Q2 2023 Hancock Whitney Corporation Earnings Call

Speaker 1: This time all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, this call may be recorded. I would now like to introduce your host for today's conference, Catherine Mistich, Investor Relations Manager. Please go ahead.

Speaker 2: Thank you and good afternoon. During today's call, we may make four 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.

Speaker 2: 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. 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. We believe that the expectations reflected or implied by any forward-looking statements are based on reasonable assumptions.

Speaker 2: 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. 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: Thank you, Katherine, and good afternoon to everyone. The second quarter of 2023 exhibited the continued benefits and challenges of the current operating environment. Our balance sheet remains solid, with loan growth funded by both client deposit growth and cash flow from the securities portfolio.

Speaker 3: The precautionary liquidity added in March was eliminated in May as planned, so by June 30 we were back to normal levels of liquidity.

Speaker 3: As expected, loan growth moderated somewhat this quarter. Total loans were up $384 million, primarily driven by project draws in multifamily real estate, small to medium ticket business lending, and mortgage. As a note, about 60% of the volume we show is mortgage growth on slide 8.

Speaker 3: is in reality reclassification to mortgage from construction as residential projects are completed.

Speaker 3: Our indirect auto portfolio continues to amortize but has now reached generally immaterial levels. As of mid-year, demand continues to soften in new construction, middle market, and corporate banking as disciplined pricing, more conservative terms, inflationary pressure, and debt costs sideline clients waiting to be

Speaker 3: for a more advantageous borrowing moment. Interestingly, demand in small and medium business ticket items is more resilient as economic activity in that space remains brisk. The net effect is a slowing of net loan growth, but becoming more granular with better yields and in more self-funding sectors. So we would say at this point, the efforts of the Federal Reserve Bank to slow economic activity in the United States.

Speaker 3: Within investor CRE, growth in second quarter was 90% multifamily and 10% industrial, which we expect to continue in the short run. We maintained our guidance for the year with loan growth expected to finish the year in low to mid single digits. We continue to maintain a seasoned, stable and diversified deposit base.

Speaker 3: As shown on slide 6 of the investor deck, consumer and wealth deposits make up 49% of the deposit base, while the remainder is comprised of 11% public funds, 35% commercial and small business, and only 5% brokerage CDs. Uninsured deposits are 34%.

Speaker 3: The ICS product, which is available to clients as a way to ensure deposits above FDIC limits, has stabilized after an initial and brief surge following the March Bank failures.

Speaker 3: We remain pleased with the quality of our book of deposits, however growth remains a challenge in today's environment. While we reported deposit growth of $430 million this quarter, it is important to note that growth was influenced by a couple of factors. During the quarter we issued broker deposits of $590 million to support lending activities.

Speaker 3: Late in the quarter, we received approximately $250 million in temporary trust deposits. These deposits were invested by our clients shortly after quarter end.

Speaker 3: DDA Remix continued this quarter given the current banking environment drives promotional CD pricing. Clients are highly rate sensitive and we don't expect that will go away anytime soon, especially if we see another rate hike this month. Where CDs reprice in second half 23 is a meaningful part of the NIMS story going forward.

Speaker 3: for PP&R for the year and now expect PP&R to decline 1-3% from 2022. Earnings in a lower level of tangible assets contributed to improving capital levels. TCE was up 34 basis points to 7.5% and Tier 1 at 11.83% improved 23 basis points.

Speaker 3: We have been and continue to be cognizant of the current macroeconomic environment that is impacting our industry. We've maintained a robust ACL, we have solid capital and multiple sources of liquidity, which will help us manage through any continuing volatility. We remain confident in our ability to remain strong and stable as we have for 124 years. With that, I'll turn to Mike for further comments.

Speaker 4: Thanks, John . Good afternoon, everyone. Second quarter's net income totaled $118 million or $1.35 per share. Those levels were down $8.7 million and $0.10 per share, respectively.

Speaker 4: PP&R was $158 million for the quarter and was also down $9.2 million.

Speaker 4: The challenges we face as an industry from rates and deposits, both mix and betas, has led to higher than expected NIM compression, in turn driving link-order decreases in net interest income and earnings.

Speaker 4: Our cost of deposits increased again in the second quarter to 1.4% from 0.91% last quarter. For the month of June , our cost of deposits was 1.57%.

Speaker 4: That drove our total deposit data for the quarter to 104%, or 28%, cycle to date, or 25%, excluding the recently issued brokered CDs.

