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Hancock Whitney Corporation (HWC 3.60%)
Q2Â 2019 Earnings Call
Jul 17, 2019, 9:30 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good day, ladies and gentlemen, and welcome to Hancock Whitney Corporation's Second Quarter 2019 Earnings Conference Call. [Operator Instructions]
I would now like to introduce your host for today's conference, Trisha Carlson, Investor Relations Manager. You may begin.
Trisha Voltz Carlson -- Executive Vice President, Investor Relations Manager
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, including the risk and uncertainties identified therein.
Hancock Whitney's ability to accurately project results or predict the effects of future plans or strategies or predict market or economic developments is inherently limited. We believe that the expectations reflected or implied by any forward-looking statements are based on reasonable assumptions, but our actual results and performance could differ materially from those set forth in our forward-looking statements. Hancock Whitney 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.
In addition, some of the remarks this morning contain non-GAAP financial measures. You can find reconciliations to the most comparable GAAP measure in our earnings release and financial tables. 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.
Participating in today's call are John Hairston, President and CEO; Mike Achary, CFO; and Chris Ziluca, Chief Credit Officer.
I will now turn the call over to John Hairston.
John M. Hairston -- President and Chief Executive Officer
Thanks, Trisha, and good morning, everyone. Results for the second quarter were solid, despite a more challenging rate environment. We reported net income of $88 million or $1.01 of EPS, up $0.10 from last quarter. Loan growth occurred within a desirable mix and yield strong enough to defray pressure on interest income, especially from LIBOR indexed credits. Energy loans returned to just under 5%, and in current projections we should be near 5%, upon closing the transaction with MidSouth.
We continued our focus on improving yield to help drive a better NIM, as noted on Slide 7. Likewise, we are pleased to report another quarter of improved, criticized and non-performing loan ratios, as noted on Slides 9 through 12. We are near peer levels for criticized loan ratios and expect to close the GAAP compared to peer non-performing loan ratios over the next several quarters.
Operating leverage increased $1.4 million, with revenue up a $9.3 million, offset by an increase in expense of almost $8 million. The drivers of revenue, which Michael go over in more detail in a moment, were mainly from fee income. All core business lines reported a linked quarter increase in some specialty lines combined to contribute an excellent quarter for non-interest revenue.
Expenses were up almost $8 million, with approximately $3 million of the change related to seasonal personnel expense. Expenses also included some non-permanent expenses. And we reported about $1 million in professional services expense related to investments in new and upgraded technology we mentioned last quarter. There are also expenses directly associated to outperformance in card interchange income.
As we suggested before, we began investing in technology in 2017, directed toward becoming more scalable, more effective and more efficient at growing the granular portions of our business. We do expect technology related expenses to increase in the back half of this year and in 2020, all of which are included in our 2019 expense guidance and fourth quarter 2020 CSOs.
During this quarter, our Capital One trust and asset management acquisition completed the systems integration, and our entire wealth group is now on an enhanced platform. The conversion occurred on time and within budget, exceeding our targeted efficiencies. Now, the integration related distraction is behind us, we are looking to this group to continue growing fee income in the second half of 2019.
During the quarter, we announced our acquisition of MidSouth Bancorp, headquartered in Lafayette, with operations in both Louisiana and Texas. Slide 22 provides a refresher on transaction details. Since the announcement, we have submitted our regulatory filings and announced an estimated 20 branch consolidations expected upon transaction closure and simultaneous integration in late third quarter.
Our capital remains strong this quarter with a reported TCE of 8.75% at June 30, up 39 basis points from the end of the prior quarter. We recognize, this is a higher level than our target of around 8%, however, we will maintain this current capital structure until we close the transaction with MidSouth. Once that acquisition is completed, we expect to consider opportunities ranging from organic growth to share repurchases and/or dividend increases.
Finally, we recognize the near-term rate environment creates headwinds to achieve our previously determined CSOs. However, we remain focused on achieving those CSOs as scheduled. We will continue adopting strategies and improvements, we believe are best for our clients, associates and to enhance shareholder value.
I will now turn the call over to Mike for a few additional comments and details.
Michael M. Achary -- Chief Financial Officer
Thanks, John. Good morning, everyone. As John noted, EPS for the second quarter was up $0.10 from last quarter. Drivers of the increase were mainly related to a $10 million lower provision for loan losses and additional fee income from specialty lines. If you recall that last quarter's provision was elevated due to the DC Solar charge. Overall, we'd say it was a good stable quarter.
