Q4 2022 Hancock Whitney Corp Earnings Call
In the low fifties, we view 2022 is a very successful year.
We see another year of potential macro environment changes coming in 2023, and expect the bulk of investor interest to be more about the future as such and as promised we have updated our three year corporate strategic objectives or CSO and we provide 2023 guidance on slide 18, our guidance for 'twenty, three shouldnt be a surprise or a trend.
Much different from what you may hear from others in our industry loan growth in the low to mid single digits reflects the recognition of a likely slowdown in the economy and we are mindful of managing risk in such an environment. We expect continued hurdles with funding loan growth with deposits and are guiding to an environment, where core deposit growth will be available, but perhaps a little.
Bit more rate sensitive our intense focus will be on core relationship lending with accompanying deposit relationships, which create meaningful value in our balance sheet through the cycle. This focus will have the impact of a slowing loan growth in 'twenty, three but a better chance of funding lending with deposits. We fell short of that goal in Q4 as loans outperform.
And the timing of seasonal deposit inflows and outflows was different than we expected. We said for the last couple of years that line utilization would begin returning to pre pandemic normal at the same time excess commercial deposits are spent and that trend was evident in the last several quarters, including Q4, but with that said, we intend to grow deposit.
So 23 in the low single digits with a downside case flat, while we use cash flow from the bond portfolio to fund any shortfall in deposits to the extent deposits outperform we will adjust to reinvesting in bonds are deploying into loans dependent upon the environment at the time the rate environment, while beneficial to net interest income.
Negatively impacted fee income with secondary mortgage being the hardest hit with trending strong performance in wealth and card fees, though we believe we can grow total noninterest income, 3% to 4% in 2023, including in covering the replacement of 10% to $11 million of lost income from the elimination of certain NSE.
<unk> beginning in December of 2022 inflation pressure pension expense and notable increases in FDIC assessments are a few of the drivers guiding to a 6% to 7% increase in 'twenty three noninterest expense backing out the pension and FDIC increases, we projected 4% to 5% inquiry.
<unk> compared to 22, our efforts over the past three years in reducing expenses have put us in a position to better adjust to these increases and still maintain an efficiency ratio in the very low fifties and finally as it relates to guidance. We believe todays results for both the quarter and the year reflect a company positioned well for today's economic environment.
Credit metrics are at historically low levels initiatives executed in 'twenty to 'twenty, two helped drive an efficiency ratio below 50% in the fourth quarter, new bankers hired over the past 18 months should help attract and enhance relationships and growth markets. We've proven our ability to proactively manage expenses and are introducing technology.
Focused on scalability and effectiveness capital remains solid our reserve is solid and our balance sheet is de risked and positioned well so with those comments I'll turn the call over to Mike for further comments.
Thanks, John and good afternoon, everyone. We ended 2022 with fourth quarter EPS of $1 65 up 10 linked quarter net income of $144 million was up $8 4 million for the third quarter <unk> was up $10 3 million and finally, our efficiency ratio came in below 50.
Percent at $49 eight 1% certainly a nice way to end a very solid 2022.
Loan growth came in stronger than expected during the quarter at $528 5 million are up 9% annualized from last quarter.
Line utilization continues improving and is trending back to pre pandemic levels, while our residential onetime close product drove a sizeable increase in mortgage loans.
Deposit growth for the company came in lighter than expected at $119 million or 2% annualized from last quarter.
Typical seasonality in public funds contributed $494 million, while time deposits were up $493 million due to a CD promotion during the quarter.
DDA and interest bearing transaction deposits were down $692 million and $176 million respectively.
We recognize that deposit growth will be a challenge in 2023 for both our company as well as the industry.
<unk> clients are deploying excess liquidity into working capital, while consumers are becoming more rate sensitive.
You can see on slides 13, and 14 in the earnings deck that while we were successful in holding deposit beta is relatively low but most of this year. We did see a pivot up in our deposit beta to around 21% in the fourth quarter.
Excluding the seasonal increase in public funds that deposit data was closer to 14%.
We still believe that when the current rate cycle is done that our cumulative total deposit data should be no worse than around 25%. So about the same as the last up cycle.
Our fourth quarter NIM at 368% was up 14 basis points linked quarter.
That level of widening is impressive on its own admittedly it did not move up as much as we expected coming into the quarter.
The yield on new loans jumped 134 basis points to six 7% in the bond portfolio increased 12 basis points, adding 51 basis points to our earning asset yield compared to last quarter.
