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Executives

Trisha Voltz Carlson

Carl J. Chaney - Chief Executive Officer, President, Director, President of Hancock Bank of Mississippi, President of Hancock Bank of Louisiana, President of Hancock Bank of Florida, President of Hancock Bank of Alabama and President of Hancock Bank

Michael M. Achary - Chief Financial Officer and Executive Vice President

Samuel B. Kendricks - Chief Credit Officer and Executive Vice President

Analysts

Jennifer H. Demba - SunTrust Robinson Humphrey, Inc., Research Division

Ebrahim H. Poonawala - BofA Merrill Lynch, Research Division

Matthew T. Clark - Crédit Suisse AG, Research Division

Kevin Fitzsimmons - Sandler O'Neill + Partners, L.P., Research Division

Emlen B. Harmon - Jefferies LLC, Research Division

Michael Rose - Raymond James & Associates, Inc., Research Division

Matt Olney - Stephens Inc., Research Division

Christopher W. Marinac - FIG Partners, LLC, Research Division

Peyton N. Green - Sterne Agee & Leach Inc., Research Division

Kevin B. Reynolds - Wunderlich Securities Inc., Research Division

Mikhail Goberman - Portales Partners, LLC

Jon G. Arfstrom - RBC Capital Markets, LLC, Research Division

Hancock Holding (HBHC) Q4 2013 Earnings Call January 24, 2014 9:00 AM ET

Operator

Good morning, and welcome to Hancock Holding Company's Fourth Quarter 2013 Earnings Conference Call. Participating in today's call are Carl Chaney, President and Chief Executive Officer; Mike Achary, CFO; Sam Kendricks, Chief Credit Officer; and Trisha Carlson, Investor Relations Manager. As a reminder, this call is being recorded. I would now like to turn the call over to Trisha Carlson. Ma'am, you may begin.

Trisha Voltz Carlson

Thank you, and good morning. During today's call, we may make forward-looking statements. We would like to remind everyone to review the Safe Harbor language that was published with yesterday's release and presentation and in the company's most recent 10-K and 10-Q.

Hancock's ability to accurately project results or predict the effects of future plans or strategies is inherently limited. We believe that the expectations reflected or implied by any forward-looking statements are based on reasonable assumptions, but the actual results and performance could differ materially from those set forth in the forward-looking statements. Hancock undertakes no obligation to update or revise any forward-looking statements, and you are cautioned not to place undue reliance on such forward-looking statements.

The presentation slides included in our 8-K are also posted with the conference call webcast link on the Investor Relations website. We will reference some of those slides in today's call. I will now turn the call over to Carl Chaney, President and CEO.

Carl J. Chaney

Good morning, and thank you for joining us today. In previous quarters, I've noted that our performance has reflected an improvement in our core results, a trend we expected to build upon in the future. In the fourth quarter, that trend accelerated and has now become more evident in our results.

Improvements were noted in many areas such as loan growth and mix, net interest income and net interest margin and a reduction in operating expenses. Yesterday, we reported fourth quarter operating earnings of $45.8 million or $0.55 per share and an ROA just under 1%.

The improvement in our core performance was significant and largely offset the anticipated runoff and accretion of our purchase accounting income. As a result, earnings were relatively stable linked-quarter.

As we have discussed in previous quarters, the level of purchased accounting income in our numbers has been significant and somewhat volatile. And we have been providing projections of how accretion will decline in future periods and cautioning investors not to count on continued levels of above-expected cash recoveries.

This quarter, as detailed on Slide 5 in our earnings presentation, loan accretion was down about $8 million or $0.06 per share from the third quarter. That is significant. But as I mentioned earlier, the strategic initiatives we have recently put in place continue to have a meaningful positive impact on our results, with the decline in purchase accounting income largely offset by core earnings performance.

As a reminder, our core results are simply our reported results less the impact of net purchase accounting adjustments, which are detailed on Slide 13. Some of the areas I'd like to highlight include an increase in core net interest income of approximately $1.5 million with expansion in the core net interest margin of 3 basis points.

Approximately $625 million linked-quarter net loan growth or 22% annualized, and over $900 million or 8% year-over-year loan growth, each excluding FDIC-covered loans. We had very nice loan growth in each of the 5 states in which we operate.

Continued improvement in overall asset quality metrics and most notably, a decline in operating expenses of $4.2 million linked-quarter. That decline in expenses reflects the progress we are making in conjunction with the expense and efficiency initiatives we announced in early 2013.

Comparing the fourth quarter to our starting point of first quarter 2013, expenses are down $12 million annualized, and we remain on track to meet our first quarter 2014 target.

So what are we doing to meet the first quarter target? We redefined our markets with either a consumer, business or combination focus. We continued our ongoing branch rationalization process and recently closed or sold 38 smaller retail branches across our 5-state footprint and we reevaluated market leadership and efficiency and staffing.

