Hancock Whitney Corporation Q1 2023 Earnings Call

Speaker 1: Later, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, this call is being recorded. I would now like to introduce your host for today's conference, Catherine Mistich, Investor Relations Manager. You may begin.

Speaker 2: Thank you, and good afternoon.

Speaker 2: During today's call we may make four looking statements.

Speaker 2: 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.

Speaker 2: You should keep in mind that any forward-looking statements made by Hancock Whitney speak only as of the date on which they were made.

Speaker 2: As everyone understands, the current economic environment is rapidly evolving and changing.

Speaker 2: 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.

Speaker 2: 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.

Speaker 2: And our actual results and performance could differ materially from those set forth in our forward-looking statements.

Speaker 2: 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.

Speaker 2: Some of the remarks contain non-GAAP financial measures. You can find reconciliations to the most comparable GAAP measures in our earnings release and financial tables. I thereafter w enc a

Speaker 2: The presentation slides included in our 8k are also posted with the conference call webcast link on the investor relations website.

Speaker 2: We will reference some of these slides in today's call.

Speaker 2: Participating in today's call are John Harrison, President and CEO , Mike Acri, CFO , and Chris Aluca, Chief Credit Officer. I will now turn the call over to John Harrison.

Speaker 3: Thanks, Catherine. Good afternoon, everyone. Thank you for joining us today. The first quarter of 2023 was a solid start to the year, despite volatility within our industry launched by unique bank failures in early March. Despite all that noise, we've continued to maintain strong levels of liquidity.

Speaker 3: solid capital, and a stable, seasoned deposit base well diversified among consumer, commercial, and wealth clients as detailed on page 6 of the investor deck.

Speaker 3: Both linked quarter and since the bank failures the weekend of March 10th, we have seen growth in total deposits, including core client segments. In fact, a majority of our growth in core client deposits came after March 10th. For the quarter, core client deposits are up 234 million, of which 203 million was added post March 10.

Speaker 3: We added additional details in the deck that we believe show the strength and stability we have in our markets and among our client base. We had weathered many storms both literally and figuratively over 124 years and the name Hancock Whitney is synonymous with strength and stability in our footprint. We are pleased with deposit growth this quarter though continued rate hikes coupled with the current rate hike.

Speaker 3: and well diversified.

Speaker 3: Details are included on slides six and seven of our earnings day.

Speaker 3: DDA's as a percentage of total deposits remain strong at 43%, well above pre-pandemic levels. Our portfolio is diverse with 43% consumer, 36% commercial and small business, 12% public funds, 7% wealth and only 2% brokered CDs.

Speaker 3: The brokered CDs were issued in late March as a precautionary measure only, and as of today, we don't anticipate needing to issue anymore. Uninsured deposits were 36 percent at the end of March, and we continue to offer varied ways for both consumers and businesses to further insure their funds above current FDIC limits.

Speaker 3: while maintaining their primary deposit relationship with Hancock Whitney.

Speaker 3: On slide 8, we updated our liquidity metrics, again indicating a position of strength. With almost $20 billion in available sources of funds, we currently use less than $4 billion, much of which was drawn as precautionary during the height of volatility in March. So we sit with approximately 16 bigot and net available sources of funds.

Speaker 3: end, some would offset the benefit from a solid earnings result for the quarter, but should gradually reverse itself as headline volatility declines. We do note the first quarter in a while where we and many peers benefited from OCI impact to our TCE ratio.

Speaker 3: In summary, we are very mindful of the current operating environment and the macroeconomic trends which may impact our industry. But as I just detailed, given our strong liquidity, our solid capital and stable, seasoned, diverse, and granular deposit base, we believe we are well positioned for the environment. With that, I'll turn the call to Mike for further comments.

Speaker 4: Thanks, John . Good afternoon, everyone. The first quarter was a solid quarter with net income of $126 million and EPS of $1.45 per share. The results were down a bit from last quarter driven primarily by a 13 basis point narrowing of our NIM resulting from the continued remix of deposits.

Speaker 4: and higher overall deposit cost.

Speaker 4: Even so, deposit growth was strong this quarter at $543 million with increases in core client deposits and brokered CDs partly offset by typical seasonal runoff in our public fund deposit book. Now that has become more of the gears for the II program, it is time for the confirmation series.

Speaker 4: Going forward, we recognize that deposit growth will be a challenge for the remainder of the year, really for all banks.

