Hancock Holding Management Discusses Q1 2014 Results - Earnings Call Transcript

Apr.17.14 | About: Hancock Holding (HBHC)

Hancock Holding (NASDAQ:HBHC)

Q1 2014 Earnings Call

April 17, 2014 10:00 am ET

Executives

Trisha Voltz Carlson - Senior Vice President and Investor Relations Manager

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

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

Jefferson Harralson - Keefe, Bruyette, & Woods, Inc., Research Division

Emlen B. Harmon - Jefferies LLC, Research Division

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

Matthew T. Clark - Crédit Suisse AG, Research Division

Matt Olney - Stephens Inc., Research Division

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

Mikhail Goberman - Portales Partners, LLC

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

Operator

Good morning, and welcome to Hancock Holding Company's First Quarter 2014 Earnings Conference Call. Participating in today's call are Carl Chaney, President and CEO; 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, 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 actual results and performance could differ materially from those set forth in the forward-looking statements. Hancock undertakes no obligation to update or revise any forward-looking statements, and you are cautioned not to place undue reliance on such forward-looking statements.

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

I will now turn the call over to Carl Chaney, President and CEO.

Carl J. Chaney

Good morning. And thank you for joining us today. Let me start today's call by saying how proud I am of our associates and our management team. We've set some very aggressive goals early last year. And as we noted in our release yesterday, we met both of our expense targets for 2014. Not only did we meet the first quarter's target, we also met the fourth quarter's goal, 3 quarters ahead of schedule.

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

And as we noted in the release, we are continuing our branch rationalization program and closing more locations across our footprint. But at the same time we're closing branches, we are also opening new locations. We just opened a regional headquarters in Lafayette, Louisiana, a significant market for the oil and gas business. And in a few weeks, we will be opening business financial centers in Houston, Texas and Jacksonville, Florida to support our strategic business focus for those markets. And we have plans on the table to open additional branches and BFCs in more markets during 2014. While you see us investing, it is also important to note that we remain committed to keep the expenses under control and in line with our stated goal for the fourth quarter of '14.

Yesterday, we reported first quarter earnings of $49 million or $0.58 per share and an ROA of 1.05%. We continue the trend of replacing purchase accounting income with core earnings. A combination of lower operating expenses and stability in the net interest margin helped improve the overall quality of our earnings. Operating expenses declined $10 million, linked quarter. And compared to our starting point a year ago, operating expenses are down almost $13 million or 8%. The efficiency ratio improved to 62%, down from 66% last quarter. Core net interest income was flat linked quarter while the core net interest margin narrowed 3 basis points. We had over $230 million in linked-quarter net loan growth or 8% annualized and approximately $1.2 billion or 11% year-over-year loan growth, each excluding the FDIC-covered portfolio.

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

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

Michael M. Achary

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

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

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

The first quarter also saw higher levels of payoffs and paydowns with also very healthy levels of new loan origination activity. While new loans were booked at levels just under 4%, the runoff rate was higher, compressing the core loan yield by 7 basis points and, in turn, causing a slight 3-basis-point compression in the core NIM. However, the additional loan volume during the first quarter did help offset the loss in net interest income from 2 fewer accrual days this quarter.

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

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

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

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

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

Service charges and card fees, together, were down about $1.6 million from last quarter, partly due to the shorter quarter. Trust investment and insurance fees totaled $18.9 million and were up $800,000 linked quarter. Included in that total was $3.7 million of insurance revenue. As a reminder, we announced the divestiture of our P&C and group benefits insurance lines a couple of weeks ago. Insurance related revenue and expense are both expected to decline by less than $2 million per quarter beginning in the second quarter.

Operating expenses for the first quarter totaled $147 million, this was also our targeted goal for expenses in the fourth quarter of 2014. So as Carl mentioned earlier, we were able to achieve our expense goal 3 quarters early.

Expenses were down just over $10 million linked quarter, excluding $17 million of onetime costs last quarter. Expense reductions were broad-based and reflected the combination of our efficiency activities, which we've been sharing with the market the last few quarters. These activities included a full quarter's impact from recent branch sales and closures, reorganization of market leadership, procurement activities, as well as process improvement and enabling technology initiatives.

All of these aforementioned items will not stop now that we've achieved our expense goal early. For example, branch rationalization is an ongoing process, but we continue to open, close and consolidate branches when warranted. Yesterday, we announced we will close an additional 16 branch locations in Mississippi, Florida and Louisiana in early third quarter 2014. However, as Carl noted in his comments, we also are opening new branches and business financial centers at the same time.

