Good day, ladies and gentlemen, and welcome to Hancock Whitney Corporation's first quarter 2022 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. As a reminder, this call may be recorded. I would now like to introduce your host for today's conference, Tricia Carlson, 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, 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. 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 DeLuca, Chief Credit Officer.
I will now turn the call over to John Hairston.
Thanks, Tricia, and thanks to everyone for joining us. We hope you had a safe and enjoyable holiday weekend. We are pleased to report another solid quarter and a healthy launch for 2022. The company's first quarter results were on track with core loan growth of 8% linked quarter annualized, mix improvement in a stable deposit base, initiation of a widening net interest margin, superior AQ metrics, continuing excellent expense management, improved operating PPNR, and solid capital levels. Momentum from 2021 carried into the first quarter with an increase in core loans of $385 million linked quarter. This growth more than offset the almost $200 million in PPP forgiveness. Increasing economic activity in our markets, increasing line utilization and pull-through rates all led to growth broadly across our markets and lines of business.
New loan yields rose a couple of basis points as production levels remained strong. We expect these trends will continue and be more positively impactful as PPP forgiveness impact is a less significant headwind next quarter. Speaking of decreasing headwinds, I'd like to share an update on the New Orleans MSA. As I pointed out on previous calls, most of our footprint experienced record tourism and very healthy hospitality industry segments throughout the pandemic. New Orleans was an exception due to dependence on convention, trade show, and festival business as an economic driver. We are pleased to report a resurgent New Orleans in 2022. Beginning with the New Year's Sugar Bowl game, a robust Mardi Gras season, hotels were booked, festival tourists returned, and the city rebounded as a national and international destination. March brought relaxed pandemic restrictions and family tourism surged during the spring break vacation period.
We were proud to host the Final Four basketball tournament and are preparing for the return of the Jazz & Heritage Festival and the Zurich Classic Golf Tournament. Conventions have returned, guided tours and restaurants are fully available, and we hope to see many of you in a couple of weeks at the Gulf South Bank Conference. The New Orleans MSA has joined the rest of our footprint in economic recovery. We're also pleased to report another quarter of superb asset quality metrics. After peaking in the fourth quarter of 2016 at 10.1%, our commercial criticized loan ratio improved for the sixth straight quarter to 1.7% of total commercial loans.
From a high of 2.3% in the first quarter of 2018, non-performing loans are in the ninth straight quarter of improvement and sit at 0.22% of total loans. Net charge-offs were again only one basis point for the quarter. I'm very proud of our team for maintaining diligence throughout the pandemic disruption. The combination of their very hard work and de-risking our balance sheet have delivered AQ metrics among the best compared to peers. Our capital levels remain solid. I recognize a TCE of 7.15% is well off our internal target of 8%. However, the primary driver of the decline is related to valuation of the available-for-sale portfolio at March 31.
This was the primary driver of the 56 basis point decline in our TCE ratio during the quarter and a trend we expect to see repeated across the banking sector due to rapidly rising rates. Other capital metrics remain solid, however, with an estimated Tier 1 ratio of 11.12%, up 3 basis points linked-quarter. We opportunistically continued buying back shares during the quarter and repurchased 350,000 shares at $52.79. Finally, before I turn the call back to Mike, I'd like to update you on a strategic decision we made and announced last month addressing recent trends by others in the industry regarding consumer segment NSF and OD fees. On March 25th, we published a press release detailing the decision to proactively eliminate consumer NSF and certain OD fees by the end of 2022.
We shared an estimate of an annual impact of $10 million-$11 million in fee income from that decision. We believe these changes are in line with an evolving retail banking industry as traditional banks adjust products to meet consumer needs and provide them with the tools needed to help manage their overall finances. We expect to see improving consumer account acquisition rates in 2023 with this change and as we launch additional retail products and features and expand our digital storefront. With that, I'll turn the call over to Mike for further comments.
Thanks, John. First quarter net income totaled $123.5 million, so down $14.3 million from last quarter, but up over 15% from the same quarter a year ago. EPS at $1.40 per share in the first quarter was down $0.15 from last quarter, but was up $0.19 from the first quarter of last year. Drivers of the change from last quarter included a higher overall tax rate, the absence of last quarter's storm-related insurance gain, and finally, a lower negative provision this quarter compared to last quarter. A few themes for this quarter included continued loan and earning asset growth, what we believe will prove to be top quartile asset quality, and stellar expense control.
