Hancock Whitney Corporation (NASDAQ:HWC) Q3 2023 Earnings Call Transcript

Hancock Whitney Corporation (NASDAQ:HWC) Q3 2023 Earnings Call Transcript October 17, 2023

Hancock Whitney Corporation beats earnings expectations. Reported EPS is $1.12, expectations were $1.02.

Operator: Good day, ladies and gentlemen, and welcome to Hancock Whitney Corporation’s Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, this call may be recorded. I would now like to introduce your host for today’s conference, Kathryn Mistich, Investor Relations Manager. Please go ahead.

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.

A man in a suit and tie, placing a deposit in a bank and smiling confidentally. Editorial photo for a financial news article. 8k. –ar 16:9

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 Harrison.

John Hairston: Thanks everyone for joining us this afternoon. Third quarter’s results reflect continued growth in capital ratios, fully funding loan growth with core deposit growth, a slowing remix of DDAs, and early but welcome signs of NIM stabilization, due to higher loan yields and lower growth in deposit costs. As anticipated, loan growth again moderated this quarter. Total loans were up $194 million, driven mostly by project draws in both multifamily real estate and mortgage. As noted on slide seven, the net growth in both CRE and mortgage relates primarily to migration of in-process construction projects as they are completed. Demand has continued to slow as higher rates and insurance costs have changed client behavior.

Today we are seeing both commercial and consumers either choose to forgo large purchases or use existing funds in lieu of borrowing. Our own internal appetite also continues to moderate as we remain focused on full-service relationships, disciplined pricing, and selective appetite in some sectors. Our path to loan growth will be determined by our ability to fund growth with core deposits and lending within our risk appetite. The credit quality of our loan portfolio remains solid and we continue to be well reserved. Criticized, commercial and non-accrual loans remain at low levels, and in fact, criticized ratios are again at a historical low. Despite the one large idiosyncratic charge-off disclosed during the quarter, we have seen no significant or systemic weakening in any sector of the portfolio.

That said, we are mindful of the impact of higher for longer rates, inflationary cost and the regulatory environment, thus are proactive in monitoring for any developing risk. Core client deposits grew this quarter and we continue to maintain our diversified deposit base. Total deposits were up $277 million, with the remix continuing from DDA to time deposits and other interest-bearing deposit products. The DDA remix did, however, show signs of slowing this quarter, and we ended the quarter with 38% of our deposits in DDAs at the top end of the range contemplated in the mid-quarter update. Promotional CD and interest-bearing money market pricing contributed to the remix this quarter. Our clients do remain rate sensitive and we don’t expect that will significantly moderate until rates stabilize or start to decline.

When looking at our balance sheet our guidance for both loans and deposits is unchanged and we see the trends from Q3 continuing through year end. A quick note on capital, our TCE was down this quarter to 7.34%, due to impacts of higher long-term rates on AOCI. However, we are pleased to report that our Tier 1 ratio ended the quarter above 10% and our CET1 ratio was above 12%. As a reminder, we have no preferred stock shares in our capital stack. As we reflect on the year so far and look into the fourth quarter, we believe our strong deposit base will continue to help support our funding needs. We maintain a robust ACL and continue to build capital, which we believe will help us manage successfully through this cycle. October marks Founders Month, and we look forward to continuing our legacy of commitment and service to the people and communities we operate in, as we have for over 124 years.

Before turning the call over to Mike, I would also like to take a moment to honor the life of George Schloegel, who joined the organization in the mailroom as a high school student, ultimately rising to Chairman and Chief Executive Officer during his long 52-year career. George passed away unexpectedly and peacefully on October the 6th, only weeks after giving interviews to various trade organizations on the history and future of banking. George was a young and particularly vigorous 83 in his passing, and we will dearly miss our longtime friend and colleague. With that, I’ll invite Mike to add additional comments.

Mike Achary: Thanks, John. Good afternoon, everyone. Third quarter’s net income was $98 million, or $1.12 per share, that was down $20 million, or $0.23 per share from last quarter and was primarily related to the previously disclosed charge-off of $29.7 million. PPNR for the quarter was $153 million, down just $5 million from last quarter’s level of $158 million. In part due to a significant slowdown in our NIM compression, the rate of decline in our NII also slowed, while a modest increase in fees were nearly offset by a similar increase in expenses. As mentioned, our NIM compression did slow this quarter to 3 basis points from 25 basis points last quarter and was better than our previous guide of 5 basis points to 8 basis points of compression.