Speaker 4: We expect that our total deposit data for the cycle could now approach 35%, assuming the Fed raises rates to 5.5% in July and holds through year-end.

Speaker 4: The reality of higher rates for longer and the growing dependence on CDs as a non-interest-bearing deposit remix destination is driving this reality.

Speaker 4: Reminder that our total deposit data in the off-last upgrade cycle was 29%.

Speaker 4: As was the case in the first quarter, our deposits in the second quarter continued to remix between noninterest bearing deposits and primarily time deposits.

Speaker 4: Our mix of non-interest bearing deposits to total deposits moved from 43% on March 31st to 40% on June 30th.

Speaker 4: Given the pressure on deposit costs and assumed continued remix of non-interest bearing deposits,

Speaker 4: we do see additional NIM compressions in the second half of 2023, although likely at a slower pace than what we experienced in the first half of the year.

Speaker 4: Again, assuming Fed funds tops out at 5.5%,

Speaker 4: We could see NIM compression of about five to eight basis points in each of the next two quarters.

Speaker 4: Included in our assumptions is the expectation that our non-interest bearing deposit mix could fall to just below pre-pandemic levels by the end of the year or about 35%.

Speaker 4: Slides 14 and 15 in the deck provide additional details related to our NIM and interest rate sensitivity.

Speaker 4: Turning to credit, criticized levels were relatively stable and have been for several quarters.

Speaker 4: We did have an uptick in non-accrual loans as those levels have begun to normalize.

Speaker 4: Net charge-offs were down $3.4 million from last quarter and came in at six basis points of average loans.

Speaker 4: During the quarter, we built reserves by $4.2 million, which resulted in a solid ACL of 1.45% to loans at June 30th.

Speaker 4: Fee income improved this quarter driven by increases in service charges on commercial accounts and specialty income.

Expenses were up slightly in quarter, driven by higher insurance and regulatory costs, but also higher technology-related costs. Otherwise expenses were well controlled.

We have continued to reinvest back into the company through additional revenue-generating staff, technology improvements, and automation, all leading to increases in personnel and technology-related expense.

We intend to continue these reinvestments to support adding additional value in the future, but of course are paying attention to the impact of inflation on expenses during a challenging top-line revenue environment. We are pleased to see stability in other expense categories and as noted previously,

we will have to manage through items outside of our control, such as retirement costs, benefits, insurance costs, as well as normal FDIC assessment increases.

All of this leads to a few updates to guidance called out on slide 20 reflecting both second quarter activity as well as changes in the operating environment. John mentioned the change to the PP&R guidance, but we have also updated guidance on fees, expenses, and the efficiency ratio.

One important note, the PP&R and expense guidance does not include any impact from the expected FDIC special assessment related to the March 2023 bank failures. I will now turn the call back to John .

Thanks Mike and moderator if we could let's open the call for questions. Thank you sir. Ladies and gentlemen if you have a question please press star 1 on your telephone keypad. Once again that is star 1 to ask a question. We'll go first to Michael Rose Raymond James.

Hey, good afternoon, everyone. Thanks for taking my questions. Mike, I appreciate the commentary around the NIB mix settling a little bit lower than maybe what you talked about before. Can you just give us a sense for the realm of competence or the range of competence here that 35% roughly is?

Kind of the floor and you know, what would be kind of the the puts and takes there because I think we're just trying to get a sense for you know, you know, are we approaching a bottom here in terms of mixed shift and You know beta expectations. Thanks Yeah, Michael, obviously, this is Mike be glad to and You know

by the end of the third quarter and then down to maybe 35% by the end of the fourth quarter. And obviously, you know, it's this environment related to higher rates for longer that's driving that. But then also if you look at our average account balances, you know, they're still about 20 to 25% higher now compared to where they were pre-pandemic.

So, I think to get full confidence on where that NIB mix actually ends up, we really need rates to start to come down and we need that average account balance also to come down some. So, the 35% is what we're looking at by the end of this year.

And into 2024, I mean obviously we're not here to give guidance for 2024, but certainly if we don't have lower rates and we don't have that average account balance down, we could end up lower than 35% as we move into 2024. But for now, our focus is pretty high confidence that I think it will be around that 35% level by the end of this year. Thank you.