Speaker 4: Clients continue to be rate sensitive, resulting in a continued shift in the mix of deposits from DDA to higher cost deposits, mostly CDs.

Speaker 4: That dynamic will likely continue for as long as rates are elevated.

Speaker 4: Given the current environment, we believe our NIM will likely compress again in the second quarter and then potentially stabilize over the second half of the year. That's based on an environment where the Fed raises rates again in May, then backs off from any additional rate hikes for the balance of the year.

Speaker 4: Slides 15 and 16 in the earnings deck provide additional details related to NIM and our interest rate sensitivity.

Speaker 4: Details around our securities portfolio can be found on slide 14. The portfolio is, as always, conservative in composition and mostly invested in safe residential and commercial mortgage backed securities. As noted last quarter, we used the runoff in the bond portfolio of about 125 million

Speaker 4: and HTM portfolios are noted at the bottom of the slide and have improved around 13% since last quarter.

Speaker 4: Given questions about the impact of unrealized losses from the bond portfolio on capital, we included a set of pro forma capital ratios that look at what those ratios might be if all unrealized losses were included in the calculations.

Speaker 4: You see that on slide 20 in the earnings deck. The takeaway for us is that even after including all unrealized losses, we will not be able

Speaker 4: We remain above well-capitalized levels with common Tier 1 capital over 9%.

Speaker 4: Taking into account the current rate environment, updated forecasts around future rate hikes, and higher deposit betas, we have adjusted our annual PPNR guidance and currently expect an increase somewhere between 3 and 7% for 2023 compared to 2022.

Speaker 4: You'll see that updated guidance on slide 21 of the deck.

Speaker 4: Loan growth was in line with expectations at just under $300 million or 5% linked quarter annualized.

Speaker 4: The one-time closed product in the mortgage lending portfolio was again a driver of the growth in the quarter, coupled with an increase in CRE income-producing loans.

Speaker 4: This increase is mainly related to the movement of loans from the construction phase to permit financing at completion.

Speaker 4: We continue to limit our growth in CRE and have provided additional information on slide 10.

Speaker 4: A quick comment on credit.

Speaker 4: The increase in net charge-offs was driven by a handful of smaller charge-offs and a lower level of recoveries compared to the fourth quarter.

Speaker 4: We continue to operate from low levels of commercial criticized and non-approved loans, both relatively stable this quarter, and our ACL remains strong at 146 basis points. We income improve this quarter with wealth and specialty income key drivers of the increase.

Speaker 4: As a reminder, this is the first full quarter for the previously announced elimination of certain consumer NSF and OD fees and service charges.

Speaker 4: Expenses were uplinked quarter but in line with guidance we provided last quarter.

Speaker 4: As detailed on slide 18, other non-interest expense was the biggest category of the increase.

Speaker 4: With the higher level of expenses and compression in NIM, we ended the first quarter with an efficiency ratio of 53.8%. In today's environment with higher deposit costs and elevated rates, we feel that the work done in prior years to produce a more efficient company continues to serve us well.

Speaker 4: We will continue to strive to deliver peer best earnings at efficiency ratio levels below 55%.

Speaker 4: I will now turn the call back to John .

Speaker 3: Thanks Mike and moderator if we could let's open the call for questions.

Speaker 1: At this time, I would like to remind everyone, in order to ask a question, press star, the number one on your telephone keypad. Our first question comes from Catherine Mailer with KBW. Your line is open. Your line is open.

Speaker 5: Thanks. Good evening everyone. Hi, Catherine.

Speaker 5: I want to maybe start with the margin and I guess this is the million dollar question, but you're trying to see how much deposit mix shift you're expecting over the course of the year. We saw a big mix shift out of noninterest bearing and into CDs. As you look at your PP&R guide.

Speaker 5: How are you envisioning today where you think NIBs should bottom and then where CD should eventually get to? Thanks.

Speaker 4: Yeah, hi, Catherine. Good afternoon. It's Mike. So in terms of our deposit mix, you know, again at the end of the first quarter, we were at 43% non-interest bearing. If we kind of think about the rate environment and where we are is...

Speaker 4: we see the Fed potentially raising rates another 25 basis points and then kind of going flat for the balance of the year. So under that scenario, we see that 43% probably trending toward somewhere in the 38-39% range by the end of this year.