We refocused efforts around procurement savings through centralized sourcing and RFPs, added efficiency through process enhancements and enabling technology implementation. And we announced in November a bank charter consolidation to help improve back office efficiency.

A few have asked about the charter consolidation, specifically, how much of the cost savings and which bank will remain. First, let me start by saying this initiative will not eliminate a significant amount of current run rate expenses, less than $1 million annually. What it will do is bring efficiency to certain areas and eliminate the need to add future expenses in meeting regulatory requirements, such as stress testing and annual reviews, which are required at the individual bank level. Both Hancock Holding Company and its single bank charter will continue to be headquartered in Gulfport.

As you know, for over a century, in each bank's case, brand loyalty has been important to both Hancock and Whitney. It was important when the transaction was announced and it remains important that we continue to do business as Whitney Bank in Louisiana and Texas and Hancock Bank in Mississippi, Alabama and Florida. This charter consolidation is simply a back office event and will not have any impact on our customers or our branding.

We're continuing to work on initiatives designed to meet our fourth quarter 2014 target. And as I just described, related to our first quarter target, we will continue to provide additional details in future quarters. What is important is that as of today, we have identified initiatives that will get us the majority of the way to meeting our fourth quarter 2014 target. We are currently reviewing those initiatives while at the same time, exploring opportunities for other initiatives that can be implemented in the best interest of our shareholders, customers and associates.

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

Michael M. Achary

Thank you, Carl, and good morning, everyone. As we discussed over the past several quarters, one of our goals for 2013 was to grow the company's loan portfolio but also to improve the mix of loans we're adding to our balance sheet.

Aside from the tactical decisions made around our mortgage production, we are making progress in improving the mix of CRE credit. For example, CRE was about 15% of our total new loan production in the first quarter of '13 and is now about 18%. The largest component of the quarter's growth was C&I, which was up about 10%. We also reported increases in CRE, up 5%, and residential mortgages, up 3%. The majority of the growth came from our South Louisiana, Houston and Florida markets. But all markets across our footprint reported positive loan growth.

Additionally, the levels of payoffs and paydowns on the loan portfolio returned to a more normalized level in the quarter. While we are very pleased with these results, given the nature of our mostly commercial portfolio, we do not expect to report the same rate of quarterly growth going forward. For the full year 2014, we expect period-end loan growth in the mid single-digit range.

Total deposits for the company at year end were $15.4 billion. That was up $306 million from last quarter. The deposit growth from last quarter was mostly reflected in interest-bearing public fund deposits of about $330 million. As a reminder, public fund deposits typically reflect higher balances at year end with subsequent reductions beginning in the first quarter.

As Carl mentioned earlier, we reported expansion in core net interest income and the core net interest margin, despite declines in the reported levels of both. On a reported basis, the linked-quarter decrease in net interest income was mainly related to the decline of almost $8 million of loan accretion. With earning assets relatively flat, that decrease was also the main driver behind the 14 basis point drop in our reported margin.

What we believe is significant is the 3 basis point expansion in our core margin to 3.40%. The core loan yield of 4.09% declined only 3 basis points during the quarter and was offset by an improvement in the yield on investment securities of 19 basis points and a slight decline in the cost of funds of 1 basis point. Additionally, while earning assets remain flat, the mix improved as cash flow from the bond portfolio once again funded the growth in loans.

Non-interest income for the company totaled $59 million. That was down $4 million from the third quarter. The decrease reflects a decline in service charges of about $1 million, mostly related to fewer business days in the fourth quarter, and approximately $1 million less in ATM and bank card fees, mostly again due to a one-time Visa-related incentive that was booked last quarter.

The decline in mortgage fees of almost $1 million reflects a continued slowdown in mortgage loan activity, resulting from the impact of increased longer-term interest rates. The fourth quarter's activity also reflects a continued higher level of portfolio loan production.

Additionally, other non-interest income was down about $1.2 million on a linked-quarter basis. That decline mainly reflected the lower level expected future losses on covered loans. That resulted in an increase of $1.1 million and the amortization of the FDIC indemnification asset.

Excluding one-time costs of $17 million, non-interest expense totaled $157 million. That was down $4.2 million or about 10% annualized from last quarter. Personnel expense was down almost $2 million with occupancy and equipment down just over $1 million. The reduction in these categories reflects a full quarter's impact from the recent branch closings.

ORE expense for the company totaled $1.5 million for the quarter. That was down about $1 million. The effective income tax rate for the fourth quarter was 20%. The linked-quarter decline was primarily related to several additional new market tax investments closed during the quarter. We expect the effective tax rate to approximate 25% to 27% during 2014.

And finally, we have a couple of months remaining on the current stock buyback program. Given the recent increase in our stock price, we do expect to receive about 700,000 additional shares when the buyback is complete in May.

