Hancock Whitney Corporation (NASDAQ:HWC) Q1 2024 Earnings Call Transcript

Hancock Whitney Corporation (NASDAQ:HWC) Q1 2024 Earnings Call Transcript April 16, 2024

Hancock Whitney Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day, ladies and gentlemen. Welcome to Hancock Whitney Corporation’s First Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. As a reminder, this call may be recorded. I would now like to introduce your host for today’s conference, Kathryn Mistich, Investor Relations Manager. You may begin.

Kathryn Mistich: 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.

John Hairston: Thank you, Kathryn, and thanks everyone for joining us today. We are pleased to report a solid start to 2024, which marks our 125th anniversary of helping people achieve their dreams under a charter our founders established in 1899. The first quarter results reflect our efforts to continue to grow capital and to reposition our balance sheet, all while maintaining solid profitability and earnings. Fee income and expenses were both flat this quarter, demonstrating our ability to take advantage of fee income opportunities and at the same time control expenses. Net interest income was down slightly this quarter, driven by lower average earning assets due to the impact of a portfolio restructure. The decrease was partially offset by a more attractive mix of earning assets, stabilization in deposit costs, and lower short-term borrowings.

We ended the quarter with no wholesale borrowings except the remaining brokered CDs. Our continued focus on repositioning our balance sheet and prudent pricing efforts has led to NIM expansion. We are delighted with these results and believe we are well-positioned to take advantage of future rate decreases should they happen this year. Loan growth was modest this quarter and in line with what we expected for the first half of the year. We continued our focus on more granular full relationship loans and are deemphasizing large loan-only relationships. The team was successful at producing the loan volumes necessary to overcome our more select credit appetite and achieve overall growth with mortgage driving the growth this quarter. Loan pricing remains a top priority and we believe focusing on more granular credit deals will drive improved pricing on new loans.

As expected, our credit quality metrics continued to normalize during the quarter and net charge-offs were modest. Despite the uptick in criticized commercial and non-accrual loans, we remain in the top quartile of our peers. Our loan portfolio is diverse and we still see no significant weakening in any specific portfolio sectors or geography. We remain proactive in monitoring portfolio risk and are mindful of potential macroeconomic environments. We continue to maintain a solid reserve of 1.42%, up slightly from the prior quarter. We are pleased with our deposit growth during the quarter of $86 million, which included the maturity of $195 million in brokered deposits. Excluding the impact of brokered deposits, client deposits were up $281 million this quarter.

We saw growth in money markets and in CDs due to promotional pricing we offered on both of these account types. The DDA remix continued, but overall pace continues to slow. We ended the quarter with 36% of our deposits in DDAs. We are also proud to report continued improvement in all of our capital ratios. Our TCE grew to 8.62% and our common equity Tier 1 ratio ended the quarter at 12.67%. Our capital metrics continue to be supported by our solid earnings. We remain well capitalized, inclusive of all AOCI and unrealized losses. A quick note on guidance. We did not make any updates to our guidance this quarter, which Mike will further address in his commentary next. As we look forward to celebrating our 125th year and beyond, we believe we continue to position ourselves to effectively navigate any operating environment.

With that, I’ll invite Mike to add additional color.

Mike Achary: Thanks, John. Good afternoon, everyone. First quarter’s reported net income was $109 million or $1.24 per share. We did accrue an additional net charge of $3.8 million, or $0.04 per share for the FDIC special assessment this quarter. Excluding this item, net income would have been $112 million, or $1.28 per share. Adjusted PPNR was $153 million, down about $3 million from the prior quarter, but in line with expectations. Our NIM did expand 5 basis points this quarter, but NII was down mostly due to a smaller average earning asset base. Fees and expenses were in line and flat with last quarter. As mentioned, we saw NIM expansion this quarter with NIM of 3.32%, up 5 basis points from the prior quarter. As shown on Slide 15 of the investor deck, our NIM performance was driven by higher securities yields following our bond portfolio restructuring last quarter, a slower rate of deposit cost increases in NIB remix, improved funding mix, and then finally higher loan yields.