Speaker 4: So, as a reminder, pre-pandemic, so call it fourth quarter of 19, we were at 37%. So I do think a year from now we'll probably be at that level or pretty close to it.

Speaker 5: Great. Okay. And is there, and I feel like as the industry, we're generally going back to pre-pandemic levels with that mix shift. Is there any reason or what's the case to be made that we won't go below pre-pandemic deposit mix shift? Absolutely.

Speaker 4: Well, I think for us, we've done a lot of work during the pandemic years, a lot of activity around the PPP process, and I think have brought onto our balance sheet an awful lot of good core customers. Again, a lot of those customers.

Speaker 4: have operating accounts with us and that helps to make a case for, I think, the non-interest bearing mix potentially going no lower than where it was when we started. But look, that's a hard thing to predict and I don't think anybody has a crystal ball in that regard.

Speaker 4: And, you know, a big assumption is what I described earlier around our view of what the Fed could possibly do. If they do something materially different than that, then obviously that could change, you know, that ultimate outcome.

Speaker 5: Yeah, of course, and it's helpful to hear the way you're thinking about that. Thank you, Mike.

Speaker 3: Go ahead John . This is John . The only thing I'll add to it is

Speaker 3: You know, for several years we focused on improving granularity in the loan portfolio and the place that we're adding bankers the most right now, pardon me, given that we're obviously out of the liquidity deployment business and we're into funding core loan growth with core deposit growth. So the types of bankers we're adding are primarily in the smaller business purpose segments.

Speaker 3: And those segments typically fund between one and a half and two dollars of liquidity per dollar of credit. And so the more successful we are, and right now that's going very well. It's in fact the fastest growing segment of our deposit book. So the faster we can grow that, the better chance we have of staying above or where we ended up before and certainly trying to stay.

Speaker 3: no worse than at the same level we're at pre-pandemic. So it's a focus area for us and hopefully we'll see some good results as we move through the years. So we'll see what we have happen in Q1.

Speaker 5: And then a follow-up on the margin, is it, as we look at your PP&R guide, is it fair to assume that we can expect the NII dollars to be down every quarter for the rest of the year? It's hard, yeah, this quarter was down, but there is the day count that does impact that, but you are guiding for the margin to be lower next quarter. So just trying to think about how you...

Speaker 4: it implies NII growth of somewhere between 6% or 7% year over year. So given that we do expect some margin compression in the second quarter, we would expect NII to accordingly be down some quarter over quarter. But then at that point I think that...

Speaker 4: it kind of flattens out as we go through the second half of the year, again, based on the rate assumption we described earlier.

Speaker 4: flattens out as we go through the second half of the year, again based on the rate assumption we described earlier. Great. Very helpful. Thank you.

Speaker 1: Thank you. Appreciate the questions. Your next question comes from Michael Rose with Raymond James. Your line is open.

Speaker 6: Hey, good afternoon. Thanks for taking my questions. I certainly understand the FHLB build. Mike, if you can just give us a sense for how long you might expect that to maybe stick around and maybe what the term is on that, just trying to get a sense for what the term

Speaker 4: you know, impact on average balances, things like that. Thanks. Sure, I'd be glad to, Michael. So the liquidity that we added to the balance sheet late quarter again was about a billion two in home loan advances. Those advances were really split into a 30 day piece and a 45 day piece for the most part.

Speaker 4: you know, all price at just a little bit north of 5%. And then, of course, we added the other brokered CDs as we mentioned earlier.

Speaker 4: So that yeah, you're right. I mean the big question is how long do we keep that extra liquidity on the balance sheet? And the shorter answer is you know, we'll keep it for as long as it takes to kind of get through You know any potential period of additional stability if that happens, you know in the banking environment going forward

Speaker 4: I do think though that when it's all said and done on a go-forward basis, we'll probably keep a little bit extra liquidity going forward than we probably did before, let's say, March 10th. How much that ends up being, again, it really just kind of depends on what the environment looks like.

Speaker 6: Perfect. Appreciate that, caller Mike. Maybe one for Chris. Notice that the non-accrual loans ticked up just a little bit. I know we're going off a really low base here, but any sort of discernible trends, because it looks like criticized classified was down, so just trying to get some color there. Thanks.