Loans came in just below our guidance. However, as we noted last quarter, we did expect a higher level of paydowns during the second quarter, mainly from CRE loans. We also saw payoffs and paydowns in energy and healthcare, which helped with our overall remix efforts. And finally, we sold $45 million of lower yielding mortgage loans during the quarter.
Slide 6 of the earnings deck provides some details by market and segment. Despite the lower level of growth, we still expect average loan growth for the year to come in around mid single-digit levels.
Earlier, John mentioned in his comments the challenging rate environment. We're pleased to know that we were able to maintain a stable NIM in the second quarter, so down only 1 basis point. As noted on Slide 14 in the earnings deck, our remix efforts and a higher level of interest recoveries were nice NIM tailwinds for the quarter.
Headwinds included higher CD renewal rates and higher premium amortization on the bond portfolio. We do see the potential for stabilization of deposit rates going forward, and in fact, our cost of deposits did flatten out in June as compared to May.
Looking forward, if the Fed does move rates lower later this month, it would absolutely be a headwind to our margin. However, rest assured that we will continue our focus on improving loan yields and we'll be proactive in moving our deposit costs down. We feel that's the formula for NIM stability in this environment.
Switching to fee income, seasonality and specialty income led to a better than expected increase in fees for the second quarter. We reported increases in all lines of business driven by additional days in the quarter, increased activity on certain products and seasonality such as tax prep fees.
Income from BOLI, derivatives and our SBIC investments contributed almost $5 million to fees. So while it's hard to predict the timing on this kind of income, we did increase our 2019 guidance slightly to reflect this.
John detailed our expense increase in his comments, and I'll add one other item to the mix. ORE expense returned to a more normal level in the second quarter, and drove a $1.4 million linked-quarter increase related to a gain in the first quarter. Our guidance on Slide 20 of the deck reflects a slightly higher 2019 expense level, related to the investments in technology mentioned earlier. We are however continuing efforts to help offset those costs by managing down other expenses where appropriate.
One note related to the outlook slide. For now, the guidance excludes any impact of our acquisition of MidSouth. Once the transaction closes, we will update as appropriate.
Finally, we have our CSOs detailed on Slide 21 of the deck. No changes there until we complete this year's planning process and then republish after fourth quarter earnings in January. Just a reminder that when the CSOs were originally published in January, we assume no changes in interest rates and no M&A activity. Certainly, the rate environment looks to be a headwind toward achieving our goals, while the MSL deal gives us some EPS tailwind. So while the path to achieving our targets may be a little different than originally planned, we remain committed to the goals.
I'll now turn the call back to John.
John M. Hairston -- President and Chief Executive Officer
Thanks, Mike. And Brian, let's just open the call directly for questions.
Questions and Answers:
Operator
Yes, sir. Thank you. [Operator Instructions] And our first question will come from Catherine Mealor with KBW. Your line is now open.
Catherine Mealor -- Keefe Bruyette & Woods Inc. -- Analyst
Thanks. Good morning.
John M. Hairston -- President and Chief Executive Officer
Good morning, Catherine.
Catherine Mealor -- Keefe Bruyette & Woods Inc. -- Analyst
I'm going to start with the margin. And I appreciate that it's hard to really think about guidance if rates are cut. But could you kind of dig into that just a little bit more, Mike, and maybe talk through some of the strategies that you think you may have at your fingertips to try to keep the NIM more stable, and prevent the margin from moving lower if rates are in fact, cut? Maybe talk about new loan to deposit ratio and how quickly you think you can actually lower deposits, if we really do get into that environment? Thanks.
Michael M. Achary -- Chief Financial Officer
Sure, Catherine, I'll be glad to. So certainly, if the Fed does cut rates by, say, 25 basis points later this month, we do have a bit of a headwind, obviously to overcome on a full quarter's impact. That's probably about 2 to 4 basis points or so. And certainly that comes from our concentration primarily in LIBOR based loans. So we have about 31% of our loan book that's explicitly tied to that index. So our game plan really involves mitigating as much of that 2 to 4 basis points as possible, by barely -- bye being fairly aggressive in cutting deposit costs.