The quarter's $385 million core loan growth continues the momentum began several quarters ago around deploying excess liquidity into loans, then bonds. We also grew the bond portfolio $318 million in keeping with previous guidance around our liquidity deployment plans. Continued growth in loans and earning assets going forward, along with higher rates, will result in higher revenue that will position us to achieve our profitability goals and targets. Our asset quality continues to improve and has reached what we believe to be top quartile levels of commercial criticized and NPLs, along with effectively zero net charge-offs. We reduced our reserve release this quarter to $23 million compared to $29 million last quarter and can envision future releases tapering off to near zero in a few quarters.
While there's uncertainty in economic and geopolitical environments, we believe we are well positioned for what that may bring. The company's overall operating expenses on a reported basis were down again this quarter to just under $180 million from $183 million last quarter. Our ongoing efficiency initiatives continue to help us manage overall expense levels and will continue to do so. We have lowered our expense guidance for the year a bit, so now expecting expenses to range between $735 million and $745 million for 2022. We do expect seasonal drivers such as annual merit increases will likely drive expenses higher in the second quarter, but we are committed to expense levels that will support our 55% efficiency ratio target and longer term profitability goals.
Rate hikes in 2022 now present a tailwind to achieving that goal sooner than expected. Now just a few other comments related to the quarter. While total deposits were virtually unchanged linked quarter, the bigger story is the shift in mix during the quarter. As you can see on slide 12 in our deck, at quarter end, we're split nearly 50/50 between interest bearing deposits and DDAs. Seasonal runoff in public fund deposits and maturities in CDs left money sitting in non-interest bearing deposits. We expect our deposits will remain at these levels over the near term. We continued our strategy of deploying excess liquidity into the bond portfolio and added $318 million in the first quarter. New purchases and reinvestments totaled $620 million at yields of 2.13%.
The revaluation of the AFS bond portfolio at March 31 reflected an unrealized pretax loss of $387 million compared to an unrealized gain of $2.2 million at year-end 2021, and also negatively impacted our TCE. As of quarter end, our mix of HTM and AFS bonds was 28% and 72% respectively. However, we do have some OCI protection with $1.7 billion of fair value hedges on roughly $1.9 billion of AFS bonds. Details in our current hedge positions are noted on slide 29. Our NIM for the first quarter was 2.81%, an increase of 1 basis point from last quarter. Net interest income was virtually unchanged despite 2 fewer business days and PPP forgiveness. Better earning asset yields and mix as well as lower deposit costs added 8 basis points to the NIM.
However, the impact of PPP runoff and other items offset that widening and compressed the margin 7 basis points, leaving us with a net increase of 1 basis point. We expect the net interest margin will continue to widen as rates increase, and we have added supplemental information in our deck on slide 19. Please note this additional information does not include any potential changes in balance sheet composition or deleveraging activities which could potentially drive additional NIM widening in future quarters.
As you would expect, fees were down linked quarter as rising rates continued to impact secondary mortgage fees. We expect fees will be a challenge moving forward and have lowered our guidance for 2022 to reflect both a rising rate environment and our announcement last month regarding the elimination of NSF and certain overdraft fees later this year. A solid first quarter and a good start to the year. With that, I'll turn the call back to John.
Thank you, Mike. Let's open the call for questions.
If you would like to ask a question, please press star followed by one on your telephone keypad. If for any reason you would like to remove that question, please press star followed by two. Again, to ask a question, press star one. As a reminder, if you are using a speakerphone, please remember to pick up your handset before asking your question. We will pause here briefly as questions are registered. The first question is from the line of Brett Rabatin with Hovde Group. Your line is open.
Hey, good afternoon, everyone.
Hey, Brett.
I wanted to first ask you've got the slide on the hires this quarter, and you tweaked the expense guidance down a little bit. I was curious if you could give us an update on, you know, it's nice to see the hires and, you know, obviously that'll help your loan pipeline over time. You know, I assume you have some other plans as indicated that you'll continue to grow that in 2022. Has your expectations changed for hires? How has that affected your expense growth outlook, you know, and then maybe just color on what your pipeline does look like from a hire perspective.
