Hancock Whitney Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
October 17, 2023

There are 13 speakers on the call.

Operator

Good day, ladies and gentlemen, and welcome to Hancock Whitney Corporation's Third Quarter 2023 Earnings Conference Call. At 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, Kathryn Mestich, Investor Relations Manager, you may begin.

Speaker 1

Thank you, and good afternoon. During today's call, we may make forward looking statements. We would like to remind everyone to carefully review the Safe Harbor language that was published with the earnings release and presentation and in the company's most recent 10 ks and 10 Q, including the risks and uncertainties identified therein. 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. We believe that the expectations reflected or implied by any forward looking statements are based on reasonable assumptions, but are not guarantees of performance or results, and our actual results and performance could differ materially from those set forth in our forward looking statements.

Speaker 1

Hancock Whitney undertakes no obligation to update or revise any forward looking statements, and you are cautioned not to place undue reliance on such forward looking statements. Some of 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 8 ks are also posted with the conference call webcast link on the Investor Relations website. We will reference some of these slides in today's call.

Speaker 1

Participating in today's call are John Hairston, President and CEO Mike Acree, CFO and Chris Zaluca, Chief Credit Officer. I will now turn the call over to John Hairston.

Speaker 2

Thanks everyone for joining us this afternoon. 3rd quarter's results reflect continued growth in capital ratios, Fully funding loan growth with core deposit growth, a slowing remix of DDAs and early but welcome signs of Due to higher loan yields and lower growth in deposit costs. As anticipated, loan growth again moderated this quarter. Total loans were up $194,000,000 driven mostly by project draws in both multifamily real estate and mortgage. As noted on Slide 7, the net growth in both CRE and mortgage relates primarily to migration of in process construction projects as they are completed.

Speaker 2

Demand has continued to slow as higher rates and insurance costs have changed client behavior. Today, we are seeing both Commercial and consumers either choose to forego large purchases or use existing funds in lieu of borrowing. Our own internal appetite also continues to moderate as we remain focused on full service relationships, disciplined pricing and selective appetite in some sectors. Our path to loan growth will be determined by our ability to fund growth with core deposits and lending within our risk appetite. The credit quality of our loan portfolio remains solid and we continue to be well reserved.

Speaker 2

Criticized commercial and non accrual loans remain at low levels And in fact, criticized ratios are again at a historical low. Despite the one large idiosyncratic charge off disclosed during the quarter, We have seen no significant or systemic weakening in any sector of the portfolio. That said, we are mindful of the impact of higher for longer rates, Inflationary cost in the regulatory environment, thus are proactive in monitoring for any developing risks. Core client deposits grew this quarter and we continue to maintain our diversified deposit base. Total deposits were up $277,000,000 with the remix continuing from DDA to time deposits and other interest bearing deposit products.

Speaker 2

The DDA remix did however show signs of slowing this quarter and we ended the quarter with 38% of our deposits and DDAs at The top end of the range contemplated in the mid quarter update. Promotional CD and interest bearing money market pricing contributed to the remix this quarter. Our clients do remain rate sensitive and we don't expect that will significantly moderate until rates stabilize or start to decline. When looking at our balance sheet, our guidance for both loans and deposits is unchanged and we see the trends from Q3 continuing through year end. A quick note on capital.

Speaker 2

Our TCE was down this quarter to 7.34% due to impacts of higher long term rates on AOCI. However, we are pleased to report that our Tier 1 ratio ended the quarter above 10% and our CET1 ratio was above 12%. As a reminder, we have no preferred stock shares in our capital stack. As we reflect on the year so far and look into the Q4, we believe our strong deposit base will continue to help support our funding needs. We maintained a robust ACL and continue to build capital, which we believe will help us manage successfully through this cycle.

Speaker 2

October marks Founders' Month and we look forward to continuing our legacy of commitment and service to the people and communities we operate in as we have for over 124 years. Before turning the call over to Mike, I would also like to take a moment to honor the life of George Slogel, Who joined the organization in the mail room is a high school student, ultimately rising to Chairman and Chief Executive Officer during his long 52 year career. George passed away unexpectedly and peacefully on October 6, only weeks after giving interviews to various trade organizations on the history and future of banking. George was a young and particularly vigorous eighty three in his passing and we will dearly miss our long time friend and colleague. With that, I'll invite Mike to add additional comments.

Speaker 3

Thanks, John. Good afternoon, everyone. 3rd quarter's net income was $98,000,000 or $1.12 per share. That was down $20,000,000 or $0.23 per share from last quarter and was primarily related to the previously disclosed charge off of 29,700,000 PP and R for the quarter was $153,000,000 down just $5,000,000 from last quarter's level of $158,000,000 In part due to a significant slowdown in our NIM compression, the rate of decline in our NII also slowed, while a modest increase in fees were nearly offset by a similar increase in expenses. As mentioned, our NIM compression did slow this quarter to 3 basis points from 25 basis points last quarter and was better than our previous guide of 5 to 8 basis points of compression.

