Hancock Whitney Q3 2024 Earnings Call Transcript

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Provided by Quartr
October 15, 2024

There are 13 speakers on the call.

Operator

Good day, ladies and gentlemen, and welcome to Hancock Whitney Corporation's Third Quarter 2024 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. And I would now like to introduce your host for today's conference, Kathryn Mestich, Investor Relations Manager.

Operator

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

Speaker 1

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 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. 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.

Speaker 1

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. 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

Thank you all for joining us this afternoon. We are pleased to report our 3rd quarter results, again reflecting improved profitability and efficiency. We achieved an ROA of 1.32% and reported another quarter of NIM expansion, fee income growth lower operating expenses. Strong earnings facilitated continued growth in capital ratios now among top quartile peers. Net interest income was up this quarter due to higher yields on loans and securities and a flat cost of funds.

Speaker 2

Fee income continues to outperform and expenses remain well controlled and in fact were down quarter over quarter. In recent years, we made and continue to make strategic investments in fee income lines of business and are very pleased with continued impressive returns. Turning to the balance sheet, loans were down $450,000,000 over $250,000,000 of which is related to our purposeful decrease in SNC exposure. We also saw higher payoffs due to refinance and sales transactions within the CRE Multifamily and CRE Industrial portfolio across the footprint. The balance of overall loan reduction this quarter was largely the completion and liquidation of large industrial projects in the Lake Charles, Louisiana market.

Speaker 2

The balance sheet doesn't reflect the full story though as we enjoyed very solid production and new credits during the quarter. We are also very pleased to have attained peer levels of SNC exposure a year ahead of the original schedule. So this particular line item will generally cease to be a purposeful headwind to growth. We are actively recruiting bankers to support growing the balance sheet next year now that we have reached all our goals in earnings efficiency and capital. Deposits were down in the quarter, but the DDA outflow remains moderated and our DDA mix was consistent at around 36%.

Speaker 2

There was some normal seasonal runoff in public funds deposits and we experienced growth in interest bearing transaction accounts and in time deposits despite a reduction in promotional rates during the quarter. Mike will add more detail in his comments later. Our credit quality metrics continue to normalize with a decrease in non accrual loans, but an increase in criticized loans fully reflecting the results of the recent SNC exam, which was impactful to criticized migration. We expect to compare well versus peers in criticized loans and expect to be in the top quartile for non accrual loans. Net charge offs were up quarter over quarter, but we continue to see no significant weakening in any specific portfolio sectors or geography.

Speaker 2

We continue to enjoy a solid reserve of 1.46%, up slightly from the prior quarter. We maintained our posture of returning capital to investors by repurchasing over 300,000 shares of common stock in the quarter. Even after returning capital, we had strong growth in all of our capital metrics due to solid profitability, ending the quarter with a TCE of 9.56 percent and a common equity Tier 1 ratio of 13.79%. We made modest changes to our guidance for the Q4. And as a reminder, we will give full guidance for 2025 on next quarter's call.

Speaker 2

October 9 marked the 125th anniversary of our bank charter. We attained this milestone because of our shareholders and clients' trust and the efforts of our current and past associates who live by the core values our founders set forth those many years ago. We have focused on achieving strong profitability, granular revenue sourcing, admirable earnings efficiency, solid capital and ACL reserves, a de risked loan portfolio and top quartile capital ratios. As we reflect on our past and celebrate our future, we look forward to another 125 years of strength and stability. Lastly, I would like to acknowledge the incredible efforts of our team during the recent hurricanes impacting our footprint, as we again were the last to close and the first to open locations in storm impacted areas.

Speaker 2

I'm exceptionally proud to serve with colleagues who are intensely focused on a commitment to serve our communities in their time of greatest need. As we speak, our teams are delivering meals, ice and fuel in hard hit areas to assure we do our very best to serve. Our thoughts and our prayers are with those impacted by these storms and we are committed to being a steadfast partner in the recovery process. For over a century, our bank has been here to help people rebuild and recover and this time is no different. With that, I'll invite Mike to add additional comments.

Speaker 3

Thanks, John, and good afternoon, everyone. 3rd quarter's net income was $116,000,000 or $1.33 per share, so up $1,000,000.02 per share from last quarter. EPNR growth was again strong this quarter and was up $10,100,000 or 10 percent to $167,000,000 Express has a return on average assets that's a peer leading 1.92%. Our NIM expanded 2 basis points to 3.39, driving modest growth in NII. As already mentioned, but our fee income businesses had an outstanding quarter and expenses were again very well controlled.

