Good day, ladies and gentlemen, and welcome to Hancock Whitney Corporation's fourth 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 conference call is being recorded. I would now like to introduce your host for today's conference, Kathryn Mistich, Investor Relations Manager. You may begin.
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-K 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. Hancock Whitney's ability to accurately project results or predict the effects of future plans or strategies, or predict market or economic developments is inherently limited. We believe that the expectations reflected or implied by any forward-looking statements are based on reasonable assumptions, but are not guarantees of performance or results.
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. The presentation slides included in our 8-K 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 Achary, CFO, and Chris Ziluca, Chief Credit Officer. I will now turn the call over to John Hairston.
Thank you, Kathryn. Happy New Year, everyone, and thank you all for joining us today. We are pleased to report a strong end to 2023, with a very solid fourth quarter. The results reflect our successful bond portfolio restructuring, remarkable growth in our capital ratios, a hopeful end to NIM compression, and improvement in PPNR, fee income and expenses after adjusting for the significant items we previously discussed in the mid-quarter update. We hope to carry this momentum into 2024, which will be a year to celebrate our 125-year legacy of commitment by our associates, to clients, and to the communities we serve. As anticipated, we have revised our three-year corporate strategic objectives, or CSOs, and have provided updated guidance for 2024, both of which are detailed on slide 22 of the Investor Day.
Starting with the balance sheet, loan balances were relatively flat this quarter, as loan demand once again was tepid in Q4, similar to the last several quarters. Under the surface, however, the team was successful at producing loans at a volume necessary to hold our own and overcome a more select credit appetite, continued focus on pricing, and in replacing large credit-only relationships with granular relationships. Business banking continued to impress on both sides of the balance sheet, and consumer lending volume has begun to cover the remnant of pandemic recovery paydowns. As we look forward into 2024, we expect loan demand will return after rates begin to soften mid-year, and therefore, much of our loan growth is anticipated in the second half of the year. Credit quality metrics were flat quarter-over-quarter, with criticized commercial and nonaccrual loans at very low levels.
As mentioned in the mid-quarter update, charge-offs began to normalize in Q4, but we still see no significant weakening in any portfolio sector. Despite impressive AQ ratios, we continue to be mindful of the current and potential macroeconomic environments. We are proactive in monitoring risks, and we continue to maintain a solid reserve of 1.41%. Total deposits were down $630 million this quarter, driven primarily by the maturity of $567 million in broker deposits. We were able to use the proceeds from the bond portfolio restructuring to delever these higher cost deposits. Aside from that, client deposits were roughly flat with prior quarter. Seasonal inflows of public funds did occur as expected. The DDA remix continued, but pleasantly at a slower pace.
We ended the quarter with 37% of our deposits in DDAs, and we're pleased to finish Q4 at the top end of the range contemplated in the mid-quarter update. Retail time deposits grew, and interest-bearing transaction and savings accounts were stable, thanks to the promotional pricing we offered on CDs and money market accounts. Our clients remain rate sensitive, and we really don't expect a significant moderation until rates begin to decline in the second half of this year. Mike will make a few comments in a moment regarding our future expectations for rates. In 2024, we expect low single-digit growth in our deposit balances year-over-year, used to fund loan growth. Another bright spot for the quarter was growth in all of our capital ratios.
Our TCE grew to over 8% due to lower, longer-term yields and the benefits of our bond portfolio restructuring. Our total risk-based capital ratio reached 14% this quarter, and we remain well capitalized, inclusive of all AOCI and unrealized losses. As we look back on 2023 and forward into 2024, we believe we have positioned ourselves to effectively navigate the operating environment this year. Our deposit base has been remarkably stable and we expect it will continue to support our funding needs.... Our ACL is quite robust, and our capital levels grew throughout the year, which we feel will help position us for success in 2024. With that, I'll invite Mike to add additional comments.
Thanks, John. Good afternoon, everyone. Fourth quarter's reported net income was $51 million, or $0.58 per share. Adjusting for the three significant items this quarter that were previously disclosed, net income would have been $110 million or $1.26 per share. That's up about $12 million or $0.14 per share from last quarter. Adjusted PPNR was $158 million, up $5 million from the prior quarter. Both NIM and NII were flat, with fees up and expenses down. So a good quarter in an otherwise challenging environment that drove a nice increase in PPNR over last quarter. As mentioned, we saw no NIM compression this quarter, and our NIM was flat at 3.27%. This was better than our original guidance for the quarter of 3-5 basis points of compression.
As shown on slide 15, the investor deck, our strong NIM performance was driven by higher loan yields, approximately 1 month's impact from our bond portfolio restructuring transaction, and continued slowing of our non-interest-bearing deposit remix. Deposit costs for the company were up 19 basis points to 1.93%. But we're pleased that the rate of growth in deposit costs has continued to level off. This resulted in a total deposit beta of 36% cycle to date. We expect deposit betas will move up modestly in the first half of the year, but we will be proactive in reducing deposit costs when rates begin to come down, which, as of now, we're expecting in the second half of 2024.
