Q1 2022 Hancock Whitney Corp Earnings Call
Good day, ladies and gentlemen, and welcome to Hancock Whitney Corporation's first quarter 2022 earnings conference call. At this time all participants are in a listen only mode. Later, we will conduct a question answer session and instructions will follow at that time as a reminder, this call maybe recorded.
I would now like to introduce your host for today's conference Trisha Carlson Investor Relations manager you may begin.
Thank you and good afternoon.
During today's call. We may make forward looking statements, we would like to remind everyone to carefully review the safe Harbor language that was published with the earnings release and presentation and in the company's most recent 10-K and 10-Q, including the risks and uncertainties identified therein, you should keep in mind that any forward looking statements made by Hancock Whitney.
We speak only as of the date on which they were made as everyone understands the current economic environment is rapidly evolving and changing.
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 are not guarantees of performance or results and are actual work.
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.
Some of our remarks contain non-GAAP financial measures you can find reconciliations to the most comparable GAAP measures 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 Harrington, President and CEO , Mike <unk>, CFO and Crystal Luca Chief Credit Officer, I will now turn the call over to John Hurston, Thanks, Tricia and thanks to everyone for joining US. We hope you had a safe and enjoyable holiday weekend. We're pleased to report another solid quarter and a healthy launch.
For 2022, the company's first quarter results were on track with core loan growth of 8% linked quarter annualized mix improvement and a stable deposit base initiation of a widening net interest margin superior Ecu metrics, continuing excellent expense management improved operating P PNR and solid.
Levels momentum from 2021 carried into the first quarter with an increase in core loans of $385 million linked quarter. This growth more than offset the almost $200 million in PPP forgiveness, increasing economic activity in our markets increasing line utilization and pull through rates all led to grow.
<unk> broadly across our markets and lines of business new loan yields rose a couple of basis points as production levels remained strong.
We expect these trends will continue and be more positively impactful S. P. P. P forgiveness impact is less significant headwind next quarter.
Speaking of decreasing headwinds I'd like to share an update on the New Orleans MSA as I pointed out on previous calls most of our footprint experienced record tourism and very healthy hospitality industry segments. Throughout the pandemic. You Orleans was an exception due to dependents on convention Tradeshow and festival business as an economic driver.
We are pleased to report a resurgent New Orleans in 2022, beginning with the new year Sugar Ballgame are robust mardi-gras season hotels were booked festival tourists return in the city rebounded as a national and international destination March brought relaxed pandemic restrictions and family tourism Serge.
During the spring break vacation period, we were proud to host the final four basketball tournament and are preparing for the return of the jazz and Heritage Festival and the Zurich Classic Golf tournament conventions have returned guided tours and restaurants are fully available and we hope to see many of you in a couple of weeks at the Gulf South Bank Conference. So the New Orleans.
I must say he has joined the rest of our footprint and economic recovery. We're also pleased to report another quarter of superb asset quality metrics after peaking in the fourth quarter of 2016 at 10, 1% our commercial criticized loan ratio improved for the sixth straight quarter to one 7% of <unk>.
Total commercial loans from a high of two 3% in the first quarter of 2018 nonperforming loans are in the ninth straight quarter of improvement and sit at 0.22% of total loans and net charge offs were again only one basis point for the quarter I'm very proud of our team for maintaining diligence throughout.
The pandemic disruption the combination of their very hard work and Derisking, our balance sheet, they've delivered ecu metrics among the best compared to peers, our capital levels remain solid I recognize a TCE of 7.15% as well off our internal target of 8%. However, the primary driver of the decline is.
Related to evaluation of the available for sale portfolio at March 31. This was the primary driver of the 56 basis point decline in our TCE ratio during the quarter and a trend we expect to see repeated across the banking sector due to rapidly rising rates other capital metrics remained solid however, with an estimated tier one race.
Seo of 11.12% up three basis points linked quarter, we opportunistically continued buying back shares during the quarter and repurchased 350000 shares at $52.79 and finally before I turn the call back to Mike I'd like to update you on our strategic decision, we made and announced last month.
Addressing recent trends by others in the industry regarding consumer segment, NSF and O D face on March 25th we published a press release detailing the decision to proactively eliminate consumer NSF and certain O D fees by the end of 2022, we shared an estimate of an annual impact of 10 to <unk>.