Speaker 3

As mentioned, but the company's NIM expanded 2 basis points from last quarter to 3.39%. This expansion was driven by higher loan and security yields, a flat cost of funds and a favorable mix of borrowed funds as shown on slide 14 of the investor deck. Our cost of deposits was up 2 basis points to 2.02 this quarter, mostly due to inflows of high balance money market deposits from the equity markets in August. That in turn drove a mid quarter bump in our cost of deposits to 2.04%. We finished the quarter at an even 2%, which provides a nice glide path to a more significant reduction in the 4th quarter.

Speaker 3

Also as expected, we saw $2,600,000,000 of ceding maturities this quarter, which repriced from 5.04% to 4.62%, driving down the rate on time deposits by about 5 basis points. The pace of DDA outflows continued to slow this quarter with a drop of only $142,000,000 and a stable DDA mix of 36%. We believe the DDA mix could stay at least at this level through year end. With the rate cuts in September and the 2 25 basis point rate cuts, we anticipate in the 4th quarter, we expect our cost of deposits will be down significantly in the coming quarter. Our loan yield was up 3 basis points to 6.27 percent, reflecting fixed rate loan repricing and new loan originations, partially offset by lower rates on variable rate loans.

Speaker 3

Given the 2 additional rate cuts we expect in the 4th quarter, we do expect loan yields will be down next quarter. Bond yields for the company were up 6 basis points to 2.66 percent due to our continued reinvestment of cash flows back into our bond portfolio. In the Q3, dollars 220,000,000 of bonds came off the balance sheet at a yield of 2.69% and were reinvested at 4.74%. Next quarter, we expect about $200,000,000 of cash flows coming off at about 3.10% and will be reinvested at over 4.5%. All this to say that we believe that through the net effect of lower deposit rates, higher bond yields, partially offset by lower loan yields, we do expect to achieve modest NIM expansion in the 4th quarter again, despite 2 additional rate cuts and limited balance sheet growth.

Speaker 3

As mentioned, the fee income was again strong this quarter, up 8% from last quarter. We benefited from higher investment and annuity fees, service charges on deposit accounts and specialty income. We now expect non interest income for 2024 will be up between 6% and 7% from 2023's adjusted non interest income level. Expenses were down 1% this quarter as we continue to focus on controlling costs throughout the company. Our guidance has been updated and we expect to grow expenses between 1% 2% year over year, inclusive of our plans to hire additional revenue generating staff in the coming quarters.

Speaker 3

Our PP and R guide is to be flat to down slightly from 2023's adjusted levels, reflecting our updated expectations on rate cuts, fee income and expense guidance. Lastly, a couple of quick comments on capital. Our capital ratios remain remarkably strong even after returning capital through continued share repurchases and the recent increase in our common dividend. All things equal, we expect the share repurchases will continue at a similar pace in the 4th quarter. As always, the changes in the growth dynamics of our balance sheet and share valuation could impact that view.

Speaker 3

I will now turn the call back to John.

Speaker 2

Thanks, Mike. Let's open the call for questions.

Operator

And thank you. We will now begin the question and answer session. And your first question comes from the line of Michael Rose with Raymond James. Your line is

Speaker 4

Maybe we could start with Chris. Saw the uptick in criticized commercial loans this quarter and it's been over the past couple of quarters an upward progression. I see you built the reserve a little bit. Can you just talk us through kind of what's driving the increase? And then as we think about the prospects for lower rates, what's the driving factor to maybe bring some of those loans current?

Speaker 4

And then just separately, does this have anything to do with maybe accelerating some of the disposition of your SNCs? Thanks.

Speaker 5

Yes, no problem, Michael. I appreciate the question. First of all, I just really want to kind of couch everything with the understanding that we continue to really be pleased overall with our asset quality performance, especially in relationship to peers and where we are in the cycle. And I know in the past during the calls, we signaled and anticipated some migration, especially in the commercial loan book as it relates to criticize loans. I do want to point out that for the most part, none of the migration really related to our investment commercial real estate book.

Speaker 5

Most of it was really in our C and I book. And we continue to really analyze and interrogate and assess the drivers for the migration. And really, I know it seems like a very simple answer, but we really don't see specific sectors that are driving migration. It really is geographically spread this quarter, probably more in our Louisiana, Alabama, Texas markets. But even then, it was only 60%.

