Good day, ladies and gentlemen, welcome to Hancock Whitney Corporation's Fourth 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 pass the call over to 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, 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 Ziluca, Chief Credit Officer.
I will now turn the call over to John Hairston.
Thank you, Kathryn . Good afternoon and Happy New Year to everyone. Thanks for joining us on what I know is a very busy day. While we look forward to the start of a new year, we also want to celebrate a successful Q4 and a strong conclusion to 2022. We are exceptionally proud of the Hancock Whitney team and the company's overall performance during a remarkable year of volatility. The results reveal not only progress made in 22, but also the culmination of decisions made the last several years to better position the company. With year-over-year earnings up $61 million, PPNR up nearly $104 million, net loan growth up $2 billion, NIM up 31 basis points, and an efficiency ratio in the low fifties, we view 2022 as a very successful year.
We see another year of potential macro environment changes coming in 2023 and expect the bulk of investor interest to be more about the future. As such and as promised, we have updated our three-year Corporate Strategic Objectives or CSOs, and we provide 2023 guidance on slide 18. Our guidance for 23 shouldn't be a surprise or a trend much different from what you may hear from others in our industry. Loan growth in the low to mid-single digits reflects the recognition of a likely slowdown in the economy, and we are mindful of managing risk in such an environment. We expect continued hurdles with funding loan growth with deposits and are guiding to an environment where core deposit growth will be available but perhaps a little bit more rate sensitive.
Our intense focus will be on core relationship lending with accompanying deposit relationships, which create meaningful value in our balance sheet through the cycle. This focus will have the impact of a slowing loan growth in 2023, but a better chance of funding lending with deposits. We fell short of that goal in Q4 as loans outperformed and the timing of seasonal deposit inflows and outflows was different than we expected. We said for the last couple of years that line utilization would begin returning to pre-pandemic normal at the same time excess commercial deposits were spent, and that trend was evident in the last several quarters, including Q4. With that said, we intend to grow deposits in 2023 in the low single digits with a downside case of flat, where we use cash flow from the bond portfolio to fund any shortfall in deposits.
To the extent deposits outperform, we will adjust to reinvesting in bonds or deploying into loans dependent upon the environment at the time. The rate environment, while beneficial to net interest income, negatively impacted fee income, with secondary mortgage being the hardest hit. With trending strong performance in wealth and card fees, though, we believe we can grow total non-interest income 3%-4% in 2023, including and covering the replacement of $10 million-$11 million of lost income from the elimination of certain NSF/OD fees beginning December of 2022. Inflation pressure, pension expense, and notable increases in FDIC assessments are a few of the drivers guiding to a 6%-7% increase in 2023 non-interest expense. Backing out the pension and FDIC increases, we project a 4%-5% increase compared to 2022.
Our efforts over the past three years in reducing expenses have put us in a position to better adjust to these increases and still maintain an efficiency ratio in the very low fifties. As it relates to guidance, we believe today's results for both the quarter and the year reflect a company positioned well for today's economic environment. Credit metrics are at historically low levels. Initiatives executed in 20-22 helped drive an efficiency ratio below 50% in the 4th quarter. New bankers hired over the past 18 months should help attract and enhance relationships in growth markets. We've proven our ability to proactively manage expenses and are introducing technology focused on scalability and effectiveness.
Capital remains solid, our reserve is solid, and our balance sheet is de-risked and positioned well. With those comments, I'll turn the call over to Mike for further comments.
Thanks, John. Good afternoon, everyone. We ended 2022 with fourth quarter EPS of $1.65, up $0.10 linked quarter. Net income of $144 million was up $8.4 million from the third quarter. PPNR was up $10.3 million. Finally, our efficiency ratio came in below 50% at 49.81%. Certainly a nice way to end a very solid 2022. Loan growth came in stronger than expected during the quarter at $528.5 million or up 9% annualized from last quarter. Line utilization continues improving and is trending back to pre-pandemic levels, while our residential One-Time Close product drove a sizable increase in mortgage loans. Deposit growth for the company came in lighter than expected at $119 million or 2% annualized from last quarter.
Typical seasonality in public funds contributed $494 million, while time deposits were up $493 million due to a CD promotion during the quarter. DDA and interest-bearing transaction deposits were down $692 million and $176 million, respectively. We recognize that deposit growth will be a challenge in 2023 for both our company as well as the industry. Commercial clients are deploying excess liquidity into working capital while consumers are becoming more rate sensitive. You can see on slides 13 and 14 in the earnings deck that while we were successful in holding deposit betas relatively low for most of this year, we did see a pivot up in our deposit beta to around 21% in the fourth quarter. Excluding the seasonal increase in public funds, that deposit beta was closer to 14%.