$11 million in fee income from that decision. We believe these changes are in line with an evolving retail banking industry as traditional bank suggest products to meet consumer needs and provide them with the tools needed to help manage their overall finances, we expect to see improving consumer account acquisition rates in 2023.
With this change and as we launch additional retail products and features and expand our digital storefront and with that I'll turn the call over to Mike for further comments.
Thanks, John first quarter net income totaled $123 5 million, so down $14 3 million from last quarter, but up over 15% from the same quarter a year ago EPS at $1 40 per share in the first quarter was down 15 cents from last quarter that was up 19.
From the first quarter of last year drivers of the change from last quarter included a higher overall tax rate. The absence of last quarter's storm related insurance gain and finally, a lower negative provision this quarter compared to last quarter a.
A few themes for this quarter included continued loan and earning asset growth. What we believe will prove to be top quartile asset quality and stellar expense control.
The quarter's 385 million core loan growth continues the momentum began several quarters ago around deploying excess liquidity into loans than bonds.
We also grew the bond portfolio of $318 million in keeping with previous guidance around our liquidity deployment plans.
Continued growth in loans, and earning assets going forward along with higher rates will result in higher revenue that will position us to achieve our profitability goals and targets.
Asset quality continues to improve and his reach what we believe to be top quartile levels of commercial criticized N N P. LS, along with effectively zero net charge offs.
We reduced our reserve release this quarter to 23 million compared to 29 million last quarter and you can envision future releases tapering off to near zero in a few quarters. While there is uncertainty in the economic and geopolitical environment. We believe we are well positioned for what that neighboring.
The company's overall operating expenses on a reported basis were down again this quarter to just under $180 million from 183 million last quarter.
Our ongoing efficiency initiatives continue to help us manage overall expense levels and we'll continue to do so we.
We have lowered our expense guidance for the year a bit so now expecting expenses to range between $735 million and 745 million for 2022.
We do expect seasonal drivers such as annual Merit increases will likely drive expenses higher in the second quarter, but we are committed to expense levels that will support our 55% efficiency ratio target and longer term profitability goals.
Rate hikes in 2022, now present, a tailwind to achieving that goal sooner than expected.
So now just a few other comments related to the quarter.
While total deposits were virtually unchanged linked quarter. The bigger story is the shift in mix during the quarter as you can see on slide 12 in our deck at quarter end were split nearly 50 50 between interest bearing deposits in D D as seasonal runoff in public fund deposits in mature.
<unk> and Cds left money sitting in noninterest bearing deposits we.
We expect our deposits will remain at these levels over the near term.
We continued our strategy of deploying excess liquidity into the bond portfolio and added $318 million in the first quarter.
New purchases and Reinvestments totaled $620 million at yields of 2.13%.
The reevaluation of the a F S bond portfolio at March 31st reflected an unrealized pretax loss of 387 million compared to an unrealized gain of $2 2 million at year end 2021 and also negatively impacted our TCE.
As of quarter end, our mix of H T M and E. F. S bonds was 28 and 72% respectively. However, we do have some OCI protection with $1 7 billion of fair value hedges on roughly 1.9 billion FAA F S bonds.
Details and our current hedge positions are noted on slide 29.
Our NIM for the first quarter was 2.81% an increase of one basis point from last quarter net.
Net interest income was virtually unchanged. Despite two fewer business days and P. P. P forgiveness.
Better, earning asset yields and mix as well as lower deposit cost added eight basis points to the NIM. However, the impact of P. P. P runoff and other items offset that widening and compressed the margin seven basis points, leaving us with a net increase of one basis point.
We expect the net interest margin will continue to widen as rates increase and we've added supplemental information in our deck on slide 19. Please.
Please note. This additional information does not include any potential changes in balance sheet composition or deleveraging activities, which could potentially drive additional NIM widening in future quarters.
As you would expect these were down linked quarter as rising rates continued to impact secondary mortgage fees. We expect these will be a challenge moving forward and have lowered our guidance for 2022 to reflect both a rising rate environment and our announcement last month regarding the elimination of NSA.
And certain overdraft fees later this year.
So a solid first quarter and a good start to the year with that I'll turn the call back to John .
Thank you, Mike, let's open the call for questions.
Thank you.
I'd like to ask a question. Please press star followed by one on your telephone keypad. If for any reason you would like to remove that question. Please press star followed by team again to ask a question Press Star one as a reminder, if you are using a speaker phone. Please remember to pick up your handset before asking your question, we will pause briefly ask questions registered.