Speaker 3

The quarter's improved NIM performance was driven by a leveling off of deposit cost, a slowing DDA remix, less reliance on wholesale borrowings and better loan yields. Our cost of deposits increased 34 basis points in the 3rd quarter compared to an increase of 49 basis points in the 2nd quarter. Slide 13 provides additional monthly trend detail for the cost of deposits, reflecting the slowdown in each month of the quarter. We expect deposit costs could be up around 18 basis points or so in the 4th quarter and would bring the second half of the year's increase to around 52 basis points compared to 90 basis points in the first half of twenty twenty three. Our total deposit beta for the Q3 increased to 127% or about 33% cycle to date.

Speaker 3

We expect the cumulative level will approach 35% by year end. How much higher the deposit beta goes from there will of course depend on the direction of deposit rates next year. On the asset side of the balance sheet, our loan yield improved to 6 8.03% and was up 63 basis points from last quarter. The previous quarter's increase was 52 basis points, So momentum is building with our new loan rates. As we mentioned throughout the quarter, increasing our loan yields has been a focus point for the company and will continue to be so going forward.

Speaker 3

As we look forward to the Q4, we do expect an additional 3 to 5 basis Points of NIM compression. We're assuming that the Fed will not raise rates in the 4th quarter and therefore stays at 5.5% through year end. We expect ongoing headwinds from the continued DDA remix, albeit at a slower pace, as well as the impact of CD maturities in the 4th quarter. We do, however, continue to see positive tailwinds from continued stabilization in deposit cost and higher loan yields. Net charge offs were $38,300,000 this quarter or 0.64 percent of average loans, of which 50 basis points was related to the idiosyncratic charge off mentioned earlier.

Speaker 3

Reserves were down slightly during the quarter, but still ended the quarter with a robust ACL to loans of 140 basis points. This quarter was our 3rd consecutive quarter of fee income growth from the Q4 of 2022. Our service charges on deposit income improved and we benefited from a strong quarter of income from our specialty lines of business. Our guide for fee income is unchanged this quarter and we expect a slight decline in the 4th quarter. Expenses for the company were relatively stable this quarter.

Speaker 3

We remain confident in our annual guide for 2023 and currently expect expenses in the 4th quarter to be down from the 3rd quarter's level. And finally, all aspects of our forward guidance are summarized on Slide 20 of our earnings deck. I will now turn the call back to John.

Speaker 2

Thank you, Mike. And let's open the call for questions.

Operator

Your first question comes from the line of Michael Rose with Raymond James. Your line is open.

Speaker 4

Hey, good afternoon, everyone. Thanks for taking my questions. Just wanted to start on the reserve release this quarter. Yes, certainly understand the credit. I appreciate you guys disclosing that beforehand.

Speaker 4

But just given we are seeing some slowing kind of across The economic landscape and people seem to be getting more cautious. Just can you describe the factors that drove that reserve release? I understand that Criticized Classified came down, non performers came down. That's all great, but why not just kind of Build reserves here. I just wanted to kind of pick your brain as to the rationale.

Speaker 4

Thanks.

Speaker 3

Yes, I'll start, Michael. This is Mike. Certainly Chris or John can add some commentary as well. No real reason other than we felt the reserve Where we ended the quarter at 140 basis points was certainly robust enough for our view of credit and our view of The economy and all the factors that go into determining the reserve going forward. So we did release 9.8 $1,000,000 but $5,800,000 of that overall release was related to the one credit.

Speaker 3

So I guess the net release was really just 4,000,000 So that would have been another basis point or 2 related to the OCL to total loans. So that basically was our thinking. And also the levels of our commercial criticized and NPLs And our view of those asset quality metrics going forward also played into it. But again, I think the bottom line is The 140 ACL to loans, we feel is certainly robust enough. So Chris or John, if you want to add anything.

Speaker 3

No, I think that covered it. That makes sense, Mike.

Speaker 4

All right. Yes. Appreciate it. Appreciate the net amount there. Maybe just as my follow-up, Just wanted to talk about the margin and specifically you had talked previously about potentially restructuring securities portfolio looks like the FDIC charge will hit in the 4th quarter.

Speaker 4

I think you had previously discussed maybe not wanting to do it in the If you were going to do a restructuring, not in the same quarter as that charge was going to hit. But just wondering to get any updated Thoughts there and then just what gives you kind of confidence that given the margin is already down 3 bps that you can kind of maintain around these levels in the Q4? Thanks.

Speaker 3

Yes. So first on the NIM guidance. So the guidance for the Q4 is really for our NIM to potentially Compress another 3 to 5 basis points. And if we think about that level of compression and we think about it in terms of Positives and negatives, so tailwinds or headwinds. The positives of the tailwinds really is this notion of Deposit costs really begin to stabilize.

Speaker 3

And of course, we saw that begin to happen in earnest over the course of Q3. So You may have heard from the earlier comments, we expect our cost of deposits to potentially be up about 18 basis points or so in the 4th quarter. And that's in relation to the 34 that we saw in the Q3. So some definite stability there. The other thing we think is a positive is this notion of higher loan yields.

