Hancock Whitney Corporation (NASDAQ:HWC) Q4 2023 Earnings Call Transcript

Hancock Whitney Corporation (NASDAQ:HWC) Q4 2023 Earnings Call Transcript January 16, 2024

Hancock Whitney Corporation misses on earnings expectations. Reported EPS is $0.58 EPS, expectations were $1.1. 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).

Michael Rose – Raymond James:

Catherine Mealor – KBW:

Casey Haire – Jefferies:

Brett Rabatin – Hovde Group:

Brandon King – Truist Securities:

Matt Olney – Stephens:

Christopher Marinac – Janney Montgomery Scott:

Stephen Scouten – Piper Sandler:

Ben Gerlinger – Citi:

Operator: Good day, ladies and gentlemen, and welcome to Hancock Whitney Corporation’s Fourth 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 conference is being 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. Happy New Year, everyone, and thank you all for joining us today. We are pleased to report a strong end to 2023 with a very solid fourth quarter. The results reflect our successful bond portfolio restructuring, remarkable growth in our capital ratios, hopefully in the NIM compression and improvement in PP&R, fee income and expenses after adjusting for the significant items we previously discussed in the mid-quarter update. We hope to carry this momentum into 2024, which will be a year to celebrate our 125 year legacy of commitment by our associates to clients and to the communities we serve. As anticipated, we have revised our three-year Corporate Strategic Objectives or CSOs, and have provided updated guidance for 2024, both of which are detailed on slide 22 of the investor deck.

Starting with the balance sheet, loan balances were relatively flat this quarter as loan demand once again was tepid in Q4, similar to the last several quarters. Under the surface, however, the team was successful at producing loans at a volume necessary to hold our own and overcome a more select credit appetite, continued focus on pricing, and in replacing large credit only relationships with granular relationships. Business banking continued to impress on both sides of the balance sheet and consumer lending volume has begun to cover the remnant of pandemic recovery paydowns. As we look forward into 2024, we expect loan demand will return after rates begin to soften mid-year, and therefore much of our loan growth is anticipated in the second-half of the year.

Credit quality metrics were flat quarter-over-quarter, with criticized commercial and non-accrual loans at very low levels. As mentioned in the mid-quarter update, charge-offs began to normalize in Q4, but we still see no significant weakening in any portfolio sector. Despite impressive AQ ratios, we continue to be mindful of the current and potential macroeconomic environments. We are proactive in monitoring risks and we continue to maintain a solid reserve of 1.41%. Total deposits were down $630 million this quarter, driven primarily by the maturity of $567 million in broker deposits. We were able to use the proceeds from the bond portfolio restructuring to delever these higher cost deposits. Aside from that, client deposits were roughly flat with prior quarter.

Seasonal inflows of public funds did occur as expected. The DDA remix continued, but pleasantly at a slower pace. We ended the quarter with 37% of our deposits in DDAs and we’re pleased to finish Q4 at the top end of the range contemplated in the mid-quarter update. Retail time deposits grew and interest-bearing transaction and savings accounts were stable thanks to the promotional pricing we offered on CDs and money market accounts. Our clients remain rate sensitive and we really don’t expect a significant moderation until rates begin to decline in the second-half of this year. Mike will make a few comments in a moment regarding our future expectations for rates. In 2024 we expect low-single-digit growth in our deposit balances year-over-year used to fund loan growth.

Another bright spot for the quarter was growth in all of our capital ratios. Our TCE grew to over 8% due to lower, longer-term yields and the benefits of our bond portfolio restructuring. Our total risk-based capital ratio reached 14% this quarter, and we remain well-capitalized, inclusive of all AOCI and unrealized losses. As we look back on 2023 and forward into 2024, we believe we have positioned ourselves to effectively navigate the operating environment this year. Our deposit base has been remarkably stable and we expect it will continue to support our funding needs. Our ACL is quite robust and our capital levels grew throughout the year, which we feel will help position us for success in 2024. With that I’ll invite Mike to add additional comments.

