgrade for us, mid year to third quarter.

That's right.

And this is John. It's also -- we can't speculate on anybody else's book, what they're thinking or the client base. But all RBLs are not created equal.

The smaller players, the more narrow the field they're operating in, the more stress they will have. We deliberately built an RBL book that had larger players with more diversified holdings. So far that has served us well.

I don't want to make the mistake of giving an indication that we think we're totally out of the woods at RBL. I don't think anybody is given the price constraints that have been placed on energy providers. Hopefully we will see a recovery soon enough so that everyone can see some improvement in RBL. So far, we haven't seen a lot of degradation.

Okay, great. Just a follow-up. I know you guys don't do second liens, but have you seen any companies you work with, what write-downs if any yet on that product or that piece of the debt structure?

Not in a meaningful way. You have seen some bankruptcy filings, et cetera, out there that have obviously been impacted by those second lien positions, but we haven't seen a whole lot of them.

Got it. Just one follow-up for Mike. I appreciate you saying the cost of funds is only up 1 basis point. Looks like some of the categories within the interest bearing deposits have been rising.

Maybe surprised to see that given how much liquidity you guys have, speaking specifically to I guess interest bearing deposits up maybe 5 basis points, 10 basis points since the second quarter. Any color there? Is that a different product? Will that level out? Just surprised to see that pressure given the liquidity you have.

Great question and great observation, and really a lot of that has been related to some certain deposit category specials that we've had really beginning in the third quarter and continuing a little bit into the fourth quarter. And some of that was really just to ensure that we continue to fund the loan growth that we knew was coming in the second half of the year, dollar per dollar for the most part with deposits. And a fair amount of that's was also to position ourselves in the advance of any rate hikes.

Of course, we did have that in December. And by position, was I mean by that is as we head into 2016, unless there's a series of additional rate hikes that follow, we really believe that we will be able to hold the line on our deposit of cost, and that's our intention for 2016. So some of that was a little bit in a way of a precursor to that, and so far it seems to have worked out pretty well.

Great. Thank you guys.

Thank you. Our next question comes from the line of Jennifer Demba with SunTrust. Your line is open.

Good morning. Could you remind us what percentage of your energy loans are shared national credits?

Sam, you want to take that?

I've got the number here. It's a little bit less than half. A little bit less than half of our total SNC book is energy related. So that roughly works out to be about two-thirds of our energy book is syndicated credits.

How many of those are you in the lead on?

It's less than 10. I think it's somewhere in the neighborhood of eight or so. And that's total.

That's total.

Jennifer, that's total.

In terms of energy, that's a subset of that number, so I can follow up and get you the number. I just don't have it handy right here.

Okay. And what kind of growth are you expecting in this healthcare portfolio that you acquired from UCBI?

Jennifer, this is John. So far since we added the team, and if you take out the book that we acquired, the growth has been about $25 million through the 12/31 period.

So that would -- that's about a 10% growth on an end-of-period basis just from when we started. That was all in the fourth quarter. I don't know that I'd project a compounded 10% every quarter, but would certainly expect to see maybe $10 million or $20 million a quarter of growth at a minimum.

Is that mostly or all shared national credit?

No, what we bought -- good question. What we bought was mostly shared national credits because that's what they had at that particular bank. We wanted the expertise, and we took the SNCs to essentially fund the cost of the team, purely to match up revenue with the new expense.

On a going forward basis, the desire would be that book of growth is primarily driven towards more regional business in the markets we serve and it being non-SNC. We will see how it works out, but that's the plan.

Thank you.

You bet. Good to hear from you, Jennifer.

Thank you. Our next question comes from the line of Jefferson Harralson with KBW. Your line is open.

Thanks. I wanted to ask you guys about the resolutions you had this quarter. Is that people writing checks? Does that bring in additional collateral? Is that private equity buying people out? What's going on to create resolutions in this environment?

Hey, Jefferson, this is Sam. It's a number of items. In one case, a sale of a company and/or a division was a resolution. In another, we received just a payoff, complete payoff as they moved the credit to another financing source.

We have seen some pay-downs resulting from additional equity injection, which allowed folks to pay down lines and maintain availability. So it's really a mix of things. So the big driver for the fourth quarter, however, was a workout solution where sale of a division of a company as well as just a refinance on another credit of some their outstanding debt.

Okay. And can you guys remind me just how a rating and a write-down of a shared national credit works? If the lead bank writes it down, then you need to write it down or rate it similarly?

If the shared national credit exam has it at a certain rating, you have to put it at a certain rating? How much flexibility is there for a bank like you in rating the shared national credit pieces you have versus the national exam and the lead bank?

I'm going to answer that in a couple of different segments. If a credit is a shared national credit and we change our opinion of the risk profile, we may and can downgrade it internally irrespective of what the lead bank may say about it or what their opinion is. So if we make a decision on our own, we can downgrade it internally.

Now, if during a national, shared national credit exam the exam team makes a determination that the risk profile is greater than the bank's recognized it, then all the banks that are in that shared national credit will have to reflect that different risk rating as articulated by the regulators. We do have the opportunity to appeal if we have a difference of opinion, but ultimately the final ruling by the regulators will rule the day and all the banks will have to make that risk rating adjustments So we've got two different paths depending whether it's directed by the regulators or whether we internally make our own determination.