We still believe that when the current rate cycle is done, that our cumulative total deposit beta should be no worse than around 25%, about the same as the last up cycle. Our fourth quarter NIM at 3.68% was up 14 basis points linked quarter. While that level of widening is impressive on its own, admittedly, it did not move up as much as we expected coming into the quarter. The yield on new loans jumped 134 basis points to 6.27%, the bond portfolio increased 12 basis points, adding 51 basis points to our earning asset yield compared to last quarter. Funding costs were higher this quarter as expected, mostly due to promotional pricing on a successful CD offering that did result in higher deposit costs and a shift in our funding mix.
We still believe our NIM has room to expand with future rate hikes, but it will be small and very dependent on the level, mix, and cost of deposits. Concluding my comments with credit, our metrics trended to historically low levels in 2022 and remained there. Negative provisions ended as future CECL scenarios call for potential slowdown and possible recessionary environment. Our provisioning has been modest and charge-offs remain low, and we believe we're positioned well with an ACL of 148 basis points. While that ratio did decline by 2 basis points linked quarter, we actually added $1.5 million to the reserve at year-end. With that, I'll turn the call back to John.
Thank you, Mike. Okay, let's open the call for questions.
We will now begin the question and answer session. If you would like to ask a question, please press star followed by one on your touch-tone 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 a question. We will pause here briefly to allow questions to generate in queue. The first question comes from the line of Brad Milsaps with Piper Sandler. Please proceed.
Hey, good afternoon.
Good afternoon, Brad.
I appreciate all the guidance in the slide deck. I did maybe want to jump in maybe the fee income guidance first. Obviously a lot of moving parts this quarter. You note some of the specialty items, you know, may be lower than they have been. Typically, you know, you've got the, you've got the headwind with the NSFOD of about $10 million-$11 million. Is really the swing factor some of those specialty items coming back? Or John, are there other, you know, segments or endeavors that you have out there that you feel like are gonna be able to kind of push that number up higher towards your guidance?
Yeah. Good question, Brad. This is John. I'll start off, and [audio distortion] welcome to. You gave a quick inventory of exactly the right things to point to. The NSFOD income we forecasted. I think we talked about that maybe three or four quarters ago. That's will be a $10 million-$11 million annualized hit that started in December of 2022. First quarter 2023 will bear the full brunt of that run rate. As balances in consumer and business accounts continue easing down to pre-pandemic level, we anticipate that overall service charges from the deposit book and deposit accounts will keep going up throughout the year.
We also anticipate a very strong performance from our wealth management groups for fourth quarter was very promising as we anticipated, and we think we'll go into 2023 with an awful lot of momentum. Then finally, all things card related continue to outperform, and we expect that to also be a very good performance for the year. So all in all, the 3%-4% guide is inclusive of covering the downside from the NSFOD fee changes. You mentioned the other income bucket, and there's a lot of cats and dogs in that bucket. And for the fourth quarter, it was unusual in that, you know, virtually every one of those categories was at a lower run rate level or lower level than we typically experience in the run rate.
We do expect that to bounce back to something more closely to overall 2022 performance or maybe a little bit better. All of those factors are rolled into the 3%-4% guide for the year. The only area that we're not counting on, Brad, is secondary fee income from mortgage. It does appear after about a 54% reduction in deal flow Q4 2021 to Q4 2022. We think we're at or pretty near the bottom on that particular fee income source. While we're not counting on any benefit through 2023, any beneficial movement in 30-year rates would obviously, you know, be an unexpected benefit.
We don't have that expected at all in our numbers, but, you know, that would be a little bit more of an upside or a tailwind. Did that answer your question okay?
Yes, John. very helpful. Maybe as a follow-up to Mike as it relates to the CSOs. I see that you put sort of a framework of kind of your assumptions around, you know, Fed funds for the next 3 years. I know, you know, when rates are moving up, you know, initially you were looking for, you know, 4 to 6 basis points of NIM expansion with each 25 basis point increase. Would there be a similar level of contraction, you know, on the way down if and when we get there?
I know it's probably a tough question given all the moving parts, but just curious kind of how to think about, you know, I can't believe we're talking about rate cuts already, but just, you know, how would you think about that as it relates to NIM?
Yeah, I'm glad to, Brad. Just to kind of close the loop on the fee income question. John's right. I mean, I can't think of a quarter in a long, long time where we've kind of had every single component of specialty income kind of down quarter-over-quarter. BOLI derivatives were both down almost $2 million each, and even our SBIC income was also down a little bit north of $1 million. I think it would be unlikely that we would have another consecutive quarter where we would have those categories all down again. We do look for that area to kind of rebound in 2023.