The first question is from the line of Brett Robinson with Hudson Group. Your line is open.
Hey, good afternoon, everyone.
Hi, Brett.
Wanted to first ask you you've got the slide on the hires this quarter and you tweak the expense guidance down a little but I was curious if you could give us an update on <unk>.
You know its nice to see the hires and you know obviously that'll help your you're alone pipeline over time.
I I assume you have some other plants has indicated that youll continue to grow that in 'twenty. Two how has your expectations changed for hires is how is that.
The fact that your expense growth outlook, you know and then maybe just just color on what your pipeline does look like from a higher perspective.
This is John Thanks for the question and thanks for recognizing that now we've had some good success in the quarter.
That's probably the most number of bankers is added in one quarter.
A goodly number of town like a good long time I think some of the increase that we've seen is coming from outside interest in us versus just recruiting efforts and we would expect that to continue as we get the rest of the year.
Yeah, Brad the other thing I would add to what John just stated is relative.
Relative to the guidance, we gave in a little bit of a change you know it certainly that.
Recognize is I think the great start that we had to the year in terms of our ability to further reduce expenses from the fourth quarter of last year. So you know getting off to a great start in that regard, but again, we're also guiding for folks to expect the the levels of expense to kind of increase as we go through the year.
So we have the normal seasonal things that drive that such as.
Such as raises in the month of April so it will have a full impact of that in the second quarter and then of course. In addition to that you'll have a full quarter's impact and really a full year's impact of the new hires that we added last year.
But we are obviously working hard to achieve that guidance.
And certainly the end result is the 55% efficiency ratio for the end of this year and you'll note that the ER came in at 56%. This quarter. So again, a pretty good start toward getting a goal accomplished.
Yeah.
Okay. Appreciate the color there and then want to make sure I'm clear on the margin you know and and slide 19, I want to make sure that that's a static balance sheet perspective, right I mean, obviously with.
It lowered liquidity continuing you know Pos is a strong possibility it would seem like those those numbers could even be conservative.
In terms of the margin, which brings me to the question about the balance sheet management and if you would expect to continue to have the trends you had in the first quarter in terms of reducing liquidity you know and then obviously your G. D. A is up 2 billion over.
Over the past year, you did make a comment about I'm expecting our had a comment in the press release about expecting that to possibly go back a little bit towards interest bearing maybe you could just give us some color on the balance sheet.
Yeah be glad to so certainly when we look at the size of the balance sheet and think about the guidance that we gave around deposits. We're not really expecting the size of the balance sheet to really increase much from where it is now in fact with the guidance on deposits to be flat to slightly down.
You can certainly look for the size of the company to the kind of mirrored that so really for 2022.
Sufficient efficient and effective way, we think of managing our balance sheet is what we began really in the first quarter and that is the deployment of all of our excess liquidity.
So it's our excess liquidity was down a bit from the fourth quarter to the first quarter.
We haven't changed our guidance around loan growth. So the 6% to 8% and then also we have not changed our guidance with this notion of increasing the size of the bond portfolio on a net basis by about 300 million or so per.
Per quarter through the end of this year. So I think all of those dynamics kind of mixed together.
They were thinking about managing the balance sheet on a go forward basis.
You also asked about slide 19 in the earnings deck.
And we added that slide really just to give folks a little bit of guidance as to what we're expecting or how we're expecting our NIM to react really for every 25 basis points of a rate hikes on a go forward basis. So youre earlier assumption is correct. It really doesn't assume that there are any changes to the <unk>.
Positioning of the balance sheet on a go forward basis. So there's certainly I think an opportunity to kind of outperform that should we continue to be effective in deploying excess liquidity.
Okay, Great appreciate all the color.
Thank you.
Thank you Mr Robinson.
The next question is from Katherine Kathryn Miller with K B W. Your line is open.
Thanks, Good evening everyone.
Hi, Catherine.
Follow up on the margin just to slide 19.
<unk> color you can give us on how you think about deposit betas.
And what your assumptions are.
Yeah, Catherine so the way, we're thinking about our deposit betas. If you go back to slide 14, we are we kind of talk about the historical both loan and deposit betas for the last time, we were in an up rate environment and you'll notice deposit betas were around 25% and that's it.