NII was down primarily due to lower average earning assets following the bond portfolio restructuring, but the decline was partially offset by improved earning asset mix and lower levels of wholesale funding. In fact, we ended the quarter with zero FHLB advances. After the brokered CD maturity of $195 million this quarter, we only have $395 million remaining. Those mature in May. Our intent as of now would be to not renew the May brokered CD maturities. Deposit costs were up 8 basis points to 2.01% from 1.93% in the fourth quarter. The month of March actually came in a bit lower at 2%, an indicator that we have reached a peak this quarter and deposit costs may begin to turn over. The moderation in deposit cost was driven by slower DDA deposit remix, higher growth and lower cost interest bearing transaction accounts and the brokered CD maturity.

Our total deposit beta remains at 37% cycle to date. The most significant driver of deposit costs going forward will be repricing activity on CDs. On the earning asset side, our securities yield was up 9 basis points to 2.56%, primarily due to the full quarter’s realization of the bond portfolio restructuring transaction. The yield in the month of March was 2.58% and we expect to see further yield improvement with portfolio reinvestments this year. We expect just under $600 million in principal cash flow from the bond portfolio over the next three quarters. Those cash flows will come off at around 2.9%, could get reinvested at yields of around 200 basis points higher. Our loan yield improved to 6.16% this quarter, up 5 basis points linked quarter.

The rate of yield growth on loans has slowed as much of the impact of 2023’s rate hikes were fully priced in during the fourth quarter. However, we remain focused on maximizing loan pricing. As we think about our NIM in 2024, our guidance remains unchanged and includes three rate cuts at 25 basis points each in June, September, and December this year. We continue to expect modest NIM expansion across the next three quarters. Headwinds include some level of continuing deposit remix, which has slowed, but we do expect that any rate cuts will be a tailwind as we are able to reprice CD maturities lower in the second half of the year. Fee income was flat this quarter as we benefited from strong activity in investment and annuity income. Expenses excluding the special FDIC assessment were up less than 1% this quarter, reflecting our focus on controlling costs throughout the company.

As noted, we have not changed our forward guidance this quarter, which is summarized on Slide 22 of the investor deck. However, we have included a disclosure around what we believe the impact on PPNR will be if there are no rate cuts this year. Lastly, a quick comment on capital. As John mentioned, our capital ratios remain remarkably strong and continue to grow. In our efforts to manage capital in the best interest of our company and our shareholders, we may pivot to looking at our common dividend and the potential resumption of buybacks under our current authority at some point later this year. I will now turn the call back to John.

John Hairston: Thanks, Mike. Let’s open the call for questions.

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Q&A Session

Operator: Thank you. We will now begin the question-and-answer session. [Operator Instructions] Your first question comes from Catherine Mealor from KBW. Please go ahead.

Catherine Mealor: Thanks, good afternoon.

John Hairston: Hi, Catherine.

Catherine Mealor: I wanted to start on credit. Just want to see if you could give us some more color on the increase in non-performers and criticized assets that you show in the slide deck.

Chris Ziluca: Yeah. Thanks, Catherine. It’s Chris Ziluca.

Catherine Mealor: Hey, Chris.

Chris Ziluca: One of the things that we wanted — I wanted to point out is, we continue to really operate at historically low levels, criticized and non-approval loans. And also wanted to point out that we also have a pretty low level of modified loans. We’re at about 16 basis points of modified loans. But we did see, as you noted and the slide deck points out on Page 12, that we did have an increase in criticized loan movement, net movement in during the quarter. We spent some time kind of looking at the various categories and geographies and really couldn’t find any continued common factor between any of them. And I guess what I would say is, from my perspective, I think a lot of companies in general have been enjoying historically the high level of liquidity, which has kind of burned down.

And with the current economic environment and the higher interest rates, I think operating costs are a little bit higher for some. And so there’s probably some challenges in general. And I guess I would say that that’s probably mostly the common theme that I would be seeing in the movement to criticize. But I don’t really see anything substantial that’s within even those movements. Matter of fact, I believe that over time, they’ll probably resolve themselves. And similarly with non-accruals during the quarter, really was driven by a single commercial credit. We appropriately charged that credit down to a point where we feel confident in its ongoing success after the charge down.

Catherine Mealor: Okay, great. And would you say that non-performer that moved most of the charge-offs this quarter were related to that one credit?

Chris Ziluca: Yes, they were.

Catherine Mealor: Okay. And then in the — I think criticized, it looks like it’s about a $66 million increase. Are there any larger credits within there or is it mostly just smaller credits to your point, it was no real trend? But just curious if there are any kind of lumpy credits within there?