As far as our CSOs, yeah, the CSOs that are there, again, as a reminder, those are our goals or targets really three years down the road. We kind of think about those in the context of fourth quarter of 2025. We've tried to be thoughtful in terms of what we think could happen with the rate environment going forward. You know, nobody has a crystal ball and certainly we don't have one. This is, I think, certainly a plausible forecast around rates and, you know, we'll go from there. Related to your NIM question, yeah, that is a tough question. Certainly as rates begin to come down, it becomes harder obviously for us to maintain a NIM at a stable level because we are so asset sensitive.
We've kind of done a lot of work in the last year or so, last two years really, in terms of extending the duration of our assets. I do think on the way down, we'll probably do better on this rate cycle down whenever it happens than probably in past rate cycles. Really the reason for that again is the work we've done to extend the duration of our assets. We'll see once we get to that environment.
Great. Thank you, guys. I'll hop back in queue.
Thanks, Brad.
Thank you. The next question comes from the line of Kevin Fitzsimmons with D.A. Davidson. Please proceed.
Hey, good evening, everyone.
Good evening.
Hey, Mike, I think I heard you earlier and, you know, and forgive me if I'm wrong on this, but I think you said that the margin had expanded but not as much as you would have expected. I'm just curious if that's true, what was that driver? Because I know as you outlined, funding costs did go higher, but you guys expected that and you probably had built in the CD promotion or maybe you didn't, and maybe that's why it was not as much as expected. If you could just go through that. Thank you.
Yeah, Kevin, I think if you go back and look at our guidance coming out of the third quarter, it probably would have pointed to a NIM maybe about 5 basis points or so higher than where we came in. Look, we're pleased with where we came in at 3.68. It certainly, you know, still impressive on its own that we could move our NIM up 14 basis points in 1 quarter. Not as impressive as the prior quarter at 50 basis points, but still, you know, 14 is a nice increase. I think the main reason is really why it probably didn't move up as much as we had thought coming into the quarter. It really was more around the loss that we experienced in DDA balances.
We were down about $700 million between the end of last quarter and this quarter. On our balance sheet, those deposits, those free deposits are extremely impactful. I think that plus the 4% 9-month CD as well as a need to kind of pivot up probably a little bit higher than we expected in our overall deposit costs. I think those factors combined really contributed to the NIM not coming in maybe as quite as high as we thought it would coming into the quarter.
Okay. That's great. I appreciate the guide on your outlook for deposit growth and the fact that the bond portfolio can supplement that. Based on what you see now, like on the one hand, the balance sheet's still very liquid and with the loan deposit ratio down at like 80% or a little below actually. When you think about allowing that loan deposit ratio to move higher, in other words, maybe you'll go after deposits, maybe you won't, versus a strategy of getting out in front of it.
Like some banks have taken a hit to the margin in the short term because they're kind of front-loading that deposit beta in effect, or maybe that's not the situation you guys are in because of the liquidity. Can you speak to those moving parts in terms of how you view that loan deposit ratio and whether you expect to grow deposits each quarter, or if it doesn't make sense, you won't necessarily?
Yeah. I'll start, Kevin. I'll pivot over to John after to let him talk a little bit about our strategy to grow DDA deposits from core customers. Certainly, the way we're looking at 2023 is really to be in a position where between the runoff from the bond portfolio that we'll use to fund loan growth, between that and any difference really coming from deposit growth. That would really be, you know, kind of the most optimum way that we'd like to manage the balance sheet, you know, from a loan deposit perspective. I think that, you know, we're certainly doing some proactive things to ensure that we kind of get a jump on that. We talked about the 9-month CD at 4% that we did last quarter.
Even right now, we have a 4.5% 9-month CD that we think will be very helpful in terms of adding some liquidity to the balance sheet. We're not really willing to give up a lot in NIM on the front end, certainly not a significant amount of it, to kind of warehouse liquidity. We do think that what we're doing is a good mix between some proactive actions and then certainly some ability to maintain a little bit higher NIM going forward. Hopefully that made sense. John, if you want to talk a little bit about DDA growth.
Sure. Just a couple of points to add. Kevin, to your prior question about 14 NIM. for some time, we've kind of given guidance to expect as the commercial line utilization numbers begin to go back up towards pre-pandemic levels, which we still got a long way to go to get to that number. As that happens, it typically, in other rate cycles, you see some of the free money from those same relationships bleed off just as people spend it. There's some disintermediation of free money to IBTs, but the primary leakage in that bucket is not account loss, it's really just people spending money, which is not necessarily a, you know, bad thing for the economy.