This is John. Thanks for the question, and thanks for recognizing it. No, we've had some good success in the quarter. That's probably the most number of bankers we've added in one quarter, in a good long time. I think some of the increase that we've seen is coming from outside interest in us versus just recruiting efforts, and we would expect that to continue as we go through the rest of the year.
Yeah, Brett, the thing I would add to what John just stated is, relative to the guidance we gave and a little bit of a change, you know, certainly that recognizes, I think, the great start that we had to the year in terms of our ability to further reduce expenses from the fourth quarter of last year. You know, getting off to a great start in that regard. We're also guiding for folks to expect the levels of expense to kind of increase as we go through the year. We have the normal seasonal things that drive that, such as raises in the month of April. We'll have a full impact of that in the second quarter.
Of course, in addition to that, you'll have a full quarter's impact and really a full year's impact of the new hires that we added last year. But we are obviously working hard to achieve that guidance. Certainly the end result is the 55% efficiency ratio for the end of this year. You'll note that the ER came in at 56% this quarter. Again, a pretty good start toward getting that goal accomplished.
Okay. Appreciate the color there. I want to make sure I'm clear on the margin, you know, and slide 19, I want to make sure that's a static balance sheet perspective, right? I mean, obviously with lowered liquidity continuing, you know, possibly a strong possibility, it would seem like those numbers could even be conservative. In terms of the margin, which brings me to the question about the balance sheet management and if you would expect to continue to have the trends you had in the first quarter in terms of reducing liquidity. You know, obviously your DDA is up $2 billion over the past year. You did make a comment about expecting or had a comment in the press release about expecting that to possibly go back a little bit towards interest bearing.
Maybe you could just give us some color on the balance sheet.
Yeah, I'd be glad to. Certainly, when we look at the size of the balance sheet and think about the guidance that we gave around deposits, we're not really expecting the size of the balance sheet to really increase much from where it is now. In fact, with the guidance on deposits to be flat to slightly down, you can certainly look for the size of the company to kind of mirror that. Really for 2022, the most efficient and effective way we think of managing our balance sheet is what we began really in the first quarter, and that is the deployment of all of our excess liquidity. Our excess liquidity was down a bit from the fourth quarter to the first quarter.
We haven't changed our guidance around loan growth, so the 6%-8%. Then also we have not changed our guidance with this notion of increasing the size of the bond portfolio on a net basis by about $300 million or so, per quarter through the end of this year. I think all of those dynamics kind of mixed together, you know, the way we're thinking about managing the balance sheet on a go-forward basis. You also asked about slide 19 in the earnings deck, and we added that slide really just to give folks a little bit of guidance as to what we're expecting or how we're expecting our NIM to react really for every 25 basis points of a rate hike on a go-forward basis. Your early assumption is correct.
It really doesn't assume that there are any changes to the composition of the balance sheet on a go-forward basis. There's certainly, I think, an opportunity to kind of outperform that, should we continue to be effective in deploying excess liquidity.
Okay. Great. Appreciate all the color.
Thank you.
Thank you, Mr. Rabatin. The next question is from Catherine Mealor with KBW. Your line is open.
Thanks. Good evening, everyone.
Hi, Catherine.
One follow-up on the margin, just with slide 19. Any color you can give us on how you think about deposit betas and what your assumptions are?
Yeah, Catherine. The way we're thinking about our deposit betas, if you go back to slide 14, we kind of talk about the historical both loan and deposit betas from the last time we were in an up-rate environment. You'll note that deposit betas were around 25%, and that's on total deposits. Kind of on a go-forward basis, the assumptions that are built into slide 19 around deposit betas are that we, generally speaking, would mirror that same deposit beta experience that we had the last time rates were up, so around 25% on a total deposit basis.
Great. Okay, perfect. That's my way of thinking about the slide 19 is if we think that there's another, I guess, 6 hikes, then in total, that will get us kind of somewhere between, I don't know, 21 and 30-some basis points of NIM expansion with just kind of a static balance sheet. But then as you deploy excess cash and that moves, call it from 10% today to maybe, I don't know, somewhere around 5%-6% or something like that, then you could see additional expansion on top of that. Is that a fair kind of summary of what the slide is telling us?