As a reminder, we have a relatively low loan to deposit ratio at around 86%, 87%. And so we think that gives us a great deal of flexibility to be pretty aggressive in cutting rates. Also, as a reminder, we have a $3 billion public fund book that has nearly a 100% deposit beta, and then certainly we have about $1 billion, $1.2 billion, or so in wholesale funding sources that have high betas, obviously, as well.
So that's how we're kind of thinking about a Fed rate cut potentially later this month. And really, those are our strategies to kind of deal with that. That makes sense?
Catherine Mealor -- Keefe Bruyette & Woods Inc. -- Analyst
That -- it does, very helpful. Thank you. And then one follow-up just on the expense growth. So you talked about how the back half of the year is going to be higher expenses because of the tax spend and that you carry through next year. As we think about expense growth rate, as we move through next year, would it be fair to assume that the growth rate could flow next year versus this year, just as some of those costs are already embedded in your expense base, so that the growth rate could actually did soften a little bit, which may help you hit some of those CSO goals?
Michael M. Achary -- Chief Financial Officer
Well, kind of think about the little bit of a change in guidance that we gave for the back half of '19 around expenses. And you really kind of go through the math of kind of backing out the non-permanent expenses we had in the second quarter as well as the technology spend. So those two items together were about $3 million. And then if you kind of back out additional technology spends it will have in the second half of '19, then for all practical purposes, really, our guidance would have -- would not have changed. It would have stayed around 4% to 5%. So the thing that's driving it a little bit higher again is those non-permanent items that we had in the second quarter, as well as the technology spend.
So John, I don't know if you want to kind of comment a little bit on some of the things we're doing in that area.
John M. Hairston -- President and Chief Executive Officer
Sure. I'll be glad to. And good morning, Catherine. I guess the only thing I would add is, when you get aside from the personnel expense, the normal annual salary increases, which were fully loaded into Q2, take up a non-recurring expense, and all of the increase really in the second half is in technology. And we've talked about our technology plans for a few quarters. And if we go all the way back to comments, maybe in '17 and '18, in those days, we were busy, assuring that our core systems were completely updated, and the middleware work that was needed for the various database analytics to achieve the future CSOs and maybe the next round as well was also scalable.
All that work concluded in '17 and early '18, and are extremely scalable. So none of the technology expense we've talked about this year or that we'll be dealing with next year is related to those items. Every investment -- for practical purposes, every investment is targeted to advanced solutions. It's about enhancing sales and relationship retention per customer facing FTE. It's about increasing our digital account wins on both sides of the balance sheet, both deposits and loans, which is not as good a retention account business as branch opened, but the expense base to win them is quite lucrative. And that's an area that we really haven't availed ourselves off yet. So I'm looking forward to seeing some good progress there.
And then the process reductions will yield to a little smaller servicing back office relative to revenue. And so by the time you pull all the numbers together, we'll end up at about 10% technology expense to total revenue, which is in line with peers, and will remain so for this upcoming CSO cycle. And then I'd be disappointed if we don't outperform in technology expense compared to revenue as the revenue thrown off from those technology investments materializes.
So there's a few more milestones to complete before we go into adds and deletes to expenses, and what we expect the sales effectiveness metrics to be. I'd like to get past MSL because things are going to somewhat reset with the new expense base when that happens, and we can share more about it. But to answer the question and maybe what Mike was lead me to was, the tech spend we're talking about is not a catch-up expense. It's enhancement toward being more effective and getting the efficiency ratio ultimately down below that CSO goal in future years.
Did that answer your question, Catherine?
Catherine Mealor -- Keefe Bruyette & Woods Inc. -- Analyst
It does, yes. It makes sense. Great. Thank you very much.
Michael M. Achary -- Chief Financial Officer
And Catherine, one other quick item I would add to John's comment. All of the technology spend and investments that we're talking about, all of that was part of this year's business plan. So all of those investments as well as the expenses are built into our CSOs through next year.
Catherine Mealor -- Keefe Bruyette & Woods Inc. -- Analyst
Got it. All right. Great. Thank you and great quarter.
Michael M. Achary -- Chief Financial Officer
Thank you.
Operator
Thank you. And our next question will come from the line of Ebrahim Poonawala with Bank of America. Your line is now open.
Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst
Good morning, guys.
John M. Hairston -- President and Chief Executive Officer
Good morning.
Michael M. Achary -- Chief Financial Officer
Good morning.
Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst
I was wondering, John, if you could -- so your provisioning guidance implies relatively subdued outlook on credit. If you can just talk about in terms of -- we've seen pretty decent healthy credit sales for a while now at the bank, in terms of how you look -- how you view credit risk going forward. You've obviously seen one offs from banks continued to rise over the last several quarters. So would love to get just your thoughts around credit, credit quality and customer sentiment even as it leads to loan growth, if you could.
John M. Hairston -- President and Chief Executive Officer
Sure, Ebrahim. This is John. Chris Ziluca is here with us. I'm going to let Chris take that question.
Christopher S. Ziluca -- Chief Credit Officer
Hi, Ebrahim. Yes. I think our our forward view on asset quality is still positive. I think we see a continued opportunity to improve on some of the core asset quality metrics that we report on in the earnings releases. So -- and I met a few customers recently, I think there's still a generally positive sentiment out there. So I think over the coming quarters, I think we'll see a continued improvement in that area.
Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst
Understood. And just moving back to the margin and the deposit costs, Mike, when you think about one, you mentioned loan to deposit ratio 86% to 87%, if you would tell us how high you feel comfortable within -- getting that ratio if you had to? And also in terms of when you think about customer pricing, do you expect the CD pricing, public funds, obviously, in term to rerate relatively quickly? Or is it going to be market driven based on what competitor end up doing?
Michael M. Achary -- Chief Financial Officer
Okay. Thank you, Ebrahim. Related to the first part of the question, in the LD ratio, certainly don't want to create an expectation that we're going to increase our LD ratio, since we were stating that we have the flexibility to do so with a relatively low one. And so we stand at about 86%, 87% now. And I think we feel comfortable as a Company, bringing that right around the 90%, maybe a little low -- above 90s range.
And again, the effort there will be to be fairly aggressive in terms of dropping deposit costs, should the Fed move down later this month. Now, some of that is kind of already happening. We really have kind of put on the sidelines nearly all of our CD promotional rates and promotional CDs. We do have one out there that we think is attractive, but to the most part related to the CD maturities that we'll have coming up, we think that there's a real opportunity for a bit of a price down going forward. So hopefully that answers your question.
Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst
Well, that's helpful. Thank you very much for taking my questions.
Michael M. Achary -- Chief Financial Officer
Yes.
John M. Hairston -- President and Chief Executive Officer
Ebrahim, this is John. I'll just tag one other credit point on there. If you note in the investor deck on Slide 10, we've mentioned last several quarters that getting our criticized and non-performing loan ratios down into the peer comparative areas something very important to us and important to our investors.
If you look on slide 10, you'll note that gap from a year ago has gone from roughly 300 basis points to down around 70. So the gap is getting close. As TDRs begin to come down and come out of both NPLs and criticized credit, I would expect that gap to be extinguished. But -- so I think we're not ready to call victory yet on criticized credit. We still have some more progress to make there. But I think just from a focus and a amount of vigor, our attention is more on the non-performing sector than just criticized now, because I think that's what's weighing to some degree our market cap. So we're interested to get some lumpy credits remaining, particularly inside that accruing TDR bucket. Either upgraded or gone at that point in time, that comparison will be as attractive as the criticized.
So that's going to take a few quarters. It's not going to all happen at one time. We've made good progress so far, but the background for Chris's tone as shown in those ratios can be found in Slides 10 to 12.
Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst
Noted. Thanks, John.
John M. Hairston -- President and Chief Executive Officer
Okay, sure.
Operator
Thank you. And our next question will come from the line of Brad Milsaps with Sandler O'Neill. Your line is now open.
Brad J. Milsaps -- Sandler O'Neill -- Analyst
Hey, good morning, guys.
John M. Hairston -- President and Chief Executive Officer
Good morning.
Brad J. Milsaps -- Sandler O'Neill -- Analyst
John and Mike, I just wanted to talk a little bit more about your chart on Page 7. I know you've talked a little bit about this last quarter, but, focused on doing more granular loans, you did a little -- it looks like a little over $2.2 billion of production in the year ago quarter. This quarter was around $1.2 billion. [Phonetic] I'm just curious, a number of loans this quarter versus year ago quarter, just thinking about, how granular have you gotten in terms of what you've been able to put on the books, as part of that plan to I guess reduced risk around larger loans and get better pricing?