Funding costs were higher this quarter as expected, mostly due to promotional pricing on a successful CD offering.
That did result in higher deposit cost and a shift in our funding mix.
We still believe our NIM has room to expand with future rate hikes, but it will be small and very dependent on the level mix and cost of deposits.
Concluding my comments with credit or metrics trended to historically low levels in 2022 and remained there negative provisions ended as future seasonal scenarios call for potential slowdown impossible recessionary environment.
Our provisioning has been modest and charge offs remain low and we believe we are positioned well within ACL of 148 basis points. So while that ratio declined by two basis points linked quarter. We actually added one 5 million to the reserve at year end with that I'll turn the call back to John .
Thank you Mike Okay, let's open the call for questions.
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The first question comes from the line of Brad <unk> with Piper Sandler. Please proceed.
Yeah.
Hey, good afternoon.
Good afternoon, Brad.
I.
Right all of the guidance in the slide deck.
You want to.
And maybe the fee income guidance first.
We see a lot of moving parts this quarter.
The specialty items, maybe lower than they have been.
You've got that you've got the headwind with the NSF fees of about $10 million to $11 million is really the swing factor some of those specialty items coming back or John are there other other.
[noise] segments or endeavors that you have out there that you feel like are going to be able to kind of push that number up.
Up higher towards your guidance.
Yes. Good question, Brad This is John I'll start off Michael.
Welcome to.
You gave a quick inventory of exactly the right things to point to.
<unk> income, we forecasted I think we talked about that might be three or four quarters ago that would be a $10 million to $11 million annualized yet that started in December of 'twenty. Two so first quarter 'twenty three will bear the full brunt of that run rate, but as balances.
Consumer and business accounts continue.
<unk> got a pre pandemic level, we anticipate the overall service charges from the deposit book and deposit accounts.
Keep going up throughout the year, we also.
Anticipating a very strong performance from our wealth management groups FERC fourth quarter was very promising as we anticipated and we think we'll go into 2023 of an awful lot of momentum and then finally, all things card related I'll continue to outperform and we expect that to also be up.
Very good performance for the year. So all in all the 3% to 4% guidance is inclusive of covering.
The downside from NSF.
Fee changes when you mentioned the other income bucket and Theres, a lot of cats and dogs in that bucket.
The fourth quarter it was unusual and virtually every one of those categories was.
Was that a lower run rate level or lower level than we typically experience in the run rate we.
And we do expect that to bounce back to something more closely to overall 2022 performance for maybe a little bit better. So all of those factors roll into the 3% to 4% guide for the year.
The only area that we're not counting on Brad is secondary fee income for mortgage it does appear after about 54% reduction in deal flow quarter for 'twenty, one to quarter for 'twenty two.
We think we're at or pretty near the bottom.
On that particular fee income source, while we're not counting on any benefit through 'twenty three any beneficial movement.
And 30 year rates, what obviously.
An unexpected benefit so we don't have that expected at all of the numbers, but that would be a little bit more of an upside or tailwind does that answer your question. Okay.
Yes, John that's very helpful and maybe as a follow up to Mike as it relates to the Dsos I see that.
Sort of a framework that's kind of your assumptions around fed funds for the next three years I know when rates are moving up you. Initially you were looking for four to six basis points of NIM expansion with each.
25 basis point increase would there be a similar level of contraction.
On the way to out if and when we get there or I know, it's probably a tough question given all the moving parts, but just curious kind of how to think about I can't believe we're talking about rate cuts already but just.
How should we think about that as it relates to net.
Yes, I'll be glad to Brad and just to kind of close the loop on the fee income question. John is right I mean, I can't think of a quarter in a long long time, where we've kind of had every single component of specialty income kind of down quarter over quarter. So boldly.
<unk> were both down almost $2 million each in EBIT.
<unk> income was also down.
A little bit north of $1 billion. So I think it would be unlikely that we would have another quarter another consecutive quarter, where we would have those categories. All down again. So we do look for that area to kind of rebound in 2023 as.
As far as our CSO is.
So yes, the CSO side are there again as a reminder.
Those are our goals our targets really three years down the road. So we kind of think about those in the context of fourth quarter of 'twenty five and we've tried to be thoughtful in terms of what we think could happen with the rate environment going forward.
Nobody has a crystal ball and certainly we don't have one but this is I think certainly a plausible forecast around rates.
And we'll go from there.
It related to your NIM question.
Yes that is a tough question, but certainly has.