Yeah, I think so. I think that's fair. Yeah, that's fair and correct. The other thing I would point out on slide 19 is you'll note after we get to a Fed funds rate of about 125 basis points, you see that the expected NIM impact begins to narrow just a little bit. What we're kind of assuming at that point is that the deposit betas would probably kick in a little bit, and we would begin paying a little bit more for deposits than for the first 125 basis points or so.
Great. Okay. Maybe one last question just on buybacks. How do you think about how the lower TCE just from the AOCI hit, it may maybe potentially limit share buybacks in the near term? However, your valuation is at a really attractive level to be buying back shares today.
Sure.
How are we kind of thinking about that push and pull?
Yeah. Certainly a fair point to make that 7.15% is not where we would normally like to operate the company at from a TCE point of view. To be honest with you, it really doesn't change our thinking around how we manage capital or the priorities around how we go about that. Something like the buybacks, given the kind of opportunistic way we've been looking at that the last couple of quarters, I think in our minds, TCE at 7.15% really doesn't change that. I think you can continue to see us, or expect to continue to see us, to remain opportunistic.
I think if you look back over what we've actually done for the last couple of quarters, that's a good guide to use of what we kind of mean by being opportunistic in terms of how many shares we might look to to actually buy back. You know, of course, a lot of that depends on the disruption that happens during the quarter in the market. The last two quarters certainly had, I think, more than its fair share of disruption. You saw the number of shares that we bought back.
Great. Very helpful. Thank you so much.
Yeah, thank you.
Thank you, Ms. Mealor. The next question is from Michael Rose with Raymond James. Your line is open.
Hey, good afternoon, everyone. Just wanted to go to-
Hey, Michael.
Slide 6. Hi, how are you? It's been good to see the line utilization, you know, creeping up. Looks like we're back to third quarter 2020 levels. If you can just give some color on what's driving that. Then just as kind of a separate question, you know, you did mention the Central region in the press release was virtually unchanged from the quarter. John, if I hear your comments, it sounds like everything's open for business, so is it just an issue of pay downs with the reduction levels, you know, on Slide 7, so, you know, pretty strong and healthy? Thanks.
Thanks. I'll start with the line utilization. If you look through the trends on page six, Michael, you can see that utilization continued to climb throughout 2020, really all about the pandemic and the cash inflow from stimulus and the lack of spending. As we got to the bottom around the early part of 2021, it began to expand. Generally speaking, that pace of utilization, the slope has been pretty consistent all through the last several quarters. We would expect that to continue, as different clients burn through some of their excess liquidity themselves and opt to lever as opposed to use cash.
If concern about any economic downturn were to occur more quickly, then the utilization may bump up or down a little bit less steadily than it has the last several quarters. We really, based on what we're seeing in economic activity in the southeastern part of the country, which is our footprint, we would anticipate seeing that curve relatively steady. Steady in terms of slope upward.
Okay. In the Central region, just any commentary there?
Specifically in New Orleans? Well, I mean, as I said in the prepared comments, New Orleans had a little bit more of its fair share of the downturn of the pandemic due to the impact on the larger events in tourism. The restrictions there, by the local government were a little bit more arduous in New Orleans than the rest of our footprint. That also stymied some of the economic growth occurring quickly. That all really reversed itself as we got to the latter areas of 2021. For the first time last quarter, we got to pretty much a push, in New Orleans, and in this quarter enjoyed some good expansion.
I really think when I use the sentence, New Orleans has joined the economic recovery the rest of the footprint's been enjoying, that's quite literal in terms of that activity. We feel as if NOLA is going to expand. Now, our market presence there is we have a very sizable market share. It's not like the growth opportunity on a percentage basis we would see in Dallas or Houston or Tampa or any of the markets we've entered more recently that are high growth. But just the magnitude of the book there and the disruption around it, we would expect NOLA to be more of a growth story this year than we've had in some time.
Okay, helpful. Maybe just one follow-up question for me. You know, on slide 20, you talk about moving to that mid-fifties efficiency target by, you know, the end of the year. Can you remind us of the puts and takes, you know, to that? You know, I assume rates, you know, higher rates would obviously get you there faster. You know, outside of maybe mortgage, you know, what are some of the potential headwinds that you see that could prevent you from getting there? Thanks.