John M. Hairston -- President and Chief Executive Officer
Okay. And thanks for the question. This is John. I think that we haven't really talked about specific numbers of credit, so I think we've given some tone on that in the past. But over the course of just quarter-over-quarter, and there's some seasonality impact. But generally speaking, the volumes of credits in the commercial banking space and down sporadically improve year-over-year. When the rate environment changes, the impact of the overall consumer book is heavily impacted by what happens in mortgage. And so I'm trying to discount my answer a little bit with that. But -- so let me talk about mortgage first.
Mortgage approved or closed business was up about 20%. The number of apps was up about 39% over the previous quarter. Now, that had been drifting downward from the beginning of last year, just because -- remember at that time, rates were actually going the other way. As long term, the 15 year and 30 year money rates have declined, then we've seen as you would expect a bump up in both apps and in closed business.
So some of our overall impact on loan growth was affected by the portfolio sale, Mike mentioned about $45 million, but we're still seeing an uptick in overall mortgage book because production has indeed increased. And that happens every time, we see those money rates come down. Interestingly enough, it's not really driven entirely by refi. There just seems to be new borrower interest in home deals after somewhat of a declining environment, at least in our footprints where we're active over the last year or two.
But commercial banking segment is doing well, the business banking segment is doing well, and really -- and just looking overall loan growth, there may be a little bit of a mismatch, Brad, in our -- what we consider adequate amounts of covenants tied to construction CRE. The deal flow in the first half of the year was real good. But the covenant light nature of those deals were a little bit outside our appetite at this point of the credit cycle. And that did begin to moderate as we got toward the end of the second quarter.
Same -- similar point on healthcare. The amount of leverage per deal, the deal flow was good, but the leverage was a little higher for our appetite, and so we saw the healthcare book shrink. That also began to moderate a little as we got toward the end of the quarter. And so those are two segments that we think are more likely to expand in the second half of the year versus the first half of the year. And on top of that, we expect to see continuing ramp up in the granular segments. And then finally, the seasonality draw downs we see on lines of credit in Q4 should lead to a more impressive second half than first half, even while we still maintain very rigid attention toward the yield.
Does that kind of expand the color what you were looking for?
Brad J. Milsaps -- Sandler O'Neill -- Analyst
Yes. I guess, my question was more from the perception of risk, the market was ultra concerned about credit risk and the perception is bigger credit to carry more risk. Just wondered if -- are you guys really focused on, have the credits gotten smaller, and you're just doing more of them?
John M. Hairston -- President and Chief Executive Officer
I think we're doing more of the smaller segments. We're doing less of the very large lumpy credits. Our syndication percentage is markedly different. So even though we're carrying about the same amount of snicks, [Phonetic] I think that's about $2.1 billion is similar to last quarter. It's about the same volume or same balance sheet as we had probably in second quarter '16, three years ago. So -- but what's inside that snick book is quite different. So we expect to have a little bit more of a depository or fee participation with national -- shared national credits we're involved in. And the participation in energy related snicks has continued to decline.
So I think it would be yes, the number of larger credits has diminished. And yes, the number of smaller credits has increased. And I'm glad we did that when we did it because primarily the pressure on LIBOR index credits is at the upper end. So we're not having to do something really new to deal with the rate environment to getting a little bit lot more challenging because the focus on the smaller credits was something we really focused hard on a year ago and continued to ramp up.
Brad J. Milsaps -- Sandler O'Neill -- Analyst
Now, that's very helpful.
Michael M. Achary -- Chief Financial Officer
Brad, just one quick comment. This is Mike. And thanks for kind of calling attention to the slide. You -- we think it's a pretty good depiction of the strategy -- our remix strategy and the fact that it's actually working. And certainly you see the yield on new loans increasing the way it's done over the last five quarters. And certainly the production levels, as John mentioned, certainly in part that's related to a larger number of smaller credits that we're putting on the books. And we believe that we're able to do that with really kind of a better risk trade-off, if you will.
John M. Hairston -- President and Chief Executive Officer
Yes.
Brad J. Milsaps -- Sandler O'Neill -- Analyst
To just to follow up on the yield piece of it, I mean, I guess, Prime is up a 100 basis points since last March. Your yields are up, I think 134 basis points. So you feel like you've got some permanent, better pricing on and above where -- what the index rates have done. Is that -- would that be a fair assessment?
