Good day, ladies and gentlemen, and welcome to Hancock Whitney Corporation's Third Quarter 2021 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 ks and 10 Q, including the risks and uncertainties identified therein. 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 ks are also posted with the conference call webcast link on the Investor Relations website. We will reference some of these slides in today's call.
Participating in today's call are John Hairston, President and CEO Mike Acree, CFO and Chris Zaluca, Chief Credit Officer. I will now turn the call over to John Hairston.
Good afternoon, everyone, and thank you for joining us. We're pleased to report another solid quarter despite the impact from the COVID-nineteen delta surge and hurricane item. Net income of $130,000,000 or 1.4 $6 per share was up $41,000,000 or $0.46 linked quarter. After adjusting for non operating items in both the second and third quarter's results, EPS for the Q3 was $1.45 up $0.08 linked quarter. The primary driver of the quarterly increase was a $27,000,000 negative provision in the Q3 compared to a negative provision of $17,000,000 in the 2nd quarter, substantially due to less than $2,000,000 of net charge offs.
Our asset quality metrics have continued to improve and are now among the best in Mid Cap Group. Criticized and non performing loans continue to improve and are down 29% 65%, respectively, from 1 year ago. Our ACL coverage remains strong at just under 2% of total loans. Without performing asset quality ratios and certainly an adequate loan loss reserve, we are positioned well on credit. At this point, we do not anticipate any significant pressure on credit from Hurricane Ida or the remnant Delta surge.
Stimulus funding and other programs designed to help businesses navigate the pandemic had worked, and the recent storm was mostly an insured event, thankfully much different than Hurricane Katrina 16 years ago. I should mention my appreciation for the incredible efforts of our team during the Ida recovery As we reopen locations in storm impacted areas on a very rapid basis, while simultaneously feeding nearly 40,000 people in our impacted communities. That only happens with commitment and with teamwork, both of which were strongly exhibited by my colleagues at Hancock Whitney. Before I turn the call over to Mike, I'd like to note that this quarter's results and our near term guidance are the building blocks for our plans in 2022. Slide 1718 in the investor deck provide a good background for our path to a 55 percent efficiency ratio.
Today, we reported another good quarter of organic loan growth in line with guidance and expect another quarter Solid growth to end the year. We kept expenses flat linked quarter despite inflationary pressure and are committed to hitting the $187,000,000 target for the Q4 as well as the $750,000,000 target for 2022. Deployment of excess liquidity into loans and then modestly into securities as rates begin to rise is key to our continuing success. We expect to harvest additional efficiencies via strategic procurement and operational effectiveness gains due to technology deployment and as a means to offset wage inflation and the addition of new bankers. As shown in the top right quadrant of Slide 18, we are hiring bankers in new and in growth markets across our footprint and have recently added 15 new bankers And finally, we are able to execute from a position of strength with TCE projected back to 8% or better By year end, a de risked balance sheet, successful results from efficiency efforts and hopefully with economic and biological challenges in the rearview mirror.
I will now turn the call over to Mike Acree for further comments.
Thanks, John. Good afternoon, everyone. 3rd quarter's results were in line with our guidance and in some areas exceeded consensus expectations. Core loan growth continued in both our markets and specialty lines across the footprint with net growth in the Central and Western regions as well as continued increases in equipment finance and healthcare. In total, core EOP loans grew $220,000,000 partly offsetting $482,000,000 in PPP forgiveness during the quarter.
As a result, total reported loans were down $262,000,000 and ended the quarter at just under $21,000,000,000 Similar to last quarter, improvement in economic activity across our operating regions led to increased loan pipeline pull through rates And coupled with fewer payoffs and a slight uptick in line utilization rates resulted in 4% linked quarter annualized growth for the quarter. As we move into the Q4, we have maintained our guidance for core loan growth of $400,000,000 to 500,000,000 and PPP forgiveness of up to $500,000,000 We are calling out a risk of higher than normal CRE payoffs in the 4th quarter, but otherwise our guidance is unchanged. We beat expectations in our NIM guidance with only 2 basis points of compression in the quarter and flat net interest income. A full quarter's impact from the June redemption of our 2015 sub debt Any impact from a lower cost of deposits added 5 basis points to the NIM, but a continued shift in the overall earning asset mix and yield Plus a net change in the quarterly level of net interest recoveries compressed the NIM 7 basis points. The aforementioned all combined to result in the NIM down 2 basis points.