I hope it's evident from the numbers and comments today that we are very pleased to report the significant progress made so far on many of the initiatives we've been discussing since early last year. Specifically, we hit the inflection point for core net interest income and reported an expansion in core net interest margin this quarter.

Our level of operating expenses declined this quarter, some $17 million annualized, and reflects the impact of initiatives that we've implemented over the last few quarters. The strong levels of loan growth, along with a renewed focus on loan mix and the declining level of loan accretion, especially related to excess cash recoveries, did significantly impact the quarter, but was largely replaced this quarter through increases in core operating metrics such as higher net interest income and lower expenses.

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

Samuel B. Kendricks

Thank you, Mike. As Carl noted in his comments, our asset quality metrics continued to improve. Nonperforming loans, ORE and foreclosed assets, net charge-offs, criticized and classified loans are all down linked-quarter.

The total provision was virtually unchanged, and the change in the allowance for loan losses, which was down $4.6 million linked-quarter primarily reflected a $7.2 million net reversal of previous impairment on FDIC-covered loans.

We did build the allowance on the non-covered portfolio by $2.6 million during the fourth quarter despite the continued positive trends in asset quality metrics. With continued loan growth, the natural migration of some acquired loans to the originated portfolio and the accretion of the remaining discount on the acquired performing portfolio, we expect to continue to build this portion of the reserve in the future.

As a final note, from a credit perspective, I am pleased with the quality of the new business we are seeing and booking across our footprint and our overall loan portfolio mix.

I will now turn the call back over to Carl.

Carl J. Chaney

Thanks, Sam. Before I open the call for questions, I would like to point out that while our release and today's comments have focused on the fourth quarter, we don't want to lose sight of the fact that through all of the noise we have seen in our results over the past several quarters, loan growth is up over $900 million or 8% from year-end 2012. Our year-over-year diluted EPS is up 4%. Operating income is up 2% and our capital remains very strong with a TCE of 9%.

We will now open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Jennifer Demba of SunTrust.

Jennifer H. Demba - SunTrust Robinson Humphrey, Inc., Research Division

I think last quarter, Carl, you indicated you guys would talk in a little more detail about some of the process, improved changes that you've made. I'm wondering if you could give us some color there.

Carl J. Chaney

Well, we did some -- Jennifer, we implemented some enabling technology in the back office that allowed us to actually reduce some FTE, allowing us to continue to operate even more and more efficiency. We have a -- it's a laundry list of initiatives in that respect that go throughout the organization from the front office all the way through the back office and it's pretty significant. And the impact, as we mentioned earlier, the impact of -- the accumulative impact of all of those initiatives really started to show up in the fourth quarter and will continue to show up as we get full run rates throughout 2014, certainly hitting toward our fourth quarter 2014 goal.

Michael M. Achary

Jennifer, this is Mike. Just to add a little bit of additional color to Carl's comment, certainly, we've talked in the past before about the enabling technologies that we'll be implementing. Probably the best example of something that was done over the course of the fourth quarter is again something we've talked about before and that's our conversion to a new general ledger. And it's not just the general ledger. It actually is all the peripheral systems associated with the GL, such as payables, fixed assets, procurement, et cetera. So that's helped us dramatically improve the efficiency -- the operating efficiency of our finance groups, specifically accounting. And so that's resulted in some very real cost savings that are reflected in the fourth quarter numbers. I think as we go through 2014 and get closer to the fourth quarter, we'll be able to give more examples of those kinds of improvements in enabling technologies. So not to give those details today, but there are several projects that we're working on right now that, again, we'll be in a better position to chat about a little bit later.

Operator

Our next question comes from Ebrahim Poonawala of Bank of America Merrill Lynch.

Ebrahim H. Poonawala - BofA Merrill Lynch, Research Division

Just one quick question in terms of loan growth. Did we disclose -- and I apologize if I missed it. How much of the growth this quarter was driven by syndicated loans?

Samuel B. Kendricks

Ebrahim, this is Sam. Of the total loan growth, only about $60 million is attributed to shared national credits. So we feel very good about the core growth in the portfolio. As Carl said, every state in our footprint had growth for the fourth quarter. So this is not through purchase activity or through core growth in our markets, in our footprint.

Carl J. Chaney

As you can see, the percentage of syndicated, it was extremely low. And what little there was, was actually in market, which is what we typically do.

Michael M. Achary

And again, just to add a little bit more color, we kind of talked about some of the categories that were up. And hopefully, the message came through that the increase in loans was very broad based across almost all of our loan categories. The only exceptions I think were construction and indirect, we're both down just a little bit. And in all of our markets across our footprint reported positive loan growth. So we're certainly excited about the progress that was made in the quarter and look for that to continue into 2014.