Speaker 5

So the other 40% was spread out among the other jurisdictions. And even when you think about the industries, 70% of the migration during the quarter was spread out among manufacturing companies, retail and wholesale trade, transportation companies, which is a sector that I indicated last quarter and other banks have as well, are a little under pressure. And then even professional services and information services. Again, some of it was, as John mentioned during his opening comments, a result of our SNC exam and the results that came from that. But even then, only 60% really came from that exam process.

Speaker 5

And so it was a little bit more diversified in that regard. But we continue to really take a hard look at. We really do we've enhanced our and this was done a year or 2 ago, enhanced our watch process to include a lot more early dialogue around issues that might be starting to percolate below the surface. And then the one thing we did look at was kind of the composition of the recent migration in the past couple of quarters and whether or not we really see any sort of near term material issues with those credits. And really, we don't identify any at this point in time.

Speaker 5

And it's just kind of where we are in the cycle with respect to kind of slackening of demand off of that kind of buildup during the post pandemic period and just higher operating costs. And you asked about rates and how that might have some benefit. And obviously, it happened late in the quarter. So any of our customers that have higher borrowing costs aren't going to benefit from it their current metrics. And to the extent that there is some further easing in interest rates, we believe or I believe that there will be some benefit.

Speaker 5

But some of the issues that our customers are experiencing aren't just interest rates. They are obviously a little bit of softening of demand and just general higher operating costs. But we still feel pretty confident in the book and also in relationship to where we've been historically and where we are relative to peers. We feel okay.

Speaker 4

That's great color. Thanks for that, Chris. And then maybe just as my follow-up. How should we think about loan growth from here? I know you guys have worked down the SNC portfolio, it's down kind of close to your target range.

Speaker 4

The guidance unchanged kind of implies maybe a little bit of growth, but maybe some flatness in the Q4. But assuming that the Q4 is kind of the end of the SNC runoff, understanding that you had some projects that paid down as well outside of the SNCs this quarter and you're going to be hiring some people. How should we I know it's early for 20 25, but how should we be thinking about loan growth from here and does this kind of incorporate the forward curve in terms of what your outlook might be assuming you'd have greater growth as rates would come down? Thanks.

Speaker 2

Okay, Michael, sure. This is John. I'll take that one. You mentioned the SNC part, so I'll start there. Page 8 breaks down the loan growth numbers for the quarter by sector, but I can provide some color that may more directly answer your question.

Speaker 2

So I think as I said in the prepared comments, about $250,000,000 of the total reduction was in the SNC portfolio. That was planned. It's been something we've been trying to do for the past several quarters. And frankly, I'm pleased to get to the point to where we can kind of call it even to peer now relative to exposure with our peers. And we can kind of stop having that self inflicted headwind for growth at this point.

Speaker 2

So there may be a little bit of runoff left in the Q4, but that would just be just in terms of the timing of when we're bringing deals in and taking them out. So I think we can kind of call the SNC self induced headwind pretty much over. Now in terms of growth, Michael, I wouldn't suggest that that's going to be

Speaker 3

a book that grows

Speaker 2

much. But I do think it will be held relatively flat as a percentage of overall loans as we move into a little bit more growth year numbers in total credits. The second one you mentioned was those project pay downs. And you may remember there was a lot of press around the very large LNG projects that occurred in the Lake Charles area of Louisiana that were extremely beneficial to that market and the state in general. The projects that we partly financed have been wrapped up.

Speaker 2

Those contractors have been paid and they in turn pay down their operating lines. So the little downward jump you see on Page 8 in the top right of line utilization is materially all that amount of pay downs. And so that was the 2nd chunk. And really the only thing unplanned in terms or expected in terms of overall loan growth was we did see more pressure on the CRE book in terms of payoffs. There's always a lot of churn in it.

Speaker 2

But this quarter, and it started really the prior quarter, we saw the private equity market as well as bridge lenders come in very strong, very aggressive in both pricing and terms. And so the pay downs occurred there at a little higher level than we anticipated. Given that the pipeline has begun to improve in C and D and we are looking more new projects, that diminishment overall C and D you see on Page 8 is really more the timing between the paydowns that occurred and the time it takes for borrowers to run through their own equity before they begin to borrow on the lines we've already approved. So we'll begin to see that come in as we get into 'twenty five. So I guess if I try to put overall tone, I would say demand is still a bit tepid, but there's definitely green shoots of progress out there.