Thank you. On the EPS guidance you gave, the 25% [pre] pre-guidance you gave over 2014, if you put your provision guidance on there and, I don't know, 27% tax rate, that gets me to EPS that's substantially higher than what the Street is. I'm getting to [$2.55]. Am I doing something wrong or is that in the ballpark?

If you wouldn't mind, Jefferson, say again what you're doing. You're adding back some level of provision.

You guys gave a $258 million, 2014 pre, pre, you said that can grow by 25%. That got me to $322 million for 2016. I will put $52 million of provision on there. Is that just the energy provision, that's $11 million to $15 million?

That's total provision.

Okay. That gets me to $270 million pretax, put a 27% tax rate on it and that got me to [$255 million] unless I'm missing something.

I'd have to go back and check that math, but that's probably ballpark-ish. What you're doing in terms of I guess the provision is probably a key assumption.

All right. Thanks, guys.

You bet.

Good to hear from you, Jefferson.

Thank you. Our next question comes from the line of Jon Arfstrom with RBC Capital Markets. Your line is open.

Thanks. Good morning.

Hi, Jon.

Couple questions. We will give you an energy break before we go back to it again. The loan growth guidance that you gave earlier for the full year, Mike, you talked about the lower end of the range.

Yes.

But at the same time, you had a great Q4. Even if you exclude the purchased loans, you were still close to 5%. Just curious if you're at the lower end of the range of 7%, what's different? What's changed between Q4 and Q1 as you look out into 2016?

I think part of it is just a little bit of conservatism related to the potential outlook for energy pay-downs in 2016 as well as just the realization of where the commodity price is right now and the potential impact that might have eventually if the duration of this cycle continues at the current level of severity, what that might do to some of our local economies. As Sam talked about before as well as John, we're really not seeing a big, significant net impact now.

But again, if this continues at these levels or gets worse, it's very likely that we could see some of those impacts as we move into 2016, especially the back end of that year. And so the guidance that we have now, the 7% to 9%, is really just a realization of those factors.

Jon, this is John. I will add some color to that. If you look in -- I think one of the deck pages showed where we had loan growth in the fourth quarter.

As Mike highlighted, it was really spread everywhere. Every market we had enjoyed loan growth. And the Eastern side of the franchise had superb loan growth.

You would think by now when we're just a few months away from this being the longest energy cycle ever that we would be seeing a lot more diminished demand in non-energy sectors of the markets that have been historically impacted. And while it's a little bit muted, it hasn't been down that far.

So we recognize that when we give the 7% to 9% relative to the fourth quarter, it's tough to do the math to say why are we being that conservative. But it is really driven primarily by the unknown impact of perhaps those economies slowing down more in 2016 than we saw so far in 2015.

I hope it doesn't happen, but we want to make sure we're being transparent to you and what we expect. I'd love to beat the guidance, but we're guiding more to the lower end just because of that risk.

Okay.

As Mike pointed out too, I'm sorry to interrupt you, we here in a few months will be the longest cycle ever. We don't really have a lot of history of what energy pay-downs ought to be.

You would have to belief, and based on what we're hearing from clients, the expectation of them retiring debt ought to be more in 2016 than it was in 2015. And we don't intend to replace it.

Okay. That's fair. There's a lot of uncertainty here. I understand that. Just a couple of questions. I'm not sure how you want to answer them.

Where does oil and gas need to be for you to feel more comfortable? I know there's not a magic number and maybe the answer is just higher, but give us some thoughts on that. I do have a couple follow-ups just on the risk rating changes too.

What a great question that is. Every day that it's up, I feel better, and every day that it's down, I don't. I wish that I could give you a better answer than that.

But generally what I'd tell you is that when the price of oil is comfortably ahead of maybe a factor of two or so against the lift price on the average of our RBL portfolio, then I will feel really good. And so we have a pretty low lift cost for our client base because we really have a good RBL client base, but you want to see some factors in there so they're able to really make money. And right now it's pretty anemic, especially -- I know oil's up the last couple days, it's been a nice increase.

All the gloom and doom you've seen from some as Sam called them prognosticators of a $20 oil price, when you stop hearing that, I think everyone ought to feel better. And right now some people really do believe that.

That's helpful. And I guess Sam or John, we don't see what you see in the book, but I guess one of my surprises was that there weren't any risk rating changes. I understand what you were saying about the flow in and out of the book and some resolution. Appreciate the qualitative stuff. But why do you think we haven't seen the risk rating changes yet, especially in the services book?

Well, this is Sam. As it relates to the services book, we have in fact seen some risk rating migration. The fact that there was less of it in the fourth quarter is somewhat masked by the activity you saw in the second and third quarter. There were some pretty heavy migration.

If you look at our overall reserve position, the support services segment is where most of our allowance has been allocated. So we think there's going to continue to be some real pressure in those segments.