On the earning asset side, our loan yield improved to 6.11%, up 10 basis points from last quarter, with the coupon rate on new loans at 8.15, so up 12 basis points from last quarter. As John mentioned, a continued point of emphasis is improving our loan yields going forward. The increase in our new loan rate did slow somewhat this quarter and reflected the flattening of the Fed Funds Rate, as well as lower long-term rates. In part due to the bond portfolio restructuring transaction, our securities yield was up 10 basis points to 2.47 for the quarter, while the yield for the month of December was 2.57. As a reminder, we expect an annualized benefit to NIM of about 13 basis points from the restructuring transaction.
As we think about our NIM in 2024, we believe modest NIM expansion is possible, with single-digit expansion in the first half of 2024 and potentially a bit more in the second half of the year. As a basis for our guidance, we're assuming the Fed will cut rates 3 times at 25 basis points each, beginning in June of 2024. We continue to expect some ongoing headwinds from the continued deposit remix, which has slowed, but we also see tailwinds as we move into 2024. The projected rate cuts will allow us to reprice CD maturities lower in the second half of the year, and we expect higher loan and securities yields will help offset the impact of any deposit remix.
Fee income, adjusted for the significant items, was up this quarter, the fourth consecutive quarter of fee income growth, beginning with the fourth quarter of 2022. We benefited from strong activity in investment and annuity income this quarter, and we remain focused on finding opportunities to grow fee income. Our guide for fee income in 2024 is continued growth of between 3% and 4% from the adjusted non-interest income in 2023. Expenses, excluding the special FDIC assessment, were down this quarter, reflecting lower incentive expense. We expect expense growth of between 3% to 4%, which is a welcome decline from 2023's growth rate as we continue to work hard to control costs throughout the company.
We have continued to reinvest back into the company and will continue to do so, but at a bit slower pace as we allow technology and other investments to mature. And finally, all aspects of our forward guidance, including our revised CSOs, are summarized on slide 22 of our earnings deck. I will now turn the call back to John.
Thanks, Mike. Let's open the call for questions.
If you would like to ask a question, please press star followed by the number 1 on your telephone keypad. If you would like to withdraw your question, again, press star 1. We'll pause for a moment to compile the Q&A roster. Your first question comes from the line of Michael Rose from Raymond James. Please go ahead. Your line is open.
Hey, good afternoon. Thanks for taking my questions. Mike, I think you might have just answered this, but it looks like if I use kind of the midpoints of the ranges to back into the NII, it's up about 0.5% year-over-year, if I'm doing my math right. I just wanted to get a sense for, you know, what the sensitivity is, you know, kind of per rate hike since the forward curve is, you know, kind of baking in a little bit more. I appreciate the sensitivity you provided on... I forget what slide it was, but just wanted to kind of see what the puts and takes were to the NIM and NII outlook. Thanks.
... Yeah, I think you're referring to the table at the bottom right of 17, Michael. And then also, your numbers around how we're kind of thinking about NII for next year, I think are pretty spot on. So we have 3 rate hikes built into the forecast for next year. The first one in June, then September, and then lastly in December. So those are 3 rate hikes of 25 basis points each. And as we think about our NIM next year, you know, we really think about modest expansion in the first half of the year, so first and second quarter, and then I think a bit more in the second half of the year. And some of that calculus is absolutely related to the prospect of lower rates in the second half of the year.
To that end, what we're trying to do is kind of choreograph our CD maturity, such that we have, you know, a fair amount of those maturities happening in the second half of next year, where obviously, the rate environment will be a little bit lower. So the trajectory of our NII really would kind of follow the trajectory that I mentioned around our NIM. So that's how we kind of think about those aspects of NII, NIM, and the growth for next year.
Very helpful. I think you meant rate cuts, not rate hikes. I think we're used to-
Sorry, sorry.
rate hikes at this point. So-
Yeah.
Well, we get it.
We're so used to rate hikes.
Yeah.
We're so used to rate hikes.
Yeah.
I apologize.
No, no worries. I get it. Just as a follow-up, you know, you mentioned for the loan growth outlook, the growth to be weighted kind of in the back half of the year. But I think, you know, increasing number of management teams that I've spoken with have talked, you know, about a mild recession. And I guess if you can kind of explain where that growth you would expect to come from, and if a mild recession is kind of the base case. I know you didn't move the factors in your credit weighting, Q-on-Q, but just wanted to get some thoughts there. Thanks.
I mean, we still have that built into kind of our macroeconomic assumptions that obviously inform the ACL. But at this point, you know, it looks like that we may, you know, have achieved, you know, kind of that soft landing, or as John says, safe landing.
Yeah. Mike, this is John. Thanks for the question. I'll start it, and then if Chris and Mike want to add any more color to it, they're welcome to. But if we look at the fourth quarter and see a reported EOP that's relatively flat, it somewhat disguises all the activity under the surface. And as mentioned on several calls the past year or so, we've had a fairly acute focus on replacing credit-only relationships, particularly larger ones, with more granular relationships that bring liquidity and fee opportunities, where right now, liquidity, obviously, is the most important. And that happened in Q4, and so we had about, I think about $200 million.
I think the number I have in my mind is $196 in SNC balances that left in Q4 and were replaced nearly entirely by core relationships. So there's a lot of productivity occurring. It just isn't in the same size chunks as some of the outbound activity. I would expect to see that continue, although I don't expect the SNC reduction to be at the pace it was in Q4.