Rates begin to come down it becomes harder obviously for us to maintain our NIM at a stable level because we are so asset sensitive, but we've done a lot of work in the last year or so last two years really in terms of extending the duration of our assets.
And I do think on the way down.
We'll probably do better.
This great cycled down whenever it happens then property in past rate cycles, and really the reason for that again is the work we've done to extend the duration of our assets. So we will see once we get to that environment.
Great. Thank you guys I'll hop back in queue.
Thanks, Brad.
Thank you.
The next question comes from the line of Kevin Fitzsimmons with D. A Davidson. Please proceed.
Hey, good evening everyone.
Good evening.
Hey, Mike I think I heard you earlier.
And forgive me if I'm wrong on this but I think you said that the margin it expanded but not as much.
As you would've expected so.
I'm just curious what.
If that is true what what was that driver because I know as you outlined funding cost did go higher but you guys expected that are new.
Probably had built in the CD promotion or maybe you did and maybe that's why it was not as much as expected if you could just.
Go through that.
Yes, Thank you Kevin.
I think if you go back and look at our guidance coming out of the third quarter. It probably would have pointed to a NIM, maybe about five basis points or so higher than where we came in and look we're pleased with where we came in at $3 68 at certainly.
Still impressive on its own.
Could move our NIM by 14 basis points in one quarter not as impressive as the prior quarter at 50 50 basis points, but still <unk>.
<unk> is a nice increase I think the main reasons really why it probably didn't move up as much as we had thought coming into the quarter.
It really was more around the lawsuit.
That we experienced in DDA balances, so we were down about $700 million.
Between the end of last quarter, and this quarter and on our balance sheet. Those deposits that was pretty deposits are extremely impactful. So I think that plus the.
The 4% nine months CD as well as a need to kind of pivot up probably a little bit higher than we expected and our overall deposit costs.
Those factors combined really contributed to the NIM that coming in maybe as quite as high as we thought it would coming into the quarter.
Okay.
That's great.
Yes.
And I appreciate the.
The guide on your outlook for deposit growth and the fact that.
Bond portfolio can.
Supplement that.
But.
Based on what you see now like on the one hand, the balance sheet is still very liquid and with the loan to deposit ratio down at like 80% or a little below actually.
When you when you think about.
Allowing.
That loan to deposit ratio to move higher so in other words, maybe youll go after deposits maybe you want.
Versus our strategy of getting out in front of it like some some banks have.
Thank.
<unk> taken a hit to the margin in the short term because they are kind of front loading.
That deposit beta and effect, where we were maybe that's not the situation you guys were in because of the liquidity.
Can you speak to those moving parts in terms of how you view that loan to deposit ratio.
Weather.
You expect to grow deposits each quarter or if it if it doesn't make sense you won't necessarily.
Yes, I'll start Kevin and our pivotal to John after let him talk a little bit about our strategy to grow DDA deposits from core customers, but certainly the way we're looking at 2023.
It is really to be in a position where between the runoff from the bond portfolio that we'll use to fund loan growth.
Between that and any difference really coming from deposit growth that would really be.
The most optimum way that we'd like to manage the balance sheet from a loan deposit perspective.
And I think that.
We are certainly doing some proactive things to ensure that we kind of get a jump on that we talked about the nine month CD at 4% that we did last quarter.
And even right now we have a four 5% nine months CD that we think will will be very helpful. In terms of adding some liquidity to the balance sheet.
Were not really willing to give up a lot of NIM on the front and certainly not a significant amount of it.
Two to kind of warehouse liquidity, but we do think that what we're doing is a good mix between some proactive actions and then certainly some ability to maintain a little bit higher NIM going forward. So hopefully that makes sense.
Jonathan you want to talk a little bit about DDA.
Sure.
A couple of points to add Kevin to your prior question about.
<unk> now.
For some time.
Kind of given guidance to expect ASP.
Commercial line utilization numbers begin to go back up towards pre pandemic levels, which we still got a long way to go to get to that number.
As that happens and typically in other rate cycles, you see some of the <unk>.
Free money from those same relationships bleed off just as people spend it.
There is some disintermediation of free money <unk>, but the primary.
Linkage in that pocket is not account loss, that's really just people spending money, which is not necessarily bad.
Thing.
For the economy, but but.
The line utilization I think it was up 106 basis points for the quarter is one of the larger ones for the past three or four quarters.
And while fourth quarter typically has a bit of.