Thanks for the call, Mike. Maybe just as a follow-up, just switching to expenses, I think they were a little bit higher than what I was looking for. You raised the guidance a little bit. Can you just talk about some of the expense reduction efforts? I understand you're investing in the franchise, technology investments, things like that. topics today, I look forward to seeing what effects how you make money through your investment

Just given the pressure on spread revenue, what kind of actions could we expect to see you guys take to get that efficiency ratio down back closer to your CSOs? I know it's ten quarters out from here, but just trying to get a better sense of what actions you could take. Thanks.

Yeah, I mean obviously we did a lot of hard work throughout our company to get our efficiency ratio down to the levels that we reported the last couple of quarters. So there's certainly no joy in being slightly above 55% like we are right now. But going forward in terms of...

continuing to control expenses, I mean that's something that I think everyone knows is pretty well institutionalized at our company and it's something that we focus on and I think do a good job of. The things that are kind of driving the change in expense guidance compared to last quarter really have to do with

visibility that we have in the second half of the year to certain expense categories. We called out higher pension, higher regulatory costs, and then higher insurance costs related to the PNC insurance on our facilities. So we really do look at those as kind of one-off items. And I think if you look at the change guidance, so the seven and a half to eight and a half percent

We talked in the past around standing up, you know, a very professional and very effective strategic procurement process. That process is becoming mature and we certainly expect to harvest expense savings, you know, through the full implementation of that program. You mentioned reinvesting back in the company. Is there something we feel strongly about continuing to...

We've invested a great deal of money in technology over a number of years and the last two or three years the bulk of that technology spend was about 75% toward frontline effectiveness in terms of implementing Salesforce throughout the revenue bearing part of the company, a much more professional marketing lead.

coming back and you don't have to look any further than the continued growth in both deposits and loans in the small and mid-sized ticket area of business lending to see that benefit. At the same time, as we're rolling out all that technology, I mean the turnover rate in our industry has been horrendous and we've not been immune to that, particularly in the hourly levels.

I think some thoughtful consideration of how long we should expect to take in this environment given the spread differences for the revenue-bearing individuals we've hired to get up to their full profitability. I think that's probably where we focus for the next couple of quarters. So I think Mike's word choice was good. There's no joy being above 55. About half of that driver were things that we really...

cutting control, but what goes up will come down and the assessments will decrease. The insurance costs will eventually decrease both on property and in FDIC. And I think I'd like to see a little bit better efficiency in our back of the house through some of the automation over the next couple of quarters. So we've got some work to do there if we're gonna continue the reinvestment pace we've been on. But I appreciate the question.

You know, you guys, you know, approaching 12% on CT1, I think I know the answer. We just want to

Curious as to your appetite for buybacks.

Yeah, Casey, this is Mike. So, appreciate the question on capital and yeah, you're right. I mean, really for the next couple of quarters, buybacks is not something that's a big priority for us. So, I don't know that we'll be participating in that, at least for the next couple of quarters. In this environment.

Our stance really is more around preserving and growing capital. And we're pleased to see those capital levels move on up. We'll continue that approach.

Okay, and then what about potentially rejiggering the bond book, given things are a lot calmer versus March and April ? Is there any appetite to use some of the excess capital towards that? No.

Yeah, I think there is and that's a great question. And so that's something that, you know, we've looked at through this environment and continue to look at, not here today to announce that we're executing on anything per se, but I think it's a fair expectation to have that we would certainly look very seriously at doing something like that in the second half of this year.

Thanks very much.

Okay, great. Thanks very much. You bet.

Next up is Catherine Miller, KBW. Thanks. A question on the margin. It feels like from your margin guidance, we're going to be ending the year somewhere around 315 to 320, I think, depending on, you know, where the deposit remix shakes out. And

As you think about next year, which I know we're just trying to get this year done, but as we think about next year, as we're exiting near around that kind of margin level, how do you think about hire for longer and what type of, I don't know, kind of tailwinds you maybe will have on the loan portfolio or

Maybe with some defenses you may have if we stay, because of that 550 Fed funds through next year. Thanks. You bet, Catherine. I think to kind of start the narrative on that question is, you know, we talked just now about the potential of restructuring the bond portfolio. That could certainly, I think, be a nice lead in to 2024.