Carl J. Chaney

And from an asset quality perspective, high-quality credit, we're not giving up on asset quality as we book these transactions.

Ebrahim H. Poonawala - BofA Merrill Lynch, Research Division

Got it. And just a quick follow-up on -- in terms of -- Mike, you alluded to the remaining buybacks. And going forward, and you mentioned the appreciation of the stock, does that change our thought process around buybacks?

Michael M. Achary

Well, not related to the current program.

Ebrahim H. Poonawala - BofA Merrill Lynch, Research Division

;

Beyond that.

Michael M. Achary

Beyond that, certainly, is a question around capital management and certainly, additional buybacks and other forms of capital management activity are certainly out there. When we look at our capital levels, specifically TCE, you can see that we're at an even 9% at the end of the fourth quarter. And if we track back to the first quarter of last year, right before the buyback was announced, we were at 9.14%. So here we are 3 quarters later, having gone through a 5% stock buyback and have nearly grown our TCE back to the level that it was at before the stock buyback was announced. So Carl, you may have some additional.

Carl J. Chaney

Yes. I mean, so that's pretty impressive if you think about that. Our capital ratios are just about back where they were in 3 quarters after having purchased back 5% of our stock. But with the recent uptick in our stock clearly has an impact on our thought process for future buybacks, as well as other means of deploying that capital M&A and other means. So yes, that clearly will have a impact and certainly is a factor to be considered.

Operator

Our next question comes from Matthew Clark of Crédit Suisse.

Matthew T. Clark - Crédit Suisse AG, Research Division

Maybe just first on the loan growth. Big increases this quarter and you've offered some color. But just curious whether -- and also, there was an increase in line utilization within the C&I bucket. Also, whether or not there may have been an increased appetite in some industry vertical or not. Just curious if there's anything that's changed other than maybe the increasing usage as well.

Samuel B. Kendricks

Matt, this is Sam. We saw some slight increase in usage, particularly in the fourth quarter as it relates to some seasonality for some of our clients. That's something we typically see. We will see some of that stick. But in the first quarter, we typically see a little bit of runoff in certain classifications. As it relates to any industry verticals, very broad-based in terms of the growth. We saw a little bit in reserve-based lending. We saw core C&I. We had some clients that were out making acquisitions of other enterprises. We did see a little bit of growth in CRE space, which we -- was a targeted area for us for quality projects. As you recall, we contracted the CRE segment of our portfolio over the course of a couple of years as we tried to derisk the portfolio. We feel very positive about our efforts there and have moved backed into that space with some quality projects. So we feel very good about our success there, and this is largely the result of the effort throughout 2013. You don't, in one quarter, turn on the spigot and have the results. This is the result of our line-of-business leadership, market leadership and sales teams out in the markets who are doing this work in the first, second and third quarter of 2013 with the fundings coming online later in the year. So this is a year's worth of effort that's starting to show up in these numbers, at least from our perspective.

Matthew T. Clark - Crédit Suisse AG, Research Division

Okay. And then I guess just as a follow-up, why only mid single-digit growth, I guess, for this coming year? Is it -- the pipeline is down maybe more after this quarter?

Michael M. Achary

Yes. Well, one, and Sam kind of alluded to this, Matt, just a second ago. But we normally see a little bit of a seasonal increase in the fourth quarter of every year, and that is usually followed by a little bit of a seasonal decrease in the first quarter. So as we kind of talked about a little bit earlier, we're really looking for a kind of flattish EOP growth for the first quarter and then kind of growing from there.

Matthew T. Clark - Crédit Suisse AG, Research Division

Okay. And on the tax benefit, was there any offset in expenses there or was that -- just followed the bottom line?

Michael M. Achary

Yes. There is an offset related to expenses that are embedded in the expense numbers that we discussed. It gets very complicated in terms of the accounting related to the New Market Tax Credits. But certainly, there's a benefit in the tax credit that impacts the effective tax rate. But then, there's also a little bit of amortization of the original investment that's reflected in operating expenses.

Matthew T. Clark - Crédit Suisse AG, Research Division

Okay. And then lastly, on M&A, any change in your appetite here based on what you're seeing here in your currency?

Carl J. Chaney

Well, clearly, our currency is benefiting us, no doubt. And I can tell you that the quality of the books that we're starting to look at has certainly increased. And so I'm pretty optimistic about our ability to have some opportunities for some strategic moves, probably in the latter part of the year and going into '15.

Operator

Our next question comes from Jefferson Harralson of KBW.

[Technical Difficulty]

Operator

Okay. We'll move on to the next question, Kevin Fitzsimmons of Sandler O'Neill.