Speaker 3: No worries, Michael. Thanks for the question. Yeah, as you pointed out, we really are operating at a relatively low base. I mean, it really is a historical low levels. So any movement in non-accruals may seem significant. But realistically, it was just really one account that we've been

Speaker 7: one major account, if you want to call it that, that we've been following for probably a year now, where we've been kind of working through a strategy to recast the loan, and in the process we had to move it into non-accrual, but not a real significant issue in our non-accruals.

Speaker 3: With the appreciate the guide on on margin and AI is it fair, you know to

Speaker 8: Given the steps taken and how late in the quarter it was on boosting liquidity, get the broken CDs, the FHLB, while we still have ongoing the DDA shift, is it fair to expect that the continuation of

Speaker 8: percentage margin compression in the second quarter would be more substantial than what you saw in first quarter. Is that a fair assumption?

Speaker 4: Kevin, this is Mike. Not necessarily. I do think that the margin compression that we are looking at potentially for the second quarter is probably somewhere around the magnitude of what we saw in the first quarter compared to the fourth quarter. So I don't know that it will be necessarily more than the 13 basis points, but probably somewhere in that neighborhood.

Speaker 8: So Mike, can you just go through some of the takes on that? Because just, you know, definitely liquidity and stability of balance sheet is top priority. And I recognize the steps you took, but it seems like

Speaker 8: Like is there more loan repricing coming or is it, you know, I'm just trying to think of the offs, the positive offsets.

Speaker 4: to more of the wholesale and brokered funding. Yeah, well, I think some of it is I don't know necessarily we have built into the second quarter forecast the same 2.9 billion of excess liquidity. So that does come down a little bit as we go through the second quarter and again as I mentioned earlier

Speaker 4: built into our forecast, the Fed raising rates another 25 basis points, so there's some beneficial impact of that related to our variable rate loans. We received a nice cumulative impact from the overall repricing of all of our fixed rate loans. There's a slide in the deck that talks about

Speaker 4: the yields that we're getting in terms of loans due to the balance sheet. So, you know, for the fixed rate loans, that's nearly 6.5%, and that's not insignificant, you know, and continues to build kind of on a cumulative basis going forward. The other thing is, you know, we have pretty attractive CD pricing.

Speaker 4: being offered right now, and I think again depending on the amount of stability we have in the environment, you know, we're likely maybe to come off some of that. So those are all things that I think will help and you know build the case a little bit for the NIM, not narrowing much more than it did in the first quarter.

Speaker 8: Okay, very helpful. Thanks, Mike.

Speaker 8: Very helpful, thanks, Mike. Just thinking about

Speaker 8: the percentage of DDA and where that settles and you know, if it comes down to the high 30s.

Speaker 8: Do you, you know, you kind of mentioned.

Speaker 8: year-end, do you think, you know, assuming the Fed has one more move to go, does that pace like it continues that mix shift, but at a diminishing pace over the balance of the year is your best guess?

Speaker 4: Yeah, absolutely. I think that remix of deposits will continue as we go through the year. If the Fed does raise rates one more time and then goes to the sidelines, then I do think that remix has the potential to slow a little bit from the levels that we saw the last couple of quarters. Kevin, this is John . Just one thing to add to the algebra.

Speaker 3: as the account balances...

Speaker 3: move from the pandemic highs to the pre-pandemic norms, which

Speaker 3: seem to be on track for both consumer and business purpose accounts for the middle of 2024. There's a bit less money that would be set aside in chunks inside CDs because people don't think they're going to need it for a period of time. So even though consumer spending is strong, there's a lot of money that's going to be spent on CDs.

Speaker 3: The types of spending is more necessities versus large ticket items like it was the last couple of years. So there's a likelihood that people put less money into CDs over the course of the next four to six quarters than occurred the past four to six months, if that makes sense.

Speaker 3: So there would be some natural change simply because the degree of excess goes away. And so the closer we get to norm, the closer we get to norm in all matters of the balance sheet. I hope that makes sense.

Speaker 3: Yeah, no, that's a good point. Yeah, the other driver is, as rates go up and revolving line costs goes up, excess liquidity seems to find its way towards paying down that debt. I mean, you know, why have it sit in the bank if you can use it to decrease your cost, right? So, you know, I think that's a good point.

Speaker 3: As you saw for the first time in really about two years, we saw a decrease in line utilization, and that's predominantly coming from people using the remaining excess fluidity to pay down debt. So, those two things I think are a little outsized based on the poking of the rate there, so to speak, by the Fed's pace of interest rate increases.