And look, just depending on the rate environment and kind of where we are with our deposit remix, you know, that'll play a big role and a big part in how we think about our NIMF next year. It certainly appears that deposit costs, you know, might be leveling out and that's part of our...

narrative and assumption for the second half of this year and if that's the case and continues into next year there's certainly the opportunity for CDs potentially to reprice a little bit lower next year and then obviously if the operating environment is a bit better you know the potential certainly exists for us to add.

loan growth next year. So again, a bit premature to talk about strict guidance for 2024, but those are the things I think we kind of think about in that regard. John , anything you want to add? Catherine, this is John . This is obviously not easy to model, but just...

thinking about conceptually how the higher for longer environment could affect our book. We have about two, maybe three quarters, maybe two and a half quarters of growth out of sort of all things real estate. We have a pretty big C and D....

and a really excellent team that's done great with terrific quality and good spreads for a long time. But that pipeline is crimping a bit and so the growth we see in C&D on slide 8 is really more driven by draws on existing projects.

So as those projects are completed, a minority of that book will move into real estate and a good bit of it will get sold off in the permanent finance markets. Ditto mortgage, those projects come out if they're a resident construction project, get reclassed into mortgage, and then begin to amortize. And right now about 90% of our applications are directed to the secondary market on mortgage. So.

When you sort of apply all that together, between that and the disciplined pricing and conservative credit appetite that we have in middle market, corporate, and certainly on syndications, there should be some repatriation of liquidity next year out of that sector of the portfolio back. And the intent is to deploy that and more granular, better spread.

and less lumpy areas that are better for margin. We're also getting about $2 of liquidity to a buck of lending in those small business sectors. So I think, I don't wanna talk about 24 or too much, Catherine, but there is some self-generated relief in liquidity next year. And if the policy for...

So how all that mixes together should, and if the Fed stops raising rates as we all hope they will here in the back half of the year, then we should see a little bit better picture in 24 for stability. Both portfolio and spread and NIM if that all makes sense.

Too early for 24 right now, but that's just a ton. That's very helpful, very helpful. And then, John , you hinted that there was some CD repricing to be aware of in the back half of the year. Can you just remind us of what that looks like? Catherine, this is Mike. Back half of 23.

Yes. Yes, so we have about a billion two of CDs maturing in the third quarter. Those are coming off at about 386. And then in the fourth quarter we have about 900 million of CDs maturing and those are coming off at right at about 4%. We also have about $500 million of the broken CDs that we added back in March.

that'll be coming off in the month of December . Those are coming off at 545. So those are the CD maturities we have in the second half. And so that story, I think I used the words NIMS story earlier, Catherine, if we were a little more hopeful that we would not see another rate increase, but I think the tone from the Fed.

realistic vol in terms of the Fed does raise rates again and perhaps even again and tightening continues then the competitiveness around us for CDE rates may not relent until after the end of the year and if that happens our ability to reprice down for the levels might mention really is challenged and so

Yep, that makes perfect sense. Perfect sense. And then maybe one last one. Just, I know there was one commercial NPL that increased this quarter. If you could just give us a little bit of color on that.

Chris, you want to take that one? Yeah, sure. Catherine, it's Chris Luca. Yeah, it was a credit that we've been tracking for a while, and it kind of migrated from criticize to NPL, which is why you don't see the criticize going up at all, really. And frankly, it's just a customer in the...

All right, thank you.

You bet. Thank you, Catherine.

Your next question comes from Brett Raveton of the group. Hey good afternoon thanks for the questions. Wanted to first start on fee income and just the guidance you know the change their link order if that was a function of

less annuity fee growth than maybe you were expecting or if there were dynamics in the back half of the year that resulted in that change? Yeah, great question. This is John . Great question and you're pretty right on top of it. The guidance change is really sort of like in the deposit conversation we just had with the prior question. When we look at the effect of higher rates for longer.

there are two areas of the fee income buckets that should see less activity. So it's not our lack of appreciation for the sector, it's just the reality that we will likely sell less annuities in the back half of the year than we sold in the front. We had a terrific year up until now.

But when we look at less traffic with the pie of opportunity shrinking a bit in both annuities and in non-amortized loan fees, if we're doing less lumpy loans, then you get less fees that you bring to the bottom line that same quarter. And so with a little bit more anemic outlook for that traffic for the back half...

and the outlook for opportunities. So if the opportunities were the same as they had been, we wouldn't have changed the guidance. So it really is just an issue of the pie getting smaller.

Okay, that's helpful. And then just wanted to make sure I understood the thought process around the competitive environment. I think last quarter, banks kind of felt like things were settling down into earnings season in April after the crazy March and I feel like everyone kind of...

add a little bit since maybe the heavy

period of late May. Is your question specific to deposit pricing, Brett? Just to make sure we hear you right. Yes, yes, just to deposit pricing and what you're seeing in your markets in terms of your competitors pricing.