Kevin Fitzsimmons - Sandler O'Neill + Partners, L.P., Research Division

Mike, definitely appreciate the disclosure you guys have on the purchase accounting, I just want to kind of go to more of a top-level mixture, if I'm thinking about it right. It's roughly -- I think it's about a 69 basis point difference right now between the reported margin and the core margin. And I know you lay out the revenue anticipated over the -- over 2014, 2015. So is the way to kind of -- I mean, just kind of doing this back of the envelope, is it -- are we looking at something in the neighborhood of 25-plus basis points over this next year, another 25 over 2015 and then the balance occurs when it totally goes away in 2016? Just trying to get a feel for how that pace is going to work in the reported margin. And then on the topic of NII, you had mentioned that you guys feel you hit that inflection point on core NII. When do you feel you'll hit that inflection point on reported NII? So in other words, when will that loan growth be enough to offset the ongoing wind down in the scheduled accretion income that's going to go on over the next 2 years?

Michael M. Achary

Sure, sure. Thank you, Kevin. And I guess there were a couple of questions in there, so I'll try to answer it in this manner. Certainly, we've disclosed in terms of an annual projection for '14 and '15 around what we're believing the runoff in all of the purchase accounting to be over the next couple of years. And again, those are annual projections and certainly, the devil is in details around how that happens on a quarterly basis. I think what you'll see over the course of '14 is the purchase accounting to go down or the impact of purchase accounting to go down modestly the next couple of quarters and then toward the end of the year, a little bit more of a significant increase. And then over 2015, it'll probably be a little bit more measured in terms of stepping down each and every quarter. So once we're through 2015, we'll still have some impacts in '16, but they'll be much, much less significant. So by the time we get to -- around the first quarter of '16, you'll see that convergence between our reported net interest margin and the core net interest margin. Now as far as the outlook, say, for the next 4 quarters, obviously, we're thrilled and worked very, very hard this year to reduce the compression in the core net interest margin and then begin the process of inflecting that upward. So over the next couple of quarters, the increases in our core net interest margin will probably be on the modest side, a couple of basis points every quarter potentially, and of course, very dependent upon our ability to continue to grow the loan portfolio and affect improvements of that loan mix. So hopefully, that answer the questions.

Kevin Fitzsimmons - Sandler O'Neill + Partners, L.P., Research Division

Yes. That's great, Mike. And just a real quick one, that item within fees, the -- basically, the write-down on the FDI receivable, what's the date when the loss share on the FDIC deal expires? And what do we -- what should we expect on from that write-down item between now and then?

Michael M. Achary

As you know, we have 2 parts to the loss share agreement related to Peoples First. The nonresidential coverage expires at the end of this year. And then on the residential piece, we have another 5 years to go once we complete this year. And so as of right now, when we look at the expiration of the nonresidential piece, we're not looking at any specific event when that agreement expires. We're very cautious and very conservatively are reprojecting our losses, which, of course, has impacts on the ultimate receivable. And so we begin to write that down a little bit more aggressively in the fourth quarter. There was an increase in that IA amortization of about $1.1 million, and that will continue through the balance of this calendar year.

Operator

Our next question comes from Emlen Harmon of Jefferies.

Emlen B. Harmon - Jefferies LLC, Research Division

You gave us some good color on kind of what you've done from the processing side of things to date to generate some saves. And I think with the additional efficiencies going forward, kind of what you said is that you would expect that -- those sales to come from kind of processing technology expense. I guess 2 questions. When do you kind of wrap up that evaluation process and distinctly know where those saves are coming from? And do you feel like you're getting saves from any areas outside of that kind of processing technology that you've talked about in the past?

Carl J. Chaney

Well, we are honestly continuing to work throughout this calendar year. And I think that -- to address one of your questions, as far as the timetable, I think when we arrive into the fourth quarter, we certainly expected to be where we need to be. We're continuing to work on processing efficiencies, procurement savings, as we mentioned earlier. All of those, by the time we roll into the latter part of the year, specifically the fourth quarter, we'll have those in full operations, so we'll get the full benefit of those. I didn't quite understand the last question that you asked, so if you don't mind repeating that.

Emlen B. Harmon - Jefferies LLC, Research Division

Yes, for sure. I guess what you said in the past is that kind of second half of the efficiency program that gets you the fourth quarter '14 number is going to come from -- kind of the processing and technology side of things. And I was just kind of curious, does it continue to be the case if that's where the saves are going to come from? Are you finding other opportunities that you think are going to help you get to that target as well?

Carl J. Chaney

Well, I think it will be -- it will continue to be some of the process improvements. But we always -- are always looking at our branch rationalization. And there are some other initiatives and opportunities that we're pursuing at this time that may well contribute to the ultimate fourth quarter '14 target.

Michael M. Achary

And Carl, what I would add to that is the initiatives are very broad based across both the front office and the back office. We have things like business process improvements that are at hand right now and being worked on intently. So again, Emlen, as we go through the year and we actually hit our target for the first quarter, we'll give some additional specifics beyond what we've done in today's call. And then as we approach the fourth quarter, we'll do the same thing.