Speaker 2

Our commercial banking pipelines are beginning to build. It's too early to know the timing of when people begin to feel a little bit better, but I suspect we'll need to get the election behind this and maybe a little more demonstration of a rate movement downward by the Federal Reserve to see the projects on the fence finally tip over to get executed. But the pipeline is building. In more granular sectors of our business purpose lending book, still having terrific success there. The business banking group, the SBA group are quarter over quarter really doing terrific work.

Speaker 2

And in fact, we have another quarter, a record quarter of SBA volumes and fee income that's reflected on Page 17 in the fee bucket. So we feel pretty good about where we are with loan numbers, I think, with some

Speaker 3

of the headwinds out of the

Speaker 2

way, and the new bankers coming online as we get to 25. We certainly expect to have a better story next year, which we'll cover on the January call, or in the when we cover the end of year numbers, the updated CSOs and some guidance for the year. Did I answer what you were looking for there, Michael? Or do you want to ask a question?

Speaker 4

No, that's good. I appreciate all the color. I'll step back. Thanks for taking my questions.

Speaker 2

Thank you, Michael. Appreciate the questions.

Operator

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

Speaker 6

Thanks. Good evening. Hi, Catherine. I wanted to go back to the margin and appreciate the guidance for Q4 and glad to see that we can still see the NIM move higher next quarter. We just think wondering if you could just kind of talk us through how you're thinking about the margin structurally as we move into next year, without just giving exact guidance.

Speaker 6

As you how do you think about it feels like you're kind of generally asset sensitive, maybe liability sensitive in the near term. Is there a scenario we can still see the margin increasing through next year? Or is this increase really just a result of some of the things you can do on your CD book? And it's more likely that we'll see some in compression as we move into 2025? Thanks.

Speaker 7

Hey, Catherine, it's Mike. And I think the way to think about it is to first kind of talk about the Q4 and what we're expecting. And look, some of those things I think will certainly carry forward into 2025. So just as we've experienced the last couple of quarters, our NIM continues to be driven by really our fixed asset repricing and then the repricing of our CD portfolio. So those things help drive the NIM expansion in the Q3.

Speaker 7

They'll again help drive the modest NIM expansion that we've kind of guided to for the Q4. And then as we head into 2025, again, as John mentioned, we'll talk in much more detail about guidance for 2025 in January. But that theme, I think, continues into 2025 around having a lot of opportunities to reprice our bond book just for 2025. And these numbers I think will change or evolve a little bit, but we have the better part of $700,000,000 of principal cash flow coming back to us from the bond portfolio next year. You can probably add to that another $300,000,000 or $400,000,000 where our fair value hedges on specific bonds become effective.

Speaker 7

So that'll be a real, I think, headwind toward I'm sorry, tailwind toward helping with NIM expansion into next year. And then on our CD book, in the prepared comments, everybody kind of talked about the Q3 re pricing of the $2,600,000,000 In the 4th quarter, we've got a little bit north of $3,000,000,000 repricing at an advantage of close to 100 basis points. And then into 2025, there's going to be some significant turnover in our CD book. So call it close to $10,000,000,000 of CDs repricing, again, at an advantage of we think at least 100 basis points. So all those things combined give us a pretty good tailwind as we go through 2025.

Speaker 7

And certainly that helps with some of our near term liability sensitivity. But just as we've talked about throughout really the second half of the year, the missing ingredient really for us to continue NIM expansion and NII expansion in a down rate environment really needs to be balance sheet growth. And certainly John has already kind of talked about how we're thinking about growing the loan book into next year. So if we're successful in doing that, we certainly have, I think a pretty good chance of as a modestly asset sensitive company being able to continue NIM expansion in a down rate environment.

Speaker 6

Okay, great. And then is it all higher than organic growth as a primary way to get there or does M and A become more of an interest to you? I think one thing that John has said many times, he's more worried about revenue growth than credit risk. And so in an environment where we still feel pretty good about credit and we're really looking at revenue growth, do you think you can hit your targets just organically or does M and A become a bigger piece of your story?

Speaker 7

Well, when we think about our plans and the way we put together our business plan for next year and for 'twenty six, we really think about it 1st and foremost from an organic perspective. So the plan that we put together is built on organic balance sheet growth. So we don't plan for M and A. Certainly, if those kinds of opportunities present themselves in the next year or 2, that's something that we certainly would take a look at. But it's not anything we're planning for per se, if that's helpful.