So if you think about in terms of puts and takes, if you think about another, say, $300-$400 million of SNC balances reduced, offset somewhat evenly over the first half of the year, and then more than the amount going out will be coming in in granular relationships the back half due to rate increases, that's really where you kind of get to the low single digit production or single digit balance sheet growth for the overall year. So while it's weighted to the back half of the year, it's not like there's not a lot of activity that's already been successful and will continue to be successful in the first half of the year.
Was that the kind of color you were looking for, or you want to ask a different question?
Yep. Nope, that's very helpful. I appreciate that. Maybe just one final one for me. You know, TCE above 8%, you guys have the buyback in place through the end of this year. I know you guys haven't been in the market, but would you expect to be, particularly if the economic environment continues to cooperate? Or is it, you know, capital rules are changing for the largest banks, there's thought processes that could come downhill, and are you looking to build capital here? Just trying to figure out how you guys are thinking about it. Thanks.
So Michael, we're extremely pleased with our ability to grow capital over the last couple of quarters, and certainly rates have kind of helped with that, you know, especially with TCE. But those rates can also kind of take some of that away. So we're cognizant of that. We're cognizant of, you know, the potential impact of any kind of economic slowdown, especially in the second half of this year. And I think for now, our stance related to managing capital will be to continue to build capital, as we have the past couple of quarters. So right now, not really thinking about buybacks.
That certainly could change, as you mentioned, and I think if it does, you know, hard to kind of gauge when that might be, but you know, it's probably something I think we might look at a little bit more intently in the second half of the year. But again, no plans right now.
Great. I appreciate you taking my questions. I'll step back.
You bet, Michael. Thank you for asking.
Your next question comes from the line of Catherine Mealor from KBW. Please go ahead. Your line is open.
... Thanks. Good afternoon.
Hi, Catherine.
One follow-up on just the margin outlook, and in thinking about how your margin will react in a scenario where we see rate cuts, can you just talk to us a little bit about the puts and takes in just loan yields? I would have thought with 60% of your loan book variable, we may see a period of time where your margin actually comes down first, and then maybe as you kind of see growth improve or the back book starting to reprice at a faster pace, you know, then you may see the NIM expansion. But that size of the variable rate loan book, you know, could have a near-term kind of negative impact on the margin. Is it just that the CD repricing is enough to offset that?
Just kind of talk us through why that's not a bigger negative impact than we may think.
Yeah, yeah, Catherine, this is Mike. I'll start with that, and it, it's a great question, and I think as much as anything else, it really is all about time. So again, if you think about the way we have the, the rate cuts, you know, kind of choreographed out, the first in June, and then a couple of months later, September, and then finally in December. So as you think about 2024, the rate drop in December really won't have much of an impact. Obviously, a bit of an impact in the fourth quarter.
But again, the way we're kind of thinking about the second half of the year and the way we're trying to choreograph again, our CD maturities, we, we'd like to be in a position where, you know, certainly a rate cut of 25 basis points is impactful in terms of our variable loan rate. But again, our fixed rate loans continue to reprice higher, you know, a solid 12 basis points per quarter, you know, for the past 5 or 6 quarters. And, we see that continuing at least through the balance of 2024. So that is a little bit of an offset to the impact of the variable rate impact from a lower rate environment. But again, the CD maturities, we think will also be very helpful.
I think net-net, if the rate drops are spaced out the way we think they could be spaced out, that certainly I think, will be helpful to avoid any kind of potential NIM compression in the second half of the year.
That makes a lot of sense. And so then, in a scenario where the forward curve is right, and I'm not saying it is, I don't think it is-
Right.
But let's just say that's the way it plays out, so there could be more NIM compression if that, if we do get 6 rate cuts this year that come at a faster pace?
Yeah, especially if they're bunched up together, or in an environment where the rate cuts are maybe more than 25 basis points. You know, so we'll, we'll see. But again, the way we're thinking about it is kind of the way I described. So that, that's the way we have it kind of planned out.
Yes. Yes, that makes perfect sense. And then my other question is just in the NII guide, any change to kind of the size of the bond book outside of the most recent restructure and how you're thinking about liquidity size? Just kind of trying to think about how you're thinking about the size of average earning assets, as we look to that, NII growth or really-
Yeah, in terms of-
-stability.
Sure, sure. In terms of kind of managing the balance sheet next year, you know, related to the bond portfolio especially, I mean, obviously, it's down, you know, considerably because of the restructuring transaction that we effected in the fourth quarter. But as we think about next year, we're really going to be in the mode of kind of resuming, reinvesting pay downs and maturities back into the bond book. So, unless there's some other activity in the bond portfolio, we would expect that to be pretty flat from where it ended the year.
In terms of average earning assets, you know, given the guidance we've given around the kind of loan growth we're expecting next year, as well as the level of deposit growth, again, what we're striving for is for loan growth to be funded, you know, kind of dollar for dollar or as close to that as possible through deposit growth. If you put all those dynamics together, including, you know, the bond book on balance compared to last year being down, you know, we would envision a scenario where average earning assets year-over-year would be kind of flattish for the most part.
Great, that makes sense. All right. Thank you for the clarification.
