$HWC Hancock Whitney Q1 2024 Earnings Conference Call

Thank you, Katherine, 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. The 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 broker 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 selective credit appetite and achieved 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 continue to normalize during the quarter, and net charge-offs were modest despite the uptick in criticized commercial and nonaccrual 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%, slightly up from the prior quarter. We're pleased with our deposit growth during the quarter of $86 million, which included the maturity of $195 million in broker deposits. Excluding the impact of broker 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.

Thanks, Mike. Let's open the call for questions.

Okay, Katherine, this is John. I'll take that one. Thanks for the question. In terms of comparative to peers, not everybody reports, so when we look to see how we compare to others, occasionally we've noted where we're deemed as being a little heavy in that category. It's always bothersome to be considered heavy in anything that may be considered 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 at the Fed overnight led us to do a little more liquidity deployment. That's now coming down, and I think over the course of the next couple of years it should moderate to something in the neighborhood of what we see as reporting peer levels, which is a couple of hundred basis points expressed as a percentage of loans. If you apply dollars to that, it's about $250 million per year for a couple of years. That's not a size we are concerned about. Our production is able to replace that, and we have the ability to moderate up or down as we participate, renew, and look at new relationships. Not insurmountable, but it's out there as a contra. But if we can redeploy credit-only money into full relationship money, ultimately we are ahead in overall revenue. Does that make sense?

You bet.

Sure, Michael. To be clear, the net growth you show quarter over quarter, there is a good bit of credit just moving into the category that are not new. As you know, it's somewhat of a technical designation. If under a common exposure the outstanding balance creeps above the line of demarcation where it's considered a SNIC, or if there are a couple of banks and then they add a bank that pushes it over to SNIC, then we have to classify it as a SNIC. That vast majority of the increase is not new money; it's simply class change into the SNIC category. At this point, we are in the posture of on a net basis quarter over quarter decreasing the large credit-only relationship. They are not that big, but it's higher than we'd like it to be, and frankly we need the liquidity to put into other things that we think are better and more valuable to investors over the course of time. Did I answer your question, Michael?

Oh, sure. Overall, there are a number of tailwinds that are helpful. The ones 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 eight. It's been five quarters since we saw line utilization improve. One data point isn't the trend, and I would be premature to say it's a sustainable trend, but we anticipated that as deposits on average per account begin to moderate back toward pre-pandemic levels, logically we should see line utilization begin to creep back up. That's exactly what's happening. Whether that continues, I wouldn't bet one way or the other, but it was welcome. 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 are seeing paydowns that are unexpected in nature very minimal. There are very few operating company divestitures happening in our book of business, so we don't see much windfall to pay off a loan because a business has been sold. That's been close to zero. As we get to the back half of the year, there will be two drivers for increase across most of our categories of lending. One would be if the rate environment finally begins to moderate, people who have been on the fence waiting for a better deal time probably take action. Secondly, even if the rate environment doesn't go down, there is enough pent-up demand to go do things as a business owner that they will simply say they don't want to wait any longer and will pull the trigger now. I think it would be a better environment for growth if rates go down, but even if they don't, the more likely question will be how much we are willing to concede on rate to grow the balance sheet. It's a little early to tell. Right now we are still focused on getting good rate given that the cost of deposits is what it is today.

Yeah, Casey, this is John. I'll just add one other point that may be interesting if not helpful. The components of the first quarter fee income included a couple of categories that are the best we have ever had. SBA continues to set records pretty much every quarter, and at the pace that fee income bucket is improving, that pushes some of the guide high. Secondly, our wealth management area now makes up a full third of our fee income. It was probably less than 10% just seven or eight years ago, and now it's almost a third. That includes record sales in annuities this quarter after record sales last quarter. We kind of hate to increase the guidance above the top end of the range on 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. So we probably are being a little conservative by leaving the guide alone.

Stephen, this is John. I'll just add to that. Internally the way we look at this is more outrunning the other hunters versus the bear, if you know what I mean. What we consider successful through this cycle is remaining in the top quartile in terms of low levels of criticized and NPL credit. Anything below peer median would be a deep surprise and disappointment. So if you look at it that way, that's sort of the bookends of what our expectations are: somewhere between the first and second quartile, but obviously top quartile is what we deem a success.