Hi, Michael, this is Mike. Probably the biggest headwind I can think of, really two, I guess. One would be that our performance in terms of fees for the next couple of quarters, you know, ends up being a lot worse than the guidance that we've given. We're not expecting that to happen, but you know, that's certainly an area that could be impacted. The other item would be, I think that you know, maybe the assumptions that we're making around inflation and you know, wage costs, you know, certainly could again be a little bit higher than what we're expecting on a go-forward basis. Now granted, we're not expecting either of those things to really you know, kind of get in the way or present any kind of significant challenge.
You asked about the headwinds, and those are the two that I can think of.
Okay. Thanks for taking my questions.
Thank you, Michael.
Thank you, Mr. Rose. The next question is from Casey Haire with Jefferies. Your line is open.
Thanks. Good afternoon, everyone.
Good day.
Question on the fee guidance. Down 1%-3%, that would imply from this run rate 83.4. By my math, that looks like you would need to get that fee run rate back to at least, you know, $86 million plus in the remaining three quarters. I'm just curious, what are the drivers to get you there?
I think Casey, this is Mike. I think the biggest thing that can get us from where we are now to that level is this notion of specialty income. That includes a whole bunch of fee income categories, things like BOLI, derivative fees, unused line fees, things of that nature. That particular fee income category can be pretty volatile quarter to quarter. The first quarter, I think, was a bit low compared to our normal run rate in what we consider specialty fees. In my mind, that's probably the way we get there.
Okay.
Casey, this is John. I'm sorry I stepped on you.
No, go ahead.
The only thing I would add to Mike's comment is our treasury area and merchant area has had some pretty robust new sales activity over the past several quarters that looks as if it'll continue to upwardly trend. That business card merchant income growth is typically going to be a little different in Q1 of the year than the rest of the year. We would expect to finish the year at a pretty good high clip compared to the past. The other area is inside the wealth management area. Remember Q1, the market really didn't perform terribly well for a goodly part of the quarter. That has a pretty profound impact on AUM fees and then rebounded in March.
For the second quarter throughout, unless the market falters pretty significantly, we would expect a little bit of performance out of wealth, given the performance of the market has improved from the first of the year.
Okay, very good. On the cash position, you guys, you know, pulled forward. I mean, you guys were targeting $1.2 billion of deployment in the securities book this year. You pulled forward a nice bit in the first quarter here. I'm assuming that was because of the rate backdrop. Is there an opportunity or an appetite, rather, to accelerate the deployment like you did in the first quarter?
As of now, Casey, I would tell you the answer to that is no, but that's a decision, you know, that we monitor very closely. Certainly we could decide in coming quarters to accelerate that a little bit, especially if the current yields for new bonds remain at the levels that it is now. That's certainly a possibility, although right now, as of today, we have no plans to accelerate. Yeah.
Loan growth obviously is a material part of that, you know, quarter in, quarter out decision. Q1 typically and seasonally is a very low growth quarter for us in loans, but Q1 outperformed pretty well, and that's on top of the paydowns that leaked from fourth quarter to first quarter that I mentioned on this call, you know, three months ago. We were quite pleased with the growth level in Q1, and it certainly supports the high end of the guidance that we've given for loan growth. The higher that number ends up being through the year, then the less pressure we'll really have to deploy liquidity through securities. As Mike said, we really have to make that decision quarter by quarter.
I don't think we wouldn't object to either one just depending on the algebra of where the outlook looks on loans.
Got it. Thank you.
Thank you.
Thank you, Mr. Haire. The next question is from Jennifer Demba with Truist. Your line is open.
Thanks. Good afternoon. The asset quality improvement really has been pretty impressive over the last several quarters. As rates rise, what areas of the loan portfolio do you think would be the most vulnerable? And what do you think are kind of normalized levels of net charge-offs for this company?
Yeah, this is Chris DeLuca. Yeah, I mean, I guess, you know, any of our loans that are not, you know, that are floating rate, probably are a little bit more at risk to some degree. A lot of our customers swap out, so that tends to protect them on the upside. I would guess, you know, in general, commercial real estate could be impacted a little bit depending on whether or not it translates into any further any cap rate compression or or the like. You know, we don't currently anticipate that. We obviously stress that in our underwriting quite substantially. We feel that our portfolio can kind of withstand a reasonable amount of rate increase in that regard.