The line utilization up about, I think it was up 106 basis points for the quarter is one of the larger ones for the past three or four quarters. While fourth quarter typically has a bit of a run up, it was a pretty handsome one. Some of the runoff really just accompanies the same type of behavior and oversight decisions made by commercial clients as they look at their own balance sheets. With free money out and 100% variable money, you know, getting charged up as part of the line utilization increase, you know, the spread on that is not gonna be quite as attractive as it is if you still have that free money sitting on the books.
That's just one additional, you know, point for you to ponder. In terms of a going forward strategy, you know, we had almost no digital capacity to gather deposit accounts just a year ago. A lot of the tech uplift has occurred in the past 12 months. As it draws to completion, we would anticipate gathering more client accounts digitally. Secondly, the treasury services area, it competes extremely well with both our size and very large organizations, and we continue to add treasury service and treasury sales professionals to that team. Added one yesterday, in fact, focused purely on our payment cards. As a result, I would expect to see more operating accounts come in.
In the areas of our franchise that experience disruption as integrations occur, I think we'll be pretty busy trying to move folks into the book that actually help us with some of the offset to the outflow. One item that is maybe too far in the weeds for this call, but our incentive plans are engineered to be quite flexible. Obviously, you know, 1 year ago, deployment of liquidity was very important, and today gathering liquidity is obviously very important. We'll see a fairly significant shift or already have shifted to a deposit campaigns driving compensation for our bankers, which I'm sure will yield a very good result. It usually does.
The capacity of the company to gather, deposits and loans, is greater than the guidance that we're giving, but it's primarily driven, the guidance is driven around the expectation that the quality of what's in the book is going to be more valuable overall than just sheer growth. Our focus for 23, and maybe for 24, we'll see, you know, how the economic outlook looks at the time, is really on stability and earnings, good credit outcomes, very effective and efficient sales staff, and maintaining very strong profitability, compared to peer as we go through the cycle. The CSOs somewhat overlay the same time period for what people think the recessive period may be. You know, that's pretty much where we'd expect to earn as we get through that period.
That may have been more than you asked for, but I wanted to make sure we.
No, very helpful. Yeah, very helpful, John. One quick follow-up to what Brad had asked about before that, you know, the impact to the margin when rates start going down. You guided in here on the margin that, you know, the margin peaks when the Fed is done or after the Fed is done. If we don't have a pivot right away to cutting rates when we're just stable like that, can you and would you expect to be able to keep the margin stable? Is it more likely that we have some grinding lower just as given the lag of funded costs going higher?
Yeah, Kevin, this is Mike again. Certainly, our intention and the way we look at managing the balance sheet in the company would be in that environment to maintain a stable NIM. Now, stable NIM could mean that we could have a quarter where it could be up 1 basis point or 2, or down 1 basis point or 2. Other than, you know, things like loan growth and what we're able to do in terms of expanding customer relationships, probably the biggest determinant of really what happens when the Fed stops is what happens to our deposit balances, namely DDAs. Again, you can appreciate the focus that we have on that component of our customer relationships and a desire to continue to build on that.
Yeah. Okay.
Kevin-
Thanks very much.
... protection of the NIM. Okay. I'll stop. We'll probably pick up another question on that topic a little later on. Thank you, though.
Thank you.
Thank you. The next question comes from the line of Jennifer Demba with Truist Securities. Please proceed.
Good afternoon, everybody.
Hi, Jennifer.
Just curious, as to, you know, you made some comments in your forward guidance on loan loss reserve and provisioning and net charge-offs. I'm wondering, John, how you're feeling about the loan portfolio right now and what pockets you feel are most vulnerable in a higher rate environment? You know, some companies have pointed out they're worried about office down the road. I'm curious how you guys would characterize your office exposure at this point?
Thanks. Great question, Jennifer. I'm gonna let Chris take the first whack at that one, then I'll follow up.
Yeah. Hi. As it relates to kind of, you know, segments of the portfolio that might be more vulnerable and your comment about office, you know, obviously, you know, those customers that are probably in a floating rate environment and are maybe a little bit more levered are things that we've been looking at. We've stress tested those loans in our portfolio and feel confident that, you know, they could largely withstand, you know, the current environment and maybe, you know, the rate rises that are anticipated in early 2023.
You know, but we continue to watch that, and think about the impact there as well as obviously those customers that are impacted by some of the rising costs that are being incurred, especially ones that are more labor-intensive and with labor costs going up, you know, just really keeping an eye on that. No specific worries or concerns in that regard.