Michael M. Achary -- Chief Financial Officer
Yes, correct.
John M. Hairston -- President and Chief Executive Officer
That would be appropriate assessment.
Brad J. Milsaps -- Sandler O'Neill -- Analyst
Okay. Great. Thanks for the color.
John M. Hairston -- President and Chief Executive Officer
Just wish we had more of it.
Brad J. Milsaps -- Sandler O'Neill -- Analyst
Understood. Don't we all?
Operator
Thank you. And our next question will come from Jennifer Demba with SunTrust. Your line is now open.
Stephen Stone -- SunTrust Robinson Humphrey -- Analyst
Hey, guys, it's actually Steve on for Jennifer.
John M. Hairston -- President and Chief Executive Officer
Hi, Steve.
Stephen Stone -- SunTrust Robinson Humphrey -- Analyst
Hi. Just looking kind of at rate cuts a little differently. What -- what's the impact of rate cuts on kind of the MSL acquisition accretion numbers you guys have put out?
John M. Hairston -- President and Chief Executive Officer
No discernible impact at this point, Steve. And certainly that's something I think we'll talk a little bit more about once we consummate the transaction. And again, that's planned for end of the current quarter. And at that point, we'll share, I guess, a little bit more color around how that book is impacting our rate sensitivity.
Stephen Stone -- SunTrust Robinson Humphrey -- Analyst
Okay. So if we get a cut end of this month, you guys are still OK with that kind of $0.13 to $0.15?
John M. Hairston -- President and Chief Executive Officer
Yes, that's right.
Michael M. Achary -- Chief Financial Officer
Absolutely.
Stephen Stone -- SunTrust Robinson Humphrey -- Analyst
Okay. And then looking back at that kind of that slide we're just talking about, the new loan yields kind of have risen nicely. Ex-rate cuts, do you guys have a chance to kind of improve those? Do you think those are going to kind of hold steady and going to add to the book?
John M. Hairston -- President and Chief Executive Officer
Well, I will start and Mike can clean up, if we need some more clarity. But I think it's important to note in the second quarter '19, that, that new loan business coming in at that 522 [Phonetic] number, there hadn't been a Fed overnight money rate cut. But LIBOR is absolutely priced in already. So I don't know if that number may be around 30 bps compared to the previous quarter on us. And some 60% of our new credits are still indexed, produced in the second quarter and in the new money yield held up. So I think we've been able to find ways, both with the intention of granularity, pricing, discipline and being selective around what deals we participated in or didn't, we've been able to weather that storm with only a 3 bp decline in new money from the first quarter, and a much better indexed business.
So we've -- we feel pretty good about it holding up. I mean, I'm -- we're not even and ignoring that, if there was another rate cut that happened, and the tone toward a second 25 bp, the increase would certainly make that tough. But I don't think it affects our strategy any other than we would want to understand more about why would we want to see a second rate cut occur in an expanding economy, that seeing what -- some -- seemed somewhat counter-intuitive.
Stephen Stone -- SunTrust Robinson Humphrey -- Analyst
Thanks, guys.
John M. Hairston -- President and Chief Executive Officer
Thank you.
Operator
Thank you. And our next question will come from Casey Haire with Jefferies. Your line is now open.
Casey Haire -- Jefferies Capital Mgmt -- Analyst
Thanks, good morning, guys. I want to touch on the loan growth. I appreciate the guide that you guys have. But -- I mean, if my math is right, you guys could kind of run loans in place and still hit your guide. So just trying to get a -- an outlook as to how you see long growth trending in the back half of the year. You still anticipate these kind of headwinds in CRE paydowns in the energy, healthcare, or can we see loan pipeline start to deliver without these sort of impediments?
John M. Hairston -- President and Chief Executive Officer
Yes. To hit -- thanks for the question. Yes. And just to make sure we're interpreting correctly. To hit the mid single level digits end of year -- over end of year, we'll need more loan growth in second half and somewhat substantially so than the first half. To get to the specifics of your question, what we would expect to happen is, healthcare is probably static to up, in the second half versus shrinking in the first half. Ditto, CRE will continue growing the granular areas of the balance sheet. And we probably won't have as much of a headwind with energy, noting that we had to reduce energy, some of the neighborhood of around $70 million in the first half of the year. So with some of those headwinds out and with what we see is a little stronger deal flow coming in the second half, together with seasonality of the fourth quarter [Indecipherable] I mentioned before, we think we'll see a second half loan growth number just a little bit higher.