Operator

Our next question comes from Michael Rose of Raymond James.

Michael Rose - Raymond James & Associates, Inc., Research Division

Just a question on the paydowns. You mentioned that they slowed obviously. What was the actual amount of paydowns this quarter and last quarter? And then maybe if you can talk to loan production and pipelines and where you're seeing strength in the pipeline.

Michael M. Achary

As far as the paydown numbers, and these are pretty broad numbers, Michael that we had somewhere in the neighborhood of about $1.1 billion last quarter and that went down to about $730 million this quarter. And again, those are rough numbers. And Sam, do you want to speak to the pipeline?

Samuel B. Kendricks

Well, from a pipeline perspective, again, the -- we feel very good about where we find ourselves positioned. We've already talked about the anticipated loan growth for the year. We'll see a little bit of attrition through some of those seasonal fundings of lines that will come down, we expect, in this quarter, but we also expect some backfilling through the remainder of the year from some commitments that have already been approved that we'll be funding. And again, those are broad-based from CRE to -- there is some reserve-based opportunity -- reserve-based funding opportunity in there, as well as a number of industries that are doing very well, particularly in the South Louisiana markets. So based on the pipeline, I feel very good about our current run rate and the projected loan growth that was alluded to earlier.

Michael Rose - Raymond James & Associates, Inc., Research Division

Okay, that's helpful. And then just on credit quality, you had a nice drop in credit size balances again this quarter. How should we balance that with the loan growth that you expect as it relates to the provisioning on a quarterly basis for '14? And how should we think about reserve trends from here?

Michael M. Achary

Yes, Michael. I think going forward, it could very well be the case, where we have similar levels of provision for the next couple of quarters, although we could see our charge-offs down and then the amount that we set aside in the ALLL actually increase a little bit.

Operator

Our next question comes from Matt Olney of Stephens.

Matt Olney - Stephens Inc., Research Division

I want to circle back on the loan growth guidance that you guys gave. You mentioned that paydowns slowed in the fourth quarter. As it relates to your expectations, so that mid single-digit loan growth in '14, are you assuming that paydowns pick back up again or are you assuming they remain relatively tame like they were in the fourth quarter?

Michael M. Achary

Yes. What will probably happen to the paydowns -- and if we look at the fourth quarter, it was down pretty significantly from the third quarter and a little bit lower than what we would consider to be kind of normal quarter. So we would expect all things equal to see 2 things happen in the first quarter. One would be that the paydowns could go up a little bit to what's considered a more normalized level, as well as the seasonal decreases in lines and in other credit facilities that, again, we normally see in the first quarter.

Matt Olney - Stephens Inc., Research Division

Okay, that's helpful. And I was encouraged to see the core margin improve in the fourth quarter. I wanted to ask about the core loan yield, down 3 bps. I'm trying to get a better idea of where this could go and how close we are to that core loan yield stabilizing, if you guys had any kind of that as far as the yields on the new and renewed loans in the fourth quarter that would also be helpful.

Michael M. Achary

Yes. Just a couple of items, Matt. Certainly, with our core loan yield down 3 basis points, we consider that pretty darn close to stable. As far as the yield on loans that were -- the new loans that were added this quarter, because C&I was a little bit greater mix in terms of all the loans that were added, we did see that new loan yield go down just a little bit between the third quarter and the fourth quarter.

Operator

Our next question comes from Christopher Marinac of FIG Partners.

Christopher W. Marinac - FIG Partners, LLC, Research Division

Mike, you may have mentioned this earlier, I just missed it. But what is the impact of sort of any loans that you're sort of involved with from syndications or purchased type of credits? Is that at all impacting this quarter?

Michael M. Achary

Yes. We talked about that a little bit earlier, Chris, but the increase in our syndicated loan portfolio was about $60 million...

Samuel B. Kendricks

Funding -- fund

Michael M. Achary

On a funded basis, right? Yes.

Carl J. Chaney

So that's a very, very small piece of the loan growth.

Matt Olney - Stephens Inc., Research Division

Right.

Michael M. Achary

Yes, it's one of the smaller increases we've had.

Matt Olney - Stephens Inc., Research Division

Got you. Okay, great. I mean, can you give us more color, I guess, on the tax rate? I know that from the disclosures that you get involved, with the new purchased tax credits, will more of that happen in the future? Is that what you already have in place baked into what you've given us in terms of the forward tax rate or can that even evolve further?

Michael M. Achary

That could definitely evolve further. That's becoming a very nice line of business for us, and it's one that obviously is pretty, pretty lucrative. So the guidance around the effective tax rate for next year certainly includes the portfolio of New Market Tax Credits that we have on the books now and a conservative assumption of what could be added in 2014. If we exceed those expectations, then yes, the tax rate could come down a little bit from where we're projecting.