Speaker 6

It is. Great. Thanks for the color.

Speaker 2

Thanks for the question.

Operator

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

Speaker 8

Hey, good afternoon, everyone. Wanted to start with fee hey, guys. I wanted to start with fee income and just with the guidance in the Q4 and the annuity income usually being higher in 4Q. I'm curious if you could give some more color on the other bucket in 3Q, specifically how much derivative income SBIC, BOLI and SBA might have been unusual in 3Q? And then just maybe how much that might come down in 4Q to reconcile that 6% to 7% for the full year?

Speaker 7

Sure, Brett. This is Mike. I'll get started and certainly John can add some color. So if we look at the Q3, again, an absolutely excellent quarter across the board really for fee income growth. So it's certainly something we're very pleased to be able to report.

Speaker 7

And again, really, I think shows the success of the investments that we've made the past couple of year in our fee income businesses. So again, if we look at the Q3, Slide 17 in the deck kind of outlines through that waterfall graph, the various components. And certainly the other income does stick out this quarter. It was up $5,600,000 quarter over quarter. And the vast majority of that increase really came from what we refer to as our specialty fee income lines.

Speaker 7

So talking about things like SBA fees being up about 1,600,000 dollars Our SBIC income or venture capital income was up about $700,000 BOLI showed a nice increase of about $500,000 And then derivatives were up almost $2,000,000 So that's the better part of the 5,000,000 dollars that we're showing as $5,600,000 growth quarter over quarter. So as we think about the Q4, certainly we would expect to see continued growth in wealth management. So our trust fees as well as our annuity income to some extent. And certainly when you look at quarter over quarter considering the Q4, really can't necessarily count on some of these specialty lines to again show the level of increase that we showed in the Q3. So when we think about fee income in the Q4, we would expect to see somewhat of a modest drop between the 3rd Q4.

Speaker 7

So John, anything you want to add

Speaker 6

to that?

Speaker 2

Okay. Any other question on the fees and we can clarify for you, Brett.

Speaker 8

No, that's helpful guys. And then just wanted to talk about capital for a second. And I know with the outlook for the 4th quarter in a flattish balance sheet and then maybe in 2025, the growth becomes more prevalent again at some point. But it feels like given your level of profitability, you could continue to have some capital accumulation even despite the share buyback. Any thoughts on just capital accumulation and maybe what the right might be for capital as you view it as core versus excess you want to try and figure out how to invest?

Speaker 7

Sure, Brett. So when we think about capital, obviously, as we've talked about in many venues, really going back 4 years or so, that really has been one of our strategic focus points to build capital to top quartile levels. And I think certainly we've been able to accomplish that over this time period. So from the numerical perspective, TCE is certainly knocking on the door of 10% and common Tier 1 nearly 14%. So those are attractive levels and we view those capital levels as things that really just give us a lot of optionality around how we think about managing capital going forward.

Speaker 7

So in the past couple of quarters, we've increased the common and we presume buybacks and really have guided to looking at both of those things as we move into 'twenty five with really the top priority for deploying capital really to be support organic balance sheet growth. So that's something that we're looking forward to being able to support next year. And again, we've talked a lot about the different things that we're putting in place to ensure that we're able to grow the balance sheet, specifically loans next year. So certainly if that growth for whatever reason isn't as attractive as what we're planning for, certainly we could certainly look at increasing the buybacks or the common dividend or things of that nature. So again, the levels of capital that we have, I think 1st and foremost give us a lot of optionality with respect to how we think about managing the balance sheet.

Speaker 7

I think that's important.

Speaker 8

Okay. That's really helpful. Thanks for all the color.

Speaker 2

Yes, sir. Thank you for asking the question.

Operator

And your next question comes from the line of Ben Gellinger with Citi. Your line is open.

Speaker 9

Hey, good afternoon, guys. Hey, Ben. I know we've kind of beaten a dead horse here in the credit, but

Speaker 8

kind of the responses thus far, I

Speaker 9

mean, I think it was 60% of the increase was SNC related. Obviously, that's rounding our ballpark, however you guys want to phrase it. When you think about just kind of going forward, so that would back out roughly, I don't know, dollars 75,000,000 of the roughly $130,000,000 linked quarter criticized.