Speaker 3: So as they slow and as the account size is normalized, we should see some degree of mitigation in the pace that we're seeing migrate from NIB to something else. Hopefully that makes sense. Yeah, that's great. Thank you, guys. Thanks for watching.

Speaker 3: And as the account size is normalized, we should see some degree of mitigation in the pace that we're seeing migrate from NIB to something else. Hopefully, that makes sense. Yeah, that's great. Thank you, guys. You bet. It's been excellent work, hot topic.

Speaker 1: Our next question comes from Brandon King with Truist. Your line is open. Hey, good afternoon. Good afternoon, Brandon.

Speaker 4: Yes, so I wanted to ask a question on the capital. You know, capital levels are pretty strong here and you're not growing as much. So are there any thoughts to any share repurchases or getting more aggressive to buyback? Just given where the stock is trading at.

Speaker 4: Yeah, hey Brandon, this is Mike. Good question and really our stance and how we think about or look at buybacks really haven't changed. We remain opportunistic in terms of looking at that. As you probably know, the buyback authority was re-upped this past January , so that's 5% really through the end of next year.

Speaker 4: Having said all of that, we really haven't bought back many shares the last quarter or so and certainly for the coming quarter and really for the foreseeable future right now, I don't see us buying back a whole lot in the way of shares. We take the stance right now that we're going to have to buy back a whole lot in the way of shares.

Speaker 4: with so much uncertainty out there, it's probably better just to continue to build capital in this environment. Has those conditions changed? I mean, obviously we'll reassess and if there's opportunity to you know, be a little bit more active in terms of buybacks, that's certainly something we'll consider as we go through the year.

Speaker 9: Make sense.

Speaker 10: And then I had a follow up to the net interest margin discussion.

Speaker 4: Do you mind sharing what the NIM was for March? I know there's a lot of actions that happen later in the quarter. Yeah, so the, goodness gracious, the NIM for March, I don't have that right with me.

Speaker 4: Certainly don't mind sharing it, but while we're looking for that, you know, certainly one of the things that's impacting the NIM, you know, in the month of March is our cost of deposit. So as the quarter went on, that went up to 107 basis points. So that's certainly going to.

Speaker 1: Our next question comes from Brett with

Speaker 1: Our next question comes from Brett Rabatten with HOVD group. Your line is open.

Speaker 4: Hey, good afternoon, everyone. Wanted to ask two questions on the guidance. I guess first on the expenses, wanted to make sure I was clear. You know, the other bucket obviously included a couple line items this quarter that were different, the FDIC assessment.

Speaker 11: Was there anything else unusual that might not be recurring in that line item going forward? Is that one key level a good level for maybe ongoing from here?

Speaker 4: Yeah, Brett, I think that the level in the fourth quarter, I mean the first quarter, so the 200 million or so is a pretty good run rate to use going forward. In terms of the categories and items that we called out and other expenses, really except for the storm-related losses.

Speaker 4: that we had in the prior quarter, pretty much everything else is kind of ongoing or built into the ongoing assumptions. Data processing is something that can move around a little bit from quarter to quarter, but given some of the technology investments and other things that we have going on related to that category, we do think that that level will probably continue at somewhere near that going forward.

Speaker 11: Okay. And then in fee income, you know, obviously, you know, year over year, if you're going to have growth in that number, the quarters from year have to grow. You know, are there specific line items that you think might have a higher propensity to grow from one Q levels or any color on that? Yeah, sure. This is John . Thanks for the question on fees. There are a couple of things moving around in the year.

Speaker 3: What we saw happen in Q1, as expected, is the volume of normally recurring account maintenance fees is offsetting the decline that we experienced in the NSF.

Speaker 3: So that was helpful. And then secondary mortgage, while it was green for the quarter, which was actually somewhat of a pleasant surprise, as people lost a few, you know, just these little boomlets of production that occurred on a series of dates where the rates softened a little bit, we'd see a surge.

Speaker 3: production come through and that was helpful for secondary mortgage. But the real star of the show, the last several years and probably for the next couple of years outside of what happens with mortgage or any other type of regulatory engagement with fees, would be the wealth related items which are the investment subsidiary.

Speaker 3: trust fees.