Total deposits so kind of on a go forward basis. The assumptions that are built into slide 19 around deposit betas are that we generally speaking would mirror that same deposit beta experience that we had the last time rates were up so around 25% on a total deposit basis.
Great.
Blake.
And so that's my way of thinking about the slide 19 as you know we think that there is another I guess six hikes.
Then in total that will get us somewhere between.
21 and 30.
On basis points of NIM expansion with just kind of a static balance sheet, but then as you deploy excess cash in that news.
Call it from 10% today that maybe somewhere around five 6% or something like that then you could see additional expansion on top of that is that a fair kind of summary of what I think Florida I think that's fair Yeah, That's fair and correct and the other thing I would point out on slide 19, as you'll know after we get to a fed funds rate.
About 125 basis points, you see that the expected net impact begins to narrow just a little bit and what were kind of assuming that that point is that the deposit betas will probably kick in a little bit.
And we will begin paying a little bit more for deposits than for the first 125 basis points or so.
Great.
Okay.
And then maybe one last question just on on buybacks. How do you think about how the lower TCE just from the NCI had it made maybe potentially limit share buybacks in the near term. However, your your valuation is attractive level to be buying back shares today. So how do we kind of think about that question.
Paul.
Yeah, So certainly a fair point to make there at 715 is not where we would normally like to operate the company add from a TCE point of view, but to be honest with you. It really doesn't change our thinking around how we manage capital or the priorities around how we go about that so something like the <unk>.
<unk> given the kind of opportunistic way we've been looking at that the last couple of quarters I think in our minds TCE.
TCE at 715 really doesn't change that so I think you can continue to see us or expect to continue to see us to remain opportunistic and I think if you look back over what we've actually done for the last couple of quarters. That's a good guide to use of what we kind of mean by being opportunistic in terms of how many shares we might look to.
It's actually buyback.
Of course, a lot of that depends on the disruption that happens during the quarter and in the market.
And the last two quarters, certainly had I think more than its fair share of disruption. So you saw the number of shares that.
We bought back.
Great very helpful. Thank you so much.
Thank you.
Thank you Ms Mueller.
The next question is from Michael Rose with Raymond James Your line is open.
Hey, good afternoon, everyone. Just wanted to go to slide six.
So it's been good to see the the line utilization creeping up it looks like we're back to third quarter 'twenty levels if.
If you can just give some color on what's what's driving that and then just as kind of a separate question. You did mentioned the central region in the press release was virtually unchanged.
In the quarter, but John if I hear your comments it sounds like everything is open for business or was it just an issue of pay downs because the production levels.
On slide seven so look pretty strong and healthy thanks.
Thanks.
I'll I'll start with the line utilization.
The trends on page six Michael you can see that you lose utilization continue to decline throughout 'twenty.
Really all about the pandemic and the cash inflow from stimulus and the lack of spending and then as we got to the bottom around the early part of 'twenty, one and began to expand and generally speaking that pace of utilization. The slope has been pretty consistent all through the last several quarters, we would expect that to continue as <unk>.
Different clients burn through some of their excess liquidity themselves so novel.
Two to lever as opposed to use cash and so yeah if concern about.
Any economic downturn were to occur more quickly than the utilization may bump up or down a little bit less steadily then it has the last several quarters, but were really based on what we're seeing in economic activity in the south eastern part of the country, which is our footprint, we would anticipate seeing that curve relatively steady.
Steady in terms of slope upward.
Okay, and then in the Central region.
Just any commentary there.
Specifically in New Orleans.
<unk> said in the prepared comments.
<unk> had a little bit more of its fair share.
The downturn in the pandemic due to the impact on the largest events in tourism.
The restrictions there by the local government, where a little bit more arduous and new Orleans than the rest of our footprint and so that also stemming some of the economic growth occurring quickly that all really reversed itself as we get to the latter areas of 'twenty, one and so for the first time last quarter, we got a pretty much a push.
New Orleans and in this quarter enjoying some good expansion. So I really think when I use the <unk> New Orleans has joined the economic recovery. The footprint has been enjoying that that's quite literal in terms of productivity.
So.
We feel as if no one's going to expand now our market presence. There is we have a very sizable market share. So it's not like the growth opportunity on a percentage basis, we would see in Dallas or Houston, or Tampa or any of the markets. We've entered more recently that are high growth.
Just the magnitude of the book there the disruption around it.
We would expect now to be more of a growth story. This year, because we've had in some time.