Then as it relates to kind of our office portfolio, I think one of the things that we've been stressing for a long time now, even before I got here, almost 5 years ago, is that, you know, we've been shifting our focus away from, you know, traditional office to more medical office, which I think has, you know, helped us a lot. A lot of our office tends to be kind of, you know, mid-rise type office, not necessarily the high-rise type buildings that rely upon large tenants to take large amounts of space or the re-tenanting risks.
It's not to say that there may be some risks in office in general, but we feel fairly confident that in the markets that we operate in, as well as the type of office that we've done, and the more focus around medical office, that we're, you know, probably less worried than some would be.
Thanks so much.
Thank you.
Thank you. The next question comes from the line of Brett Rabatin with Hovde Group. You may proceed.
Hey, good afternoon, everyone.
Hey, Brett. How are you?
I'm great, thanks. Wanted to ask about the expense guide 6-7 and 4%-5% excluding the FDIC and pension. You know, you look at the past 2 years, you've been able to manage expenses flat, and I noticed you took out slide 28 that showed the hires. Can you maybe walk through and give us some color on what things you're gonna have higher expenses on in the coming year? Maybe any initiatives that might be taking place that might also benefit the longer term profitability of the company?
Yeah, Brett, this is Mike. Yeah, again, we gave the guide two ways. One was obviously including the higher pension and FDIC expense. Look, those amounts aren't insignificant. Pension, you know, that's a $18 million difference. I'm sorry, an $11 million difference. On FDIC, it's about $5.5 million difference. Those are significant items that really kind of add to the expense base. If we take a step back and kind of back those out and look at expenses up 4%-5%. Again, this is after a year where we're actually down 1% between 2022 and 2021. I think the biggest driver is gonna be personnel expenses and just the normal raises that we'll be looking at for 2023.
Those will be around 4% or so. Aside from that, I think the biggest drivers will be some technology investments that we continue to make and to continue to invest in the company in that regard. We have some new hires planned for next year. Probably not as many new bankers in 2023, all things equal, compared to 2022. I think overall, you know, we'll continue to be opportunistic in terms of how we look at those kinds of opportunities. Overall, I think when we look at expenses in 2023, it really kind of represents a little bit of a normalization of what we think our expense base probably is on a go-forward basis, excluding kind of the extraordinary increases in pension and FDIC.
Okay.
Brett, this is John.
That's okay. I'll go Mike. I'm sorry, go ahead.
Oh, you go ahead. It's okay. If you have the same question, just take that.
No, no. Yeah, no, I didn't mean to cut you off there. Go ahead.
That's okay. What I was gonna add to it was just when you look at the two largest ones, which are pension and FDIC, obviously you don't, you don't get the FDIC expense back, right? On the pension side, you know, there's a likelihood that as the market may change a little bit this year or next year, to some degree, you know, those changes swap back the other way. It's, it's painful to eyeball it for this year, but it should swing back and be much more positive. It will swing back and be more a positive, contributor, at some point either next year or the year after that. The other point to add, you mentioned the new investments. I mean, Mike's right.
We have been investing a lot of money in technology, and it's really not like catch-up technology. Core systems are all forward-looking technical upgrades that help us to be more effective, more scalable, help our bankers to be faster and turn around business. A lot of that deployment is continuing to occur as we wrap up last year, and it should be principally done early this year. That actually creates some efficiencies that can benefit on the expense side as we get toward the end of the year. I don't want to call it a bubble, but there's, you know, the pension overlay to it kind of blows the number up somewhat artificially. The remainder of it are really investments in our future.
In terms of the banker adds, right now the numbers are 10-20 or so in the plan. The big difference is the types of people that we would anticipate adding in next year. You know, back when we were sitting on, you know, $2 billion-$3 billion of excess liquidity, the desire to add bankers that could deploy liquidity led us more towards middle market and specialty bankers. And that was helping us to start up some of the new markets we expanded to. As we look at 2023, where our focus is more on the sectors that include full relationships, that's gonna be more bankers on the smaller end than middle market. That 10-20 will be made up primarily of what we call business bankers, commercial bankers, and treasury sales staff.
Little different mix, but continued investment. How well we do at picking up that talent will depend on the availability of people and the alignment with our values and credit posture. I'm confident we'll see some pretty good gains in good talent as we go through 2023.
Okay. Yeah, that's a great color. Obviously you've managed the efficiency ratio well here in the past two years, downward. Wanted to maybe take the deposit question a different way. You know, just thinking about the DDA and non-stream DDA and that being, you know, hard to predict. Would you happen to have handy, you know, balances for commercial or retail, you know, pre, during, and maybe post-pandemic current quarter in terms of the size as a way to see how much liquidity the customers have drained out of their accounts?