Yeah, this is Mike. I think you hit the nail on the head there and certainly over the course of the second half of the second quarter we saw that ratcheting up of primarily deposit pricing competition. A couple of folks, you know, have kind of stepped out there. So that more or less I think has kind of calmed down a bit. We certainly don't see.

that getting any worse as we move into the first couple of weeks of July . Okay, great. And then maybe one last quick one, you know, one of the push backs I get on Hancock is

just the markets might not perform as well in a recession. So I was just curious what you were seeing economically and some of the coastal markets, you know, how New Orleans was behaving. You know, I know that

Jazz Fest was probably the best one ever in May, so I know there's been some solid tourism.

Yeah, well I hope you came down to visit. It was a good show this season. But really, our markets, you can kind of bifurcate the markets into the high growth markets like in the larger MSAs of Texas and then in Florida where they've had such massive inflow of population.

in the COVID pandemic and pandemic recovery area. Those would sort of be in one group and then a little bit slower growth there in the core of the area, but very dependable. So in the last recessive period, we were really pleased with how those books performed. I mean, we had a bad time with energy, but it was...

and the sentiment being positive. And when we talk to our clients, particularly the larger clients, four or five months ago or so, there was a lot more, and when I say concern, I don't mean concern like hand-wringing but just very mindful of the risk that if the Fed's increase in rates was so steep and so long and kept going, that we could see that proverbial hard landing. We really don't hear that kind of concern from our clients.

I hope we don't have one, but I feel good about it. The tourism this summer has been off the hook, really across our overall footprint. New Orleans that suffered mightily during the pandemic because the convention center and family tourism economies shut down hard in 20, and really only family came back in 21, then everything began opening back up in 22. It's fully back.

the city of New Orleans I think is just more, that's a tendency we're seeing throughout the country. And so I hope that kind of gives you the tone of a lot of confidence in our markets. We actually feel pretty good about them. That's great. That's very helpful. Thanks for all the color.

that's a tendency we're seeing throughout the country. And so I hope that kind of gives you the tone of a lot of confidence in our markets. We actually feel pretty good about. That's great, that's very helpful. Thanks for all the color. You bet, thank you.

Kevin Fitzsimmons from DA Davidson is up next.

Hey, good afternoon, guys. How are you? Hi, Kevin. Just one thing I wanted to ask about the margin. I know it's been very clear that there's ongoing margin compression ahead, maybe at a less of a pace than what we've seen in the second quarter. But I was a little... I was always=(?)

actually encouraged to see the margin for the month of June was equal to The full quarter margin if I saw that right as opposed to it being lower like like I think we're used to seeing indicating, you know it coming going lower coming out of the quarter and I was just curious whether any unusual items driving that or or

or is that a source of encouragement? Yeah, Kevin, this is Mike. Yeah, that's correct. Our NIM for the month of June came in at 3.30, which, as you pointed out, was equal to what we are reporting for the quarter. So, yeah, that is encouraging, and I think that speaks probably.

as much as anything else to the fact that we do see deposit costs kind of leveling out a bit. You know, certainly I think there's more of that to come in the second half of the year. In fact, if we look at the increases in our cost of deposits for the second half of the year compared to the first half of the year, much less.

that the NIM compression will lessen as we go through the rest of the year. And really the primary driver and probably the biggest wild card will be the continued level of NIB remix. If that lets up a bit for whatever reason as we go through the second half of the year, then obviously I think that bodes well.

for us coming in at maybe the lower end of the NIM compression range that I gave in the prepared comments. And, Mike, I'm assuming you're tracking on a, you know, obviously quarterly, but monthly, weekly, the deposit remix, but I guess it can...

It's hard to draw conclusions on it if you see it settling a bit because it can be very chunky, right? So if we have a Fed hike and that could lead to a big chunk and then it's a question of if we have more hikes After that, but I guess I guess that we do we get at a certain point? Even if there are more hikes so we get to a point where?

just the nature of those accounts that you have, that that outflow would decline because who's left?