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

I will now turn the call back over to Carl.

Carl J. Chaney

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

We will now open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Michael Rose with Raymond James.

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

As we think about going into 2015, with 2014 being kind of a transition year, and as you get towards your -- or move towards your longer-term efficiency target of 57% to 59%, should we think about more the efficiency improvement in '15 coming from revenue as opposed to expenses? And then what are some of the areas outside of some of the new branches that you're going to open that you would invest some of the cost savings into?

Michael M. Achary

Thank you, Michael. This is Mike Achary. Yes, again, I think you hit the nail in the head. Certainly, 2015 -- or 2014, again, is a bit of a transition year as we harvested our expense savings, as we've done, but then also continue the good work to create opportunity to invest in revenue initiatives. That's happening now. That will continue as we move through 2014. And we're really looking for 2015 to be the year where we really begin to show that incremental revenue growth that helps us achieve those targets for 2016. So we talked a lot about, I think, some of the efficiency improvements that we've made in the company. Some of the things that help our lenders and relationship managers create more opportunities to be face-to-face with their customers. That's also involving things that help us remove some of the burdens of the day-to-day operations that those folks have so, again, that they can focus on good customer contact on -- with their customers. So going forward, the things that I think you'll see us invest in will be things that actually help us add, where it's appropriate in certain markets, relationship managers that help us with our commercial, middle market and corporate banking customers. You'll see us add some resources that help us with our mutual fund complex in terms of wholesalers. We have a whole host of initiatives pointed at fee income. Much of that is wealth management, but then also treasury services. And those are the areas that we'll continue to invest in. Carl talked earlier about the BFCs that we're opening and look for more to come in that regard as we head down the road. And then finally, I think I already kind of mentioned this, but additional automation that really helps us become a more efficient company, again with respect to customer contact, freeing up time for our lenders to spend more face time with good customers. So that's really kind of how we're thinking about this year and into next year.

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

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

Carl J. Chaney

Sure, Michael. We -- I can assure you, every board meeting that we have, we have a healthy dialogue and discussion about our options. The nice thing is that we have ample options to manage our capital down to where it needs to be in the best of our shareholders. So we're continuing -- are continuously looking at M&A opportunities, as well as running numbers for additional buybacks. So we look at that every board meeting, literally, every board meeting we discuss it. And the nice thing, as I mentioned, is we have options and feel very confident in our ability to execute on one or more of the options that we have to continue to manage our capital.

Operator

Our next question comes from the line of Jefferson Harralson with KBW.

Jefferson Harralson - Keefe, Bruyette, & Woods, Inc., Research Division

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

Michael M. Achary

Yes, Jefferson, this is Mike. When we talk about that guidance, it really is for the next couple of quarters, so the next 2 or 3 quarters. And you're right, we do have a headwind of the diminishing level of purchase accounting. Between fourth quarter and first quarter, that impact was about $600,000. As we head into the second quarter, probably another $600,000 or $700,000 of kind of projected diminishment. But then as we head into the back half of 2014, those diminishment levels will pick up a bit. So right now, we're looking at somewhere in neighborhood of about $5 million of purchase accounting diminishment in each of the third and fourth quarter. So obviously, we're looking to make that up with all of the efficiency initiatives that we kind of talked about a little bit earlier. So again, that's a mix of continuing to reduce expenses, where appropriate, to create funding for revenue initiatives, and then certainly we're looking for some of those revenue initiatives to begin a payback period little bit later this year.

Jefferson Harralson - Keefe, Bruyette, & Woods, Inc., Research Division

All right. Then I'll just ask on the revenue initiatives will be the key to getting where you want to be, I think, in 2016. You mentioned better loan growth. Where is that coming from, and what are you seeing there? And what are the other maybe 1 or 2 main revenue initiatives that need to occur to -- for you guys to meet your '16 goals?

Carl J. Chaney

Well, with the loan growth -- Jeff, this is Carl. Loan growth, we expect to continue to originate where we've had recent success, which is really all across our footprint, all 5 states, generating nice loan growth. And so we're fortunate to be operating in markets that are doing very well economically, from the driving oil and gas industry in Texas, as well as South Louisiana, to the nice recovery we're seeing in Central Florida from Tampa to Jacksonville. So -- and then on the Mississippi Coast, we had some nice loan growth. So we really do expect to see continued growth in those markets as those economies continue to grow and improve.