Mike Achary: Thanks, John. Good afternoon everyone. Fourth quarter’s reported net income was $51 million or $0.58 per share adjusting for the three significant items this quarter that were previously disclosed: net income would have been $110 million or $1.26 per share, that’s up about $12 million or $0.14 per share from last quarter. Adjusted PPNR was $158 million, up $5 million from the prior quarter. Both NIM and NII were flat with fees up and expenses down. So a good quarter in an otherwise challenging environment that drove a nice increase in PPNR over last quarter. As mentioned, we saw no NIM compression this quarter and our NIM was flat at 3.27%. This was better than our original guidance for the quarter of 3 to 5 basis points of compression.

As shown on slide 15 in the investor deck, our strong NIM performance was driven by higher loan yields, approximately one month’s impact from our bond portfolio restructuring transaction and continued slowing of our non-interest bearing deposit remix. Deposit costs for the company were up 19 basis points to 1.93%, but we’re pleased that the rate of growth in deposit costs has continued to level off. This resulted in a total deposit beta of 36% cycle-to-date. We expect deposit betas will move up modestly in the first-half of the year, but we will be proactive in reducing deposit costs when rates begin to come down, which of now we’re expecting in the second-half of 2024. On the earning asset side, our loan yield improved to 6.11%, up 10 basis points from last quarter with the coupon rate on new loans at 8.15%, so up 12 basis points from last quarter.

As John mentioned, a continued point of emphasis is improving our loan yields going forward. The increase in our new loan rate did slow somewhat this quarter and reflected the flattening of the Fed funds rate, as well as lower long-term rates. In part due to the bond portfolio restructuring transaction, our securities yield was up 10 basis points to 2.47% for the quarter, while the yield for the month of December was 2.57%. As a reminder, we expect an annualized benefit to NIM of about 13 basis points from the restructuring transaction. As we think about our NIM in 2024, we believe modest NIM expansion is possible with single-digit expansion in the first-half of 2024 and potentially a bit more in the second-half of the year. As a basis for our guidance we’re assuming the Fed will cut rates 3 times at 25 basis points each beginning in June of 2024.

We continue to expect some ongoing headwinds from the continued deposit remix, which has slowed, but we also see tailwinds as we move into 2024. The projected rate cuts will allow us to reprice CD maturities lower in the second-half of the year, and we expect higher loan and securities yields will help offset the impact of any deposit remix. Fee income adjusted for the significant items was up this quarter, the fourth consecutive quarter of the income growth beginning with the fourth quarter of 2022. We benefited from strong activity in investment and annuity income this quarter and we remain focused on finding opportunities to grow fee income. Our guide for fee income in 2024 is continued growth of between 3% and 4% from the adjusted non-interest income in 2023.

Expenses excluding the special FDIC assessment were down this quarter, reflecting lower incentive expense. We expect expense growth of between 3% to 4%, which is a welcome decline from 2023’s growth rate as we continue to work hard to control costs throughout the company. We had continued to reinvest back into the company, will continue to do so, but at a bit slower pace as we allow technology and other investments to mature. And finally, all aspects of our forward guidance, including our revised CSOs, are summarized on slide 22 of our earnings deck. I will now turn the call back to John.

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

Operator: [Operator Instructions] Your first question comes from the line of Michael Rose from Raymond James. Please go ahead. Your line is open.

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Q&A Session

Michael Rose: Hey, good afternoon. Thanks for taking my questions. Mike, I think you might have just answered this, but it looks like if I use kind of the midpoints of the ranges and back into the NII, it’s about — it’s up about 0.5% year-on-year if I’m doing my math, right? I just wanted to get a sense for, you know, if — you know, what the sensitivity is, you know, kind of per rate hike since the forward curve is kind of baking in a little bit more? I appreciate the sensitivity provided on — I forget what slide it was, but just wanted to kind of see what the puts and takes were to the NIM and NII outlook? Thanks.