Speaker 2

Do you have any thoughts on kind

Speaker 9

of what we should expect going forward, especially with lower rates? I know that some of this is economically dependent and that it's something you just can't tell 6 or 9, 12 months from now. But when you think about lower rates and kind of the cleaning up of the balance sheet, do you feel like you've appropriately addressed a lot of the credit or presumably could be so we could potentially be overmarked? Or is it still kind of more fluid than that?

Speaker 5

Yes. It's definitely a crystal ball type question. We address credit kind of on a daily, monthly, quarterly basis, and we make sure that we have our portfolio and our individual relationships and loans classified correctly. As we kind of look forward, as I mentioned in one of my earlier comments, interest rates definitely have had and do have an impact on the performance of our customers, some more than others. If you think about consumer in general, they're probably, if they're kind of a borrower, a net borrower, they're definitely going to be impacted, and benefit from lower interest rates.

Speaker 5

On the commercial side, many of our customers, either hedge or they enter into fixed rate obligations. Some are floating, obviously. The floating ones will definitely benefit. The fixed ones will obviously have to kind of reprice over time. And obviously, the buildup in interest rates that we saw over the past year or 2, was much more dramatic than I think we're going to see in interest rates coming back down.

Speaker 5

And so the benefit is probably going to be a little bit slower to realize from our customers' perspective on the C and I side of things. And so I think one of the things that they're going to have to kind of face into is general demand for their goods and services. And if there's kind of a forward view of continued slowness in that regard, then they're going to have to kind of rationalize their expense base as they manage through that. And we're seeing that. I mean, we're seeing some customers managing their inventory levels down because of just slowness in demand, especially for heavy equipment and things like vehicles and more durable goods.

Speaker 5

And then others are going to have to manage their expenses through just payroll and many are taking that step as well. So my view sitting where I am right now is I think we have our credit book appropriately marked or classified. And it just remains to be seen what happens as either rates help or any sort of kind of twist in the economic cycle manifest itself in a particular sector. But as I indicated, I mean, we're pretty spread out from industry specific issues. So I think they're very situational at this point and rather than being geographic or industry specific outside of transportation, which I still think is we're not heavily weighted in that area, but we are definitely seeing some things in that space.

Speaker 2

Ben, this is John. Just to add a little color and maybe this is more in line with what you're looking for. But clearly, inflation reducing the cost of workforce becoming a little bit more reasonable or certainly not going up as fast as it was. And the cost of variable rate money coming down are certainly tailwinds to improving the bottom line for clients. But as you know, we have to risk rate based on current and relatively reasonably previous financials.

Speaker 2

And so the outlook for how well things may get unfortunately can't be inclusive in the ratings. So it's a little bit of a rear view. The comments we're giving you, a rear view look on ratings and a forward view on confidence of things working out pretty well. Hopefully, that's helpful.

Speaker 9

Yes, I thought it is helpful. I mean, I got a few emails to criticize the jump spooked some people, but I think the SNC review and then, like you said, credit is a little backward looking in this respect, especially if it's kind of rate focused, probably dissuades some of the peers. Kind of a little more nuance to the question. I saw modified loans continue to go up, not acutely low. Any color there would be helpful?

Speaker 5

Sure. Yes, this is Chris again. Just by its nature, if you imagine a special assets department, we tend to manage the portfolio kind of on a short duration basis as we work through individual issues. So as loans mature with customers that we're looking to either encourage to refinance elsewhere or to allow them to get to a better place, we keep the duration of the maturity short. And so most of our modifications are term related because we roll them forward in 90 and 120 day increments.

Speaker 5

And over a period of time, you then have to classify those loans as modifications, even though it's part of the strategy that we work through with those customers.

Speaker 9

Got you. That's helpful. I'll step back. Appreciate the time, Chris.

Speaker 10

Thanks, Ben.

Operator

And your next question comes from the line of Gary Tenner with D. A. Davidson. Your line is open.

Speaker 9

Thanks. Good afternoon. Hi, Gary. Hey, I wanted to ask about kind

Speaker 11

of the overall guide on PPNR as it is now versus where it was last quarter. If you kind of look at the midpoints of what you provided for fees and expenses in the last quarter on PPNR with the changes now. It certainly would appear that NII for full year is coming in lower than what you would have thought a quarter ago despite the fact that you still are guiding to additional monosnim expansion and the loan growth guide hasn't really changed. So is it a function of maybe just the balance sheet not growing at all really kind of back half of the year or what's the primary item there just says kind of then we're thinking about rolling forward into 2025?