Thanks, Catherine.
Your next question comes from the line of Casey Haire from Jefferies. Please go ahead. Your line is open.
Yeah, great. Thanks. Good afternoon, everyone. So just another follow-up on NIM. So if I'm understanding this correctly, the modest NIM expansion that you guys are expecting this year is predicated on a little bit of deposit beta pressure in the early going, and then proactive management of funding costs, of deposit costs down, once you start to get Fed cuts. I'm just wanted to get some color. Is the velocity of the deposit beta in the first half, is that pretty modest? And then it's going to be more. The velocity is going to be faster on the way down as you guys manage once you get Fed cuts.
Yeah, I think on balance, Casey, that's right. So we would expect the deposit beta impact to be pretty modest, if not kind of flattish from where it ended the year. You know, we don't see a whole lot of change in terms of our cost of deposits really in the first quarter, you know, with the end of the year at 1.99 in terms of December, 1.93 for the quarter. And I think as we think about the first quarter, you know, that could be up a handful of basis points, potentially even a little bit less than that.
And again, you know, a lot of this depends on our CD maturities that we have across the year, not only for the first half of the year, but the second half of the year, and how that will line up with any potential rate cuts in the second half of the year. So I think overall, what you said is, you know, pretty spot on.
Okay, great. And on the CD maturities, which is there any color you can provide on this, on the maturity schedule, in terms of balances and, you know, what the rate they're running off at as is?
Yeah. So in the first quarter, we have about $1.8 billion of maturities, and they'll be running off at about 4.77%. That goes down by about half in the second quarter. The run-off rate is about the same. And then in the second half of the year, we have about $1.5 billion coming off, and the other run-off rate is just a bit higher right now. And again, the way we're thinking about those maturities lined up with the promotional rates that we have in place, is that the plan really is to have a lot of the CD maturities that happen in the first quarter come back on or renew in relatively short maturities, such that when those mature, we're in the second half of the year in potentially a lower rate environment.
So that's a little bit of color around how that's kind of choreographed.
Okay. Yeah, that's helpful. Apologies if I missed this, what is the promotional rate versus that 4.70?
We're at about 5.25. You know, and that'll be a relatively short maturity. Now, we also have promo rates, you know, in the 4.75-4.25 range, that stretch out those maturities just a little bit.
Okay. So the CD maturities basically don't start to benefit the NIM until the back half when we get-
That's right.
You know. Okay, gotcha.
That's correct.
Okay.
Casey, presuming a June initiation-
Right
... of rates going down. If that happened earlier, obviously, the benefits would, you know, be quite different.
Okay. All right, great. Just, just last one, the bond book—can you give us the spot yield on the bond book at 12/31? I know you gave it at 2.57, but I was just wondering, you know, what the exit rate was so we could have a better, better pinpoint on it.
Well, it was, it was 257 for the month of December. Is that what you're asking?
Yeah. I know it was 250. I saw that in the deck.
Right.
I was wondering what it was at 12/31.
Well, we were at 247 for the quarter, 257 for the month of December. And the way I'll share that information is, for the first quarter, we're looking at that yield to be just a couple of basis points lower than when it ended the month of December. So call it 255 or so.
Okay, gotcha. Thank you.
Your next question comes from the line of Brett Rabatin from Hovde Group. Please go ahead. Your line is open.
Hey, good afternoon, everyone. Thanks for the questions. Wanted to ask first on slide 28, you have the deposit account size, and one of the variables I'm not sure if I'm clear on is the expectation for continued atrophy, maybe in DDA from here. Are you guys thinking that DDA levels have almost troughed? Or maybe give us some color, given that the size relative to 1Q, or I guess the 4Q 2019 is still about 23% higher today.
Yeah. So obviously, one of the, the positives for the fourth quarter, you know, was the notion of our NIB remix kind of leveling off. So in the prior quarter, we were at 38%. We finished the fourth quarter at 37%. And as we think about next year, Brett, you know, we, we expect there to be continued remixing, but at a much, much slower pace. So potentially, we could, we could see ourselves at around 33%-34% or so by the fourth quarter of next year. So that's, that's obviously a big help, and, and has been a big help, and I think will continue to be helpful to, you know, this notion of, potential NIM expansion next year.
But Mike, to be clear, it sounds like you're not expecting the average balances to maybe go back to prior levels completely. Is that fair in your assessment?
Yeah, I think so.
Yeah, I think I'll jump in and help. This is John. The consumer balances are a lot closer now to where they were pre-pandemic. Brett, the wholesale balances, because of the volume of operating accounts we are adding and hoping to add on a faster clip this year, have higher balances, and that skews the total, if you would, on an average, a little bit higher. So there's more than just, you know, just the same volume of accounts from 2019 compared to now, because the mix has changed some. The business deposits accounts on the smaller end, we expect to hit pre-pandemic in around June or so. That's the run rate extrapolated. So we'll see if the expectations around the rate environment changes that any.
And then on the larger side, you're right, those average balances seem to have held. And it's somewhat curious because, you know, the balance sheet, you know, more than covered the earnings analysis fees that we have on the treasury side. And you would think that they would have flown back out to cover the debt. But I think just the absence of investment on the wholesale side in the last six months or so has tempered that outflow. If rates begin to go down, and the environment gets a little bit more optimistic, then I think we may turn more to those 2019 balances, simply because people are spending the money and investing it in things, and want to use their money versus ours for the time being.