Mike Achary: Yes, I think you’re referring to the table at the bottom right of 17, Michael, and then also your numbers around how we’re kind of thinking about NII for next year, I think are pretty spot on. So we have three rate hikes built into the forecast for next year. The first one in June, then September, and then lastly in December. So those are three rate hikes at 25 basis points each. And as we think about our NIM next year, we really think about modest expansion in the first-half of the year, so first and second quarter, and then I think a bit more in the second-half of the year. And some of that calculus is absolutely related to the prospect of lower rates in the second-half of the year. And to that end, what we’re trying to do is kind of choreograph our CD maturities such that we have, you know, a fair amount of those maturities happening in the second-half of next year, where obviously the rate environment will be a little bit lower.

So the trajectory of our NII really would kind of follow the trajectory that I mentioned around our NIM. So that’s how we kind of think about those aspects of NII, NIM, and the growth for next year.

Michael Rose: Very helpful. And I think you meant rate cuts, not rate hikes. I think we’re used to rate hikes at this point. So…

Mike Achary: Yes. We’re so used to rate hikes. I apologize.

Michael Rose: No worries to get it. Just as a follow-up, you know, you mentioned for the loan growth outlook the growth to be weighted kind of in the back half of the year, but I think increasing number of management teams that I’ve spoken with have talked about a mild recession. And I guess if you can kind of explain where that growth you would expect to come from and if a mild recession is kind of the base case? I know you didn’t move the factors in your credit weighting Q-on-Q, but just wanted to get some thoughts there? Thanks.

Mike Achary: I mean, we still have that built into kind of our macroeconomic assumptions that obviously inform the ACL, but at this point, it looks like that we may have achieved that soft landing or as John says, safe landing.

John Hairston: Mike, this is John. Thanks for the question. I’ll start it and then if Chris and Mike want to add any more color to it, they’re welcome to. But if we look at the fourth quarter and see a reported EOP that’s relatively flat, it somewhat disguises all the activity under the surface. And as mentioned in several calls the past year or so we’ve had a fairly acute focus on replacing credit only relationships particularly larger ones with more granular relationships that bring liquidity and fee opportunities where right now liquidity obviously is the most important. And that happened in Q4, and so we had about, I think about $200 million. I think the number I have in my mind is $196 million and SNC balances that left in Q4 and were replaced nearly entirely by core relationships.

So there’s a lot of productivity occurring. It just isn’t in the same size chunks as some of the outbound activity. And I would expect to see that continue, although I don’t expect the SNC production to be at the pace it was before. So if you think about, in terms of puts and takes, if you think about another, say $300 million or $400 million of SNC balances reduced, offset somewhat evenly over the first-half of the year. And then more than the amount going out will be coming in in granular relationships, the back half, due to rate increases. That’s really where you kind of get to the low-single-digit production — single-digit balance sheet growth for the overall year. So while it’s weighted to the back half of the year, it’s not like there’s not a lot of activity that’s already been successful and will continue to be successful in the first-half of the year.

Was that the kind of color you were looking for or you want to ask [Multiple Speakers] question?

Michael Rose: Yes. no, that’s very helpful. I appreciate that. Maybe just one final one for me. TCE above 8%, you guys have the buy back in place through the end of this year. I know you guys haven’t been in the market, but would you expect to be, particularly if the economic environment continues to cooperate, or is it capital rules are changing for the largest banks, there’s thought processes that could come downhill and are you looking to build capital here? Just trying to figure out how you guys are thinking about it? Thanks.

John Hairston: So Michael, we’re extremely pleased with our ability to grow capital over the last couple of quarters and certainly rates have helped with that especially with TCE, but those rates can also kind of take some of that away. So we’re cognizant of that, we’re cognizant of the potential impact of any economic slowdown especially in the second-half of this year. And I think for now, our stance related to managing capital will be to continue to build capital as we have the past couple of quarters. So right now, not really thinking about buybacks. That certainly could change, as you mentioned. And I think if it does, hard to kind of gauge when that might be. But it’s probably something I think we might look at a little bit more intently in the second-half of the year. But again, no plans right now.

Michael Rose: Great. I appreciate you taking my questions. I’ll step back.

John Hairston: You bet, Michael. Thank you for asking.

Operator: Your next question comes from the line of Catherine Mealor from KBW. Please go ahead. Your line is open.

Catherine Mealor: Thanks, good afternoon.

John Hairston: Hi, Catherine.