Speaker 3

So if we look at the new coupon rates, we talked about those Exceeding 8% really for the first time in quite some time. But if we kind of look at how those have grown over the past couple of quarters, 3rd quarter to second quarter, we were up 63. 2nd quarter to first quarter, we were up 52 basis points. So we definitely believe that there is some momentum building with respect to the new loan rates. We've also talked in the past About our fixed rate loan portfolio repricing up.

Speaker 3

And if you look at that trend, I think there's a slide in the appendix included. If you look at that trend, It's a pretty solid dozen basis points or so for the past couple of quarters. So we certainly expect that fixed rate loan portfolio to continue repricing Now as far as the headwinds and things that are really driving the little bit of compression that we expect in the 4th quarter, One of the positives this quarter we thought was the DDA remix slowing a bit, 38% This quarter compared to 40% in the previous quarter, we've talked about the end of the year arriving somewhere around 36% or so. So it's still a negative or a drag on our NIM, but some definite slowdown in that regard. Probably the biggest thing that's impacting the compression that we expect in the 4th quarter is CD maturities.

Speaker 3

So we have about $1,400,000,000 of CDs that will be maturing in the 4th quarter. Those CDs will be coming off at about 4.34% And then re pricing at around 4.92 percent or so. So that difference in terms of those CDs re pricing up You know, it will be a significant factor this quarter. And most of those CDs, just under $1,000,000,000 are actually maturing in the front part of the quarter, So the month of October. So we will have that impact for most of the Q4.

Speaker 3

Related to any bond portfolio restructuring, In our view, that's still something that we're considering. It's certainly on the table. Whether that's something we execute In the Q4 or maybe even in the Q1 remains to be seen. You're right, we do have The potential for the FDIC special assessment in the 4th quarter that certainly looks like it will be in the 4th quarter. But There again, we thought it was going to be in the Q3 as well and it got pushed to the floor.

Speaker 3

So we'll see. So really nothing more on the

Speaker 4

Thanks for taking my questions. It seems like you were anticipating that question, Mike. So I appreciate all the color.

Speaker 5

Thanks, guys.

Speaker 3

Thanks, Michael. This isn't my first call.

Operator

Your next question comes from the line of Brett Rabatin with Hovde Group. Your line is open.

Speaker 6

Hey, good afternoon, everyone. Thanks for the questions. Wanted to start with the non interest bearing DDA and just obviously it continues to To atrophy a little bit and you talked some about how that's impacting your guidance. Is there any update on where you think that might settle in terms of Your balances and how you have or do you have any visibility of operating accounts that maybe you think that they've reached their bottom? Just I was hoping for any color on an update on DDA thoughts.

Speaker 3

Yes, Brett. I'll start and John Certainly, I might want to add some additional color. But again, as I mentioned a little bit earlier, we're expecting that DDA remix or that non interest bearing 1% to probably end the year somewhere around 36% or so. When we conclude the Q4 and talk about Guidance for next year. I think we'll have a little bit more clarity around where we think that trajectory will take us as we go through 'twenty four, so more on that Obviously, next quarter, but we're encouraged by what we're seeing and what kind of transpired this quarter.

Speaker 3

So if you look at the percentage declines quarter over quarter, 2nd quarter compared to 1st, we were down about 5.5% And that slowed to about 4.5% or so in the 3rd quarter. And if you look at the makeup of our DDA base, Really about 2 thirds, a little bit less than 2 thirds of that is commercial customers. And we saw an even more Significant slowing in those balances, so about 7% in the previous quarter and then that slowed to a little bit under 4% in the 4th quarter. So it absolutely is happening, I think across our customer base, but obviously more so on the commercial side. So John, anything you want to add

Speaker 2

That was a good answer. And Brett, this is John. The only thing I would add is, we still Point towards a trajectory that shows we reached the pre pandemic average account balances Sometime around the end of Q2 or Q3 next year. So where that lands and it's not Really possible to say that's when it totally ends, but at least we'll be at a marker that was pretty steady For several years prior to the pandemic's beginning. So when Mike mentioned the end of the year looking Like we should be close to 36%.

Speaker 2

That's actually a little better than the low end of the range that we gave just a few months ago. So the updated target for the end of the year is maybe a little more attractive than where we were recently. So that's really The diminishment of the mix change that we've encountered so far. So in terms of where it settles, it's really tough to see clearly through the crystal ball. But if we presume That the target is reached when we get to the pre pandemic average balances that would suggest a continued slowing, Maybe not every quarter, but it's slowing to get you to somewhere around a target in the Q2, Q3 of next year, if that's helpful.

Speaker 2

Okay.

Speaker 6

Yes, that's helpful. And then the

Speaker 2

other question I wanted

Speaker 6

to ask was just around you guys referenced Mike's Slide on loan repricing and Slide 24, you have that 4 to 12 months bucket and the Composition is different than the 3 months or less obviously with that having more consumer in it. So I'm just curious thinking about As we're trying to model your loan portfolio increases over the next year in terms of the existing book, Does that weighted average rate I assume the weighted average rate for that 4 to 12 month bucket is going to be somewhat less than the 805 given partly a consumer That's in the 3 month or less piece.