Okay helpful. And then maybe just one follow up question for me on Slide 20, you talk about moving to.
So that mid fifties efficiency target by the end of by the end of the year can you remind us of the puts and takes.
You know what.
Could I assume rates.
Higher rates would obviously gets you there they're faster but.
Side of maybe mortgage you know what are some of the.
The potential headwinds that you see.
That could prevent you from getting there. Thanks.
Probably the.
Hi, Michael This is Mike so probably the biggest headwind I can think of really two I guess.
And one would be that our performance in terms of fees for the next couple of quarters.
Ends up being a lot worse than the guidance that we've given we're not expecting that to happen but.
That's certainly an area that could be impacted.
The other item would be I think that you know.
Maybe the assumptions that were nation, making around inflation.
Wage costs.
It certainly could again be a little bit higher than what we were expecting on a go forward basis.
Now granted we're not expecting either of those things to really you know.
Getting away or present any kind of significant challenge.
But you asked about the headwinds and those are the two that I can think of.
Okay. Thanks for taking my questions.
Thank you Mark.
Thank you Mr Rose.
The next question is from Casey Haire with Jefferies. Your line is open.
Thanks, Good afternoon, everyone.
Question on the fee.
The fee guide.
So down 1% to 3% that that would imply from this run rate 83.4.
By my math that looks like you would need to get that fee run rate back to at least $86 million plus and the remaining three quarters I'm. Just curious what are the what are the drivers to get you there.
I think the Casey. This is Mike I think the biggest thing that can get us from where we are now to that level is this notion of specialty income. So that includes a whole bunch of fee income categories things like boldly derivative fees unused line fees.
Things of that feature and that particular fee income category can be pretty volatile quarter to quarter.
The first quarter, I think was a bit low compared to our normal run rate and what we consider specialty fees. So in my mind, that's probably the way we get there.
Okay. So this is John .
I'm, sorry, I stepped on you.
The only thing I would add.
The only thing I would add to mikes comment is our.
Our treasury area and merchant area has had.
Some pretty robust new sales activity over the past several quarters that looks as if it'll continue to to upwardly trend and so that business card merchant income growth.
It's typically going to be a little different in Q1 of the year than the rest of the year and we would expect to finish the year at a pretty good high clip compared to the past.
The other area is inside the wealth management area.
For Q1, the market really getting performed terribly well for a goodly part of the quarter that hasn't asked a pretty profound impact on our U M Phase and then rebounded in March and so for the second quarter threw out unless the market falters pretty significantly we would expect a little better performance out of wealth given the performance.
So the market has improved from.
In the first of the year.
Okay very good.
On the on the cash position.
You guys pulled forward I mean, you guys were targeting $1 billion of deployment in the Securities book. This this year you pulled forward a nice bid in the first quarter here is there I'm assuming that was because of the rate backdrop is there an opportunity or an appetite rather too.
To accelerate the sort of <unk>.
Ointment.
You did in the first quarter.
Has it now Casey I would tell you the answer to that is no but that's a decision you know that we monitor very closely and certainly we could decide in coming quarters to accelerate that a little bit, especially if the go to yields for new but new bonds remain.
At the levels that it is now so that's certainly a possibility although right now as of today, we have no plans to accelerate.
Yes, I think in loan growth, obviously is a material part.
That quarter in quarter out decision.
Q1, typically and seasonally is a very low growth quarter for us in loans, but Q1 outperformed pretty well and that's on top of the pay downs that leaked from fourth quarter to first quarter that I mentioned on this call.
Three months ago. So we were quite pleased with the growth worth level in Q1, and it certainly supports the high end of our guidance that we've given for loan growth. So.
So the higher that number ends up being through the year then the less pressure, we really have to deploy liquidity through securities, but as Mike said, we really have to make that decision quarter by quarter. I don't think we would be we wouldn't object to either one just depending on on the algebra of where where the outlook looks on loans.
Okay.
Got it thank you.
Thank you.
Okay.
Thank you Mr. Harry.
The next question is from Jennifer Denver will choose your line is open.
Thanks, Good afternoon.
The the asset quality improvement really has been pretty impressive over the last several quarters as rates rise, but areas of the loan portfolio do you think would be the most vulnerable and what do you think of kind of normalized.
Levels of net charge offs for this company.
Yes his question Luca.
Yes, I mean I guess.
Any any of our loans that are not.
They are floating rate.