I don't have that per se, Brett, but what I can share in the way of color is if you look at our deposit book and kind of think about it in, you know, DDA deposits and then basically everything else. When you look at DDA, about 70% of our DDA deposits are commercial in nature.
30% consumer. When you look at everything else, it flips a little bit, it's about 60% consumer and about 40% commercial. If you think about the pandemic impacts and you think about things like surge deposits, and if you assume that, you know, most of that came from the commercial side, then yeah, we probably had our fair share of that. You know, certainly that was helpful in increasing our mix of DDA deposits to nearly half. Certainly, that's come down a little bit. We're at, what, around 47% or so at the end of the quarter, and we certainly have guided to that number, probably continuing to trail down a little bit as we go through an environment where rates kind of stabilize at a higher level.
Not a direct answer to your question, but hopefully that's some helpful information.
Yeah, no, that's helpful. Appreciate all the color.
You bet.
Thank you. The next question comes from the line of Michael Rose with Raymond James. Please proceed.
Hey, good afternoon. Thanks for taking my questions. Just wanted to dig into slide 7 a little bit. Understanding that the growth is gonna slow next year, but, you know, you've had some nice tailwind from mortgage. You kind of point that out in the slide there. Just wanted to see what the expectations are there. Can you just kind of talk about, you know, what specific areas you're limiting, you know, CRE growth and what some of the headwinds are? Just looking for some of the puts and takes.
You mentioned as one of the tailwinds continued, you know, line utilization, you know, growth, but how much of that is gonna be a function of maybe reducing some of those lines versus, you know, your lenders actually, or your customers actually drawing down just, you know, given the economic backdrop that we're in. Thanks.
You can start with mortgage, and I'll get back to the rest.
Yeah. On mortgage, Mike, you can see that we're up about $250 million or so this quarter. Really about two-thirds of that is really attributable to our One-Time Close product again, on the mortgage loan side. We'll have those kinds of impacts. In fact, they'll probably increase a little bit related to that product in the first quarter and second quarter, and then really kind of begin to trail down. The components of our overall growth attributable to mortgage and that One-Time product will be rather significant for the next quarter or two, and then again, kind of trail off. For everything else, I'll start with line utilization.
I do not expect to see the overall line availability crash down because we're taking down the limits. I mean, that's really a customer by customer decision made as we approach renewal or whether there were any covenant issues. That really hadn't been an issue so far, and I don't think it's gonna be an issue in the future other than, you know, the occasional cat and dog situation that occurs up. If you look at page seven in the top right, you see kind of where we were pre-pandemic was a little over 48%. If the trend in 2021 and 2022 is probably a good one, I think it's dependable.
Depending on the quarter, it may be between 50 and 150 basis points of line utilization increase without much that's gonna drive that back down unless the economy sours just tremendously, which we don't anticipate that happening. We'll still have a tailwind for the better part of probably three years at that current rate to get utilization back to where it was. That'll be a tailwind. Our business banking and commercial banking sectors are likely to continue growing. Our middle market group will be tied to those accounts that typically bring their operating accounts with them. All what I'll call the core business of the company that provides the opportunity to full service relationships will continue to grow.
Frankly, we're directing much more attention to that because of the need for liquidity over the next couple of years to fund loan growth. The sectors that will be more of a push for the year will be those that don't throw off excess liquidity. You know, presuming no real downturn in the economy that makes us, you know, get more jaundiced about a sector, I would expect to see CRE, healthcare, the capital market side of equipment finance, more flat-ish for the year. They've been growing at a pretty nice clip for the last several years when liquidity was cheap, and it's just not cheap anymore.
Even though the yields of those businesses tend to be very good, if we have to raise liquidity at an unattractive price, then we're dampening NIM as the rate environment goes up and as it stabilizes. Our driver for slower growth isn't a lack of capacity to grow, Michael. It's really all around making sure that the profitability and the earnings efficiency and the NIM itself is insulated while we go through a period of volatility. We may be overcautious. To the extent that we're able to gather deposits at a better clip than we're guiding to, then we probably grow loans at a faster clip than we're guiding to.
It's just impossible at this juncture with all the differing opinions about which direction the economy is gonna go to guide to anything other than what we think is a reasonable level, and that's what we put in the numbers for 2023. If, if, wherewithal the economy allows us to grow deposits quicker, then the balance sheet may grow a little quicker than we've anticipated.
Very helpful.
Does that answer your question? Maybe as a follow-up.