Michael M. Achary

And yes, Carl, just to add to that, we saw that over the last 2 quarters, again, with a pretty broad base increase in lending activity, really across our footprint. And we certainly expect that to continue going forward. We also have the initiatives that I kind of mentioned in -- at the onset of the call a few minutes ago, and that's pretty broad-based and involves both our margin business, as well as our fee income business. And on the fee income side, again, treasury services and wealth management are really the 2 big areas that we're looking to show revenue increases in the future.

Carl J. Chaney

Yes. In addition to the loan piece, right [indiscernible].

Operator

Our next question comes from the line of Emlen Harmon with Jefferies.

Emlen B. Harmon - Jefferies LLC, Research Division

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

Michael M. Achary

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

Carl J. Chaney

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

Emlen B. Harmon - Jefferies LLC, Research Division

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

Samuel B. Kendricks

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

Emlen B. Harmon - Jefferies LLC, Research Division

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

Michael M. Achary

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

Emlen B. Harmon - Jefferies LLC, Research Division

Got you...

Michael M. Achary

That would be the way to think about it going forward.

Operator

Our next question comes from the line of Jennifer Demba with SunTrust Robinson.

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

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

Carl J. Chaney

Yes. Jennifer, this is Carl. Those are -- we call those business financial centers. And I apologize, sometimes we use the acronym BFCs. Those are commercial-oriented branches. And so when you walk in, they should not look like a typical retail branch in the sense that you don't see a large teller line, rather you walk in, it looks like a business office with professional desk around. We also do accepting in deposits and do transactions, but it certainly doesn't look like a retail branch. It is clearly focused on commercial lending and commercial banking. And so it's -- and they're typically located in business complexes, office complexes, oftentimes in the first floor of a office tower. And we have 2 opening up in a matter of just a couple of weeks, one in Houston and one in Jacksonville. And those -- that represents our strategy for markets like that, where we don't have a very large market share. We're going in with a very niche strategy play and going after commercial and high-end private banking. And so that has worked for us in the past, and so we're very confident we'll be able to continue to lever off of that strategy. As opposed to markets like New Orleans, Baton Rouge, the Mississippi Coast, where we have large market share, we have your typical retail branches, as well as our strong commercial activity.

Michael M. Achary

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

Carl J. Chaney

Yes.

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

Okay. And my second question is on M&A. Can you just talk about the pipeline as it stands now and remind us of what kind of deals you're examining and you're willing to pursue? And have you backed away from any opportunities in the last 3 to 6 months?

Carl J. Chaney

I'd say the M&A market or activity has -- is continuing to grow. It is not -- I'm not going to say it's taking off, but it is growing slightly, gradually, maybe is the best way to describe it. I will say that the quality of the books that we're starting to see continues to improve. Whereas 18 months ago, I would tell you the quality was significantly less. So that's encouraging. As far as our sweet spot, we can do up to $10 billion, $12 billion of acquisition fairly easily, but that's not our sweet spot. We're going -- I would describe our ideal target being anywhere from $1 billion to $2 billion up to $5 billion or $6 billion. That is our sweet spot. We could do one of those transactions and fold that in very nicely and not have it be a major distraction and continue with our other initiatives, which are important. So while we have -- we're still looking forward to continuing to grow our revenue, we like to look at those smaller acquisition opportunities, at the same time, that could fold in. Have we backed off? We've -- I guessed we've passed. I think maybe this is what you were referring to. There have been 2 fairly recent deals that we looked at and decided to pass on, just because they're -- they weren't strategic in our mind. But one nice thing, Jennifer, is we don't have to do a transaction right now, and so that allows us to be patient and be very deliberate and -- in our M&A thoughts. And so we would -- we will pull the trigger when the right strategic opportunity presents itself in, and we're very confident that, that will occur.

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

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

Carl J. Chaney

I mean, Houston market is fantastic as far as how the economy is working, and our results in that market have been very, very strong and positive. If something were to come available in Houston, and it had also some branches, let's just say, in Dallas, that's not a no go. We can certainly -- we'd certainly do that easily. Now if it was something in West Texas, that's not really in our radar screen right now. That's another thing that's -- we're fortunate about is that we are already in markets that we believe will provide ample opportunities for strategic expansion without having to go significantly outside of our existing footprint.