It was a it was a pretty handsome so some of the runoff really just companies the same type of behavior.
And oversight decisions made by commercial clients as they look at their own balance sheets, so with free money out and 100% variable money getting.
Getting charged up this part of the line utilization increase.
Spread on that is not going to be quite as attractive as it is we still have that free money sitting on the books. So that just one additional point for you to partner in.
In terms of our going forward strategy.
Almost no digital capacity to gather deposit accounts suggest a year ago.
A lot of the tech uplift as occurred in the past 12 months.
Draws to completion, we would anticipate gathering more client accounts digitally.
Secondly, the Treasury services area.
Compete extremely well with both our our size and very large organizations and we continue to add Treasury service in treasury sales professionals to that team added one yesterday in fact are focused purely on.
On a payment cards and so as a as a result, I would expect to see more operating accounts come in.
In the areas of our franchise that experienced disruption as integrations occur.
I think we'll be pretty busy trying to move folks into the book that actually help us with some of the offset to the outflow.
One item that it may be too far in the weeds four for this call.
But our incentive plans are engineered to be quite flexible.
And obviously one year ago deployment of liquidity was it was very important in today's gathering liquidity is obviously very important and so we will see fairly significant.
Shift or already have shifted to two deposit campaigns driving our compensation for our bankers, which I am sure a robot will yield very good results usually does so the capacity of the company to gather deposits and loans.
Is greater than the guidance that we're giving but it's primarily driven guidance is driven around the expectation that the quality of whats in the book is going to be more valuable overall and just sheer growth.
So our focus for 2003 and may be for 'twenty, four we will see how the economic outlook looks at the time. It was really on stability and earnings with good credit outcomes very effective and efficient sales staff.
Maintaining very strong profitability.
Compared to peer as we go through the cycle and the CSO is somewhat overlay at the same time period for what people think the recessive periods.
And so that's pretty much where we would expect to earn as we get through that period that may have been more than you asked for but I wanted to make sure we completely.
Paul.
Yes very helpful. John .
Quick follow up to what Brad had asked about before that.
The impact to the margin when rates start going down, but you guided in here on the margin.
The margin peaks when the fed is done or after the fed is done, but if we don't have a pivot right away to cutting rates. When we're just stable like that.
Can you when would you expect to be able to keep the margin stable or is it more likely that we have some grinding.
Lower just just.
Given the lack of funding costs going higher.
Yes, Kevin This is Mike again, certainly our intention and the way we look at managing the balance sheet and the company would be in that environment to maintain a stable NIM now.
Now stable NIM could mean that we could have a quarter where.
It could be up a basis point or two or down a basis point or two and so other than things like loan growth than what we were able to do in terms of expanding customer relationships, probably the biggest determinant of really what happens when the fed stops is what happens to our deposit balances named.
DDA and so again you can appreciate the focus that we have on that component of our customer relationships and a desire to continue to build on that.
Okay, David Thank you very much.
Okay, I'll stop will probably pick up another question on that topic a little later.
Thank you. Thank you.
Thank you.
The next question comes from the line of Jennifer timber.
Securities. Please proceed.
Okay.
Good afternoon everybody.
Hi, Jennifer.
Just curious.
Two.
You made some comments in your forward guidance on on loan loss reserve.
Provisioning in net charge offs I'm wondering.
Don.
How youre feeling about the loan portfolio right now.
What pocket you feel are most vulnerable in a higher rate environment.
And some companies have pointed out they are worried about office.
Down the road I'm curious how you guys would characterize your office exposure at this point.
Thanks, Great question, Jennifer I'm going to let Chris take the first whack at that one that I'll follow up.
Yes, hi.
So as it relates to kind of segments of the portfolio that might be more vulnerable and your comment about office.
Obviously.
Those customers that are probably in a floating rate environment and are maybe a little bit more levered.
Things that we've been looking at and we stress test test.
Those loans in our portfolio and feel confident that.
They can they can largely withstand.
The current environment and maybe.
The rate rises that are anticipated.
In early 2023.
So, but we continue to watch that.
And.
And think about the <unk>.
Out there as well as obviously those customers that are impacted by some of the rising costs that are being incurred.
The ones that are more labor intensive.
Labor cost going up.
Just really keep your eye on.
On that.
But no specific.
He is our concerns.
In that regard.
Then as it relates to kind of our office portfolio I think one of the things that we've been stressing for a long time now even before I got here almost.
Five years ago is that.