Does that all make sense?
Yeah, that's, that's really helpful. The, the other question I wanted to ask was just around the expense guidance, 3%-4%. And, and you've obviously made a lot of effort and, and results in getting more efficient in the past couple of years, but you've also talked about maybe some technology spending upcoming. Can you talk about, you know, what you're looking at in terms of, spending with technology relative to that guidance? And then, does that 3%-4%, does that kind of exclude any potential pickups of talent, of lenders in any markets? Maybe a little more color around that guidance.
Okay, thanks for the question. This is John. I'll start it, and Mike can add color if he likes. I wouldn't want to break the 3-4 down between different sectors because it gets a little complex. But what I will share is that on the technology side, the bulk of the increase in technology expenses, 2024 over 2023, is the carry cost to a large extent of all the technology we already completed and put into service in the early part of the year. So you know, when you get a full year of the amortization of the capital and the contracts of that impact on 2024, you know, carries over to the year-over-year comparisons. So there's a good bit of tech expense that isn't really new.
It's simply the full 12-month impact of all of that. And as Mike said in his earlier comments, our expectation is that as that technology, as the company really matures in using that tech, then we get more efficient, more effective, and to the degree, more effective on the revenue generating side, then we see a bit of a tailwind top line revenue as the environment improves. So, that, that's the tech part. In terms of additional spending, we really have done all the heavy lifting. I mean, what I call the big systems are all done. They're current, it's running well. We're very happy with the investments that we made. And in terms of just new stuff, we're really down to, I guess, I'll call them the dogs and cats.
So, you know, our ability to compete with a fewer number of larger banks, we believe is helpful. We believe it is helpful to continue spending more in our digital front office, to continue to invest in fraud detection early, to manage any charges that we could have avoided by having you know, good tools to help both our clients, and our bankers, and our risk professionals identify problems before it's too late to get the money back. And so I think a lot of that type of work is what's left. So the preponderance of the big stuff is actually all the big stuff is done, and we're now, I think we're adding things that just enhance value for our clients in the future.
In terms of people, you know, the average time it takes in terms of months for a banker to cover themselves got extended a bit, during the degradation in spreads, as rates began to go back up. But the investments that we made in SBA and in business banking continue to bear fruit, and in fact, because of the liquidity coming in with those relationships, the time it takes to cover the cost of a new banker is held on its own and maybe even got a little shorter. Shorter, being more attractive on the business banking side.
So we haven't set a number that we're ready to talk about in terms of adding those folks, but I can tell you that if there were an area, if I could create a little bit more room in expenses to add people, it would probably be in those areas, because frankly, the returns have been so good. The fourth quarter was the best quarter in our history in SBA income. It was also the best quarter in our history for annuities income from the Cetera investment we made back in 2022. So overall, I think we would continue investing in those things that are working.
Brett-
Yeah, that's, that's really helpful. Thanks.
The only thing I would-
Sorry, go ahead.
The other thing I would add, yeah, the only other thing I would add to that is, you know, we're not seeing a repeat, and we're certainly not expecting a repeat of some of the things that drove our expense levels last year, you know, to the uncomfortable levels of around 8%. So it's things like, you know, kind of other regulatory costs and some of the FDIC increases outside of the special assessment. We don't see that repeating. We also had some increases related to our pension and other retirement plans that we don't see a repeat. And finally, we did have a pretty big increase in our insurance costs related to our own properties last year, that we don't see, at least right now, repeating.
Some of those increases were related to some of the storms that we had in the prior couple of years. That's also very helpful to have those things not repeat this year, and puts us in a place where we feel comfortable about the guidance of between 3% and 4% for the year.
Okay. It's really helpful. Thanks for all the guidance.
You bet. Thank you.
Your next question comes from the line of Brandon King from Truist Securities. Please go ahead. Your line is open.
Hey, good evening. Thanks for taking my questions.
Hi, Brandon.
So following up on deposits, are there any deposit categories besides CDs that is a part of your strategy as far as managing costs lower? Just how are you thinking about the deposit beta lag on the downside, excluding with respect on the CD front?
Yeah. So as, as we said before, Brandon, when rates start to come down, you know, our posture and plan, and this is the way we've kind of approached it in prior environments where rates were down, is to be fairly proactive in reducing our deposit costs. And the lead there would be on the CD side, especially as we try to, you know, aggregate the CD maturities in an environment where rates are potentially lower than they are now. So that's probably the biggest driver of what we're trying to do. We're also very, very mindful of the rates on our money market accounts, and we'll start to come off of some of our promotional rates related to that category of deposits, you know, at the appropriate time. So that's kind of how we think about that.
Okay. And are there any sort of customer segments that you envision you could be more proactive in regarding consumer versus commercial?
Brandon, this is John. In terms of rate or just focus?
Rate.
On rate, I mean, the segment that's enjoyed the best spread over, you know, year-over-year was in the segment we call business banking. So really, it's the lower end of commercial. And the reason we feel pretty good about it is because even though they've enjoyed the highest growth in lending, because we've added resources in some of our growth markets for that purpose, is they've been very successful at covering on literally a par basis with incoming deposits that are carrying a cost well below our total cost of funds. So, it's really been on both sides of the balance sheet that the small business sector has been performing.