Speaker 3

Yes, I think that's right. And certainly in the 3 month or less Is where the really the lion's share of our variable rate loans are. So that's obviously dependent upon the direction of rates, but I think you have that right.

Speaker 6

So would a number closer to 7 or closer to 8 you think would be the

Speaker 7

right number for that 4 to 12 month bucket Yes, as it reprises.

Speaker 3

Well, the way we look at it on a quarterly basis, if you go back to this quarter, The new loan rate was just north of 8% and then we have that broken out on the previous slide between fixed and variable. So what we have here on 2024 is just a little bit longer look of how we view the loan

Speaker 2

And Brett, this is John. Just one point that may be helpful or at least interesting is we're seeing really better than expected performance In terms of our bankers having success with clients explaining the linkage between the renewal rate And the new loan rate and the volume of compensating balances and what those rates are. So we're glad to give up a few bps loan yield to get substantial compensating deposits and operating accounts, particularly on the business side and even More so when you get in the middle market side as we get cooperative accounts. So either one of those is net positive to NIM and to profitability. So I think the maturity of the banker core has been impressive so far.

Speaker 2

And I think that's what led maybe to the NIM compression not being quite as Bad this quarter, as we initially feared a quarter ago.

Speaker 6

Okay, great. Appreciate the color.

Speaker 2

You bet.

Operator

Your next question comes from the line of Casey Haire of Jefferies. Your line is open.

Speaker 7

Thanks. Good afternoon, everyone. I guess touching on expenses, So last quarter you guys talked about the efficiency ratio above 55 kicks off, it puts you guys at a different DEFCON level. We're now at 56 and obviously some more NIM pressure on the way. Just any more updated thoughts about Addressing operating leverage on

Speaker 2

the expense side of things.

Speaker 3

Well, sure. As we go into 2024, I think that'll become Something that we look at as intently, if not more intently going forward. But in terms of the 4th quarter And our expense increase for the second half of the year, obviously, there's no change in our guidance. We're looking at Coming in at about 8% increase year over year. And certainly as we look into 2024, We would think that that level would come down meaningfully in terms of expense increases year over year.

Speaker 3

So the 8% is not where we want to be. The 56% plus efficiency ratio is not where we want to be. So those are certainly things that we think about and we'll address going forward.

Speaker 7

Okay, very good. And then just circling back on the bond book repositioning. You're not the only ones talking about this obviously, but just wondering, it's very difficult to gauge what you guys could Potentially do from the outside. You obviously have a very strong CET1 ratio. Your TCE Is with the unrealized losses up is below that 8% level that you guys want.

Speaker 7

I'm just wondering, do you have the potential Is there enough low hanging fruit to restructure the bond book and get that lean into that CET1 ratio and get that TCE above 8 Would like a reasonable sort of earn back?

Speaker 3

Yes, I think so, Casey, certainly. And again, like we said, I mean, that's a transaction that we've been thinking about and considering. And that's certainly not off the table. It's something we're going to continue to look at intently in the Q4 and potentially into the Q1. As soon as we get to the point of executing on a transaction like that, we'll be sure to let everyone know.

Speaker 3

But right now, I think it's premature to talk about too much in the way of details. I know that you guys would Like us to be more explicit in terms of exactly how we're thinking about it, but we have to be cognizant of providing too much detail And we'll go from there.

Speaker 7

Okay, very good. Yes, no, just curious. And then just circling back I guess actually no, on credit quality, on one of the slides you mentioned, the focus has switched From traditional office to medical office, just wondering what it reads almost as if you're a little bit concerned about what you're seeing in medical office, which I understood to be a pretty strong asset class. Just some color on what's driving that?

Speaker 8

Yes. That might this is Chris, Luca. It's probably a misunderstanding In the wording or the language. As an asset class for many years now, we've been a little bit more cautious about General purpose office and typically more focused on medical office as an asset class. And clearly, as you indicate, medical office, especially depending on the type of medical work that's done in the office Environment is much stronger than any general purpose office.

Speaker 8

But as an asset class overall, we're definitely Cautious in general on that. We actually saw a little bit of a decline in our overall office exposure, not a huge amount, but about a couple 4% type levels quarter over quarter as we really shift our focus away from that as an asset class within commercial real

Operator

Your next question comes from the line of Stephen Scouten with Piper Sandler. Your line is open.

Speaker 5

Yes. Thanks, everyone. Appreciate it. I guess one more question kind of around capital usage. I mean, you guys Kind of outline your capital priorities in your slide deck and I would kind of view the potential for this Securities restructuring, somewhere within that, I'm not really sure, I guess, maybe below organic growth above dividends is kind of what I'm hearing.