We've been shifting we've been shifting our focus away from traditional office to more medical office, which I think has.
<unk> helped us a lot and.
A lot of our office.
<unk> tends to be kind of mid rise type office not necessarily the high rise type.
Buildings that rely upon large tenants to take large amounts of space.
What are the recounting risks.
Not to say that there may be some risks in office in general, but we feel fairly confident that in the markets that we operate in as well as the type of office that we've done.
And more focus around medical office.
Probably less worried than some would be.
Thanks, so much.
Thank you.
Thank you.
The next question comes from the line of Greg Robinson with Hovde Group.
You May proceed.
Hey, good afternoon, everyone.
Hey, Brett how are you.
Great. Thanks wanted to ask about the expense guide, 6% to seven 4% to 5% excluding.
The FDIC and pension.
Look at the past two years and <unk> been able to manage expenses flat and I noticed you took out slide 28 that showed the hires.
Can you maybe walk through and give us some color on what things you're going to have higher expenses on in the coming year, maybe any initiatives that might be taking place that might also benefit the longer term profitability of the company.
Yes, Brett this is Mike.
Yes, Ken.
Guide, we gave the guide two ways, one was obviously, including the higher pension and FDIC expense and look those amounts aren't insignificant for pension.
That's an 18.
$18 million difference I'm, sorry, an $11 million difference in an FDIC, it's about $5 $5 million difference. So those are significant items that really kind of add to the expense base.
We take a step back and kind of back those out.
Looking at expenses up 4% to 5% and again this is after a year, where we're actually down 1% between one and two in 'twenty one.
I think the biggest driver is going to be personnel expenses and just the normal raises that we'll be looking at for 2003, those those will be around 4% or so aside from that.
The biggest drivers will be some technology investments that we continue to make.
Continuing to invest in the company in that regard.
We have some new hires planned for next year.
Probably not as many new bankers in 'twenty three things.
Things equal compared to 22, but I think overall.
We'll continue to be opportunistic in terms of how we look at those kinds of opportunities. So overall I think when we look at expenses in 'twenty three.
It really kind of represents a little bit of a normalization.
What we think our expense base probably is on a go forward basis, excluding kind of the extraordinary increases in pension and FDIC.
Okay.
It's really helpful. Mike.
I'm sorry go ahead.
You go ahead, that's okay. Okay second question lets take that.
Yes.
I didn't mean to cut you off there.
That's okay.
What I was going to add to it was just when you look at the two largest ones, which are pension and <unk>. Obviously, you don't you don't get the FDIC expense back right on the pension side.
There is a likelihood that as the market may change a little bit this year or next year to some degree those changes swap back the other way. So it's painful lab all that for this year, but its just went back and be a much more positive, but it will swing back and be more positive contributor.
At some point next year over year after that.
The other point to add you mentioned, the new investments I mean Mike's right.
<unk> been investing a lot of money in technology.
And it's really not like catch up technology core systems are all forward looking technical upgrades that help us be more effective more scalable help.
Help our bankers to be faster and turnaround business in a lot of that deployment is continuing to occur.
As we wrap up last year and it should be principally done.
Early this year and then that actually create some efficiencies that can benefit on the expense side as we get towards the end of the year. So.
I don't want to call it a bubble but.
There is.
Pension overlay to it kind of larger number up somewhat artificially.
And the remainder of it are really investments in our future in terms of the banker ads.
Right now the numbers 10 to 20 or so in the plan.
Big difference is the types of people that we would anticipate adding in next year back when we were sitting on two or $3 billion of excess liquidity. The desire to add bankers that can deploy liquidity led us more towards middle market and specialty bankers and that was helping us to start up some of the new markets. We expanded too as we look at 'twenty three.
Where our focus is more on the sectors that include full relationships, that's going to be more bankers, all the smaller and middle market. So that 10% to 20, we've made up primarily what we call business bankers commercial bankers.
Treasury.
Sales staff, so little different mix, but continued investment and how well we are we do that picking up that talent.
And on the availability of people and the alignment with our values and credit posture.
But I am confident we will see some pretty good games.
And good talent as we go through 'twenty three.
Okay.
Yes, that's great color and obviously, if you manage the efficiency ratio while here after years downward.
Wanted to maybe take the deposit question a different way just thinking about the DVA and <unk> and that being.
Hard to predict what would you happen to have handy bally.
Balances for commercial or retail pre pre.
Pre during and post pandemic current quarter in terms of the size as it may be a way to see how much liquidity customers have drained out of their accounts.