Moving forward, we expect the impact from continued levels of liquidity and lower rates to pressure our margin. We will work hard to offset those headwinds by continuing to deploy excess liquidity into loans, modestly invest in the bond portfolio as rates rise and monitor our hedge positions to improve interest rate sensitivity. We currently expect an additional four basis points of compression in the 4th quarter with net interest income down slightly on a linked quarter basis. The details of fees and expenses are pretty self explanatory, so I'll just hit a few highlights. Hurricane Ida and the resulting evacuation, which resulted in waivers and loss of activity in certain markets, did impact overall fees in the quarter.
We expect those levels to return to normal year end seasonal levels in the 4th quarter. Secondary mortgage fees were the biggest driver of the linked quarter decline in fees. Both the storm and the 2nd quarter's change in delivery methods were the primary drivers for the decline. Overall, we expect mortgage fees to slow as the boom in refi business begins to subside. Operating expenses were flat linked quarter as efficiency initiatives announced earlier this year are maturing and are reflected in our results.
We are maintaining our guidance for a 4th quarter expense level of $187,000,000 and are committed to that run rate for 2022. As a reminder, both fees and expenses had non operating items this quarter and are detailed on Slide 24. One note for the quarter on capital. We did buy back a modest amount of stock in the 3rd quarter and repurchased just over 56,000 shares of common stock at an average price of $44.49 per share. In closing, I'd like to call out a few slides in the deck for additional information.
Slide 13 has details on our interest rate sensitivity and hedge positions. Slide 17 notes our current near term guidance and Slide 18 helps detail strategies for our path to a 55 percent efficiency ratio. With that, I'll turn the call back to John.
Okay. Thanks, Mike. Let's open the call for questions.
Please remember to pick up your handset before asking your question. We will pause here briefly to allow questions to generate in queue. The first question It's from Michael Rose with Raymond James. Please proceed.
Hey, good afternoon. Thanks for taking my questions. Just wanted to start on the efficiency ratio target. I think what I've heard Since the release tonight, it's good to see that you guys are committed to it, but I think people are trying to parse out the revenue side because there is a pretty big Delta between where consensus is in the Q4 next year and what the guidance would imply in terms of revenue. So I was just wondering if you could give us a little bit more color on maybe the expectations for fee and then NII growth?
Thanks.
Yes, Michael, this is Mike. So we haven't given any guidance per se for the 4 quarters of 2022 yet. So What I would do is direct you to slide 18 in the deck, where I think we provided some color around what we're thinking in terms of the kind of loan growth To expect not only for the Q4 of this year, but also into 'twenty two. And then in terms of how we're thinking about managing the balance sheet, Certainly, we've disclosed in a couple of places, both in the introductory comments as well as the deck, this notion of beginning to Go back to reinvesting cash flows and maturities back into the bond portfolio and then also this notion of modestly Increasing the size of the bond portfolio over the next five quarters. So there isn't an exact amount per se that we're going to increase The bond portfolio, Bob, certainly if you use a number like $1,000,000,000 or maybe a little bit north of $1,000,000,000 as kind of a placeholder, that would imply $200,000,000 plus for the next 5 quarters.
I think the exact amount that we redeploy liquidity into the bond portfolio Will really depend on what happens with rates next year, as well as what happens with our ability to continue the momentum In terms of adding loans to the balance sheet. So I think the recipe for us in the revenue side Really boils down to being able to deploy the lion's share of the excess liquidity that we have on the balance sheet into a combination of loans and bonds over the course of next year. And obviously, I think the guidance around our plans for expenses is pretty self explanatory. It's $0.87 for the Q4 this year and then this notion of that being a run rate as we move into 2022. So I think also certainly, the new banker hires that we've kind of called out, I think have been extremely helpful to our ability to kind of continue the momentum in terms of growing loans and certainly to increase it as we go into 'twenty So that's kind of how we think about the efficiency ratio goal and I think also the pathway.
So John, anything else you want to add?
No, I think you gave some pretty good guidance.
Yes, very great color, Mike. No, that was great. Thank you. Just one follow-up, just credit another positive quarter, Criticized Classified down, NPAs down, big not that big, but I guess negative provision again this quarter. Any reason to think that Assuming credit remains benign and you continue to cure some credits that we would see the reserve Level come down and we're likely to see negative provisions for at least the next couple of quarters?
Thanks.
Yes. I think certainly if you go back to the guidance slide, We are calling out the fact that at least on a go forward basis through the Q4 to look for reserve releases In the magnitude of what we've done in the last couple of quarters, so call it $27,000,000 $28,000,000 or so. And I think certainly we have some potential to continue that into 2022. So There's no endpoint out there that we have in mind right now in terms of a level to bring the ACL down to. But just for context, If you go back and look at our day 1 ACL percentage, it was about 128 basis points.