Speaker 5

But can you talk about how you think about the math versus a buyback at this point? I mean, it seems like with your stock at $115,000,000 at tangible or something like that, It might be more attractive at these levels. So just kind of curious how you're thinking about the various pieces of capital, especially relative to the buyback? Yes,

Speaker 3

yes, Steven. So again, on Slide 18, as you mentioned, we have kind of the priorities and We're careful in terms of how we think about those and really haven't changed or adjusted those priorities. So I think They really do kind of speak for themselves. And you asked about buybacks and certainly buybacks It's something we think about and consider, but I don't know that in this environment, it's something that we're going to rise to The level of actually executing on buybacks right now, I'm not sure that the environment in terms of how examiners look at that in the context of Bank failures back in March and in the context of wanting to continue to kind of build capital going forward really fit right now. So certainly aside from those things, buybacks are an attractive way to deploy capital and we've done that in the past.

Speaker 3

And I dare say at some point in the future we'll reenter that method of deploying capital. Back to the bond restructuring, I mean that is and could be an attractive way of deploying some capital. Again, not going to go into too much in the way details of that, but That's out there under consideration as we kind of mentioned.

Speaker 5

Yes. I guess my question is more like as you evaluate those, I mean is There an earn back calculation, is that what you're thinking about or it sounds like maybe more of the bond restructuring or other things could be more palatable to regulators versus a share repurchase. I'm

Speaker 3

Well, in terms of a bond restructuring, the way we would think about that is having to Earn back or pay back somewhere in the 24, little bit less than 30 month range. We think that makes sense and pulls those kinds of transactions to the point of serious execution. Got it. Got it. That's helpful.

Speaker 5

And then if we could talk about the SNC exposure briefly, I think what is it, 2 point $8,000,000,000 I think you noted at 9:30. Can you give us any more detail there in terms of What percentage of those loans you guys might be the lead on or if there's a geographic focus primarily within that book and kind of Obviously, we saw just one kind of go bad and that doesn't mean there's some greater issue, but that becomes the fear, I So just wondering if you can give us any color that might provide comfort, if you will.

Speaker 8

Yes. This is Chris Luca. Yes. I mean, geographically, obviously, we're more focused on the markets that we generally operate in, so Texas to Florida. But we also do have a healthcare specialty group that does participate in some transactions that would have more of a national focus.

Speaker 8

So there's a little bit of a mix There really isn't any sort of geographic or industry focus. We took a deeper look into that kind of anticipating this call And some discussions on it since we highlighted it here on the page, on Page 8. But we feel pretty good overall About the SNC book. And I certainly can understand the question given what happened recently. But as I think we've all indicated, it is a bit idiosyncratic.

Speaker 8

And I The final chapter of that book hasn't been written yet anyway, so we'll learn more over time. But we have In the buildup of liquidity during the kind of pandemic period there, we Deployed some of that excess capacity in that area. And as we kind of look forward, Since many of those relationships don't necessarily have full service opportunities, we'll look to dial that back

Speaker 5

Okay. That's extremely helpful. And is the reserve against those loans, I mean, Kind of in line with the 128 loan loss reserve overall or is it maybe, I guess, the commercial reserves like 130 as well.

Speaker 9

So is it kind

Speaker 5

of fair to Within that range of commercial loans?

Speaker 8

Yes. I mean, we don't necessarily segment the portfolio that way when we're deriving our reserve estimates. So they're generally sprinkled in with our C and I based on their asset quality.

Speaker 2

Yes. And Steven, this

Speaker 3

is John.

Speaker 2

Just to add maybe a little more clarity. As rates began to go up last year, We knew as we got into the second half of this year that the desire for any type of And not just SNC, but syndications and general growth would begin to get upside down just given the cost of funds, right? We'd want to preserve that liquidity For use in core growth and clients that have a little deeper wallet share with us. And so the dial back That Chris mentioned a few minutes ago, that was going to happen with or without the aforementioned idiosyncratic bad news in that one credit. So We expect it to top out somewhere around the 15% of commercial loan levels.

Speaker 2

That's where it topped out. And the expectation is that it would dial back in terms of percentage and probably absolute exposure as we repatriate those credits with smaller slices or maybe a Few less credits that we're in, coupled with the amortization and redeployed the liquidity gains from that and the things that

Speaker 5

have a little bit more of

Speaker 2

an annuitized value over Long term. So I want to make sure we're clear that that one charge off had nothing to do with our Posture and Syndications. That's really around the balance sheet.

Speaker 5

Got it. That's a really helpful point of clarification. Thanks so much for the color, guys.

Speaker 2

You bet. Thank you.

Operator

Your next question comes from the line of Brandon King with Truist Securities. Your line is open.

Speaker 2

Hey, good evening. Good day.

Speaker 9

Yes. So I appreciate the guidance on the CD renewal rates, but just wanted to get a sense of how those renewal rates have trended over the last couple of months. Have we seen some stabilization in what the renewal rates have been? And are you anticipating any potential increases Going forward.