In terms of retail, we define retail as consumer and micro businesses, all of which are handled inside our financial centers, our branches. Those segments were really under siege from a pay down perspective through the excess liquidity portions of the pandemic recovery. And in Q3, they began to get better, and in Q4, particularly on the very small business side, that began to also dampen to the degree that we're actually expecting retail growth in 2024. It's modest, but it's growth, and it's really been in pay down or in reduction really for the past three years or so during the pandemic. So on a year-to-year comparison, the absence of that vacuum is very helpful.
Just as a reminder, the indirect portfolio, which had been amortizing since we shut that business down, that impact in 2024 is relatively immaterial, really for the first time on a year-to-year basis.
Okay. And just lastly on the CD strategy, how much flexibility do you have in adjusting that strategy depending on the timing and potential magnitude of rate cuts as you look for this year?
Yeah, I think it's a pretty nimble strategy, Brandon, and I think we have lots of flexibility in how we think about adjusting our promotional rates to kind of deal with, you know, any differences that the rate environment may present us with versus what we're kind of assuming. So obviously, the CD maturities are in place, and there's no flexibility related to those. But certainly, our you know, our main way of dealing with that is going to be our promotional rates. Not only the rate, but the maturity that we attach to a specific rate. So I think we have good flexibility to deal with whatever is kind of thrown at us.
Yeah, Brandon, this is John. Without adding too much on CDs, a little earlier, one of Mike's answers to the question about the timing on CDs alluded to how high a concentration of those renewals are in the first half of the year, and the expectation that we are offering a pretty good promotional rate to keep all that money and perhaps gather more, but it's got a very short duration to the point that we would be repricing a lot more of that money in the second half of the year in a better rate environment.
So one of the whether you use flexible or nimble, as Mike said, whichever word you prefer, one of those items of flexibility is how much we're prepared to pay for how short a duration to allow us the benefit of the repricing opportunity in the second half of the year. So that's why we feel pretty good about it, is 'cause the book's already short, and it has a pretty good likelihood it's going to get shorter in the first half of the year as we reset.
That's very helpful. Thanks for taking my questions.
You bet. Thank you, Brandon.
Your next question comes from the line of Matt Olney from Stephens. Please go ahead. Your line is open.
Yeah, thanks, guys. Just a quick follow-up on the credit front. The charge-offs, I think there were $16 million of charge-offs, of which around $13 million was commercial. Any more color on kind of what those commercial charge-offs were in the fourth quarter? Thanks.
Yeah, Matt, Matt, this is Chris Ziluca. Really, it was, you know, kind of a handful of accounts that, you know, we've been tracking for a while, so they weren't really kind of any sort of surprise for us. And many of them were really kind of, you know, post-pandemic impacted and, you know, kind of had to get resolved, as we kind of move forward in time. And it was compounded by the fact, and I think I've mentioned this previously, that, you know, we are experiencing lower recoveries. During, you know, earlier periods, we had a higher rate of charge-offs that allowed us an opportunity to generate greater recoveries. But at this point in time, we're down pretty substantially on the recovery front, which is a good news, bad news thing.
More bad news than good news on the NCO side, but certainly kind of supports, you know, the good performance that we had in that regard during the past couple of years.
Okay. Thanks for that, Chris. And I guess the second part of that would be, you know, those charge-offs higher in the fourth quarter, how much of that is just kind of the end-of-year cleanup, or is this more the normalization of the charge-offs that you've been talking about for a while? Is that what we saw in the fourth quarter, and is this kind of, you know, 27 bps of charge-offs for the quarter? Is that something that's a reasonable assumption moving forward from here?
Yeah, I mean, there's. You know, again, it's Chris. You know, we don't really kind of handle cleanup in some respects. Obviously, we take charges when it's appropriate and necessary. You know, we did have probably more as a result of kind of end-of-the-year activity that occurs as people make decisions. Mostly our customers make decisions around, you know, what they're going to do in the way of, you know, selling parts of their business or selling themselves, that sort of thing. And a lot of that stuff does kind of bunch up toward the end of the year. So, you know, it's hopeful.
I mean, you know, we're never happy with, you know, you know, any sort of significant level of charge-offs, so we're hopeful that, you know, we can get below that number, but there is a normalization going on for sure.
Yeah, Matt, this is John. The only thing I'd add to it, I think what Chris said was accurate. What I would add to it is, when we describe something as normalization, there is a certain chunk of NCO level we're concluding as part of normal things that we just don't know about yet. And so we're trying to count in the guidance for the types of activity that occurs when the economy is performing the way it is right now, where even though we may get a little rate relief in the back half of the year, it's still somewhat higher for longer relative to the last decade or so of debt service requirements.
And so, we're presuming that the number of unanticipated charge-offs that occur on a very short degree of notice are inclusive in the guidance that we gave. So that's another way of saying that we're trying to factor in what we don't know, but not just what we know about, because we would otherwise give you a number that may be a little optimistic in this type of an economy.