Chris Ziluca: It’s probably a mix. I mean, I think there are some, I guess, medium-sized credits, I would call them, that are in there. But I think a lot of — I mean, even when I look at some of the larger credits, the really medium size, I would call them, I see them as kind of the transitory situation for those larger ones where they’ve maybe had a little bit of a revenue challenge that needs to be dealt with through the right sizing of their operating expense load.

Catherine Mealor: Okay. Okay, great. And you talked a lot the past couple of quarters about just your desire to lower your reliance on kind of non-relationship credits and move towards a more granular loan portfolio. As we think about your shared national credit portfolio that’s, I think, about 11% of loans, is there a level to where you think that could move to over time? And I’m just trying to kind of frame the size of a headwind that is to you getting the growth ticket to turn back on once we get to maybe a little more stabilization in the industry.

John Hairston: Okay. Catherine, this is John. I’ll take that one. Thanks for the question. Good to hear your voice. So in terms of comparative to peers, I mean, as you know, not everybody reports. So when we look to see how we compare to others, and occasionally we’ve noted on notes where we’re deemed as being a little heavy in that category, which, it’s always bothersome to be considered heavy in anything that may be considered something less than good. Our reliance on syndications is never intended to be because we couldn’t produce enough otherwise, it was because we had so much excess liquidity during the aftermath of the PPP credits that our desire to get something better than zero with the Fed overnight, we did a little bit more liquidity development because we had a little more liquidity to deploy.

So that’s now coming down. And I think over the course of the next couple of years, it should moderate down to something in the neighborhood of what we see as reported peer levels, which is a couple of hundred basis points as expressed as a percentage of loans. So if you apply dollars to that, it’s about $250 million per year for a couple of years, if you put it in that context. So that’s not a size — not a size that we’re concerned about our production being able to replace. And we have the ability to moderate that up or moderate that down, just as we participate and renew and look at new relationships if that makes sense. So, not insurmountable, but it’s out there as a contra. But if we can redeploy credit-only money into full relationship money, ultimately we’re ahead in overall revenue, if that makes sense.

Catherine Mealor: It does.

John Hairston: Does that answer your question? Was that specific enough of what you were looking for?

Catherine Mealor: It does, yes. The $250 million was exactly what I was looking for. Thank you.

John Hairston: You bet. Thank you.

Operator: Your next question comes from the line of Michael Rose from Raymond James. Please go ahead.

Michael Rose: Hey, good afternoon, everyone. Thanks for taking my questions. Just wanted to follow up on the SNC commentary. It looks like it kind of accounted for kind of all this quarter’s loan growth. I think the balances were about $2.6 billion last quarter. And you’ve talked about or reiterated again kind of acceleration in the back half of the year on loan growth. But I think there’s growing signs that the economy is slowing. Just what gives you confidence that you will see that acceleration. Is it something in the pipeline? Is it what you’re hearing from your customers? And what could be the puts and the takes to that output? And then what should we think or contemplate SNC growth as part of that guidance? Thanks.

John Hairston: Sure, Michael. And to be clear, the net growth we show quarter-over-quarter, there’s a good bit of credit just moving into the category that are not new. So as you know, it’s somewhat of a technical designation. So if — even under a common exposure, if the outstanding balances creep above the line of demarcation where it’s considered a SNC or if there’s a couple three banks and then they add a bank that pushes over to SNC, then we have to classify as a SNC. Does that make sense? So that’s not the vast majority of what you see as an increase is not new money, it’s simply class change into the SNC category. Does that make sense?

Michael Rose: Yep, totally get it.

John Hairston: So at this point in time, we are in the posture of, on a net basis, quarter-over-quarter, decreasing the large credit-only reliance. They’re not that big, but it’s higher than we’d like it to be. And frankly, we need the liquidity to put in other things that we think are better and more valuable to investors over the course of time. Did I answer your question, Michael?

Michael Rose: Yeah. And then just the puts and the takes to kind of the back half acceleration in growth, just given some of the macro headwinds.