I don't have that per say, Brett, but what I can share in the way of color is.
If you look at our deposit book and kind of think about it.
DDA deposits and basically everything else when you look at DDA about 70% of our DDA deposits are commercial in nature, So 30% consumer when you look at everything else.
Flips, a little bit and it's about 60% consumer and about 40% commercial.
So do you think about the pandemic impacts when you think about things like surge deposits.
You assume that most of that came from the commercial side.
We probably had our fair share of that and certainly that was helpful.
Increasing our mix of DDA deposits to nearly half and certainly that's come down a little bit.
Around 47% or so at the end of the quarter and we certainly have guided to that number are probably continuing to trail down a little bit as we go through.
An environment, where rates kind of stabilize at a higher level.
So not a direct answer to your question, but hopefully that's some helpful information.
Yeah. That's helpful. I appreciate all the color.
You bet.
Thank you.
The next question comes from the line of Michael Rose with Raymond James. Please proceed.
Hey, good afternoon. Thanks for taking my questions just wanted to dig into slide seven a little bit so.
Understanding that the growth is going to slow next year, but you've had some nice tailwind for mortgage you can kind of point that out in the slide there just wanted to see what the expectations are there and then can you just kind of talk about what specific areas you're limiting.
CRE growth in what some of the headwinds I was just looking for some of the puts and takes and then you mentioned as one of the tailwind continued line utilization growth, but how much of that is going to be a function of maybe reducing some of those lines versus.
Yes.
Your lenders actually are you or your customers actually drawn down.
Given the economic backdrop that we're in.
Yes.
These are solid mortgage and I'll get back to the rescue yeah. So on on mortgage Margaret you can see that we're up about $250 million or so this quarter and really about two thirds of that is really attributable to a onetime close product again on the mortgage loan side.
We will have those kinds of impacts in fact, it will probably increase a little bit related to that product in the first quarter and second quarter, and then really kind of begin to trail down so the components of our overall growth.
Tribute able to mortgage and that onetime product will be rather significant for the next quarter or two and then again kind of trail off.
So so far everything else I'll start with line utilization.
I do not expect to see.
The overall line availability crash down because were taking down the limits I mean, thats really a customer by customer decision made as we approach where needle or whether there were any covenant issues that.
Really hasn't been an issue so far and I don't think it's going to be an issue in the future other than.
The occasional cat and dog situations per zone.
So if you look at page seven of the top right you see kind of where we were pre pandemic was a little over 48%. So if a trend in 'twenty, one and 'twenty two is probably a good one I think it's dependable so depending on the quarter. It may be between 50 and 150 basis points.
Line utilization increase without much that's going to drive that back down unless the economy sours, just tremendously, which we don't anticipate that happening. So we will still have a tailwind for the better part of probably three years at that current rate to get utilization back to where it was.
So that'll be a tailwind.
Our business banking and commercial banking sectors are likely to continue growing.
In our middle market group will be tied to those accounts that typically bring their operating accounts with them. So so all what I'll call. The core business of the company that provides the opportunity to full service relationships will continue to grow and frankly, we are directing much more attention to that because of the need for liquidity over the next cut.
The year to fund loan growth set.
The sectors that will be more of a push for the year will be those that delta off excess liquidity. So.
Yes.
Assuming no real downturn in the economy that makes us get more honest about our sector I would expect to see CRE.
<unk> care capital market side of equipment finance more flattish for the year they've been growing at a pretty nice clip for the last several years when when liquidity was cheap and it's just not cheap anymore. So even though the yields on those businesses tend to be very good.
If we have to raise liquidity.
Unattractive price than we are.
Dampening the.
The rate environment goes up and stabilizes so our driver for slower growth isn't a lack of capacity to grow Michael it's really all around making sure that the profitability and the earnings efficiency and the NIM itself.
Insulating, while we go through a period of volatility and we may be over costs and to the extent that we're able to gather deposits at a better clip.
We're guiding to and we'd probably grow loans at a faster clip than we're guiding to but it's just impossible at this juncture with all the different opinions about which direction. The economy is going to go to guide to anything other than what we think is a reasonable level and that's what we've put in the numbers for 2003.
But if the wherewithal of the economy allows us to grow deposits quicker than the balance sheet may go a little quicker than we had anticipated.
Great.
Just a follow up.
Yes. It does thank you for all the color and maybe just one quick follow up.
It looks like you guys benefited from some storm related gains this quarter on the expenses do you have a sense for what the dollar impact of that was.