The quarter’s improved NIM performance was driven by a leveling off of deposit cost, a slowing DDA remix, less reliance on wholesale borrowings, and better loan yields. Our cost of deposits increased 34 basis points in the third quarter, compared to an increase of 49 basis points in the second quarter. Slide 13 provides additional monthly trend detail for the cost of deposits, reflecting the slowdown in each month of the quarter. We expect deposit costs could be up around 18 basis points or so in the fourth quarter and would bring the second-half of the year’s increase to around 52 basis points, compared to 90 basis points in the first-half of 2023. Our total deposit beta for the third quarter increased to 127% or about 33% cycle to-date. We expect the cumulative level will approach 35% by year-end.

How much higher the deposit beta goes from there will of course depend on the direction of deposit rates next year. On the asset side of the balance sheet, our loan yield improved to 6.01% this quarter. That was up 20 basis points linked quarter. The coupon rate on new loans increased to 8.03% and was up 63 basis points from last quarter. The previous quarter’s increase was 52 basis points, so momentum is building with our new loan rates. As we’ve mentioned throughout the quarter, increasing our loan yields has been a focus point for the company and will continue to be so going forward. As we look forward to the fourth quarter, we do expect an additional 3 basis points to 5 basis points of NIM compression. We’re assuming that the Fed will not raise rates in the fourth quarter and therefore stays at 5.5% through year-end.

We expect ongoing headwinds from the continued DDA remix, albeit at a slower pace, as well as the impact of CD maturities in the fourth quarter. We do, however, continue to see positive tailwinds from continued stabilization and deposit cost and higher loan yields. Net charge-offs were $38.3 million this quarter, or 0.64% of average loans, of which 50 basis points was related to the idiosyncratic charge-off mentioned earlier. Reserves were down slightly during the quarter, but still ended the quarter with a robust ACL to loans of 140 basis points. This quarter was our third consecutive quarter of fee income growth from the fourth quarter of 2022. Our service charges on deposit income improved, and we benefited from a strong quarter of income from our specialty lines of business.

Our guide for fee income is unchanged this quarter and we expect a slight decline in the fourth quarter. Expenses for the company were relatively stable this quarter. We remain confident in our annual guide for 2023 and currently expect expenses in the fourth quarter to be down from the third quarter’s level. And finally, all aspects of our forward guidance are summarized on slide 20 of our earnings deck. I will now turn the call back to John.

John Hairston: Thank you, Mike, and let’s open the call for questions.

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Q&A Session

Operator: Thank you. [Operator Instructions] Your first question comes from the line of Michael Rose with Raymond James. Your line is open.

Michael Rose: Hey good afternoon, everyone. Thanks for taking my questions. Just wanted to start on the reserve release this quarter. I certainly understand the credit, I appreciate you guys disclosing that beforehand. But just given we are seeing some slowing, kind of, across the economic landscape and people seem to be getting more cautious, just can you describe the factors that drove that reserve release? Understand that, you know, criticized classified came down, you know, non-performers came down. That’s all great, but why not just, you know, kind of, build reserves here? I just wanted to kind of pick your brain as to, you know, the rationale? Thanks.

Mike Achary: Yes, I’ll start, Michael. This is Mike and then certainly Chris or John can add some commentary as well. You know, no real reason other than we felt the reserve where we ended the quarter at 140 basis points was certainly robust enough for our view of credit and our view of the economy and all the factors that go into determining the reserve going forward. So, we did release $9.8 million, but $5.8 million of that overall release was related to the one credit. So, I guess the net release was really just $4 million. So, that would have been another basis point or 2 related to the OCL to total loans. So that basically was our thinking, and also, you know, the levels of our commercial criticized and NPLs in our view of those asset quality metrics going forward also played into it. But again, I think the bottom line is, you know, the 140 ACL to loans, we feel is certainly robust enough. So, Chris or John, if you all want to add anything?

John Hairston: No, I think that covered it.

John Hairston: That makes sense, Mike.