John Hairston: Sure. Well, if you look at it overall and it’s — when you get into puts and takes, I could talk probably with more detail than you want to hear, but I’ll try to summarize it. At this point in time, there’s a number of tailwinds that are helpful. And the ones that I’ll call out for the first quarter, which we haven’t talked about a lot lately is we did enjoy a modest amount of line utilization improvement and you see that on Page 8. I think it’s been five quarters since we saw line utilization improve. And so one data point isn’t a trend. And I would be early and premature to say that, that’s a sustainable trend. But we anticipated, way back when that as deposits on average per account begin to moderate back toward pre-pandemic levels, call it 2019 levels, that logically we should see line utilization begin to creep back up a little bit to the good.

And that’s pretty much exactly what’s happening. Whether that continues or not, I wouldn’t want that one way or the other. But we did expect utilization to go up when we normalize deposit account sizes, and that happens to be now. And so it wasn’t a surprise, but it was welcome. So that’s a pretty good tailwind and it really doesn’t cost us anything to get that additional income. Secondly, given the rate environment, we’re seeing paydowns that are unexpected in nature, very, very much minimal. There are very few operating company divestitures happening, at least in our book of business. And so we don’t see much wire in to pay off a loan because the business has been sold, certainly not as much as we saw in 2022 and the first half of ’23. So that’s been pretty close to zero.

As we get to the back half of the year, there will be two drivers for increase and it would be across most of our categories of lending. One would be if the rate environment does finally begin to moderate some to those people who have been on the fence or waiting for a better deal time, I think they’ll probably take action. Secondly, even if the rate environment doesn’t go down, that I’ll anticipate there’s enough pent-up demand to go do things as a business owner that they’ll simply say, I really don’t want to wait any longer because there may not be a better deal a quarter or two down the road, and we’ll go ahead and pull that trigger now. So I would think it’d be a better environment for growth if rates go down. But even if they don’t go down, I think the more likely question will be, how much are we willing to concede on rate to get the business to grow the balance sheet.

And it’s a little early for us to be able to tell that at this point in time. Right now, we’re still focused on getting good rate given that the cost of deposits is what it is today.

Michael Rose: Great. That’s great color, John. Maybe one for Mike before I step back. Appreciate the color on PPNR ex rate cuts. Looks like consensus is already within that range, implying that you would do better with rate cuts. Is that the way to read it? And any sense of what PPNR could look like, kind of — well, I guess you said it, down 1% to 2%. Just sort of any just broad strokes on what the puts and takes are to that outlook with no cuts. Because obviously, there’d be other pieces that move, if we don’t get any cuts. So, like, would there be some offsets in fee income or things like that?

Mike Achary: Yeah. Thank you, Michael. Appreciate the question. And we did add that disclosure this quarter around what we view PPNR to do with zero rate cuts versus the three that really is embedded in the original guidance. And the difference isn’t big, it amounts to about $7 million or so of NII for the last three quarters of the year. So again, it’s not a real big difference. And most of that difference would be weighted really toward the second half of the year. And to be honest with you, a lot of it really is in the fourth quarter. So the way we think about our NIM going forward, really in the second quarter, I think we expect pretty modest to a handful of basis points expansion. And then, if we do get the rate cuts, we have a tailwind that helps us with the CD repricing in the back half of the year.

And so from there, you’ll see a little bit in the way of modest NIM expansion. If we don’t get the rate cuts, then again, after a handful of basis points in the second quarter, we’re likely to be flat through the rest of the year. So that really is what drives that difference in guidance. The other things, though, that are certainly helpful as we kind of go through the year that aren’t really impacted by whether there’ll be a difference in rate cuts or not, is really the repricing of the bond portfolio as well as the repricing that continues to occur in our fixed rate loan portfolio. So we gave some information about the bond portfolio. We have about $600 million or so of bonds that will reprice from around [2.90%] (ph) weighted average to probably right around 5%.

Now, if we don’t get the rate cuts and the treasury yields increase, then that reinvestment rate will likely be a little bit better. On the fixed rate loan side, we continue to enjoy the benefits of repricing that portfolio. So for the balance of the year, we’re probably talking about $550 million or so in fixed rate loans that are going to reprice from, call it, 4.75% or so to probably about 7.5%. So it’s pretty important and a pretty good tailwind to have that repricing of both the bond portfolio as well as the fixed rate loan portfolio. And then the CDs, the benefit there really comes from the potential for rate cuts. And again, if those rate cuts don’t happen, we’ll have that difference that I mentioned. So hopefully, that’s helpful.