And if you back out the energy portfolio that we largely Sold last year, that brings it down to just under 1%. And I mentioned those numbers not as a target For us to reduce our ACL to, but just for context. So the actual endpoint, I think, will depend on a lot of things, including How we grow our loan book and then certainly also how the pandemic finally And we see our economies, our local economies restored to where they were before.
That's great. I appreciate you taking my questions.
Sure. You bet.
Thank you, Mr. Rose. The next question is from Brett Rabatin with Hoists Group. Please proceed.
Hey, good afternoon everyone. Hi, Matt. How are you?
Good. I wanted to first ask
On the fee income guidance, could we just talk about that for a second in terms of expecting flattish trends in the 4th quarter following Some disruption in 3Q, obviously mortgage volumes are somewhat difficult to predict. Seasonality is obviously going to be an impact in 4Q, But you obviously had lower numbers this quarter. Can you just talk about how much mortgage plays into that 4th quarter guidance around fee income and other things that might be affecting seasonality in terms of the Q4 versus a rebound in activity given the lack of the hurricane
Yes, sure, Brett. This is John. I'll start and Mike can add color. I mean, obviously, the secondary mortgage fee reduction was The heavy detractor from fee income for the quarter and then I'd have I think Mike shared in the prepared comments around $1,200,000 estimated impact. So Outside of that, the quarter actually had pretty much every category as an improved Net of the added damage to it.
So for example, service charge fees were sharply up both for business and for consumer, which was Our first material increase of the year, due
to all the liquidity that
was out there. And I think that number is around $3,000,000 up from the same quarter Previous year, so a healthy increase. Card fees, which were one of the more heavier fee impacts from IATA, just given there were no transactions Power shortfalls were relatively flat quarter to quarter. So on a net basis, we're up a push. Trust and investments were similar given the closures and some of the pushed off transaction work that would have normally happened in September that didn't.
Plus the 2nd quarter has the tax prep fees and trust that are pretty good. So push was a win there. So really every category Is firming up and doing better to the point that I think as we go into 'twenty two, we have some confidence that outside of secondary mortgage fees, We should see some year over year improvement.
Yes. Brett, the other items I would kind of add to that in a way of just a little bit additional color is If we think about the impact that the storm had on our 3rd quarter fees, we're roughly estimating that to be between $1,000,000 and about 1.2 Certainly unsure around how much of that will kind of recapture in the 4th quarter. I think safe To say certainly some of that I think could be recaptured. How much of it though is really uncertain. I think the other thing to look to For the Q4 is our specialty line.
So things like BOLI and venture capital income and some lines similar to that. We can already have a little bit of a line of sight to seeing some increases that we'll be able to show in the Q4 related to, Again, that aggregation of different lines of business that we call specialty lines. So certainly, I think If you look at headwinds, mortgage fees, I think is going to be a headwind, but there are also some tailwinds that we think will pick up the slack and offset the Further decline in mortgage fees.
Okay. And then the other big thing I wanted just to make sure I covered was just around the margin and I know there's a lot of it's difficult to parse out all the things that might impact that. But As I think about the 4 basis points of pressure in 4Q, there's definitely a better tailwind with the yield curve Possibly, do you think we're getting close to the bottom on the margin and you think it bumps along here if you can Deploys some liquidity, obviously you mentioned the $1,000,000,000 in securities, but it seemed like there could be some opportunity for it to improve over the next few quarters. And just wanted to see if you might take a stab at maybe some thoughts around that.
Yes. I think that's absolutely the case. I mean, we're guiding to the 4 basis points of Compression in the 4th quarter and that really is centered around as much as anything else the drag On the NIM related to the cash we have on the balance sheet. So to the extent that we're able to deploy more of that cash A combination of loans and bonds, certainly that had helped out the NIM and alleviates some of that pressure. We're also kind of projecting a continuation of our ability to reduce our cost of deposits by around a basis point Over the course of the Q4, so certainly if we're able to do that, I think that'll be helpful.
But kind of on a go forward basis, Given the pathway to the efficiency ratio that we kind of talked about earlier, we certainly would expect our NIM to have bottomed out And potentially be increasing as we go through 2022. And this is John.
And while It may be more of a net interest income point than simply with NIM. The bleed we're experiencing now at PPP Forgiveness, if you just presume $400,000,000 or $500,000,000 or so of that for the Q4 and guidance around $400,000,000 to $500,000,000 in organic growth. We're nearing the point to where
the impact of the write off gets
a little closer to a push. So on a net interest income basis, as we reach and pass the inflection point to where the runoff gets overcome by the growth, Then that will help us on
NII moving forward.
Okay. Great. Appreciate all the color.