Speaker 3

Yes, Brandon, this is Mike. And they have again, as I mentioned, With respect to deposit rates in total, things have absolutely stabilized as we've gone through the last four 4, 5 months or so leading up to the Q3. But specifically, if we look at the CD maturities, Again, in the Q3, we've got the well, in the Q3, we had just under $1,400,000,000 that matured At $3.95 and repriced at about $4.75 So there was an 80 basis point difference there in the 4th quarter. We think that difference will shrink to about 58 basis points. And again, that's the difference between the rate that the CDs are maturing and where we think They will renew at.

Speaker 3

And then just taking a peek into the Q4 I'm sorry, the Q1 of next year, We think that difference will shrink even more to about 23 basis points. So the stabilization of deposit rates It is really coming to life, so to speak, in terms of how our CDs reprice as we've gone through not only the last quarter, but Looking ahead to the next couple of quarters.

Speaker 9

Okay, very helpful. And then on credit quality, I noticed that accruing loans 90 days past due and modified loans still accruing, there Was a noticeable increase in those two items. Just wanted to get some more details around what's going on there? Yes.

Speaker 8

I mean, just at a high level, a lot of those are loans that we're working through maturities. And so they end up kind of crossing over in that process of processing a maturity or arranging the maturity to be Extended in its normal course.

Speaker 9

Okay. So the expectation in those will end up paying off

Speaker 8

Or being yes, or just being rewritten and then getting back to payment status. And maturity oftentimes drives it falling into Past due bucket that may not otherwise really be past due.

Speaker 9

Okay. And what about the modified? Is that Same situation for the modified loans as well?

Speaker 2

Yes. Yes. So to be clear, Brad, I know this is a little picky just in the way we obviously report things, but a loan can be past Without necessarily having a payment passed to you, right, just because it's past maturity. So they sometimes will So there's not really a linkage between call it reserve Appetite and that amount of past dues unless the payment itself is late. Does that make sense?

Speaker 2

No real concern there.

Speaker 9

Okay. So we should be expecting that to kind of trend lower going forward

Speaker 2

It goes up and down based on timing. And I don't know if it's still this way. Chris can correct me if I'm wrong, but There's a fair amount of seasonality in some of the book on the middle market side. So there's larger numbers of renewals that occur in different Parts of the year and typically in the second and third quarter is when we seem to have a little bigger bucket of those that all renew. And unfortunately, they're all kind of stacked in the quarter.

Speaker 2

So if everything doesn't come together perfectly, they will sometimes drag over the 1st day of the quarter and therefore get reported that way. Chris, Matt, is that still accurate? Yes. Yes. Okay.

Speaker 2

So that was just time.

Speaker 9

Thank you very much for taking my questions.

Speaker 6

You bet. Thanks for asking.

Operator

Your next question comes from the line of Catherine Mealor with KBW. Your line is open.

Speaker 10

Thanks. One follow-up just to the deposit cost discussion. Can you remind us seasonality around your public fund balances and any impact that might have on your NIM guidance for next quarter?

Speaker 3

Yes. Go ahead too, Catherine. So we have a pretty robust public fund business. Those deposits average around $3,000,000,000 or so as

Speaker 2

you look through the year.

Speaker 3

Typically, those deposit inflows will begin to ramp up a bit in the 4th quarter. So they can range from about $150,000,000 to Municipalities begin to kind of allocate and spend those dollars. So every one of those relationships are contractual And the vast majority are tied to primarily spreads to short treasury bills. So there is a bit of an impact in the 4th quarter terms of the deposit inflows, but then also related to deposit rates. And The dynamic around our public fund book was built into the guidance we gave for the Q4 in terms of deposit cost And potential NIM compression.

Speaker 10

Okay, perfect. And then my other question just on loan growth. Just Yes. The loan growth has slowed as it has for everybody, in the back half of this year. Just can you just give us some color around the new ones that you are putting on?

Speaker 10

Typically what kind of credit you're comfortable with, type of credits that you are doing less of and maybe an initial peek at how you're thinking about loan growth, how it could look as we move into next year in a higher for longer scenario?

Speaker 2

Okay. Thanks for the question. It's John. I'll let Chris speak to sector appetite and then I'll come back on just sentiment and whatnot. So Chris, on just sectors in focus or appetite for or not?

Speaker 2

Yes.

Speaker 8

I mean, again, we're obviously very mindful of the sectors that are Potentially most impacted by higher interest rates, the wage and employment challenges, and then just higher operating costs. In some instances, the customer is able to pass them on and others may be more challenged to be able to do so. I Clearly, when we look at consumer discretionary, I think we're obviously a little bit more thoughtful about what we're looking at there, things like Hospitality, and then even the asset classes that we sort of talked about earlier about office And retail, both retail as a C and I product and C and I as a iCree product It's something that we continue to be a little bit more tighter on, I guess, in that regard. We have pretty robust And a lot of the larger credits go through kind of a prescreen process, and so there's a lot of healthy debate before we look to Either pursue an opportunity or maybe even renew an opportunity in those areas or in general.