Sure. Okay. Thanks, guys. Appreciate the commentary.
Of course. Thank you. Thanks for the question.
Your next question comes from the line of Christopher Marinac from Janney Montgomery Scott. Please go ahead. Your line is open.
Hey, thanks. Good afternoon. Mike, just wanted you to go back to the AOCI change this quarter. Is there any way to either predict further gains in the next quarter or two, or just anything to explain the mechanics on, you know, why that was maybe punitive at 9/30 and, you know, quite a change this quarter?
Well, I think the big driver there was obviously lower rates. So the, you know, the 10-year Treasury was down, what, 70 basis points between 9/30 and 12/31. And so that, and certainly the impact of a restructuring transaction affected in the bond portfolio, you know, had the impact of reducing our unrealized loss on AFS pretty significantly. And when you combine that with the improvement on the HTM side, on a pre-tax basis, it was, you know, somewhere in the neighborhood of $411 million or so. And so that had, you know, the impact of 77 basis points on our TCE from AOCI, and also was extremely helpful in improving our tangible book value per share. So that was up, you know, some 11%-12% kind of quarter-over-quarter.
So going forward, it, you know, without the consideration of any additional, you know, transactions where we would do something in the bond portfolio, similar to what we did in the fourth quarter, more than anything else, you know, any kind of further improvement will depend on, on rates coming down a bit, you know, compared to where they were at 12/31. So that's a bit of a crystal ball right now. From where the 10-year stands right now, it's, it's up a bit from where it was at year-end, you know, something like 8 or 9 basis points. But, you know, it'll depend on where rates go, I think, in the first quarter.
Got it. Perfect. And then I had a question for Chris, on the credit side. What is the timeframe and impact of sort of just the annual review process of your accounts for, you know, both stress testing commercial borrowers, in addition to just new appraisals that come through on the CRE side?
... Yeah, good question. You know, obviously, the annual review cycle in general is we try to spread it out across the year. You know, some of it is driven by the timing of getting various financial statements from customers, you know, to the extent that they're audited or accountant-prepared financial statements. You know, they tend to come, you know, kind of in the middle of the second quarter. If they're tax return-type statements, they tend to get pushed out. A lot of people file extensions, so they come a little bit later in the year. And, you know, if...
We're also relying upon, you know, kind of the business-prepared information around the performance, you know, especially if you're talking about commercial real estate, around end-of-year performance, which, you know, will get, you know, spread throughout the first and second quarter of the year. You know, we regularly stress test our portfolio outside of just getting the financial information in to be able to do that. And, you know, we'll you know, a lot of times we're only getting updated appraisals if there's an issue that we're dealing with, or if there's a renewal situation, that sort of thing. We're not getting, you know, appraisals per se, on every loan on the commercial real estate book, unless we perceive an issue, and we wanna, you know, get our arms around it and get ahead of it a little bit.
So it's kind of a mix of an answer for you there. But, you know, we do update our stress testing and our risk ratings and our view of individual credits, you know, spread throughout the year, but usually tends to kind of come in the middle of the year, unless there's an event that occurs.
Great. That's helpful background. Thank you for sharing that, and that concludes my questions.
Thank you. Good question, Chris.
Your next question comes from the line of Steven Scouten from Piper Sandler. Please go ahead. Your line is open.
Thanks. Good afternoon. Hey, guys, I'm wondering what you're seeing in terms of kind of customer acceptance of higher loan rates. I mean, you guys lay it out nicely on slide 16 of what your new loan rates have been, and kind of you can see how that's affecting production. But, I'm curious what you're seeing, hearing from customers, and if there's any sort of wait-and-see approach from any customers that are saying: "Hey, we think rates might be lower in the future, so we might hold off for the time being." Just kind of how that affects overall demand.
Thanks. Good question. I mean, certainly that's the case for new real estate transactions, both consumer and investor CRE. There's very much. I wouldn't even call it tepid. I would say anemic demand in that type of activity. Primarily because even though there's a tremendous housing demand for building multifamily and resi construction, the cost right now to do that, in addition to the debt costs, are just really high. And so I think investors are interested in waiting a couple or three months to see what's really going to happen. Now, some of that hope was based on buying into the six rate decreases starting in March activity, which we never really believed, and I'm afraid we're going to be proven right.
And so they may move forward in Q2 with that realization, thinking that they'll renegotiate the deal when they can, as rates begin to decline. So on the real estate and mortgage side, that's absolutely the case. When we get into revolvers, you know, line utilization is as low now as it's ever been, both on the consumer and the business side, and that's simply, you know, just good money management on the part of our clients, both business and consumer, where they prefer not to have any more than the revolvers they can manage, and that's what they're doing. So as those attitudes change, we would expect one of the tailwinds to NII will be line utilization actually going up.
I'm surprised it hadn't happened already as average balances came down on the deposit side, but in reality, it really hadn't. It stayed- it went down low, and every quarter we think it's going to finally creep back up a bit, it stays flat or goes lower, and that was the case in Q4. The other item is acquisition finance is obviously very low right now as people struggle with what the appropriate valuation is for different businesses that could be available for sale for whatever reason. And I think that that's gonna probably continue to occur until we get past the election and people understand what the, the tax posture might be in terms of, of those types of transactions and, and income getting into 2025 and 2026.