Yes.
Yes, Michael so for this quarter that was right around $3 million and that was related to hurricane Lora and as a reminder, it seems like these days, we pretty much have those kinds of recoveries. Almost every year now we had won last year in the fourth quarter related to hurricane Michael and <unk>.
Likely to have another one at the end of this year related to Hurricane Ida.
<unk>.
So hopefully that's helpful.
Part of the core business model, we intend to have but it does tend to happen pretty quickly.
Understood.
Thanks for taking my questions.
You bet. Thank you Michael.
Yes.
Thank you.
The next question comes from the line of Catherine Mealor with <unk>. Please proceed.
Thanks, Good evening everybody.
Hi, Kevin.
I wanted to circle back to the guidance.
And that's kind of interesting.
Matt you ranges for fees and expenses are pretty tight ranges there.
The PPA and our range is a little bit wider which is giving you a little bit more of a room for what the spread if you kind of back into that with the spread could be.
On the low end of the guide and then the guide and so yes.
The only way to get the kind of the low end of that guide would be if you're if the margin.
<unk>.
Increases a little bit in the first half of the year and then falls.
From from maybe current levels. So just kind of curious how you're thinking about that.
What kind of assumptions you.
You were thinking about it in your margin as you kind of as you.
As you came up with that range and is it more of a margin.
Or is it more of a balance sheet size piece, that's driving the bottom end of that PPA in a range that just I'm, having a really hard time, even getting to the scenario.
Where you'd have 13% PPR growth with the other.
The other things you lay out.
Yes, I think the answer to the question is obviously NII. Katherine This is Mike and I would say, it's probably a little bit more dependent right now as we see it on what happens with the balance sheet and specifically deposits over the course of 'twenty three.
And then really the resulting NIM I mean, certainly those things impact the NIM.
I think it's really what happens with our balance sheet, whether we're able to grow loans as John mentioned before.
A little bit faster clip than maybe what the guidance is suggesting and that'll be very dependent upon our ability to retain and grow deposits and certainly as we mentioned a little bit earlier.
The change in terms of how we're thinking about managing the balance sheet is the introduction of using cash flows from the bond portfolio to help fund loan growth.
And as we go through the year, we have better.
We have a better experience with growing deposits then it's certainly likely that we could kind of scaled back on relying on the bond portfolio as much so.
I think it is very dynamic it has a lot of different moving pieces and parts.
We tried to be very thoughtful around establishing ranges.
On all of the components of our earnings going forward.
Again, I think to kind of close the loop. The missing piece is really on net interest income and kind of how we think.
That Mike.
It might happen in trail in terms of how we go through next year.
So hopefully that was helpful gave you a little bit.
Yes.
And then.
On your loan data is last quarter, you were talking about it over the cycle is 52% cumulative loan beta has anything changed.
So great with how youre seeing on pricing it seems like you are.
New loan yields are coming up significantly higher so in any kind of update on that would be helpful.
Yes.
Now where do we stand really no change in the overall guidance around both our deposit and loan betas.
Terms of how we think we'll end up on a cumulative basis with this cycle. So that's probably no worse and about 25% or so on deposits and then as far as loans.
We're in the low $50, so really no change in that regard.
Great.
And lastly, when you receive circles.
Thank you for updating that and have them.
Got it.
Rate environment included in this call.
Interesting that you is this assumption it looks like Youre, saying that you have cut in 'twenty four and 'twenty five.
And even in that scenario you could go over to RLI above $1 55 and <unk>.
So just kind of curious your thoughts on there and just overall profitability strategy to kind of hit those calls even if rates pullback.
The 3% level as you indicate on your side.
Yes, again as a reminder, the goals are really kind of fashion to be three year ago. So we're looking at the fourth quarter of 'twenty five and certainly while we see some challenges in 2023 I think the way we're looking at 'twenty four 'twenty four right now is a little bit more optimistically and so while we.
May be in a lower rate environment.
We think that we may be in an environment that may be more conducive to us growing the balance sheet more than those two years in 2003.
So again some of this is crystal ball kind.
Kind of work.
But it really is the goals that we've established for ourselves and this is the way that we're managing the company and holding ourselves accountable.
Catherine so would it be fair to assume.
You may now.
No go ahead.
I am sorry. This is a time lag I think going on Im sorry Catherine.
Interruption.
The other color I would add is the work that we did on the expense and efficiency side.