So doesn't mean that all the migration is done. It's just that for the fourth quarter there was not as much of that movement. As John said earlier, we had a good bit of that happen early in the year as we tried to make real-time assessments to the circumstances.

As we continue to get financials from our clients, look at their overall cash flow position, look at their available liquidity to continue to service debt, we will make those assessments as we continue through 2016. But I wouldn't call it done.

I think it would be fair to say the overall stability in the energy portfolio for the fourth quarter wasn't for lack of scrutiny or lack of inspection in terms of what ought be the risk rating on a given credit. If anything, we're getting more cautious and more jaundiced in how we actually set the ratings. We just frankly had more outs than ins in the fourth quarter.

Okay. Go ahead, John, sorry.

I interrupted you. Go right ahead.

Just on the -- I guess the last part here on the upstream, you touched on it earlier I think in Brad Milsaps' question, but I calculate a little over 2% reserve on that. I'm sure you see what a lot of the peers have and you feel you have a different book. But maybe just expand a little bit on that.

Why should we be comfortable with that for you when others seem to be projecting the need for a bit higher reserve? I'm not trying to push you too hard on it, but just help us get more comfortable with that.

This is Sam again. We have an ongoing process of assessing the risk rating profile. We talk about internally about our clients very regularly.

And I can't speak to the banks. I'm not familiar with the profiles of their portfolios specifically that have indicated a need for a higher reserve.

What I will tell you is that we think our reserves are appropriate based on the information we have today. We have in fact received some payoffs on some credits that were in the adversely classified and in some cases non-accrual credit categories.

So we will continue to make that assessment. We think we have the reserve in place for our portfolio that's appropriate given what we know today.

Okay. All right. I appreciate all the help. Thank you.

Thank you. Our next question comes from the line of Michael Rose with Raymond James. Your line is open.

Good morning, guys. How are you?

Hey, Michael.

I don't know if you went over this. Sorry if I missed it. Can you talk about the level of hedges that you have in place on both the oil and gas side and what percentage of your clients are hedged and maybe what levels they're hedged at in both 2016 and 2017? Thanks.

This is Sam again. Right now about two thirds of our 2016 production is hedged and about one third of 2017 production is hedged. So we're still seeing some hedges out there, but there are fewer hedges in place today compared to what we saw this time last year.

The hedges are a bit of a challenge these days. We don't see a lot of people aggressively placing hedges. But we do see some folks reworking their hedges to extend out where they can their runway, so to speak.

So certainly as the volatility of the commodity market continues, we will see how that plays out. But we're seeing less hedging activity today than we did in 2015, early 2015.

Is that the percentage of clients that are hedged, or is that the percentage of PDP that's hedged?

That's the percentage of production that's hedged.

Okay. That's helpful. And then maybe going back and trying to tie back to Ebrahim's question about if oil were to take another nose dive here. What would the sensitivity be on the loan growth side?

I know you guys took down the number. If oil went down to the low $20 range where -- maybe where do you see that loan growth guidance shaking out?

This is John, Michael. I think we've accounted for a good bit of that risk in the 7% to 9% because the rest of the organization is growing very well.

When you see the Eastern part of the franchise growth numbers in the deck, that's not going to subside because of the price of oil goes down. If anything, it should increase.

I think the moment in time I don't think I can give you a better answer than the 7% to 9%. I will certainly share it if we think otherwise in the future.

That's helpful. Thanks for taking my questions, guys.

You bet. Thank you. Good to hear from you.

Thank you. And our last question comes from the line of Christopher Marinac with FIG Partners. Your line is open.

Thanks. Just wanted to follow up on Sam's answer to Jon Arfstrom's question a few minutes ago. Sam, is it true that you don't have the year-end statements yet, so when you get those in March and April, that just functionally is going to lead to potentially more risk rate migration?

We may not have -- if the fiscal year end coincides with the calendar year end, we may not have those financial statements. We won't have the audit reviews, et cetera, yet. But we do get internally generated statements where we're reviewing, and we don't wait for an audit to downgrade a credit if we see the internal numbers indicate weakness.

So the answer to your question is, we continually get updated financials, covenant checks, et cetera from clients. However, the heaviest inflow for fiscal year-end statements happens at the very end of the first quarter, early in the second quarter.

So we may very well see additional migration as we get those financial statements. But it is not just a point in time check. That is the heaviest season for receiving those year-end numbers is as we get in the early stages of the second quarter.

Okay. Great. That's helpful. And then just Mike, a quick question for you. You may have mentioned this way at the beginning of the call. But is the balance sheet growth we saw this quarter, could that be repeated as 2016 develops or will we see lesser just expansion in terms of sheer dollar amounts?

I think overall as we move into 2016, and it's keying off the loan growth numbers we mentioned, I would not expect to see the same level of balance sheet leverage this year compared to last year.

Okay. Very good. Thank you guys. Appreciate it.

You're welcome.

Thank you. This concludes today's Q&A session. I would now like to turn the call back over to Mr. John Hairston for closing remarks.

Thanks Andrea, and thanks for serving as operator today. Thanks everyone for attending the call and for your interest in the Company. Look forward to seeing you soon.

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