Michael Rose: Alright, yes. Appreciate it. I appreciate the net amount there. Maybe just as my follow-up, just wanted to talk about the margin. And specifically, you talked previously about potentially restructuring the securities portfolio. It looks like the FDIC charge will hit in the fourth quarter. I think you had previously discussed maybe not wanting to do it. And that if you were going to do a restructuring, not in the same quarter, as that charge was going to hit? But just wondering if you got any updated thoughts there? And then just what gives you kind of confidence that given that the margin is already down 3 bps that you can kind of maintain around these levels in the fourth quarter?

Mike Achary: Yes. So first on the NIM guidance, so the guidance for the fourth quarter is really for our NIM to potentially compress another 3 basis points to 5 basis points. And if we think about that level of compression and we think about it in terms of positives and negatives, so tailwinds or headwinds, the positives of the tailwinds really is this notion of deposit costs really beginning to stabilize. And of course, we saw that begin to happen in earnest over the course of the third quarter. So, you may have heard from the earlier comments, we expect our cost of deposits to potentially be up about 18 basis points or so in the fourth quarter, and that’s in relation to the 34 that we saw in the third quarter. So some definite stability there.

The other thing we think is a positive is this notion of higher loan yields. So if we look at the new coupon rates, we talked about those exceeding 8% really for the first time in quite some time. But if we kind of look at how those have grown over the past couple of quarters, third quarter to second quarter, we were up 63. Second quarter to first quarter, we were up 52 basis points. So we definitely believe that there is some momentum building with respect to the new loan rates. We’ve also talked in the past about our fixed-rate loan portfolio repricing up. And if you look at that trend, I think there’s a slide in the appendix that we included. If you look at that trend, it’s a pretty solid 1,000 basis points or so for the past couple of quarters.

So we certainly expect that fixed rate loan portfolio to continue repricing up. Now, as far as the headwind to the things that are really driving the — a little bit of compression that we expect in the fourth quarter, one of the positives this quarter we thought was the DDA remix slowing a bit, 38% this quarter, compared to 40% in the previous quarter. We’ve talked about the end of the year arriving somewhere around 36% or so. So it’s still a negative or a drag on our NIM but some definite slowing in that regard. But probably the biggest thing that’s impacting the compression that we expect in the fourth quarter is CD maturities. So we have about $1.4 billion of CDs that will be maturing in the fourth quarter. Those CDs will be coming off at about 4.34% and then repricing at around 4.92% or so.

So that difference in terms of those CDs repricing up will be a significant factor this quarter. And most of those CDs, just under $1 billion, are actually maturing in the front part of the quarter, so the month of October. So we will have that impact for most of the fourth quarter. Related to any bond portfolio restructuring, in our view, that’s still something that we’re considering is certainly on the table, whether that’s something we execute in the fourth quarter or maybe even in the first quarter, remains to be seen. You’re right. We do have the potential for the FDIC special assessment in the fourth quarter that certainly looks like it will be in the fourth quarter. But there again, we thought it was going to be in the third quarter as well, and it got pushed to the fourth.

So we’ll see. So really nothing more on the restructuring other than it certainly is something that we continue to consider and look at.

Michael Rose: Thanks for taking my questions. It seems like you were anticipating that question, Mike. So I appreciate all the color. Thank you.

Mike Achary: Thanks, Michael. This isn’t my first call.

Operator: Your next question comes from the line of Brett Rabatin with Hovde Group. Your line is open.

Brett Rabatin: Hey, good afternoon, everyone. Thanks for the questions. Wanted to start with the noninterest-bearing DDA. And just obviously, it continues to atrophy a little bit and you talk some about how that’s impacting your guidance? Is there any update on where you think that might settle in terms of balances and how you — or do you have any visibility of operating accounts that maybe you think that they’ve reached their bottom. Just was hoping for any color or an update on DDA thoughts.

Mike Achary: Yes, Brett, I’ll start and John can certainly or might want to add some additional color. But again, as I mentioned a little bit earlier, we’re expecting that DDA remix, so that non-interest-bearing percent to probably end the year somewhere around 36% or so. When we conclude the fourth quarter and talk about guidance for next year, I think we’ll have a little bit more clarity around where we think that trajectory will take us as we go through ‘24. So more on that obviously next quarter. But we’re encouraged by what we’re seeing and what kind of transpired this quarter. So if you look at the percentage declines quarter-over-quarter, second quarter compared to first, we were down about 5.5%, and then it slowed to about 4.5% or so in the third quarter.