You bet. Thank
you. Thank
you, Mr. Rabatin. The next question is from Brad Milsaps with Piper Sandler. Please proceed.
Hey, good afternoon.
Hi, Brad.
Mike, I just kind of wanted to follow-up kind of on the balance sheet management question again. I appreciate all the color. Just kind of thinking about sort of that mid single digit loan growth target and apply maybe $1,000,000,000 or so, dollars 1,200,000,000 of growth Over the next 12 months, which essentially kind of replaces a lot of the PPP loans that you have left, you still have Upwards close to $3,000,000,000 of cash, it sounds like you might put $1,000,000,000 to work in the bond book, but it still leaves you with quite a bit of funding, assuming Deposits don't go higher. Can you kind of talk through kind of what how you're thinking about sort of the remainder of the cash excess liquidity that you have on the balance And sort of thoughts around sort of putting that to work as well?
Yes, glad to Brad. So again, our goal as we think about The next 5 quarters and kind of marching toward that 55 percent efficiency ratio was really to deploy as much of that cash as we can, Again, over the next 5 quarters. And the $1,000,000,000 or so that I mentioned related to how we might Some of that into the bond portfolio again is really kind of a placeholder. So I think we're prepared to think about that number as kind of a minimum over the next 5 And certainly could deploy more into bonds. And that I think is also very dependent upon the rate environment.
So if the rate environment We're looking at better reinvestment yields related to our new bond purchases, then I think we could certainly deploy more That particular asset category. And again, the loan growth number for 'twenty It's really a jump off point for where we'll end this year. So again, our guidance for the Q4 is $400,000,000 to $500,000,000 And then the mid single digits would be off that number.
That's helpful. Thank you. And then just as a follow-up, I appreciate all the detail on Slide 13 regarding interest rate sensitivity. It looks like that table is up quite a bit from or some from the 2nd quarter disclosure. I'm just kind of curious what deposit betas you guys are assuming to drive some of those numbers on Slide 13?
Sure. So in the way of deposit date is what I'll share with you is really just kind of what we experienced the last time rates And ironically, both numbers are in the 28%, 29% range, both in an up rate environment As well as in a down rate environment. And then on the loan side, in an up rate environment, it's really close to 50%, down rates about 40%. Great, Mike. Thank you very much.
Okay.
Thank you, Mr. Milsat. The next question is from Catherine Mealor with KBW. Please proceed.
Thanks. I just want to follow-up on the margin conversation. First on the PPP, we've got $17,600,000 left in unamortized fees. How much of that do you think comes in next quarter versus trickle to trickle in next year? And then a secondary on the margin is how much Premium, Andy, are you assuming for next quarter as well versus the $12,000,000 that you indicated in $510,000,000 for this quarter?
Okay. Great. Glad to ask you, Catherine. So you're right. Our unamortized fees at the end of the Q3 were just under 18,000,000 And really just kind of all things equal, we think in the 4th quarter and certainly this depends a bit on the level of forgiveness That the level of fees that we'll amortize in the coming quarter is somewhere around $8,000,000 or so.
And related to your question about premium In the Q3, that was down about $900,000 or so. And the way we're Thinking about the Q4, if we look at prepayments, certainly the 1st month of Q4, they remain elevated, But we could certainly see that moderating a bit in the remaining months of the quarter, especially if we're considering a little bit of a higher rate environment. So I think the conservative assumption around premium amortization is that it would largely be at about the same level It was in the Q3, kind of potentially down a little bit.
Okay, great. So then if we've got $8,000,000 in PPP fees coming in next Quarter versus $15,000,000 this quarter, then really most of that 4 bps of compression is coming from just PTP running off. And it feels like Your corn in is really stabilizing probably next quarter.
Yes, I think
that's right. Maybe even apples a little bit depending on liquidity.
Right. I think that's right. And as I mentioned before, obviously the amount of cash that we're able to deploy will influence that number a good bit. But you're correct to point out that certainly the runoff of the PPP loans is having an impact as well. So at the end of the Q3, our PPP loans stood at about $935,000,000 Based on the level of forgiveness that we see in the 4th quarter, We think that will be down to something like $400,000,000 maybe $450,000,000 by the end of the year.
And then really by the end of the second quarter, I think the forgiveness game will be largely played out. So at that point, I would imagine we Probably have less than $50,000,000 or so.
Okay, great. And then one follow-up on fees. If we look back at service charges Pre COVID, you were around an annual run rate of, call it, dollars 86,000,000 if I look back at 2019. And so as part of the path towards this higher efficiency ratio excuse me, lower efficiency ratio, does it factor in a rebound in service charges and some other fees?