Speaker 2

Catherine, any question back on that before I give you some more or would you want me to take

Speaker 10

a second? No, one follow-up and this might be where you're going John too is also just On that mortgage one time close product, I know that's been a piece of your loan growth over the past year. I'm just curious If that's something you would expect to slow as you just look at the pipeline into next year or still kind of keeping you kind of at a level of growth over the next few quarters.

Speaker 2

Yes, I'll start there. Thanks for asking about it. So the one time closed product, and I think I've said this a couple of times in the comments just Sometimes people forget about it. But it originally comes in the construction classification because it's an in construction Designation until the completion of the project and the owner takes residence. So that amount of balance sheet in the construction project is clearly in the, I Call it Q4 of the game.

Speaker 2

We're in football seats, so Q4 of the football game. And so we'll still see some mortgage growth net and probably Another, I would say, 2 quarters maybe before it begins to plane over and we see mortgage Portfolio shrinkage in the second half of the year. So it'll give some net growth over time in the mortgage category and there's still enough projects On the multifamily construction side, that will be drawing down and covering the outflow for mortgage. So I would expect to see the construction of C and D category continue to grow a bit. And then as we get into next year, that too somewhat becomes a contra.

Speaker 2

Now the drivers for those two things are Totally different. So I'll then go to multifamily. We get a lot of questions on the road about market by market absorption rates, rental rates and the difference in ask versus book or people doing specials. In most of the market To show any degradation whatsoever in absorption or in pricing is primarily in the 1, 2 and in some markets 3 star category projects. So we're about 95% 1 and 2 star.

Speaker 2

So across our whole footprint in the markets where we have any meaningful concentration, We are still seeing absorption both in absolute absorption and then in the market would support Absorption of additional projects coming online. So if we were down in the 1 and 2 star business, then we'd be maybe a little more concerned. So Our appetite for multifamily really hasn't waned that much. The problem is the number of investors and Developers who are interested in doing additional projects given the cost of money and the cost of property insurance, That is somewhat waned. So it's not really our appetite as much as the opportunity has come down and The type of projects that we do see really just don't screen within our current risk appetite.

Speaker 2

We're expecting equity in the deals. We're expecting commitments in terms of construction costs and insurability And then really only from proven developers. So those folks are a little bit on the sideline waiting for a little better environment, I think, to come in a year or 2. So once you move outside of that, it's curious, but at this point in time, our consumer, our home equity line products, which is all consumer, Is that the lowest utilization I ever remember it to be? And you would think with the average deposit account balances beginning to plane towards pre pandemic levels you would see that utilization begin to come up, but the bottom line is people aren't doing as many big ticket purchases Today as they were a year and certainly 2 or 3 years ago, and they primarily used some equity lines for those purchases, at least in our book, Because they got the tax benefit of doing that.

Speaker 2

And right now, they've just slowed down. They're slowing down. They have slowed down on big ticket purchases. So we're seeing that utilization trade down a little lower. At some point in time, that's going to flip back.

Speaker 2

And it probably flips back when there's this notion that rates Are either not going to go up anymore or they begin to come down slightly. And so as long as the Fed can Negotiate into a safe landing. I didn't say soft landing, I said safe landing. I don't know if there's such a thing as a soft landing. But as long as they can get to a safe landing, Then I think we'll begin to see loan growth opportunities pick up a bit, as sentiment, I think reaches that conclusion.

Speaker 2

Was that helpful color or did you want to hear maybe a little something else?

Speaker 10

It was. That was all really helpful. I like the safe landing commentary.

Speaker 2

That's the target. Keep the soft landing.

Speaker 3

We coined it first.

Speaker 10

The soft landing phrase has been overused.

Speaker 9

That's right. That's right.

Speaker 10

That's really helpful. Thank you, John.

Speaker 2

You bet. You bet.

Operator

Your next question comes from the line of Kevin Fitzsimons with D. A. Davidson. Your line is open.

Speaker 11

Hey, good afternoon, everyone.

Speaker 10

Most of

Speaker 11

my questions have been asked and answered. Just as a follow-up on the bond restructuring topic, and I understand the sensitivity without with not getting specifics. But maybe, Mike, you can help us understand just the different variables That are at play or in your guys' heads determining when to pull the trigger, whether to pull the trigger. I mean, imagine its rates, its Your capital levels and comfort there, the curve, I know months ago there was More of a sensitivity about in the wake of the bank failures that banks probably were hesitant to go out and sell securities because it might Create some misperception, but we're that's far enough in the rearview now. So just without getting into specifics, just curious How those variables play or maybe it's just it's more is it an internal discussion or debate about whether It's the right thing to do because I guess there would be different opinions about that.

Speaker 11

So just wanted to see your thoughts on that. Thanks.

Speaker 3

Sure. Be glad to, Kevin. So, I think as a company, we think and believe that From a philosophical point of view, it's the right thing to do in terms of potentially selling some bonds and reinvesting the proceeds. The consideration becomes this notion of whether you pay down debt, whether it's brokered CDs or Home loan borrowings or you reinvest all the proceeds back into the bond portfolio or some combination of those So those are the things that we kind of think about and talk about. Certainly, the charge that you might consider taking It is something that's out there for discussion and analysis.