Carl J. Chaney

Yes. Chris, it's Carl. We have, over time, developed a real expertise in that niche market. And when you look at those credits, those are typically very, very high quality credits as well. So we're pretty optimistic about our ability to continue in that line.

Matt Olney - Stephens Inc., Research Division

Great. Is that related to all 3 of your main states or would it be just one?

Carl J. Chaney

I mean, we have the potential kind of across the footprint, but the vast majority of where we've been successful in putting those kinds of investments on the books has been in Louisiana.

Operator

Our next question comes from Peyton Green of Sterne Agee.

Peyton N. Green - Sterne Agee & Leach Inc., Research Division

A question maybe for Mike first and Carl second. But just kind of stepping back and going back to the earnings run rate of the company before the cycle and kind of looking at it now, it's not really changed much, yet the company is certainly a lot larger. I just wondered, how much cushion do you have if the -- if we had a 10%, 15% pullback in bank stocks and Hancock found its valuation lower? I mean, what would the appetite be to maybe give the existing shareholder more ownership of the company? And then from an asset sensitivity perspective, how much more leverage will you all apply on the loan-to-deposit ratio? I know historically, 80% has been kind of a stopping point. What's the ceiling going forward? And then maybe for Sam, what's the variable percentage of the new loan growth in the quarter versus fixed?

Michael M. Achary

Okay. Thank you, Peyton. A bunch of questions there, so we'll try to hit them all. I guess the last one first. For the fourth quarter, when we look at our new loan growth, it really was weighted more toward variable, about 61% versus 39% on a fixed basis. As far as the pullback -- potential pullback of our share price, if something like that were to happen, certainly, we're constantly evaluating the options that we have in terms of how we manage our capital. And certainly, that's something that we would consider should something like that happen.

Carl J. Chaney

Yes. I'll add in to that, Peyton. If that -- in that scenario, clearly, that would have a meaningful impact on our decision of how to utilize this capital. But at the same time, in M&A, we have opportunities to deploy that capital as well either in -- either through cash acquisitions or certainly, combinations of stock and cash. So the -- how our currency trades clearly impacts the mix of future M&A opportunities, as well as the attractiveness of returning some of that capital to existing shareholders, as you mentioned.

Michael M. Achary

And then Peyton, I think your third question was around our loan-to-deposit ratio. You're correct, that 80% kind of had been a line in the sand, if you will, in terms of the way we managed our balance sheet. Carl that certainly doesn't exist in the context of the combined company, so that really is no longer a constraint.

Carl J. Chaney

Yes. That used to be a really special guiding principle. And I'm not going to say that we ignored, well, because we certainly do pay a close attention to it even today, but those hard and fast 80% ceilings no longer exist. And also, we have not -- in the last several quarters, we have not been aggressive in trying to grow deposits. It's simply been just keeping what we have and taking care of our customers. But if loan growth continues as we expect it to, we certainly have the ability to grow deposits without having a meaningful cost to us as well, so to keep that loan deposit ratio in check.

Peyton N. Green - Sterne Agee & Leach Inc., Research Division

Okay. And then I guess, so as a follow-up to that, I mean, would you go with $500 million or $600 million more in loan growth and just use all borrowings in order to keep the deposit costs down? Or is there a point in time when you really would like to grow deposits again?

Carl J. Chaney

Well, I mean, absolutely. When you look at the rate environment, I mean, clearly, doing fundings right now will make more sense than having to grow deposits. So that's the beauty of the environment we find ourselves in. So clearly, we could have that type of growth and use other sources of funding other than deposits. And then at some point, you look at whether there's a real financial need to grow deposits.

Peyton N. Green - Sterne Agee & Leach Inc., Research Division

Okay. And then I promise this is the last one. The securities yield jumped nicely. This linked quarter, was that bond premium amortization or was there a mix change or some kind of [indiscernible]

Michael M. Achary

No. The big driver, Peyton, was lower levels of premium amortization.

Operator

Our next question comes from Kevin Reynolds of Wunderlich Securities.

Kevin B. Reynolds - Wunderlich Securities Inc., Research Division

So a couple of questions. Most of my questions have been answered. A couple of questions. One is with the surge in the loan growth that you noted in the -- that was late in the quarter and obviously not reflecting the average balances -- the increase in average balances this quarter. Even with a slowdown in period ends, should we interpret the average balance to grow next quarter and therefore, to sort of boost NII maybe more than it ordinarily would have in a seasonally weak first quarter?

Michael M. Achary

Yes, that's correct.