In there that hasn't taken it out. I guess yeah, I mean that's a great point and obviously you're right I'm gonna watch that very closely you could even say on a daily basis, but and there was a point during the quarter where We thought there was a bit of a fighting chance for maybe For the quarter to show a little bit lessening that remix, but if you look at the percentage numbers

In the first quarter, that remix was about 3.5% and the second quarter, pretty much 3.5%, maybe just a tad lower than that. But the other thing, as I mentioned a little bit earlier, that we watch very carefully, is kind of the average balance per count. And again, as I mentioned, that's still a bit higher now compared to where it was in the second quarter. So...

So... And what do you think might trigger that average balance per count to go down? Is that just being stubbornly high because there's just less activity going on? People aren't getting money to work? It's obviously coming down and has come down, not only for us, but for most banks. But it still is, you know, meaningfully higher right now than it was.

to the pre-pandemic average balance and the spending rate of things people want and then later what they need, it trended to be about literally June of 2024 when we would reach the pre-pandemic average balance in a pretty complex piece of algebra.

And that's really still where it seems to be heading. Now, at that time, we didn't see a five and a quarter overnight money rate of materializing at the pace that it did. And so one would think that we would be getting a little closer to that average balance if it's really the new bottom.

sooner than June simply because we're already seeing as we monitor traffic and tone from clients the spending habits of consumers has certainly changed to, you know, they're doing more trips than buying bigger houses right now. So the sources and uses of cash have changed a bit in 23 versus...

the behavior we're seeing right now tried our best to migrate what we thought that book would look like by the end of the year and guide it to it. And we take no pleasure in guiding to anything that's not positive, but the environment we're in and the competitors that we have who are loaned up way too close to 100 percent.

They, you know, we want liquidity, they have to have liquidity and their pricing accordingly and that's driving some of our costs up a little faster than we would have liked to have seen them. So our thought of normalization may be a little bit further, maybe over, you know, past year in and into 24 versus the fact half of this year like we had hoped a quarter or so ago.

Thank you.

That's great, John . One last one for me. You mentioned earlier how the level of borrowings has come down. That was an abundance of caution, post-bank failures, and now you've kind of taken that off. Should we assume that level of borrowings at second quarter end remains fairly stable, or could there be more moves in that line item?

Yeah, Kevin, this is Mike again. I think we're more or less back to managing the balance sheet in a normal fashion. So the level of liquidity we kept on the balance sheet of June 30th may be a bit higher than what we would normally do, but not much more than a couple hundred million or so. So maybe that comes down a little bit more, but I don't know that that's a... Yeah, definitely.

a significant number. Okay, great. Thanks very much.

You bet. Thank you for the questions.

You bet. Thank you for the questions. We'll go next to Brandon King truth securities.

Good afternoon. Good afternoon. Yes, so I wanted to know what your expectation was for the pace of increases in loan yields on the balance sheet. We saw there was a 27 basis point benefit in the quarter and new loan yields are coming on at 7.4%.

So I wanted to know to what extent could you potentially offset some of this deposit pricing pressure over the next couple of quarters? Yeah, Brandon, this is Mike. I mean, that's absolutely part of what we're thinking about for the second half of the year. You know, certainly our earning asset yields will move up as the Fed raises rates. We have a very focused effort also.

on improving our loan yields, both on new-to-bank business as well as renewals. So that's something that's a big, big focus on what we're trying to accomplish and I think is part of our assumptions as we think about maybe less named compression in the second half of the year versus the first half of the year....related to the bond portfolio aside from...

you know, potential restructuring. No change in how we think about reinvesting back in the bond portfolio right now. We'll continue at least for the next couple of quarters and maybe beyond with letting those cash flows and maturities help fund loan growth and other needs on the balance sheet. So I think that's how we think about those things. John , anything you want to add on the loan side? No, the only thing I'd add, Mike, if I could do a great job on the answer, Brandon, the, I mean,

a bit from the index increases as the Fed makes 25-depth increases. We'll continue to see the fixed rate book expanding. And what hasn't happened yet in our industry, at least in our region that I believe will start occurring is banks have settled in to having a certain amount of NIBs relevant.

on the revolvers begin to reprice up a little bit beyond where they are today. I think just as banks settle and when that happens, we probably all move at about the same pace. So I think we may see better spreads against Prime if Prime stabilizes. And we may see, we will see, a fixed rate.

money actually get reprised higher as we go into the next year. So if deposits do stabilize toward the end of the year, and the competition from T-bills has waned from where the ferocious competition has been the past few quarters, then that does indicate that the NIMS stored for 24, 25 may be a lot brighter than the compression we took in the 23. But I don't want to throw any numbers around at this point in time. We'll need to wait till we get a