Speaker 3: And then also the fees that we enjoy from our card businesses. And while the card fees weren't really very big compared to first quarter over fourth quarter on a year to year basis, they do continue to perform very well. And we're continuing to add people on the treasury sale side to move card related products, in particular our purchasing cards. So I think the secret to get into the guidance of the three to 4%.

Speaker 3: quite attractive this quarter versus last. This is probably a little more of a normal quarter. In the fourth quarter, we called out the fact that we literally had zero BOLI items occur then and very close to zero SPIC, which is kind of unusual for a quarter where both of those were near zero. So Q1 was a little bit more normal in types of.

Speaker 8: Apologies if I missed this, another NIM question. I heard you guys on the DDA settling in the high 30s. Did you guys talk about what your NII forecast assumes for deposit beta versus the 19 percent here in the first quarter?

Speaker 4: Yeah Casey, this is Mike. No, we haven't yet, so thank you for that question. But in terms of our deposit data, and when I talk about deposit data, it's really talking about total deposit data. So we're at 19% cumulative for the cycle.

Speaker 4: And so for the fourth quarter this year, the assumption is that that deposit data on a cumulative basis will probably settle in at around 30 or 31 percent. And so for the fourth quarter, the assumption is that that deposit data on a cumulative basis will probably settle in at around 30 or 31 percent.

Speaker 8: you know, to hit the low end of fee guidance, you're going to have to run, by my math, it looks like 87 million in the remaining quarters. That's obviously a pretty steep ramp. I heard the color in terms of you got a number of line items that you expect to help you get there, but

Speaker 4: If you fall short of that, is there flexibility on the expense guide or is that pretty hard and fast? I think when we think about these, again, the guidance which we haven't changed is the up three to 4%. And the bias there is probably toward the low end of that range, so somewhere in the 3% range. If we think about how the trend is likely to play out for the balance of the year.

Speaker 4: You know, recall that from a seasonality point of view, fees tend to build as we go through the calendar year. So it's not like a flat amount across the year, but we would expect fees to begin to build as we go through the year beginning of the second quarter. So the high point would be the fourth quarter.

Speaker 8: Gotcha. You see my point though, right? Like it's a decent, it's a decent ramp, right? You know, so.

Speaker 8: Okay. All right. And just just last one for me on the on the office book. It's obviously everyone's biggest concern. I know it's a small piece of the pie for you guys. Um,

Speaker 7: Do you guys have any color on the LTV debt service coverage ratio and then you know percentage class A versus B and C? Yeah, thanks for the question Casey. You know a lot of our first of all on the LTV I mean we you know we surveil all of our commercial real estate and even see an iBook on a regular basis so

Speaker 7: With the additional focus on office and investment commercial real estate in general, we've certainly paid closer attention to staying close to those customers. From an LTV perspective, our weighted average LTV is in the low 60s at this point in time, so really healthy LTVs and even with the upward movement.

Speaker 7: cap rates we feel that it can be easily absorbed and still stay within a reasonable bound. And then you know occupancy levels at a lot of our you know on average are pretty high you know we're running in the in the low 90% occupancy level at this point in time so pretty strong for that asset class in general and debt service coverage in general still is pretty strong.

Speaker 7: kind of in the 1.3 to 1.6 range depending on the location. Most of ours we mentioned in the earnings deck on page 10, we really don't do a lot of high rise stuff. We have about 4% of the book in high rise. It's really literally a handful of transactions.

Speaker 7: and all of that tends to be a little bit more buoyant.

Speaker 12: Great. Thanks for all the color. You bet. You're welcome.

Speaker 12: You bet. You're welcome.

Speaker 1: Our next question comes from Brad Nisatz with Piper Sandler. Your line is open.

Speaker 13: Hey, good afternoon. Hey, Brad. Mike, just wanted to follow up on Casey's expense question. Obviously, the PP&R guide came down, which is understandable, but maybe I was a little surprised the expense guidance maybe didn't change a little bit too given the pressure on revenue. Yeah, absolutely, absolutely, and some people are over it right now.

Speaker 13: Is it just fair to assume there's just not a lot of flexibility or variability within the expense base? Most all of that is locked in and not necessarily revenue dependent based on how you gave the guidance.

Speaker 4: I think certainly there is some flexibility, but when we think about expenses in the guide, again that's 6 to 7 percent and the bias is probably toward the upper end of that range a little bit. But the other thing about the first quarter expense growth is if we back out things like pension and FDIC, the increase was really more in the neighborhood of 2.5, 2.6 percent.