That was real but really were no gimmicks to it and so as we get into a little bit better time with that.
That expectation of growing the balance sheet.
The scalability of the operating footprint should so itself and so as a result, we really shouldnt experienced the type of expense increases that we had in the last expansion period.
To the U S. We would expect those to be lower when you get to the next expansion period. So that's really the field behind both the ROI and the ER being pretty solid.
Is the expectation that we can have a pretty good expense number I know the guide for 'twenty three.
Doesn't look that way, but we wouldn't see that type of expense growth I think in the future.
Presuming that that our salary cost and that sort of stuff don't escalate in 'twenty three and four.
Like they necessarily had to 'twenty two so a big chunk of that 23 number is a full years impact of.
Sellers become at 60% more expensive and apply that throughout the rest of them.
The hourly workforce, so that shouldnt reoccur as we get into 2425 does that help.
It doesn't and that's exactly where I was going I was assuming that the expense growth would be fixed at that 1% pace in future years.
And I'll round out perfectly alright, great. Thank you so much.
You bet. Thank you Kevin.
Thank you.
The next question comes from the line of Christopher Christopher <unk>.
With Janney Montgomery Scott. Please proceed.
Hey, Thanks, very much for all the information today I just wanted to piggyback on Catherine's question on loan yields when you look at the six quarter new loan yield on variable does that put any strain on borrowers at this point is there any upper bound is that would most likely reset again in the first quarter in terms of just just the ability for.
Customers to handle that and or their demand at that rate level.
Okay.
I don't think so at this point in time for this is John .
As Luca mentioned earlier, when we stress test the book that we have right now and do that in some of the different specialty sectors.
Forecast as we have it right now really doesn't point to much additional stress that we're not presuming the fed goes up to 10% overnight right quite with ethanol different world, but and what we expect now fed futures curve, we don't anticipate a lot of stress where youll see the byproduct is where you see them begin to diminish spending.
Start two and our expectations that the warehouse operating capital on their own balance sheet versus depending on loan lending alone. So I think it would be more of an impact on our underwriting going forward and our expectations of the customers manage their own balance sheet.
Yes, I think Thats right John .
As John pointed out I mean, we we tend to scratch our borrowers when were doing new underwritings are even renewals on existing loans just to make sure that they can withstand what is the anticipated rate rises.
In the portfolio.
Okay, Great. So my question is it.
And is it fair to say then that the.
The leverage of your borrowers really is not at a worrisome level, just given their ability to handle stress scenarios.
Yes, no I mean, obviously some individual customers depending on some of their other challenges that they may be experiencing from an operating cost standpoint that we may not even be aware of.
Yes.
Could have some challenges, but as I pointed out we're not really aware of any that have kind of a combination of all of those factors at this point in time.
The fair, Chris are always dogs, and cats that show up as rates continue to go up and none of US really know what that ceiling is going to end up but from a systemic viewpoint or a sector viewpoint.
And appear to be a drag in on its way.
To your rates are really due to any other stress.
So our confidence right now is pretty high and we will have to see where we stand as the future yes.
But part of the reason that that loan loss reserve is sitting out there for today.
Is the desire to manage the ACL to about 75% slower growth scenario with movies.
If you look at the way our customers and our markets are behaving right now.
They are acting as if it's going to be a soft landing and I don't know if thats going to happen none of us really do.
But when we build the ACL the assumptions are a little bit more caustic, which keeps the ICL at a level that we think access sort of third base to the environment that we're talking about.
That makes sense.
No. It does and then just one quick related question back to the Moody's baseline. So you have the same weightings this quarter as you did last quarter.
What would have to happen for you to shift to something higher on the slower growth is to go from 75 to 80 just to pick a number.
Chris This is Mike I think a little bit more conviction and uncertainty about a recession in the second half of the year.
The Moody's <unk> scenario does call for a mild recession in the second half and we have a wait.
Weighted we think appropriately right now at 75%, which by the way we've kept these weight weightings in place for three quarters now. So we haven't we haven't changed those but I think again to answer your question.
A little bit more conviction around a recession in the second half of the year.
Perfect. Thank you very much for that additional background.
You bet. Thank you for the questions.
Thank you.
There are no additional questions at this time.
I will pass the call back to John Harrison for final remarks.
Thanks to your efforts for moderating the call and thanks to everyone for your interest we hope to see you all on the road over the next several months, we safe and be healthy and take care.
Yeah.
That concludes today's call.
Thank you you may now disconnect your lines.