Sure, I'll tackle that. This is John again. And look, I love this business and I'll talk too much about stuff like that because I really enjoy talking about it, so I hope I don't take up too much time or give you more detail. But ultimately, there's three different classes of loans inside that revolver. We're a real consumer bank, so we have a robust home equity fund.

business that is revolving and those utilization have been ticking downward really ever since Prime got to about 100 basis points below where it is right now. So volume of new applications has come down I think as people decide not to borrow and put their home up to do it for the time being and the utilization actually has come down.

down the line and just opted to pay the fee on their analysis accounts. So you had those two of the three total sectors in line utilization coming down. The contrary to that was on the construction side where as projects move through the pipeline they start off on the first day at zero. get through the pipeline and the plot of the project.

and then they move up, you know, say 85 or 90% as they get to the completion of the project, and then it either flips out of the bank to perm or into real estate for a period of time until it leases up and the project is sold. So if the pipeline is a little bit crimped on the way in as new projects volume comes down, then there's a natural utilization increase that occurs as the average project gets.

closer to completion. So if you follow me with all those three right now, the downward pressure from consumer revolvers and commercial revolving lines of credit are offsetting the increase that we're getting on the construction utilization side. And so that will continue for a couple of quarters until it eventually normalizes. Is that where you were headed with your question?

Yeah, yeah, yeah, that makes sense. Yeah, that makes sense. Okay, thank you so much for taking my questions. You bet. You bet. Thank you. Your next question is Steven Scouton, Piper Sandler.

Good afternoon, appreciate the time here. I wanted to follow up, just going back to that CD conversation, I know you said there might not be as much room to reprice those lower as you thought at one point in time. Can you give us a feel for where you saw new CDs?

come on out at a percentage basis this quarter. Yes, Steven, this is Mike. What I can share with you that probably is equally as useful is kind of where our current rates are. So, you know, that gives you a little bit of insight into where we think those maturities may land.

So the highest rate we have right now is a five and a quarter at eight months. We also have a five percent at three months. But then we also have a little bit longer maturities, nine and 11 months at four and a half and four percent respectively. So I think where those maturities land in terms of people re-upping.

their CDs will depend a little bit on their outlook for rate. So if people want to lock in a little bit lower rate for a bit longer, then some of the damage to our NIM related to the CD maturities won't be as bad. If folks opt to stay short and higher, then obviously that's a little pain that we have to endure.

Yeah, that makes sense. And then I have a question kind of around your acid sensitivity modeling, and this is just something, and I've been curious about this industry-wide really, but you know, you still screen as acid sensitive, I think it's, what was it, up 1.9% in and up 100 basis points, but obviously in the near future.

pricing that John was speaking to a minute ago. I think the short answer to your second question is yes. We do think that that introduces some level of stability. Related to your first question, just about the fact that we describe as modestly asset sensitive. You know, 59% of our loan book is very...

the non-interest bearing remix that's occurred, you know, on our balance sheet, obviously, as well as most other banks. So, you know, certainly no secret that if we go back a year or so ago, our NIB mix was nearly 50%. We had three-quarters in a row where we were kind of at that 49, 50% level. And, you know, now we're down to...

And then just last thing for me, I know you said earlier, you know, kind of expense management is an institutional mindset at this point, but I'm wondering, you know, obviously, given the difficult revenue environment, is that something that you take an even deeper and closer look at maybe a more, you know, the potential for more fulsome expense plan or anything along those lines? Do you see that?

in future quarters by any chance? Yeah, I think so. But again, keep in mind our commentary narrative around continuing to reinvest back in the company. So as a reminder, back in the days of the pandemic back in 2020, we were really one of the first banks that really made a concerted effort to use the pandemic as a period to get a lot more efficient.

And that resulted in a pretty significant decrease in our expense run rate and a pretty nice increase obviously in our efficiency. In fact, our efficiency ratio actually went slightly below 50 percent just a couple of quarters ago. So that's something that we know how to do and that's what On Photo

I mean what we mean when we say that expense management is really kind of institutionalized at our company. But again, in this environment, we also see the opportunity to reinvest, and so that's important to us as well. So the notion of being able to cut expenses or save expenses so that we can be efficient and also have room to reinvest back in the company, those things are very important to us.

John , anything you want to add? Yeah, not to belabor the question any further, but Stephen, we gave that target a 55 percent out there, and while it's in the CSOs, we're really not pleased to see it go above 55 at all, even though we haven't gotten to the CSO period. But, uh...