Michael Rose: Yeah, very helpful, Mike. Thanks, guys, for taking my questions. Appreciate it.

Mike Achary: Thank you, Mike.

Operator: Your next question comes from the line of Casey Haire from Jefferies. Please go ahead.

Casey Haire: Great, thanks. Good afternoon, everyone. Mike, wanted to follow up on the CD repricing. You guys mentioned that as a major factor on the NIM. I think, last quarter, and you might have said in the prepared remarks, but $900 million comes due this quarter. I believe it was a [4.77%] (ph) rate. What is the expectation that that rolls over? We’ve been hearing that CD repricing — CD prices have come in a little.

Mike Achary: Yeah, they’ve definitely come in. And our best promo rate is 5%, four, five months. And so that continues to be, probably our best-selling CDs. We also have a nine month at 4.75% and then 11 months at 4.25%. But as far as the CD maturities, those numbers are constantly moving around depending on the reinvestment of the renewal rates going forward. So what the numbers look like now is for the second quarter, we actually have about $2 billion of CDs maturing. Those are coming off at 4.88%. Third quarter, that goes down to about $1.3 billion, coming off at 5.11%. And in the fourth quarter, about $900 million coming off at about 4.69%. So the way we’re looking at the renewals of those CDs, the second quarter, there’ll be some benefit, but it’ll be pretty minor for the most part.

So for the third and fourth quarter, those benefits do become a little bit more significant, especially in an environment where we do have one or more rate cuts during that time period.

Casey Haire: Okay. Very good. So in other words, it’s still a little bit of a headwind, but obviously diminishing. And then at some point, it’s — you’re pretty much at market levels.

Mike Achary: Yeah, I think so. I think that’s right.

Casey Haire: Okay. All right. And then just your comments on capital. I’m just wondering what is the timing around the back half of the year. Is that — I mean, your capital ratios are in great shape. You’re tracking to your guide. Just what — I know it’s an election year, but what is so special about the back half of the year to turn on the buyback? Yeah.

Mike Achary: Yeah. I don’t know that it’s necessarily the back half of the year. So I think that’s something that will be considered as we even go through the next quarter or so. So obviously, on the dividend and any change there, that’s a Board decision. And related to the buybacks, I think it’s a pretty good option that we would probably resume buybacks at some level, at some point in the next quarter or so. So I don’t think that’s necessarily constrained or going to be delayed to the back half of the year. And some of those things could start to occur as early as this quarter.

Casey Haire: All right, great. Okay. And then just last one for me. On the fee guide, still you held that flat. If I run rate the first quarter result here, you’re kind of right at the high end of the range. You guys did pretty well in other. Just wondering, is that just conservative or do you expect a little bit of a pullback?

Mike Achary: No, I think it’s conservative. So we didn’t change the guidance on fees or expenses. But I would suggest, especially on fees, that there’s probably a bias toward the upper end of that range and even on expenses, a little bit of a bias toward the bottom end of the range without changing the range itself, if that makes sense.

Casey Haire: Yes. All right, great. Thanks, guys.

John Hairston: Yeah. Casey, this is John. I’ll just add one other point that just may be interesting, if not helpful. And that is, the components of the first quarter fee income included a couple of categories that are the best we’ve ever had. SBA continues to set records pretty much every quarter. And at the pace that that fee income bucket is improving, that pushes some of the guide high. And then secondly, our wealth management area now makes up a full third of our fee income. I mean, it was probably less than 10% just seven or eight years ago, and now it’s almost a third. That includes record sales and annuities this quarter after record sales of annuities last quarter. So, you kind of hate to increase the guidance above the top end of the range on record performance after record performance, two quarters in a row, particularly given the interest rate environment could curtail some of that, and you get the benefit on the net interest income side, right?

So we probably are being a little conservative by leaving the guide alone, but we’d like to see more about what the rate environment looks like before we evaluate changing them. Hopefully, that’s helpful.

Operator: Your next question comes from the line of Stephen Scouten from Piper Sandler. Please go ahead.

Stephen Scouten: Hey, guys, thanks for the time here. I guess I’m curious about the movements in non-interest-bearing deposits. You guys talked about the pace of decline there is slowing. I guess I’m curious, how you’re thinking about the ultimate level of projected non-interest-bearing deposits as a percentage of deposits today versus maybe previous quarter or prior?