Great question. This is John, I'll take a swing at it. I think the answer is about half mix, just differences in Q1. Q1 does typically have a little bit different mix than the other quarters of the year. Secondly, and I think this is going to be the same with our competitors as well, right now with a rate environment where the news media is talking every day about variable rates beginning to go down, that's a pretty stark change from a year ago when they were talking about how far they will go up. When we're negotiating terms, specifically rate terms with clients, it really is a tailwind to getting better pricing when there's a thought that rates are going to be flat or higher. In this environment, rates are expected to go down, so that's creating a little bit more pushback on rates upon renewal and new deals. Frankly, the competition is also just as interested in getting new deals as they can to at least hold the loan book flat. So I think competition is higher, awareness of what rate direction is happening in the market is a little higher. Both of those are driving that down a little bit. But our posture right now, to be clear, is we still want to get as good a rate as we can possibly get, and we're giving up a little volume in order to get a higher rate. As we get later in the year, if rates do indeed stay flat or the belief is that they'll still go down, I think we may see some rate concession across the banks, particularly in the midsize bank environment, to show growth. It's hard to really tell at this point in time, but if you go back through history, when people begin to expect a rate cut, it's harder and harder to get new deal rates at the level you may want. I think we saw a little bit of that in Q1, but again about half of it or a little more was mix.

Ben, this is John. I'll add this to it. Right now we're having some really good and impressive success in some areas of the granular deployment in loans, particularly in Texas and areas, particularly Dallas. There's a notion that as we get to the back of the year, depending on what the economic environment looks like, we may very well increase our deployment and add new bankers and a small amount of new facility to continue that momentum because it simply has been so good. There's a little bit of cushion built in that guidance as we sit now. In the event we do make those investments, we want to be very transparent about it, but it might not happen given how the economy could change. Right now we feel really good about the progress in the granular side of our loan balance sheet, and we believe there's some good talent out there in different places that may be available by the back half of the year that we'd like to avail ourselves of.

Yeah, I'll start. Admittedly it's a crystal ball look, but typically Mississippi and Louisiana are not high-growth markets, which means valuations don't just spike up when they may spike up elsewhere. So the handicap there is they don't grow as quickly as some of our other markets. On the other side, they typically don't bounce down very harshly in periods of recession. We can use the last financial recession as an example. We had very, very little loss in Mississippi, Louisiana, or Alabama during that period. In fact, were it not for energy, our losses would have been better than peers by a good measure. With energy very deemphasized in our book, now well below 1% of loans in that sector, I would expect those markets to perform very well in a recessionary period.

A goodly portion of it. The primary purpose of syndications for us is to lay off credit with organizations we've had for a while where the total amount of hold is just bigger than we want to hold by ourselves. We do lead a chunk of syndications, but the core book is still pretty granular in terms of what we have that is credit-only. I'm going to take out specialties like commercial real estate, because there are some credits that are syndications there that typically don't live on the books very long before the project is completed and then go off to the perm market somewhere else. We do have a healthcare group that participates a little more heavily in syndications, and those balances in exposure have been declining as we didn't need to deploy the liquidity. But I want to be clear: our concern about syndications is not as much about fear of credit as it is that the liquidity could be repurposed to other things we're particularly good at. Internally, we talk about our corporate strategic objectives, and we publicly share those, but we don't talk about some of the other things we seek and aspire to. One of those things is I'd like us to be the best bank in the Southeast for privately owned businesses. To do that, we need to have liquidity available to very competitively bring those types of organizations on. We're having that kind of result in some of the markets I spoke about earlier. So the rebalancing away from syndications is not because they are syndications; the only rebalancing is we're trying to get away from credit-only relationships to more core relationships, because ultimately we're really good at the fee business, but we can't get the fees if we don't have the core relationship. That's the driver for that change and thoughts moving forward.

Did I help you, or do you want to?

Matt, this is John, just to add a little more color that may be helpful. We managed to cover more than 100% of the broker deposit departure in Q1 with client deposits at the rates we mentioned. We have another slug and a final slug of broker deposits coming up in May. Part of maintaining the current posture is to try to eliminate as much of those as we can. We're not ready to say that will definitely happen, but that's our desire. Getting rid of that takes us to 100% core money, which makes sense. So it's a little early to try to get too aggressive on taking them down until we get past Q2. Hopefully that's helpful.

I think the first part of your answer, this is John, yes. We're hearing pretty clearly that we think the environment may be a little better for us back after the year. Some of that is because organizations are looking at their debt service, and from their perspective, they have more room to spend if they're spending less on debt service. So it invigorates them to maybe tackle a little bit more in terms of re-up and equipment, expanding buildings, and doing things that businesses do to grow their top-line revenue. I think that's really more the driver. 75 basis points doesn't light up the world; it doesn't make all of a sudden math get a lot better. It more signals that we have successfully navigated a safe landing economically, and we can think a little more positively about the next couple of years. That spurs people to begin taking a little more risk in terms of spreading their wings and investing. But as you know, at some point you can't just not spend money. My thought is that by the time we get into the latter parts of this year, if the environment looks like we go from higher for longer to higher for much longer, it's still going to cause people to go ahead and move forward with some decisions simply because they need to, and they'll manage their operating expenses accordingly to afford that higher level of debt service.

Thank you, Christo, for managing the call. Thanks to everyone for your interest. Looks like a good year shaping up, and we're glad to share more with you when we see you on the road. We'll see you all very soon.