Yes, it does. Thank you for all the color. Maybe just one quick follow-up. It looks like you guys benefited from some storm-related gains this quarter on the expenses. Do you have a sense for what the dollar impact of that was? Thanks.
Yeah, Michael. For this quarter, that was right around $3 million, and that was related to Hurricane Laura. As a reminder, it seems like these days we pretty much have those kinds of recoveries almost every year now. We had one last year in the fourth quarter related to Hurricane Michael, and we're likely to have another one at the end of this year related to Hurricane Ida. Hopefully that's helpful.
Not, not part of the core business model we intend to have, but it does tend to happen frequently.
Understood. Thanks for taking my question.
You bet. Thank you, Mike.
Thank you. The next question comes from the line of Catherine Mealor with KBW. Please proceed.
Thanks, Kathryn , and everybody.
Hi, Catherine .
I want to circle back to the guidance chart, I thought it was interesting in that your ranges for fees and expenses are pretty tight ranges. The PPNR range is a little bit wider, which is giving you a little bit more of a room for, you know, what the spread, if you kind of back into that, what the spread could be on the low end of the guide and then the high end of the guide. You know, the only way to get kind of to the low end of that guide would be if the margin maybe increases a little bit in the first half of the year and then falls, you know, from maybe current levels.
Just kind of curious how you're thinking about that and what kind of assumptions you were thinking about in your margin as you kind of, as you came up with that range. Is it more of a margin piece, or is it more of a balance sheet size piece that's driving the bottom end of that PPNR range? I'm having a really hard time even getting to a scenario where you'd have 13% PPNR growth with the other things you lay out.
Yeah. I think the answer to the question is obviously in NII, Kathryn, this is Mike. I would say it's probably a little bit more dependent right now as we see it on what happens with the balance sheet and specifically deposits over the course of 2023 and really the resulting NIM. I mean, certainly those things impact the NIM, but I think it's really what happens with our balance sheet, whether we're able to grow loans, as John mentioned before, you know, at a little bit faster clip than maybe what the guidance is suggesting, and that'll be very dependent upon our ability to retain and even grow deposits.
You know, certainly as we mentioned a little bit earlier, you know, some of the change in terms of how we're thinking about managing the balance sheet is the introduction of using cash flows from the bond portfolio to help fund loan growth. If as we go through the year, we have better, we have a better experience with growing deposits, then it's certainly likely that we could kind of scale back on relying on the bond portfolio as much. I think it's very dynamic. It has a lot of different moving pieces and parts. You know, we tried to be very thoughtful around establishing ranges, on all the components of our earnings going forward.
Again, I think to kind of close the loop, the missing piece is really on net interest income and kind of how we think, you know, that might happen and trail in terms of how we go through next year. Hopefully that was helpful. Gave you a little bit of color, I think.
Yep. No, it... Yeah. Very much so. Very much so. On your loan betas, last quarter you were talking about over the cycle, kind of 50%-52% cumulative loan beta. Has anything changed to date with how you're seeing loan pricing? It seems like your new loan yields are coming up significantly higher. Any kind of update on that would be helpful.
As of right now, where we stand, really no change in the overall guidance around both our deposit and loan betas in terms of how we think we'll end up on a cumulative basis with this cycle. That's, you know, probably no worse than about 25% or so on deposits. As far as loans, you know, somewhere in the low 50s. Really no change in that regard.
Great. Then lastly, on your CSO goals, thank you for updating that and having, you know, the updated, rate environment included in those goals. I found it interesting that you in this assumption, it looks like you're saying Fed funds, you know, have cuts in 2024 and 2025. Even in that scenario, you can still have an ROA above 1.55% and an ROE over 18%. Just kind of curious your thoughts on there and just overall profitability strategies to kind of hit those goals, even if rates pull back to the 3% level as you indicate on your slide.
Yeah. Again, as a reminder that the goals are really kind of fashioned to be three year goals. We're looking at, you know, the fourth quarter of 2025. Certainly while we see some challenges in 2023, I think the way we're looking at 2024 and 2024 right now is a little bit more optimistically. While we may be in a lower rate environment, you know, we think that we may be in an environment that may be more conducive to us growing the balance sheet more in those two years than in 2023. Again, it's some of this is crystal ball, you know, kind of work, but it really is the goals that we've established for ourselves. You know, this is the way that we're managing the company and holding ourselves accountable.
Catherine, this is John.
Would it be fair to assume in that scenario. Oh, go ahead.