Yeah, that makes sense. That's a lot of good color. And then just one clarifying question for me. Mike, I think when you were answering Michael's question earlier, you were talking about the trajectory of NII should be, you know, fairly similar to what you expect the trajectory of the NIM to do. Would that imply that NII could be kind of flattened down on a year-over-year basis, given the tough comp in the first part of the year? Or how would you kind of look at that from a year-over-year NII growth perspective?
Yeah, great question. I think year-over-year, flat to slightly up would be the way to look at it. And, you know, I don't know that we'll have a quarter experience, kind of a quarter-over-quarter decline, but certainly in the first half of the year, you know, I think more flat than not, if that makes sense.
It does very much. Thanks so much for clarifying. Appreciate the time.
You bet.
You bet. Thanks, Steve.
Your next question comes from the line of Ben Gerlinger from Citi. Please go ahead. Your line is open.
Hey, guys. Good afternoon.
... Hi, Ben, and welcome to coverage. We appreciate you picking us up.
Yes, thanks. I was curious if we could just take a quick second here. I'm trying to square a circle to some extent, 'cause I know that you guys have the 3 cuts, and the forward curve is called 6 at this point. So if the 6 is correct, what I'm getting at or what I'm kind of coming up with a model is that you have a flat-ish margin for the full year, and then your PPNR is probably a little bit more compression than the 1-2 you gave guidance. Obviously, your guidance is based off of 3 kind of layered throughout the back half of the year or starting in the middle and the back half of the year.
So one, just kind of confirming that thought process, but two, is there anything from an expense perspective that you could kind of push out a little bit further, potentially towards the year-end and into 2025, if that revenue is a little bit softer than expected?
Yeah, Ben, this is Mike, and you know, in short, I think that what you're describing is you know, more or less correct. You know, that if we do have more rate drops and they're kind of bunched up the way the forward curve is, that that would be a bit more negative than the way we think it's actually going to be panned out. So, so I think that trajectory of what you described is again, more or less correct.
And, you know, certainly if we have shortfalls in expectations around revenue, you know, we're not here to say specifically what kind of actions I think we would take on the expense side, but I do believe that we would obviously address that, you know, as those kind of conditions, you know, warrant whatever action we might wanna take in terms of, you know, further curtailing expense growth. So that's always something I think that we would consider in those kinds of circumstances. Anything you want to add to that, John?
No, I agree with what you said.
Okay.
All right. That's helpful, just kind of 10,000-foot view color. And then the follow-up I had was more along the lines of just lending in general. I get from the first half of this year, you have some headwinds from just balance sheet items in general. But when you think about growth in the back half of the year, are there areas where you're just kind of avoiding in general that because the risk-adjusted spreads are just not nearly as appealing in terms of a credit? And I get that looking six months down the road is probably pretty difficult at this point as the new starting point. But when you just think about lending today, are there areas where you're kind of tapping the brakes or just really not pressing the gas at all?
I get that there are some stronger areas in general that seem more appealing, that you've already referenced, but just from a credit perspective that you're avoiding.
Yeah, yeah. Ben, this is John. I'll start, and Chris can add if he likes. I think it—generally speaking, almost regardless of the rate environment, barring a really significant macroeconomic downside where the rates collapse because of concern, barring that, I think our—Using your analogy of what have we tapped the brakes on, what are we hitting the gas on? I think it's going to be the same all year, almost regardless of whether we have 6 adjustments, 3 adjustments, or no adjustments. The sectors that we're very interested in growing are rather granular. I think the only one that might change a bit would be investor CRE, but it wouldn't be because of a fear of the rates, it would be because there just probably won't be that much demand if the environment was worse.
But the things that we're focused on right now, I think short of a really significant macro event, will be the things that we're focused on, even as rates begin to get better, it'll just be more of it. So, that would probably stimulate more growth, given where our footprint is and given the investments we've made in growth markets. Did I answer your question or were you headed down a different road?
No, no, no. That is helpful. I was going to say, if you could throw in geography, but you just did. So that is helpful.
Yeah. You know, the markets we're in, that we have pretty high density in, when things get better, we get a really good lift in those markets because the brand's very well known. It's very much appreciated, as it's kind of a hometown bank in those core markets. And so we'll always get more than our fair share of the business we want when the environment looks brighter. And in the growth markets, it's taken us a while, I think, to flesh out the teams that we want. We're very proud and happy with the folks that have joined the company in those areas, but we're operating with a lesser number of locations and footprint than optimal.
And so a better environment makes a little bit bigger of a hunting ground, if you will, for our bankers to compete with those people who have a better financial center coverage numbers than we have. But so, so a more optimistic macro is probably going to reward us a little better than it did the last time we went from a downside to an upside, because we've added all those new markets that are really terrific growth opportunities.
That's helpful color. I stand by. Thanks.
You bet. Thank you for the question, and welcome to coverage.
We have no further questions in our queue at this time. I will now turn the call back over to John Hairston for closing remarks.
Thanks, Krista. Appreciate you moderating the call. Thanks to everyone for your interest in Hancock Whitney, and we'll see you on the road soon.
This concludes today's conference call. Thank you for your participation, and you may now disconnect.