Probably a little bit more at risk to some degree, but a lot of our customers swap out.
So that tends to protect them on the upside.
So I would guess no in general commercial real estate could be impacted a little bit depending on whether or not.
It translates into any further any cap rate compression or <unk> or the like.
But we don't currently anticipate that we obviously stress that in our underwriting quite substantially so we feel that our portfolio can withstand a reasonable amount of rate increase in that regard.
And then as it relates to normalized charge offs, and obviously were at essentially zero right now and we don't really see anything in the immediate future.
Yes.
A substantial increase of return to historic levels.
On average.
So I wouldn't want to speculate where where that might end up but I do believe that it'll.
It'll be on a run rate basis, probably less than we've experienced in the past if you take out some of the lumpy situations that gave rise to some of the higher charge offs.
Thanks, so much.
Youre welcome. Thank you Timna.
The next question is from the line of Kevin Fitzsimmons with D. A Davidson your line is open.
Good evening, Thanks for fitting me in here at the end.
Just one quick question on the.
The guidance on the <unk>.
Provisioning so with the language now being about tapering off the next few quarters previously it was a modest reserve releases expected over the next several quarters and Mike I think you kind of characterized that as modest being kind of similar to what you guys had done so it was that.
I think it's.
Very reasonable given the uncertainty that's out there that that.
It might have changed that.
Or maybe it will step down.
What we were going to do in terms of reserve, releasing but I just wanted to I just.
Wanted to make sure I was interpreting that correctly getting in between the wording and what you were trying to say there.
Yeah, Kevin I think you kind of articulated that exactly the way we meant it so.
Really this this process of this notion of tapering down our reserve releases really kind of began in the first quarter. So we're down.
$23 million or so reserve release from about $28 million or so last quarter. So we've already kind of begun that process.
And in the guidance, we kind of talked about you know this tapering too to continue maybe for a quarter or two so without providing any hard guidance concerning envision.
You know that we could have another quarter or two where we have reserve levels of reserve release levels that step down and eventually in a couple of quarters be pretty much at zero in terms of reserve releases.
So that's how we kind of think about it and what we kind of envision happening.
Obviously, that's very dependent on a lot of things that Chris just kind of talked about.
Our levels of charge offs and certainly.
The levels of commercial criticized and Npls are at great levels now and certainly if that continues then.
And then the.
Reserve levels will kind of follow.
Really the biggest wildcard out there is you know things like you know.
Kind of geopolitical events and implications and what happens with the macro economy, along with the forecast for that on a go forward basis. So.
Certainly a lot of uncertainty out there in terms of the impacts from those kinds of things.
Most of which we really can't control, but what we can control is the things like our own asset quality and that's what we're focused on.
And the pace of loan growth could affect that as well Roger you got a gap with Moody's scenarios, turning a little bit darker this quarter versus others.
<unk> that occurred this quarter was really a math exercise.
A key levels were truly stellar and so it really had nothing to do with.
It was all around the Moody's scenarios and then also thankfully.
Our second quarter of net loan growth above the PPP forgiveness.
We've got a deck page in there.
Around PPP forgiveness impact on page eight and you can see the trend where the amount of headwind we're suffering from PPP declined precipitously from <unk> to our first quarter and then it declines to getting pretty close to immaterial next quarter, that's really because of the contra to growth as people.
Forgiveness is going down and while we have relatively low amounts of reserve for PPP.
It still has been a contra to growth overall, so without those contracts in there and then there's the indirect amortization runs off net loan growth probably goes up all things being held equal from <unk> in first few forward.
So built into that guidance on provision is really the expectation that we're reserving for a little bit larger loan book.
The economy interrupts that guidance may change.
That makes sense Kevin.
Yeah, no perfectly thank you.
You bet. Thank you. Thank you Mr Fitzsimmons.
The next question is from Brad Milsap with Piper Sandler Your line is open.
Okay.
Hey, good afternoon.
Hey, there.
John in your prepared remarks, you talked about you know products that the bank, maybe developing maybe offset some of the loss.
Staffed and overdraft revenue in 2023 do you think that you'll have enough in place you know maybe by the end of this year to fully offset the lost revenue or do you think it's going to be.
Something that we kind of see gradually replaced over time.
It's a great question, it's a fair question and I hate to say, it's too early to tell but it really is a little early.
The account acquisition activity I mentioned in prepared remarks really comes from a couple of sources one of those would be new products.