Casey Haire -- Jefferies Capital Mgmt -- Analyst
Okay. So...
Michael M. Achary -- Chief Financial Officer
Yes. I just -- Casey, [Indecipherable] I'm sorry. I would add to John's comment is, also a reminder that the third and fourth quarter of every year, seasonality tends to be the better loan growth quarters for our Company. So I totally agree with what John just said in terms of looking forward to some pretty nice levels of loan growth in the second half of this year.
Casey Haire -- Jefferies Capital Mgmt -- Analyst
Okay. So the the outlook -- the guidance is average? I'm sorry, it's end of period, not average?
Michael M. Achary -- Chief Financial Officer
No. The guidance is year-over-year average loan growth, mid single-digits year-to-year. Right?
Casey Haire -- Jefferies Capital Mgmt -- Analyst
Okay.
Michael M. Achary -- Chief Financial Officer
Net of MSL.
John M. Hairston -- President and Chief Executive Officer
Right.
Casey Haire -- Jefferies Capital Mgmt -- Analyst
No -- right. Okay, great. All right. And then just switching to fees, I know it's difficult, some of these transactional fee items that did very well this quarter. But is there any piece of it that you see is a little bit more recurring, maybe on the SBIC or on the swap side?
Michael M. Achary -- Chief Financial Officer
Yes. I think the part of it that's really hard to predict. It's certainly the BOLI and the mortality gains that you have there. The SBIC income, I mean those are current investments -- are ongoing investments that we have. So it's not like all that's going to disappear in a quarter and then maybe reappear at some other point. The derivative piece is interesting. We've had an absolutely great quarter in terms of derivative fees and those kinds of products being sold to our customers. And with the challenging rate environment, one positive byproduct of that is, you tend to have bigger sales or greater sales in terms of these kinds of products. So I would expect to see additional derivative income fees in the second half of the year. I think that's going to go away next quarter.
Casey Haire -- Jefferies Capital Mgmt -- Analyst
Okay, great. Thank you.
Michael M. Achary -- Chief Financial Officer
Thank you, Casey.
Operator
Thank you. And our next question will come from the line of Matt Olney with Stephens. Your line is now open.
Matt Olney -- Stephens, Inc. -- Analyst
Hey, good morning. Thanks, guys.
John M. Hairston -- President and Chief Executive Officer
Hey, Matt.
Matt Olney -- Stephens, Inc. -- Analyst
Just want to follow-up on the margin outlook. I guess the guidance is to keep the margin relatively stable, absent any rate changes, not to get too precise. So when you talk about relatively stable, are you thinking about -- of a range of plus or minus 3 bps, or some other range? And then secondly, when you're guiding toward that stable NIM, are you guiding toward stable from the reported levels of 3.45%, or do you think we should be looking at that 3.42% NIM that would exclude some of those interest recoveries in 2Q?
Michael M. Achary -- Chief Financial Officer
Great question, Matt. And when we talk about NIM guidance and the relative stability, we're really looking at reported NIM, so the 3.45%. And certainly we had this quarter a little bit of a benefit from interest recoveries. But again, if you go back over the last four or five quarters, what we've had, I think interest recoveries in four of the last five quarters to some degree. So again, as our credit, especially on the energy side, continues to improve, we have opportunities to harvest some of that in terms of interest recoveries.
So to your question about what NIM stability means, it means a couple of basis points, I think targeting either direction. As I hesitate to give you an exact basis point number, but I think that certainly this quarter, this past quarter is a great example with the NIM being down just 1 basis point in a pretty challenging rate environment, I think adequately fits the depiction of NIM stability.
Matt Olney -- Stephens, Inc. -- Analyst
Got it. Okay. That's that's helpful, Mike. And then I also want to circle back on the credit trends within the energy portfolio. It seems like last year the bank saw a really good improvement across the board in energy credit trends. But when I look at the trends this year, in 2019, it seems like the pace of the improvement in the energy book has kind of stalled out. So I'm just looking for some commentary on why the resolution process has somewhat slowed this year.
I think some of your peer banks have suggested that some of the the problem energy loans, that are in liquidation are just not seem very strong this year compared to this time, last year. So I'm curious what you're seeing on the energy resolution side.