Operator

Our next question comes from the line of Matthew Clark with Crédit Suisse.

Matthew T. Clark - Crédit Suisse AG, Research Division

I guess first question really on the core margin outlook. I mean, I think there had been some expectation for things stabilizing there with the mix change, and I think pricing has incrementally gotten better. That differential has closed. Can you just give us a sense for how you see that core margin going forward and maybe also what kind of pricing you're seeing quarter-to-quarter?

Michael M. Achary

Matt, this is Mike. Again, if you look back over the last 5 quarters, especially, our core net interest margin really has been kind of the picture of stability. We've had a quarter or 2 where we're maybe up a couple of basis points. This quarter we were down a couple of basis points. And we've been able to achieve that more recently through the volumes that we've been able to put on the balance sheet on a net basis and also an improvement in the mix of loans that we're putting on the balance sheet, so a little bit fuller mix. All of that is taking place in what continues to be a very challenging environment to price loans, and that will continue going forward. So we're going to have that challenge, and we're going to have -- a little bit of that potential for a little bit in the way of a downward movement in our core loan yields. So our objective is to obviously maintain that core NIM stability and to continue to grow our levels of net interest income. And we think as we go through the year, we'll be able to achieve that. So again, we may see the net interest margin, the core net interest margin trend down a basis point or 2 as we go through the rest of the year. But the objective is to increase our level of net interest income.

Matthew T. Clark - Crédit Suisse AG, Research Division

Got it, okay. And then as you look beyond, say, the next couple of quarters, and I guess I'm just trying to get at maybe the underlying assumptions behind achieving that 57% to 59% core efficiency ratio in 2016. I guess when we think about expenses beyond this year, I mean, is it fair to assume that they're going to be flat or down? And I guess what type of -- I understand some of the initiatives that are in place on the revenue side. But also just trying to get a sense for your assumptions on maybe rates and any -- maybe pickup from the type of growth -- of a loan growth that you're putting on today.

Michael M. Achary

Well, going forward, on the expense side, again, as we've kind of talked about, we're continuing our efficiency efforts and we intend to continue to do that to create funding opportunities to invest back in the company. So again, going forward, we'll be very careful and transparent to kind of show what those actions and activities have been. And I think what we'll see is, once you kind of back out the investments that we've made, you'll see just kind of a marginal continued increase in expenses, somewhere in line with the rate of general inflation. So there's always going to be a little bit in the way of expense increases that are just kind of baked into the numbers for that reason going forward. And as far as the second question about the revenue component, again, we've talked a lot about that. We're very focused on continuing the level of loan growth that we've put in place the last couple of quarters, increasing that going forward and, at the same time, investing in revenue-generating initiatives, many of which are pointed squarely at our fee income lines of business and, again, wealth management. So trusts and investments are big areas that we're investing in, as well as treasury management.

Matthew T. Clark - Crédit Suisse AG, Research Division

Okay. But no change in rates in '16? I mean, do you assume some benefit of higher rates or no?

Michael M. Achary

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

Matthew T. Clark - Crédit Suisse AG, Research Division

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

Carl J. Chaney

Let's see, in terms of the total increase in overall loans, it was less than 30%. The total loans on the C&I piece, let's see here, I believe it's -- I'm not sure I've got that number handy here.

Michael M. Achary

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

Operator

Our next question comes from the line of Matt Olney with Stephens.

Matt Olney - Stephens Inc., Research Division

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

Michael M. Achary

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

Matt Olney - Stephens Inc., Research Division

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

Carl J. Chaney

Matt, it's Carl. I would say that -- I wouldn't expect any additional sales of lines going forward. We -- as I'm -- I guess it was our annual shareholder meeting 2 days ago, and I had a question similar to that. And I responded like this, we stack rank all of our lines of business from a profitability standpoint and from a profit margin. And while our commercial insurance loan business was profitable, it was at the very bottom of that stacking. And so we feel very, very comfortable and confident in our ability to sell that for a nice premium, turn around and take that investment and reinvest that into higher profit margin lines of business that we're currently operating in, that we know we can do very, very well. And so that's -- in its most simplest terms, that's exactly what we executed. And we feel very confident in our ability to generate significantly more revenue and -- that flows to the bottom line than we -- with a similar investment than we were generating with the commercial insurance line. So I don't see though -- looking at the other stack rankings, I don't see any other lines of business that it would necessarily make strategic to exit in order to reinvest as we did the commercial insurance.