As it relates to normalized charge-offs, obviously we're at you know, essentially zero right now. You know, we don't really see anything in the immediate future that would suggest a substantial increase or return to historic levels, even on average. I wouldn't want to speculate where that might end up, but I do believe that you know, it'll be on a run rate basis, probably less than we've experienced in the past if you take out some of the lumpy situations that gave rise to some of the higher charge-offs.
Thanks so much.
You're welcome.
Thank you, Jen.
Thank you, Ms. Demba. The next question is from the line of Kevin Fitzsimmons with D.A. Davidson. Your line is open.
Good evening. Thanks for fitting me in here at the end. Just one quick question on the guidance on the provisioning. You know, with the language now being about tapering off the next few quarters, previously it was modest reserve releases expected over the next several quarters. Mike, I think you kind of characterized that as modest being kind of similar to what you guys had done. Is that you know, I mean, I think it's very reasonable given the uncertainty that's out there that that might have changed that like or maybe we'll step down what we were gonna do in terms of reserve releasing.
I just wanna, you know, wanted to make sure I was interpreting that correctly, getting in between the wording and what you were trying to say there.
Yeah. Kevin, I think you kind of articulated that exactly, the way we meant it. Really this process or this notion of tapering down our reserve releases really kind of began in the first quarter. We're down, you know, to $23 million or so reserve release from about $28 million or so last quarter. We've already kind of begun that process. In the guidance, we kind of talked about, you know, this tapering to continue, you know, maybe for a quarter or two. You know, without providing any hard guidance, we can certainly envision, you know, that we could have another quarter or two where we have reserve levels or reserve release levels that step down and eventually in a couple of quarters, you know, be pretty much at zero in terms of reserve releases.
That's how we kind of think about it and what we kind of envision happening. Obviously, that's very dependent on a lot of things that Chris just kind of talked about. You know, our levels of charge-offs and certainly the levels of commercial criticized and NPLs. They're at great levels now. Certainly if that continues, then yeah, then the you know, the reserve levels will kind of follow. Probably the biggest wildcard out there is, you know, things like, you know, kind of geopolitical kind of events and implications and what happens with the macroeconomy, along with the forecast for that on a go-forward basis. You know, certainly a lot of uncertainty out there in terms of the impacts from those kinds of things.
you know, most of which we really can't control, but what we can control is the things like our own asset quality, and that's what we're focused on.
The pace of loan growth could affect that as well.
Sure. You got it. Yeah.
With Moody's scenarios turning a little bit darker this quarter versus others, the tapering that occurred this quarter was really a math exercise.
AT levels were truly stellar. It really had nothing to do with it. It was all around Moody's scenarios and also, thankfully, a second quarter of net loan growth above the PPP forgiveness. We've got a deck page in there, around PPP forgiveness impact on page 8, and you can see the trend where the amount of headwind we're suffering from PPP declined precipitously from 4Q to first quarter, and then it declines to getting pretty close to immaterial next quarter. That's really because the contra to growth is PPP forgiveness going down. While we have relatively low amounts of reserve for PPP, it still has been a contra to growth overall.
Without those contras in there, and as the indirect amortization runs off, net loan growth probably goes up, all things being held equal from 4Q and 1Q forward. Built into that guidance on provision is really the expectation that we're reserving for a little bit larger loan book. The economy interrupts that, then, you know, the guidance may change.
That make sense, Kevin? Yeah. No, perfectly. Thank you. You bet.
Thank you.
Thank you, Mr. Fitzsimmons. The next question is from Brad Milsaps with Piper Sandler. Your line is open.
Hey, good afternoon.
Hey there.
John, in your prepared remarks, you talked about, you know, products that the bank may be developing to maybe offset some of the loss, NSF and overdraft revenue in 2023. Do you think that you'll have enough in place, you know, maybe by the end of this year to, you know, fully offset that lost revenue? Or do you think it's gonna be, you know, something that we kind of see gradually replaced over time?