Speaker 3

The impact that that has on our earnings, the impact that has on our capital Really doesn't have much of an impact on TCE immediately because you're selling AFS bonds, but Certainly on a regulatory ratio basis, it is something that can be impactful going forward. So Those I think are the things we think about. I mean, certainly if you look at the volume of bonds that you could sell for any Given charge, that's less now than when it was before you had the significant increase In the treasury curve. So that's something that's a little bit of a part of the overall equation, Just where those rates are going to go over the next couple of weeks, months, quarters, those kinds of things. So, again, Those are the things I think we think about and consider in terms of a transaction like that.

Speaker 3

And I'll wrap up those comments by just stating again that it's

Speaker 2

under consideration. And as we

Speaker 3

And as soon as we affect the transaction, we'll let everyone know certainly.

Speaker 6

Okay. That's

Speaker 11

all I had. Thanks very much.

Speaker 2

You bet. You

Operator

This question comes from the line of Christopher Marinac with JMS. Your line is open.

Speaker 12

Hey, thanks. Good afternoon. I had a question Chris, on credit quality and particularly from how you stress test C and I and CRE, and what's the difference Between today's criticized level and sort of what they would be on the stress scenario and how much of that would move the reserve level?

Speaker 8

Yes. Good question. I mean, we constantly look at different slices of stress testing. On the commercial real estate side, some of the things that we'll look to stress test is not only the impact of kind of You're writing of interest rates on some of the loans that would have to reprice under the current rate environment, but we also look and Press test net operating income and the impact that, that might have on the individual's ability to debt service cover. And then we also on the C and I basis, we tend to stress test more of the Probability of default on those individual borrowers.

Speaker 8

And we use that information to really kind of inform us As to how we view our reserving, there's no direct linkage into the reserving, but it is part of the evaluation process As we go through our quarterly assessment of reserve and reserve levels. At this point in time, I mean, what I've been Pleasantly surprised with is that when we've done stress tests in these different slices, The results haven't been as alarming, I guess, as I would have thought they would have been. And that gives me comfort That there's probably a little bit more cushion in there, at least in kind of a normal stressed environment. Obviously, if you stress them for Something more significant, a severe scenario, you're going to see a More in the way of theoretical defaults and losses, but we don't really anticipate that. We do, do those stresses Just to kind of understand the outer boundaries, but we tend to focus on the realistic stresses that might then help us

Speaker 12

Okay, great. That's helpful. And then Chris, just a follow-up on the SNC conversation and the disclosure in the slides. Are there other loans that would be kind of like Club deals that are not the SNC definition, but are sort of non organically originated by Hancock that you Above and beyond the 11%?

Speaker 8

Yes. Definitely, there's not even probably more than a handful of accounts That's kind of the normal course that you do as you are presented with an opportunity that may be a little bit larger than you'd like to do, but you want to support That relationship, you'll bring in a partner and vice versa, those so called club deals. And that to us is oftentimes with banks that we regularly trade with as it were Rather than kind of the broadly syndicated transactions, which oftentimes are led by much larger institutions.

Speaker 12

Would those loans have a higher default rate across a cycle or is it kind of

Speaker 2

too early to

Speaker 12

comment on those?

Speaker 8

Yes. I mean, I don't view them any differently, to be honest with you. And I don't see them as having any materially different default rate.

Speaker 6

Okay, great. Well, thank you

Speaker 12

for all the information this afternoon. It's been great.

Speaker 2

You bet. Thank you. Thanks for the call. Thanks for your patience.

Operator

There are no further questions at this time. I will turn the call back to John for closing remarks.

Speaker 2

Thank you, Sarah, for moderating today. Thanks, everyone, for your interest. We look forward to seeing you on the road soon. Have a great night.

Operator

This concludes today's conference call. Thank

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Key Takeaways

  • Loan growth remained positive at $194 million in Q3, fully funded by core deposit growth. Growth moderated as client demand slowed amid higher rates and insurance costs, and the bank maintained disciplined pricing and selective sector appetite.
  • NIM compression slowed to 3 bps versus 25 bps last quarter, helped by stabilizing deposit costs and higher loan yields, which rose 63 bps to 8.03 %.
  • Core deposits grew by $277 million with the DDA mix remix slowing to 38 %, supported by promotional CDs and money-market pricing; deposit beta reached 127 % year-to-date.
  • Credit quality remains solid with historically low criticized and nonaccrual ratios; one large idiosyncratic $29.7 million charge-off was largely offset by reserve adjustments, leaving an ACL at 140 bps of loans.
  • Capital ratios stayed robust with CET1 above 12 % and Tier 1 above 10 %, and management is evaluating a bond portfolio restructuring to strengthen tangible capital.
AI Generated. May Contain Errors.
Earnings Conference Call
Hancock Whitney Q3 2023
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