Speaker 7

Yes. Hey, Gary, this is Mike. Great question. So when we think about PPNR, I mean, obviously the guidance that we're giving is kind of annual guidance, but at this point it's pretty easy to back into what we're expecting for the Q4. So I think you're right in terms of the size of the balance sheet and the fact that it really hasn't grown at all and really has deleveraged a little bit in the second half of the year.

Speaker 7

So I think that's driving certainly some of the leveling off, if you will, around NII that we're expecting in the Q4. Add to that, we already kind of talked about fees where we had the better part of $5,000,000 of kind of specialty items that really can't be counted on, on a quarter over quarter basis. I do think we'll have some of that, repeat in the Q4, but it really is hard to pinpoint exactly what that might be. On the expense side, I do think, while we had an absolutely tremendous quarter in terms of actually reducing expenses quarter over quarter, I think we're more likely than not to see a little bit of an increase in the 4th quarter. So I think if you kind of put all that together, again, while we had again a great quarter for PPNR growth in the Q3, that's likely to come down a little bit in the Q4, I think.

Speaker 4

Got it. No. And that helps.

Speaker 11

I mean, it was the question is really focused on the NII piece, but you answered that and the nuance on the expenses is helpful as well. And then just a second question as it relates to the comments, John, about recruiting efforts. Can you give any context around kind of numbers that you're targeting or how you're thinking about how many folks you could add to staff and what kind of talent that could be as you're looking out into next year?

Speaker 2

Yes. This is John. Thanks, Gary, for the redirect. In terms of hiring, we really aren't ready to talk about the numbers yet. We plan to do that in January.

Speaker 2

Our expectation is to be recruiting right now. And although we have made some hires, we want to get all the recruiting efforts done for 4 or 5 months and then report both progress and what our expectations are for 'twenty five as part of the 'twenty five guidance. So it'd be a little premature to do it now. We got a fair number of offers out, but as you know, pull through rate is not going to be 100%. So I'll step away from numbers right now.

Speaker 2

But I can say that the recruiting efforts have been very formally received so far. We do offer a somewhat unique environment where there's a really terrific partnership between the line credit and the treasury function in terms of helping set rates and being creative in terms of putting package together that are attractive to new clients when they first come in the door and for those clients that are looking to expand. So the effort's been pretty warmly received and we look forward to talking about it as we get into 'twenty five. In terms of where, I think you asked where, we're glad to accept good talent, particularly if it's experienced really in any of our markets, but our recruiting efforts have been more focused in the areas of our footprint that have a natural higher organic growth rate. And so that would be Texas and Florida.

Speaker 2

And generally speaking, we're recruiting bankers in the a little less than the middle market size relationships, what we call Commercial Business Banking and SBA. And also Wealth Advisors, given the success of our wealth management offering, we still have places where we think we can add Wealth Advisors and get accretive pretty quickly. So it takes about 12 months for new bankers to begin adding kind of on a flywheel basis profitability in between 2018 24 months for them to become materially profitable and closer to the target operating model. And we've had that place about 10 years and it tends to be really good and predictive after just 4 or 5 months in terms of whether it's going to work out well or not. So I think the recruiting efforts are going to be something good to talk about when we get to January.

Speaker 2

Do you want to get any clarifying questions on that or?

Speaker 11

No, that was great, John. Thanks guys.

Speaker 9

Thank you.

Operator

And your next question comes from the line of Matt Olney with Stephens. Your line is open.

Speaker 12

Yes. Thanks for taking the question. Mike, it sounds like you feel good about deposit pricing so far. It's obviously early in the cycle, but just would love to hear any update or thoughts you have on deposit betas throughout the cycle in this kind of down cycle maybe as compared to the past betas that you disclosed in your presentation.

Speaker 7

Sure, Matt. And, yes, I think you're right. We do feel good about our ability to continue to control deposit costs going forward. So we were pretty proactive in reducing our promotional rates, especially on CDs coming into the Fed move. So our top promotional CD rate is a 3 month at 4.5% and we lowered that 50 basis points.

Speaker 7

We also have a 5 month at 4.15% and then 8 11 months at 4%. So those rates I think are attractive. They're all at that kind of almost magical number of above 4% now. So we'll see where that goes from here. Our guidance for the Q4 really includes 2 25 basis point rate cuts.