John M. Hairston -- President and Chief Executive Officer
This is, John. Matt, I think the one observation that's worth mentioning is, if you're doing a comparative of energy banks, you have to note what type of energy they're doing. And if they're all midstream, you really didn't suffer too much during the cycle. If all upstream or reserve based lending, much of that book has improved more quickly, simply because prices in the strip and cash flow was better.
On the services book and particularly, the GOM [Phonetic] services book, the day rates, while they are improving and the contracts are getting led, and drilling has begun to occur, it's just going to take a little bit longer for all those energy services credits and specifically the TDRs to become conventionally structured, so that we can get them off the TDR list.
So I think our RBL book is probably healed up on pace with everybody else's RBL book. I mean, there's still some issues out there, but I don't think we're terribly dissimilar from anyone else. The lag is really more because of energy services. So that's just going to take a little bit longer for that to complete this resolution.
Chris, you have anything you want to add to that?
Christopher S. Ziluca -- Chief Credit Officer
No. I mean, I would just say that, there a number of our energy credits still remain in that TDR category and so that's kind of our bigger focus. And a lot of that is just driven off of the timing of the maturity of the loans, so that we can rewrite the loan under conforming terms. So some of those, linger a little bit longer and we will be focused on that in the next couple of quarters to affect a lot of those rewrites, so that they come out of the NPL bucket.
Matt Olney -- Stephens, Inc. -- Analyst
Okay, very helpful. Thank you.
John M. Hairston -- President and Chief Executive Officer
Okay. Thank you.
Operator
Thank you. And our next question will come from the line of Christopher Marinac with Janney Montgomery. Your line is now open.
Christopher W. Marinac -- FIG Partners LLC -- Analyst
Hey, good morning. I just want to verify on MidSouth, that it is accretive to margin? And that the sort of accretion impact is sort of de minimis as that comes online for next year?
Michael M. Achary -- Chief Financial Officer
Chris, this is Mike. That's correct. So we're looking at the MSL impact on our NIM to be around 3 basis points, or so. So that hasn't changed. And then in terms of the loan mark, the 5% loan mark, we're looking at the vast majorities of that really being added to the ALLL down the road. So there is some accretable impact, but it's not significant.
Christopher W. Marinac -- FIG Partners LLC -- Analyst
Great, Mike, that's helpful. And just one quick one for Chris. Chris, do you see anything from the utilization rates of C&I loans or anything else on the credit front that gives you a read-through into kind of just overall health and demand from borrowers?
Christopher S. Ziluca -- Chief Credit Officer
Yes. So we've been looking at -- I've been looking at utilization rates kind of as an indicator of that business -- both business activity and then also conversely any indicators of issues in the market, because they kind of cut both ways. And I would say utilization rates overall have been fairly steady when you look at it across the board. So I don't really see any indicators of issues. And I think business activity continues to be positive from everything that I've seen based on looking at utilization rates.
I don't know if John, you have any comments [Speech Overlap]
John M. Hairston -- President and Chief Executive Officer
No. I think you answered the question, yes.
Christopher W. Marinac -- FIG Partners LLC -- Analyst
All right. Great, guys. Thank you for the background here.
John M. Hairston -- President and Chief Executive Officer
Thanks, Chris.
Operator
Thank you. And this concludes our question-and-answer session for today. It is now my pleasure to hand the conference back over to Mr. John Hairston, President and Chief Executive Officer for any closing comments or remarks.
John M. Hairston -- President and Chief Executive Officer
Thanks, Brian, for moderating the call. And thanks to everyone for your interest in Hancock Whitney. We wish you a wonderful day and week. Take care.
Operator
[Operator Closing Remarks]
Duration: 41 minutes
Call participants:
Trisha Voltz Carlson -- Executive Vice President, Investor Relations Manager
John M. Hairston -- President and Chief Executive Officer
Michael M. Achary -- Chief Financial Officer
Christopher S. Ziluca -- Chief Credit Officer
Catherine Mealor -- Keefe Bruyette & Woods Inc. -- Analyst
Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst
Brad J. Milsaps -- Sandler O'Neill -- Analyst
Stephen Stone -- SunTrust Robinson Humphrey -- Analyst
Casey Haire -- Jefferies Capital Mgmt -- Analyst
Matt Olney -- Stephens, Inc. -- Analyst
Christopher W. Marinac -- FIG Partners LLC -- Analyst