Another is the growth of our digital channel, we really have underperformed in terms of digital sales, it's a lower percentage of our total new accounts than many of our peers and the reason for that is we spent a fair amount of time and money for a couple of years getting all of the infrastructure of the company whether it was <unk>.
Financial systems people systems.
Core technology sales technology, and all of that built out and and intended to have the digital channels ride those same rail. So it was more efficient and then as we kept you technology developing we could do it for a lesser cost per change then we would have if we were trying to support the old legacy systems and the new stuff and so I think we've made.
The right call, but ultimately it meant we rolled out fewer activities on the digital side when it comes to sales. So as we get closer to the end of the year and all of the new digital Tech for sales roles out all the automatic underwriting.
Screening and whatnot occurs then I believe we will see happen as a natural lift because our growth in digital sales, given where we're coming from will be a little bit steeper.
Hope to have a good and some of our peers and so.
So part of the basis is the products part of the basis as expected growth in the digital channel.
Pretty much ignoring the potential growth in new markets, there because our play in new markets for high growth has been predominantly business purpose clients for now that.
That will change as those investments turn profitable and begin to scale up and then well maybe add financial centers to improve the <unk>.
Retail penetration in some of those growth markets in 'twenty three 'twenty four.
Does that help.
Yes, Thanks, John and maybe just two.
Follow up for Mike on the funding side of the balance sheet, but Mike I noticed that the cost of public funds were down about 10 basis points linked quarter.
Can you talk about maybe the driver there and then I think historically those deposits have been fairly rate sensitive, but also I know subject to longer term contracts can you talk about how those will react as rates rise and then second question is I think you can.
That's up about 1 billion won in borrowings that are portable back to you by the FHA Ob at their option do you need to think about earmarking some of the cash.
That you have on the balance sheet to sort of absorb those if in fact they.
If in fact, they do you put those back to you.
Sure I'd be glad to overhead so the first question about about public funds.
It's a great question, so part of the way that we've been able to reduce the total cost of of that line of business around funding costs.
Is it really contracts that have have expired and basically new pricing in place based on the current rate environment. So how those deposits react on a go forward basis to the extent that they are variable and obviously they'll float back up to some extent to the extent that there on the fixed side then.
Some of that cost has kind of been locked in so it really just kind of depends on the individual deposit tour and the contract that's in place for them.
As far as our home loan borrowings that's another good question.
Yeah, we have that $1 1 billion.
Borrowings it has been in place for quite some time, we are paying around 50 basis points for that.
That could be called really as soon as the current quarter, we will see.
Kind of depends at the home loan bank.
If they have that hedged essentially how they have that edge.
But certainly I think it'll be an advantage to us certainly if we can if we can get that called and get that cost off the balance sheet.
We are although we have kind of earmarked that billion one as a potential use of the excess liquidity. We currently have on the balance sheet. So.
So if it does happen obviously, we have.
Liquidity to fund net outflows.
Thanks, Mike I really appreciate it.
You bet.
Thank you Ms Jo Mill Sats.
The next question is from Matt Olney with Stephens. Your line is open.
Yeah, Yeah, thanks for taking the question.
Just remind me the timing of when you expect the changes on the NSF OD products when when should we expect.
See the impacts of that.
Thanks for the question.
It's what we put in the guidance was or the press release was before the end of the year.
<unk>.
I mean, there's operating exercise we have to go through to build out the testing the disclosures and all that so theres a little bit of that in the fourth quarter with the assumption that will be Gannett and <unk> and that's cooked into the fee guidance that Mike gave a little earlier to the extent, we get it done earlier in the quarter it could be more.
The extended lag might be a little lighter on so the 10 to 11 million we gave for the expectation.
2023.
It's a pretty simple interpolation down to the monthly run rate that's pretty reasonable in that for every month like a short month in February our love and month like July the numbers fluctuate, but if you just take an average for December that would be a pretty good measure to use so while we again, we don't expect necessarily that December one.
We get too far into the extent, we never really put any significant co changes and as we get into the holiday season. So if we don't get it done before the first of December it'll likely be effective.
January FERC control.
Okay.
Okay. That's helpful.
And then on slide 27.
Several of the new hires that you've disclosed more recently I think last year and then and then this year had been.
And throughout the markets in Texas, just remind us what is the strategy of the bank and the Texas market I assume it's.