Speaker 7

So obviously we'll address deposit pricing as we go through the rest of the quarter. As far as our deposit betas or really our betas for this cycle, You can see at the bottom of 16 kind of for the last three cycles. And this isn't per se guidance, but just let's just call it expectations. So expectations for the current cycle around our total deposit beta, probably something between 37% 38%. When we look at our interest bearing deposit betas, 57% to 58% and then on the loan side, somewhere around 49% to 50%.

Speaker 7

So those are our expectations. That's what we're those are the things we're striving for through this cycle and it'd be interesting to see how the cycle progresses post election and through next year.

Speaker 1

Okay.

Speaker 12

Appreciate that, Mike. And then going back to the credit discussion,

Speaker 9

I heard all

Speaker 12

the great commentary on the criticized loans and the deterioration there. Did I miss the details behind the commercial loan charge off in the Q3? I'm just looking for any kind of color behind that.

Speaker 5

Yes. Yes, Matt, it's Chris, Luca. No, you didn't miss the question. Yes, so charge offs were a little bit higher this past quarter. We had a couple of C and I credits that we've been kind of working through and made the decision that now is the best time to kind of charge them down given where they are.

Speaker 5

We're still working through those issues with those customers, but wanted to make sure that it was kind of in the right spot moving forward. So we took some partial charges to kind of address that. The rest were pretty run rate oriented in nature, much smaller. So not much to talk about there.

Speaker 12

Okay. Thank you.

Speaker 2

Thanks, Matt.

Operator

And your next question comes from the line of Christopher Marinac with Janney Montgomery Scott. Your line is open.

Speaker 10

Hey, thanks. Good afternoon. I wanted to ask about risk adjusted returns, based particularly on risk adjusted yields in the commercial book as rates fall? I mean, as you look out a couple of quarters, would you imagine it gets easier to get your longer term risk adjusted yields? Or does it get harder?

Speaker 5

Yes. This is Chris Alouc. I'll attempt that even though I'm much more credit risk focused than that. But yes, I mean, I think what you see is oftentimes during kind of periods of turmoil that risk and return don't always perfectly line up. And I think as time moves on, we're going to continue to see them get better aligned.

Speaker 5

I think right now, people are focused on certain sectors more than others and so they can get a little crazy with the types of yields and the returns that they're willing to accept in those areas. But as we start to see a broader demand across C and I and pre, I think you'll see a little bit more rationalization on risk adjusted returns. We continue to be focused on that. I mean, it's one of our key mandates here, which is making sure that we get paid for the risk. If the risk is perceived to be lower from a credit quality standpoint, then we'll accept a little bit better or lower rate on a transaction.

Speaker 5

But we won't sacrifice rate for credit quality.

Speaker 10

Great, Chris. Thank you for going through that. And then just for either you or Mike, what are you seeing in terms of fraud from sort of small business related deposits? And is that showing up at all in some of the fund of your expense lines?

Speaker 2

Chris, this is John. Did you say fraud?

Speaker 10

Yes, fraud.

Speaker 5

I'll take that, if Mike can

Speaker 2

jump in or Chris if you like. Fraud, both on the consumer and the small business side, has been a challenge for the last several years. I think during the pandemic, people were distracted. And I think the bad actors began to make some pretty good headway. Actually, the way this year is going, our fraud losses have been less this year than they were last year or the year before.

Speaker 2

But it wasn't because there were less attempts. It's because we spent a good bit of money building tools and people to try to detect issues before they turned into a loss. But it's a real virus on the industry and on the economy of the country. And I think all of us are going to have to continue investing into it to try to protect our clients. But a lot of it and a lot of expense that we're having to add over time is just an education of our clients in terms of how they put in internal controls that banks have been using for a long time, but they need to implement in their own businesses.

Speaker 7

Chris, this is Mike. The only thing I would add to that is that there was nothing specific in the Q3 that rose to the level of being called out. In fact, I think our fraud overall fraud expenses were really down a bit.

Speaker 10

Great, Mike. Thank you. And John, thank you as well.

Speaker 2

And that

Operator

is all the time we have for questions today. I would like to turn the conference back over to Mr. John Hairston for closing remarks.

Speaker 2

Okay. Thanks, Abby. Thanks for moderating the call. Thanks, everyone, for your interest on I know a busy release day. We look forward to seeing you on the road soon.

Operator

Ladies and gentlemen, this concludes today's call and we thank you for your participation. You may now

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Earnings Conference Call
Hancock Whitney Q3 2024
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