It's a great question. It's a fair question, and I hate to tell you it's too early to tell, but it really is a little early. You know, the account acquisition activity I mentioned in prepared remarks really comes from a couple of sources. One of those would be new products. Another is the growth of our digital channel. We really have underperformed in terms of digital sales. It's a lower percentage of our total new accounts than many of our peers.
The reason for that is we spent a fair amount of time and money for a couple of years getting all of the infrastructure of the company, whether it was in financial systems, people systems, core technology, sales technology, and all that built out, and intended to have the digital channels ride those same rails so it was more efficient. Then as we kept new technology developing, we could do it for a lesser cost per change than we would have if we were trying to support the old legacy systems and the new stuff. I think we made the right call, but ultimately it meant we rolled out fewer activities on the digital side when it comes to sales.
As we get closer to the end of the year and all the new digital tech for sales rolls out, all the automatic underwriting, screening and whatnot occurs, then I believe what we'll see happening is a natural lift because our growth in digital sales, given where we're coming from, will be a little bit steeper slope to the good than some of our peers. Part of the basis is new products, part of the basis is expected growth in the digital channel. I'm pretty much ignoring the potential growth in new markets there because our play in new markets for high growth has been predominantly business purpose clients for now.
That will change as those investments turn profitable and begin to scale up, and then we'll maybe add financial centers to improve the retail penetration in some of those growth markets in 2023, 2024. Does that help?
Yeah. Thanks, John. Maybe just two follow-ups from Mike on the funding side of the balance sheet. Mike, I noticed that the cost of public funds were down about 10 basis points linked quarter. Can you talk about, you know, maybe the driver there? Then I think historically those deposits have been fairly rate sensitive, but also I know subject to longer term contracts. Can you talk about how those will react as rates rise? Second question is, I think you guys have about $1.1 billion in borrowings that are putable back to you by the FHLB, you know, at their option.
Do you need to think about earmarking some of the cash that you have on the balance sheet to sort of absorb those if in fact they do put those back to you?
Sure. I'd be glad to, Brad. The first question about public funds. It's a great question. Part of the way that we've been able to reduce the total cost of that line of business around funding costs is really contracts that have expired and basically new pricing in place based on the current rate environment. How those deposits react on a go forward basis to the extent that they're variable, then obviously they'll float back up to some extent. To the extent that they're on the fixed side, then, you know, some of that cost has kind of been locked in. It really just kind of depends on the individual depositor and the contract that's in place for them.
As far as our home loan borrowings, that's another good question. Yeah, we have that $1.1 billion of borrowings that has been in place for quite some time. We're paying around 50 basis points for that. That could get called really as soon as the current quarter, we'll see. Kind of depends if the home loan bank, you know, if they have that hedged, potentially how they have that hedged. But certainly I think it'll be an advantage to us, certainly if we can get that called.
Get that cost off the balance sheet. We have kind of earmarked that $1 billion as a potential use of the excess liquidity we currently have on the balance sheet. If it does happen, obviously we have liquidity to fund that outflow.
Absolutely. Thanks, Mike. I really appreciate it.
You bet.
Thank you, Mr. Milsaps. The next question is from Matt Olney with Stephens. Your line is open.
Yeah. Yeah, thanks for taking the question. Just remind me of the timing of when you expect the changes on the NSF OD products. When should we expect to see the impacts of that?
Thanks for the question. It's what we put in the guidance or the press release was before the end of the year. I mean, there's an operating exercise we have to go through to build out the testing, do the disclosures and all that. There's a little bit of that in the fourth quarter with the assumption that we'll begin it in 4Q, and that's cooked into the fee guidance that Mike gave a little earlier. To the extent we get it done earlier in the quarter, it could be more. To the extent it's late, might be a little later on. The $10 million-$11 million we gave for the expectation of 2023, it's a pretty simple interpolation down to the monthly run rate.
That's pretty reasonable, not for every month, like a short month in February, a longer month like July, the numbers fluctuate. If you just take an average for December, that would be a pretty good measure to use. While we, again, don't expect necessarily to do it December one, if we get too far into December, we never really put any significant code changes in as we get into the holiday season. If we don't get it done before the first of December, it'll likely be effective, you know, January first or twelfth or one.