It partially does, Catherine. This is John. And some of that is simply because the offset to service charges through some of the analysis work with our analysis Because it's so much of a large balance per account relative to normal, we expect that to begin to bleed off next year So somewhat the stickiness of the deposit size per account will affect how much of a fee increase we actually see in service charges. Now obviously that all changes if we add more cash, right? So the pace of adding deposit accounts that render fees next year should pick up as digital Solutions are rolled out in Q2, so that would also help for 2022 as well.
Okay, great. Thank you so much. Great quarter.
Okay. Thank you.
Thank you, Ms. Mealor. The next Question is from Jennifer Demba with Truist Securities. Please proceed. Thank you.
Good afternoon.
Yes, we have.
A question on loan pricing pressure. I'm just wondering how much loan pricing pressure you guys have seen in the last few months? And are you running any or considering running any promotions in the coming months? Thanks.
It's a good question. Thanks for asking it. Obviously, every bank that we compete with Is rather aggressive right now in pricing, particularly in, call it, the 36 month duration and down space. So that would include All the revolving credit as well as shorter duration fixed. And so it's very competitive on price.
If Chris wants to say anything about Structure competition, then you can do that whenever you have. But in terms of price, it is rather aggressive. So I would say that given our liquidity position, We are meeting that competition at price level with 36 month duration business and down. We've been very aggressive in the consumer space. And actually, even though the consumer whole number shows down, Jennifer, That's really because of the continued runoff in the indirect portfolio and the HELOC portfolio being totally due to continued pressure on mortgage.
So that's leading to Wayne as rates are going up and we're actually seeing some good healthy growth in the unsecured Revolving consumer book and that's partly because of the price aggressiveness that we've had in terms of deploying new credit. So and that's been an offset to some of the larger
Yes, ma'am. Thank you.
Thank you, Ms. Demba. The next question It's from Matt Alme with Stephens. Please proceed.
Hey, thanks guys. How are you?
Go ahead. Thank you, Matt.
Going back to the potential to build out the investment securities portfolio, Help us appreciate just how large this could be as a percent of earning assets. Are there any Policies you have internally or any guidelines you're working through with that?
Yes. Thanks, Matt. So right now and by right now, I mean the end of the third quarter, The bond book is at about $8,200,000,000 So that's roughly about 25.6 percent of earning assets. If you keep the level of earning assets static and we grow it by say $1,000,000,000 inclusive of Reinvest in cash flows and maturities, then that percentage would increase to about 28.5%. So while we don't have any hard and fast policies or ALCO policies around the size of the bond book, I think certainly once you get to around 30%, that's a level that becomes pretty large for a bank our size in terms of The mix of our earning assets.
But again, one of the implicit assumptions that I'm making is really just kind of keeping the level of earning assets static. So if you apply a little bit of a growth rate to our level of earning assets, then I think we'll stay below that 30% level. Hopefully that makes sense.
Yes. That's helpful, Mike. And then going back to the loan growth discussion and I kind of I guess Jenny's question as well. Any more color or any numbers you can give us behind the loan yields on the more recent Production, just trying to appreciate just what's coming on the book at this point, how much slippage there could be on the overall loan yields? Thanks.
Yes. So certainly, as John mentioned, I mean, I think we and many banks are feeling certainly some pressure around our loan yields. And if we look at the Q3, our production levels were really good. In fact, they were up a little bit more than 8% quarter over quarter. And And then when we look at the yield of new loans to the balance sheet, they did drop some this quarter.
They were down about 15, 18 basis points or so, somewhere in the 3.15 range. So certainly there's some pressure on our overall loan yields And that was built into the guidance that we gave around the Q4 then.
Okay. And just lastly for me, I think you mentioned in the materials, anticipate the TCE ratio approaching that 8% level by year end. I'm curious kind of what that means to the bank and specifically does that unlock any ability to Get more aggressive on the share repurchase plan. Thanks.
Not specifically, but I think those that know our company know The 8% threshold is always something that we've kind of looked at as a target, if you will, for our TCE. And there's nothing magical I think that happens once we get to that level or exceed it. And by that I mean the way we think about capital and the way we manage Capital really is unchanged, I think, once we get to 8%. Thank you. You're
welcome.
Thank you, Mr. Alny. There are no additional questions waiting at this time. I will now pass the conference back to John Harrison for closing remarks.
Okay. Thank you, and thanks for moderating. Thanks everyone for your interest and we look forward to visiting you on the road in the next few weeks.
Have a great day.
That concludes the Hancock Whitney Corporation's 3rd quarter 2021 earnings conference call. Enjoy the rest of your day.