Kevin B. Reynolds - Wunderlich Securities Inc., Research Division

Okay. Second thing is on expenses, as in 2 questions inside here. One is when you have your first milestone out there of $153 million, Mike, is -- just refresh my memory, does that include or is that excluding the CDI amortization? Because I remember your original expense projections after the Whitney deal, everything was sort of communicated as an excluding CDI kind of number. And then the second question I have after that is when you have a target have a 57% to 59%, could you remind us what has to happen in the environment for you to get there? Is there anything that you're banking on like Fed tightening or improvement in economic activity or any acquisitions or anything like that? Or is that just a sort of a steady-state expectation from here that drives -- that allows you to drive the efficiency ratio into that range?

Michael M. Achary

Sure, be glad to happy to help you with those 2. On the expense question, no, the guidance and the targets that we've established for ourselves are really kind of all-in numbers, so that would include CDI amortization. And again, just as a reminder, we've given specific targets around the $153 million and $147 million for the fourth quarter. And then the second question around -- what was -- again, can you repeat the second question, Kevin?

Kevin B. Reynolds - Wunderlich Securities Inc., Research Division

Sure, Mike. You have a targeted range of -- as part of your efficiency plan of 57% to 59% efficiency in 2016. So could you remind us what has to happen to get you there? Is the -- are you banking on things that are beyond your control, I guess, is what I'm saying, such as Fed tightening or improving economic activity or acquisitions? Or is this something that you feel confident that you can get into with just sort of continuing along the pace that you are right now? Is completely within your control to get there, into that range?

Michael M. Achary

Yes. Thank you for the reminder. No, the way we've characterized the efficiency ratio target for 2016 is really without the help of any change in the operating environment in terms of interest rates or economic activity. So it really is kind of a steady-state type target. Certainly, those things, if they were to occur in a positive nature for the company over the next 2 years would help. But we've established the target really regardless of what the -- that operating environment would be.

Operator

Our next question comes from Mikhail Goberman of Portales Partners.

Mikhail Goberman - Portales Partners, LLC

A question I have about your last slide here on the slide deck about your oil and gas portfolio. If my numbers are right, it looks like you guys had a pretty strong sequential growth of about 14% to just under $1.5 billion. Is that sort of in keeping with the period-end loan growth of 5% that we saw for all of the loan book that you have? Or is that something that is maybe something special going forward?

Carl J. Chaney

Well, what we saw were some growth and -- particularly in some of the support industries around the energy industry, from transportation to fabrication to just other non-drilling support. So it speaks to the overall growth in that segment of the economy in terms of that industry specific. And so I can't speak to whether that's going to be a continuum throughout the remainder of 2014, but we have seen some real strength in that segment for our client base that we're delighted to see, so that's the primary driver of what you see there.

Mikhail Goberman - Portales Partners, LLC

Got it. And that's mostly Southern Louisiana, correct?

Carl J. Chaney

Southern Louisiana and some Texas activity as well.

Mikhail Goberman - Portales Partners, LLC

I'm from [ph] Houston. And if -- one more, if I can get in one more. Could you guys speak to sort of the general level of loan competition in those 3 big markets that you're playing in? Is it continuing to get more tough?

Carl J. Chaney

Well, I would say it's -- the competition has been pretty fierce for the last several quarters, so I will not say that it's increasing. We occasionally see what we call mavericks, people that are really stretching on terms, covenants and things like that, but typically, that doesn't last very long. But I'd say the competition has been pretty steady, very fierce but pretty steady.

Operator

Our next question comes from Jon Arfstrom of RBC Capital Markets.

Jon G. Arfstrom - RBC Capital Markets, LLC, Research Division

Just a small question for you. On the construction line of business, curious what you're seeing in terms of new construction activity in your footprint, and if there's been -- if you have any change in appetite. My guess is there's probably some opportunities there, but curious what's your appetites changed at all.

Samuel B. Kendricks

This is Sam. I would say yes, it has in the respect -- as we mentioned earlier, we pulled back relative to the CRE segment in 2010, 2011, as we wanted to take a look at the risk profile in the portfolio and have moved some of those riskier profile transactions off the balance sheet. But then, our footprint, we have seen some real opportunities for some strong developers, who have moved back into the market, who are constructing new projects that we have an interest in. In addition, we're seeing some construction activity for owner-occupied projects as well. So both -- the answer is that yes, we have articulated a desire to move back into that space, following a period of contraction. And we're seeing some quality projects that match our risk appetite. And so that is part of our funding that we mentioned earlier in the presentation.

Operator

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

Carl J. Chaney

Okay. Thank you, all, for participating in today's call. As you can tell, we're extremely pleased with the quarter's numbers. And as you can also tell, we're starting to really see the benefits of all the hard work and initiatives that are going -- or being put into place. We told you what we were going to do several quarters ago, and this quarter certainly reflects the results of that work and that we're continuing to do what we said we would do that we want -- we continue to deliver -- what we said we were going to deliver. And we look forward to continued success as we move into 2014. So again, thank you for joining us today.

Operator

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

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