Okay. That's helpful. And then on slide 20, several of the new hires that you've disclosed more recently, I think last year and then this year have been throughout some markets in Texas. Just remind us, what is the strategy of the bank in the Texas market? I assume it's a branch light commercial lending focus, but haven't heard any discussion recently. Thanks.
Sure. Glad to share that. You know, I'll be brief on some of the history, but you know, a few years ago, we noted that we had developed through a lot of good transactions, good acquisitions, good organic growth. We had quite a high concentration, really right along the Gulf of Mexico. From an investor point of view, sometimes when we had a stormy hurricane season, we would get a little pressure from people concerned about the resiliency of the marketplace. We usually see a net positive impact from storms, but certainly they can be disruptive, particularly in a bad storm season.
Purely to decrease our risk footprint, and also we thought to stabilize value creation for investors, we opted to begin expanding into markets in Texas for really two reasons. One, to spread our risk, and then secondly, because the growth rate in several of the Texas markets that we have a profound interest in is a good bit higher on a GDP annual run rate basis of growth than the markets we were already in. It was really both from a growth perspective and then from a de-risking perspective. That was all a done deal and in the plans before the pandemic occurred. Certainly, that got accelerated by the pandemic as we built so much excess liquidity.
Our entry into several markets in Texas and the pace with which we're adding bankers has as much to do with the recent pandemic buildup of liquidity and the desire to deploy it correctly as it is to de-risk and to get into other markets besides the ones we were in. You're correct in that it's branch light initially. It's more business or commercial-focused. We quickly chase that with a treasury offering because we're really good at treasury. We do an awful lot of treasury services sales and card deployment for business purposes like purchasing card.
Right after that, a wealth management play, all of which we tackle with CRA in mind to ensure that we don't run afoul of our corporate commitments to the Community Reinvestment Act and to underserved communities in those more urban markets. We really don't do a lot of branching outside CRA service plays until we get a little bit more of a material book. Where is that? In Houston, you would expect to see branching coming a little quicker, followed by Dallas, and then finally, Austin, San Antonio would be a couple of years out before we develop a lot of facilities that are more retail-oriented.
You really wouldn't look to see a big expense load increase beyond people in Texas for the next couple, 3 years, unless we're very successful at building a book, you know, faster than we anticipate. So far, that plan has worked beautifully, and has a good bit to do with the fact that our efficiency ratio targets have done pretty well so far compared to our expected timeline.
Okay. That's all great color. I appreciate that. Thanks again and nice quarter.
Thank you very much. I appreciate the question.
Thank you, Mr. Olney. The next question is from Christopher Marinac with Janney's. Your line is open.
Hey, good afternoon. Mike and John, just a quick one for you back on this AOCI issue. Can you pinpoint Securities that are likely to get called in future quarters or that you just expect would get paid off, and therefore you kind of have that recognition back of the, of the unrealized loss?
Yeah, Chris, good question. I don't have a number for you, but I can tell you that there's not an expectation of a lot of bonds being called. You know, certainly we continue to have pay downs in maturities. With rates higher now, certainly would expect the pay downs to slow a bit, at least relative to prior quarters.
There's some natural shift back in your favor because again, I think few of us have, you know, any credit concerns on these losses. It's more just about when you get that back in value.
No, absolutely. I mean, the structure of our bond portfolio again is almost all mortgage-backed security, residential and then commercial. So we really take no credit risk to speak of in the bond portfolio in that regard.
Great. Just one more quick one. Back on slide 7, I know you talked earlier in the call about the modest improvement in the new loan yield. Should that change a lot if Fed funds rate is materially higher, one or two quarters ahead?
Well, if you look back on the nature of our production, and I'll use first quarter as an example, a little bit more than half, so call it about 56% or so of that production was floating rate, the remaining fixed rate. In a higher rate environment with the Fed, you know, hiking rates anywhere from 50 to maybe even some talk of 75 in May, you know, certainly we would expect that yield on new loans to rise accordingly.
Sounds great. Just wanted to confirm that. Thank you very much for all the time and disclosure today.
You bet. Thank you. You're welcome.
Thank you, Mr. Marinac. There are no additional questions waiting at this time. I will now turn the conference over to John Hairston for any closing remarks.
Thanks, Traci, for running the call, and thanks to everyone for your interest. We certainly wish you a safe and happy quarter. We look forward to seeing many of you the next time we're together.