I'm sorry. There's a time lag, I think, going on. I'm sorry, Catherine . I didn't mean to interrupt you. The other color I would add is. The work that we did on the expense and the efficiency side, I mean, that was real. There really were no gimmicks to it. As we get to a little bit better time with an expectation of growing the balance sheet, the scalability of the operating footprint should show itself. As a result, we really shouldn't experience the type of expense increases that we had in the last expansion period. We would expect those to be lower when you get to the next expansion period.
That's really the feel behind both the ROA and the ER being pretty solid, is the expectation that we can have a pretty good expense number. I know the guide for 2023, you know, doesn't, you know, look that way. We wouldn't see that type of expense growth, I think, in the future, presuming that salary costs and that sort of stuff don't escalate in 2023 and 2024, like they necessarily had to in 2022. A big chunk of that 2023 number is just the full year's impact of, you know, tellers becoming 60% more expensive and apply that throughout the rest of the hourly workforce. That shouldn't reoccur as we get into 2024 and 2025. Does that help?
It does. That's exactly where I was going. I was assuming that the expense growth wouldn't be at the 6%-7% pace, you know, in future years. That all rounds out perfectly. All right, great. Thank you so much.
You bet. Thank you, Catherine.
Thank you. The next question comes from the line of Christopher Marinac with Janney Montgomery Scott. Please proceed.
Hey, thanks very much for all the information today. I just wanna piggyback on Catherine's question on loan yields. When you look at the 6 and a quarter% new loan yield on variable, does that put any strain on borrowers at this point? Is there any upper bound as that would most likely reset again in the first quarter in terms of just the ability for customers to handle that and/or their demand at that rate level?
I don't think so at this point in time, Chris. This is John. The, you know, as Ziluca mentioned a little earlier, when we stress test the book that we have right now and do that in some of the different specialty sectors, the forecast as we have it right now really doesn't point to much additional stress. Now we're not presuming the Fed goes up to a 10% overnight rate, right? With that'd be a little different world. In what we expect now with the Fed futures curve, we don't anticipate a lot of stress. Where you'll see the byproduct is where you see them begin to diminish spending and start to, in our expectations, they begin to warehouse operating capital on their own balance sheet versus depending on loan, on lending alone.
I think it'd be more of an impact on our underwriting going forward and our expectations the way the customers manage their own balance sheet.
Yeah, I think that's right. As John pointed out, I mean, we tend to stress our borrowers when we're doing new underwritings or even renewals on existing loans just to make sure that they can withstand what is the anticipated rate rises in the portfolio.
Okay, great. Is it?
You have a question, Chris?
Yeah. Is it fair to say then that, the leverage of your borrowers really is not at a worrisome level, just given their ability to handle from your stress scenarios?
Yeah, no, I mean, obviously some individual customers, depending on some of their other challenges that they may be experiencing from an operating cost standpoint that we may not even be aware of, you know, could have, you know, some challenges. As I pointed out, we're not really aware of any that have kind of a combination of all of those factors, at this point in time.
Yeah. I mean, to be fair, Chris, there are always dogs and cats that show up as rates continue to go up. None of us really know what that ceiling's gonna end up. From a systemic viewpoint or a sector viewpoint, there doesn't appear to be a dragon on its way to rates or really due to any other stress. Our confidence right now is pretty high, and we'll have to see where we stand as the future goes on. Part of the reason that loan loss reserve is sitting out there in 48 is the desire to manage the ACL to about a 75% slower growth scenario with Moody's.
If you look at the way our customers and our markets are behaving right now, you know, they're acting as if it's gonna be a soft landing. I don't know if that's gonna happen, none of us really do. When we build the ACL, the assumptions are a little bit more caustic, which keeps the ACL at a level that we think acts as sort of third base to the environment that we're just talking about. Does that make sense?
No, it does. Just one quick related question back to the Moody's baseline. You have the same weightings this quarter as you did last quarter. What would have to happen for you to shift to something higher on the slower growth, S2, you know, to go just from 75 to 80, just to pick a number?
Chris, this is Mike. I think a little bit more conviction and certainty about a recession in the second half of the year. The Moody's S2 scenario does call for a mild recession in the second half, and we have it weighted, we think, appropriately right now at 75%. Which by the way, we've kept these weightings in place for 3 quarters now. We haven't changed those. I think, again, to answer your question, you know, a little bit more conviction around a recession in the second half of the year.
Perfect. Thank you very much for that additional background.
You bet. Thank you for the questions.
Thank you. There are no additional questions at this time. I will pass the call back to John Hairston for final remarks.
Thanks, Tia, for moderating the call. Thanks to everyone for your interest. We hope to see you all on the road over the next several months. Be safe and be healthy, and take care.