I mean the drivers for that are largely deposit pricing, the pressure on them. And FDIC insurance expenses are just a lot more expensive in 23 than they were in 22. We didn't expect that a year ago, but here we are. So all those things are real.

discretionary expenses that will be implemented as we move along. And if the benefit of continuing in our reinvestment pace outlays some of the pain of doing some of the more across the board expense curtailments, then we're not bashful about making that call.

Our goal though is we don't think about everything in quarters, we think of it in years. And it's very important that our company is in super and very strong shape to execute and play very offensive ball when the economy turns and we start seeing a better opportunity to grow. And so I don't want to curtail.

investments to the degree that we will wish we hadn't a year or two down the road. So we're still adding bankers, we're still adding technology, but the pace with which we're doing it is going to need and require some belt tightening elsewhere. So not really talk about those techniques and all that now, but it's all the things that you would imagine. power, which we expect to be getting the budget ready.

based on our history of being pretty good at managing expenses. Yeah, that's extremely helpful. Thank you all for the time and time. You bet. Thanks for the questions. We'll go next to Christopher Maranek, Jenny Montgomery Scott.

Thanks for hosting the call today. A quick question for Chris on the criticize assets. I'd see that they were stable obviously this quarter but just curious kind of what's out there that would cause that trend to either go down in a good way or perhaps see some inflection with deterioration in future periods.

Good question, Christopher. We're not really seeing any specific sector related confluence of events. Obviously we're operating at a historically low level on a criticized loan level. So there's probably little chance of substantial improvement.

costs associated with some of the inflation that is starting to cool off, but obviously has not come down. So they're having to kind of manage through that as well as companies that are maybe having some continued staffing challenges just because of the relatively low unemployment rate. So I think those are the sectors that we keep an eye on..

the higher interest rate for that for that debt at renewal. So we're looking at that closely as well. Are those drivers for potential changes to the reserve beyond where your position now?

I mean, not really. I mean, it could be, but generally speaking, we are factoring that into the decisions that we take. We think that the reserve is adequate for the risk that we have in the portfolio. Our objective is to kind of match the reserve to any sort of direction of risk.

if we get some stability on pricing, kind of trying to reassess how to value the franchise and the sort of funding advantage that you've always had.

Yeah, so Chris, I assume you're talking about our NIB mix and the long-term stability related to that. Sure. Yeah, and if so, yeah, look, that's been a hallmark of our companies and continues to be. And while that NIB mix has certainly come down to where it is now from a peak of nearly 49%.

You know, we think and believe that, you know, when the cycle is done, that where our mix ends up will still be, you know, an enviable position and certainly we would think it would be top quartile. So that's something that we're very focused on and, you know, we think and believe, again, that will continue to be a hallmark of our company and our balance sheet.

Great, thanks for taking all of our questions today. Sure, you bet.

Great. Thanks for taking all of our questions today. Sure. You bet. Next up is Matt Olney-Stevens.

I just want to follow up on that lung growth discussion and that one-time closed product that drove the 2Q growth. I appreciate this was a reclassification as far as the driver, but I'm curious about the product itself.

So, are these loans all originated by the bank and then when they move from construction into the mortgage classification, do any of the terms of the loan change?

Not many at all. They're pretty much fixed, but the volume of that, just to make sure I explained it clearly, about 60% of that number was the reclass. But the pipeline is zero and has been zero for some time. So, what we see in that category is largely

Did I answer your question? Yeah, that's helpful. And then just one more follow up here for Mike on the discussion of those time deposits for pricing the back half of the year. I heard those current offering rates that are out there that you disclosed. I'm curious if the current guidance...

you know, along with a re-up number that we have in mind, so around 80% or so. So we think of roughly 80% of our CDs will reprice into some configuration of the current rates that I gave on those CDs.

with a re-up number that we have in mind, so around 80% or so. So we think roughly 80% of our CDs will reprice into some configuration of the current rates that I gave on those CDs. Okay.

Okay, great. That's all from me. Thanks, guys. Yeah, thank you very much for the questions. And everyone, at this time, there are no further questions. I'll hand things back to management for additional or closing remarks. Sure. Thanks, Lisa, to you for moderating today. Everyone, have a wonderful day and a wonderful weekend, and we'll see you on the road. Once again, everyone, that does conclude today's conference. Thank you all for your participation. You may now disconnect.