Speaker 4: So really, again, using the first quarter numbers, kind of a run rate going forward, we see expenses up just a little bit, probably modestly in the second quarter, and then flattish as we go through the back end of the year. So that's how we're kind of thinking about expenses.

Speaker 3: And Brad, this is John , I'll add to that. The levers that could be pulled in terms of reducing our reinvestment pace.

Speaker 3: And Brad, this is John , I'll add to that. The levers that could be pulled in terms of reducing our reinvestment pace, we really don't see this.

Speaker 3: This current quote-unquote crisis as an industry crisis as much as a couple of banks were in crisis, and there's a lot of reaction to that which is understandable. And that's driving leverage up and therefore some pressure on NII that shouldn't continue more than however long it takes for people to get a little bit more confident in the industry.

Speaker 3: But we really haven't slowed and don't plan to slow our reinvestment both in tech, a reinvestment in adding bankers, particularly bankers that are focused on liquidity and smaller, more full relationships, and then in Treasury sales. And so we could pull the lever to decrease that reinvestment, but...

Speaker 3: I think would be focused more on the next several quarters and not the next several years. We think it's more important to our investors to continue building PP&R in the long term versus take a short term benefit. That's really the logic behind the reinvestment thesis. We still think it's a smart play and more beneficial in the long run.

Speaker 3: decline that at all. Now if the environment were to sour to the point that that makes sense then certainly we have that capacity to do that, but that's that's not the posture that we're we're sharing or taking at the moment. Got it. That's helpful John . I appreciate that. And then maybe just the final one for Chris. I appreciate the additional color on on the CRE book. I was just curious as you think about the pace of of removals.

Speaker 13: as you move through this year and next, is it, do you have a lot coming due soon or is it pretty, is it a fairly even pace, you know, over the next several years just trying to think about, you know, what could trigger appraisals and so on, just kind of how to think about the renewal process.

Speaker 7: Yeah, excellent question. We've been looking at that just to kind of stay ahead of what could be coming. And really they are evenly spread out. We probably actually have less renewals in the next year or two than we do a little bit further out. But generally speaking, it's pretty evenly spread out, which is a good thing. It allows us to kind of manage the book and make decisions along the way.

Speaker 1: Great. Thank you guys. I appreciate it. You bet. Thanks for the questions. Your next question comes from Matt Olney with Stevens. Your line is open.

Speaker 4: Thanks, guys. Just to follow up on the loan growth, you called out the CRE growth in the first quarter was from those construction loans that moved, I guess, to a permanent financing as the construction phase was completed. Anything else you can tell us about that dynamic? Keep hearing that the...

Speaker 3: secondary markets for permanent financing are still relatively shut down. So I'm just curious how that dynamic is impacting the bank. Thanks. Sure, this is John . I'll give you some color on that. So in looking at the income producing CRE category, that growth was about 90% multifamily.

Speaker 3: We still have a pretty high, a healthy buyer set, if you will. Demand for occupancy is still extremely high in our footprint, and so there's plenty of price support at the unit level and support for activity. So, at literally about 90% of the growth we showed in CRE was in multifamily, and about half of that was migration from C&D.

Speaker 3: to CRE and so that would naturally create the question of why didn't C&D go down and the answer to that is because projects that are already in flight tend to draw over time. So new commitment production is I would call modestly or maybe even moderately down.

Speaker 3: from where it was a couple of quarters ago. So I think what we expected to see happen this year is beginning to happen, which is the combination of supply cost, of labor cost, of debt cost is I think causing developers to think maybe they should wait for a...

Speaker 3: a few months to see if there's any benefit on inflation and benefit on perhaps revolving costs going down a bit. I mean, just 10 or 20 basis points can make a big difference in the total profitability of a project. So, commitments have declined even though the C&D bucket showed is flat. And so, as we go through the course of the year, we may not see those levels.

Speaker 3: growth continue. But our appetite in CRE is pretty uniquely multifamily overall because that's the business in the area that we're operating in that's enjoying the most support both in permanent and in occupancy increasing as time goes by. That's helpful John and then within that multifamily product that you John and then within that multifamily product 100% self assessment for

Speaker 3: population growth. And so, you know, the last two or three years and some of that was stimulated by the pandemic, but it wasn't different trends than we had pre-pandemic. It was just a little bit more exaggerated and that's predominantly Texas and Florida. And I think that's probably going to stay the course until we begin to see it flatten out overall. So there are...