Branch light commercial lending focus, but haven't heard any discussion recently thanks.
Sure glad glad to share that.
And I'll be brief on some of the history, but a few years ago. We noted that we had.
Through a lot of good transactions good acquisitions, good organic growth, we had quite a high concentration really right along the Gulf of Mexico. So from an investor point of view, sometimes when we had a stormy hurricane season, we would get a little pressure from people concerned about that.
The resiliency of the of the marketplace, we usually see a net positive impact from storms, but certainly that can be disruptive, particularly in a bad storm season, and so purely to decrease our risk footprint and also we thought the stabilized value creation for investors, we opted to begin expanding.
Landing in the markets in Texas for really two reasons, one to spread our risk and then secondly, because the growth rate in several of the Texas markets that we have a profoundly interested in is a good bit higher on the GDP annual run rate basis of growth in the markets. We're already in and so it was really both from a growth perspective, and then from.
On a de risking perspective that was all done deal and in the plans before the pandemic occurred certainly that got accelerated by the pandemic as we built so much success liquidity and so our entry into several several markets in Texas and.
The pace with which we're adding bankers as.
Has as much to do with the recent pandemic buildup of liquidity and the desire to deploy it correctly.
As it is to derisk into.
To get into other markets. Besides the ones we were in so youre.
Youre correct in its branch light initially, it's more business or commercial focused.
Quickly chase that with a treasury offering because we're really good at treasury.
So we do an awful lot of Treasury services sales and card deployment for business purposes like purchasing card.
Right after that of wealth management play all of which we tackle with CRA in mind to ensure that we don't run afoul of our corporate commitments to the community Reinvestment Act and to underserved communities and those more urban markets and so we really don't do a lot of branching outside CRA service.
<unk> until we get a little bit more of a material book, So where is that.
In Houston, we would expect to see branching coming a little quicker.
Followed by Dallas, and then finally Austin San Antonio.
It would be a couple of years out before we develop a lot of facilities that are more retail oriented. So you really wouldn't look to see a big expense load increase beyond people.
In Texas for the next couple three years, unless we're very successful at building a book faster than we anticipate so far that plan has worked beautifully.
And it has a good bit to do with the fact that our efficiency ratio targets.
<unk> done pretty well, so far compared to our expected timeline.
Okay.
Okay. That's all great color I appreciate that thanks.
Thanks, again and nice quarter.
Thank you very much I appreciate the question.
Thank you Mr Omi.
The next question is from Christopher <unk> with JMS. Your line is open hey.
Good afternoon, Mike and John just a quick one for you back on this <unk> issue.
Can you pinpoint secure.
Securities that are likely to get called in future quarters or that you just expect would get paid off and therefore, you kind of have that recognition back.
The unrealized loss.
Yes, Chris Good question I don't have a number for you, but I can tell you that there's not an expectation of a lot of bonds being called <unk>.
We continue to have Paydowns and maturities.
With rates higher now certainly would expect the pay downs too to slow a bit at least relative to prior quarters.
But there is some natural shift back in your favor because again I don't think fee of US I think few of us have any.
Credit concerns on these losses, it's more just about when you get that back in value.
No absolutely I mean the.
The structure of our bond portfolio again is.
Almost all mortgage backed security residential and commercial so we really take no credit risk to speak of in the bond portfolio in that regard.
Great and then just one more quick one back on slide seven I know you talked earlier in the call about the modest improvement in the new loan yield.
Should that change a lot if the fed funds rate is materially higher one or two quarters ahead.
Well, if you look back on the nature of our production and I'll use first quarter as an example.
A little bit more than half so call it about 56% or so of that production was up was floating rate.
The remaining fixed rate so in a higher rate environment with the fed hike.
Hiking rates anywhere from 50 to maybe even some talk at <unk> 75 in May.
Certainly we would expect that the yield on new loans two to rise accordingly.
It sounds great just wanted to confirm that thank you very much for all the time and disclosure today.
You bet. Thank you Youre welcome.
Thank you Mr. Mary Mack.
There are no additional questions waiting at this time I will now turn the conference over to John Harrison for any closing remarks.
Thanks, Denise for running the call and thanks to everyone for your interest we certainly wish you a safe and happy quarter. We look forward to seeing many of you next time, we're together.
Thank you to everyone for your interest in Hancock Whitney have a terrific evening.
Yeah.
Okay.
Right.
Yes.
Okay.