Michael M. Achary

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

Carl J. Chaney

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

Operator

Our next question comes from the line of Chris Marinac with FIG Partners.

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

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

Michael M. Achary

Yes, that's correct.

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

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

Carl J. Chaney

I -- Chris, I don't know if I would -- if I can really give you a priority. The priority is we will do -- we will execute on one, if not both of those. I feel pretty confident that -- because we have very strong capital as everyone seems to point out, which is not a bad thing. It does create nice options for us. And we will manage that capital in a fashion that we think is in the best interest of our shareholders. And so to be able to say -- to prioritize between M&A and stock buybacks, we don't have a deal in hand. And so no, I'd say I couldn't rank those one over the other. I'll just say that we're going to pursue both and make the right strategic decisions.

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

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

Michael M. Achary

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

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

Right, yes.

Michael M. Achary

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

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

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

Michael M. Achary

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

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

Correct.

Michael M. Achary

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

Carl J. Chaney

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

Michael M. Achary

Not at all.

Carl J. Chaney

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

Michael M. Achary

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

Operator

Our next question comes from the line of Mikhail Goberman with Portales Partners.

Mikhail Goberman - Portales Partners, LLC

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

Carl J. Chaney

Yes, sir. The -- that segment continues to be very strong. We've had opportunities to continue to expand in that space. It's not the primary driver of our growth this quarter, obviously, but we're seeing continued strength there between the production side, as well as the support industries. So we've got a broad base of clients and industries that support energy in general, whether it's upstream for the exploration production or it's non-drilling support or direct drilling support or just the other support industries, transportation, product transportation, et cetera. So we're seeing pretty broad-based opportunities across the whole -- entire energy segment.

Mikhail Goberman - Portales Partners, LLC

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

Michael M. Achary

That's correct. That's correct.

Mikhail Goberman - Portales Partners, LLC

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

Michael M. Achary

That's right, yes.

Operator

Our next question comes from the line of Peyton Green with Sterne Agee.

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

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

Michael M. Achary

Yes. Right now, Peyton, our headcount, this is on a FTE basis, is just under 4,000. So if we go back a year to the first quarter of '13, we were just under 4,200. So we're down year-to-year about 200.

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

Okay. And -- so I mean, that's flat versus the fourth quarter, and yet -- I mean, there's a big change in personnel expense, I mean, $3.5 million linked quarter. Was there any kind of bonus accrual that got reversed out that maybe you had accrued over the last year that was due that didn't get paid in the first quarter or maybe -- because, I mean, that's a huge change just on a fairly limited headcount reduction in the personnel expense.

Michael M. Achary

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

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

Yes -- no, I guess, I mean, just compared to -- I know back in the old, old days, 12, 13 years ago, when you all did a 5% reduction in force, I mean, the effect of that was not as dramatic on a per FTE basis, I guess, is just the way I'm thinking about it. So it just seemed like there might have been something else going on, but all right. And so you would expect there to be a little bit more downside on that number based on the insurance company being -- I mean, the P&C brokerage business moving out, plus the branches, but the branch closures would be offset by investment in other noninterest income businesses.

Michael M. Achary

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

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

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

Michael M. Achary

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

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

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

Michael M. Achary

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

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

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

Michael M. Achary

Yes.

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

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

Michael M. Achary

Yes. And you're exactly right. And I think we mentioned a little bit earlier some of the seasonality in the public fund book, which was kind of a legacy Hancock attribute. So sure enough, I mean, we're seeing those impacts as we go through the first quarter. And even on the Whitney legacy side. Now, typically, you'd see a little bit of an increase in, primarily, the corporate deposits that would happen around year end and then a little bit of an outflow as you go through the first and second quarter. Going forward, to answer your question, I think that on a net-net basis, second quarter will probably be kind of flattish in terms of earning asset growth. But I think in the back half of the year, we'll see a little bit in the way of an upward movement in our earning asset base as we strive to fund our loan growth through methods other than just relying on cash flow from the bond portfolio.

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

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

Michael M. Achary

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

Operator

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

Carl J. Chaney

Okay, thank you. And I want to thank, everyone, for joining us today on this call. We're very, very proud of our associates and all the hard work in achieving our expense goals, particularly the 3 quarters in advance. And we look forward to continuing to keep the market updated as we continue to focus on growing our revenue and the projects resulting therefrom.

So thank you again for joining us and your support.

Operator

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

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