Speaker 3: you know, other projects around the footprint, but the leading project is going to be in those suburban areas around the MSAs in Texas and Florida.

Speaker 7: Yeah, and I just add to that a little bit. John's absolutely right. You know, but we really look at you know the dynamics of those individual markets including the various projects that are kind of under construction to make sure that we're not supporting a project that's going into maybe what might be an oversaturated you know geography.

Speaker 3: three months ago that we would be endeavoring and working feverishly towards covering loan growth that we thought would be in the mid singles for the year with core deposit growth. And we got pretty close to doing that in Q1, coupled with the cash flow coming off the securities portfolio, we more than did that. So we're going to be doing that in Q1.

Speaker 3: I think as time goes by, we got toward the events that happened in mid-March, what we were planning to do is become even more important, we think, more thoughtful for the year. And so over the course of the next several months, we aren't intending to grow loans, just to grow loans. Since Arming was moved to Washington, attach a townazes on June 8. For many years theOne hand was very integral,.

It's about growing core deposits and then loaning that out in sectors that we believe will survive the test of a cycle. It is very important to us to focus on NIM, to focus on PP&R, our efficiency ratio, our expense ratio, and asset quality through whatever the cycle turns out to be. So if we have to give up on growth to achieve all that, that would be more important to us.

And then as the market begins to give a better opportunity for balance sheet growth, and we'll take advantage of that, then we have plenty of offensive firepower to do that when we think it's a little bit healthier environment.

then as the market begins to give a better opportunity for balance sheet growth, and we'll take advantage of that then. We have plenty of offensive firepower to do that when we think it's a little bit healthier environment. All right, thank you.

Opportunity for balance sheet growth and we'll take advantage of that. And we have plenty of offensive firepower to do that when we think it's a little bit healthier environment. Okay, thank you. You bet.

Your next question comes from Christopher Maranek from Janie Montgomery Scott. Your line is open. Hey, thank you. And thank you for hosting us all this afternoon. I just had a question, Mike and John , about slide 20 and the impact of the capital, you know, if you have this scenario of all the losses being taken. What's the impact from the cash flow hedges that, as you detail a little further back, do those help you as time goes on or are there scenarios where that can be punitive? About right now in terms of our cash flow hedges.

down are you better protected than you were is that fair to say?

Yeah, obviously if rates start to go down, then those cash flow hedges, the carry value, obviously becomes less negative, and so that's a plus in terms of the NII support.

Yeah, obviously if rates start to go down, then those cash flow hedges, the carry value, obviously becomes less negative, and so that's a plus in terms of the NII support. Okay.

And then I guess a related question if you didn't have the hedges in place, I mean as time passes you still have some natural cash flow and amortization of your securities book, right? So those numbers should be getting better even on their own beyond the theoretical issue. Yeah, yeah, absolutely. And you know the cash flow coming off the bond portfolio right now is about $125 million per quarter.

So that's a significant amount coming off and the bonds obviously, the carry value of the bonds will go down as we go through that. And then also the duration begins to shorten a little bit.

significant amount coming off and the bonds obviously, the carry value of the bonds will go down as we go through that. And also the duration begins to shorten a little bit.

So you're still in a position where there's no reason to a restructure and it's probably too expensive to do that anyways but then even some of the outlets that the Fed created that's not necessarily applicable at this point? No I don't think so but in terms of restructuring the bond portfolio I mean that's something we look at like anyone else does on a quarter by quarter basis but...

You're right, right now it's not something that we have an appetite to execute on. Great, thanks for the extra detail today, I appreciate it. You bet. Thank you very much. Okay, before we close the call, I wanted to get back to Brandon's question. His question was around the NIM for the month of March, so that was at 3.47%, so about eight basis points off the quarterly average. So just wanted to get back to Brandon on that. There are no further questions at this time. I'll now turn the call back over to John for closing remarks.

Thanks everyone for your attention to the call and for calling in a late afternoon. Thank you, Chantelle, for running the call for us. We appreciate everyone's interest and we'll look forward to seeing you on the road. This concludes today's conference call. Thank you for your participation. You may now disconnect. Good bye.