Hancock Whitney Corp Q1 FY2022 Earnings Call

Good day, ladies and gentlemen, and welcome to Hancock Whitney Corporation's First Quarter 2022 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 will now like to introduce your host for today's conference, Trisha 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-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.

Thanks, Trisha. And thanks to everyone for joining us. We hope you had a safe and enjoyable holiday weekend. We're pleased to report another solid quarter and a healthy launch for 2022. The company's first-quarter results were on track with core loan growth of 8% linked-quarter annualized, marked improvement in a stable deposit base, initiation of a widening net interest margin, superior asset quality metrics, continuing excellent expense management, improved operating PPNR, and solid capital levels. Momentum from 2021 carried into the first quarter with an increase in core loans of $385 million linked-quarter. This growth more than offset the almost $200 million in PPP forgiveness. Increasing economic activity in our markets, increasing line utilization and pull-through rates all led to growth broadly across our markets and lines of business. New loan yields rose a couple of basis points as production levels remain strong. We expect these trends will continue and be more positively impactful as the PPP forgiveness impact becomes a less significant headwind next quarter. Speaking of decreasing headwinds, I would like to share an update on the New Orleans MSA. As I pointed out on previous calls, most of our footprint experienced record tourism and very healthy hospitality industry segments throughout the pandemic. New Orleans was an exception due to its dependence on convention, trade show, and festival business as an economic driver. We're pleased to report a resurgent New Orleans in 2022. Beginning with the New Year Sugar Bowl game, we saw a robust Mardi Gras season—hotels were booked, festival tourists returned, and the city rebounded as a national and international destination. March brought relaxed pandemic restrictions and family tourism surged during the spring break vacation period. We were proud to host the Final Four basketball tournament and are preparing for the return of the Jazz & Heritage Festival and the Zurich Classic golf tournament. Conventions have returned, guided tours and restaurants are fully available, and we hope to see many of you in a couple of weeks at the Gulf South Bank Conference. New Orleans has joined the rest of our footprint in economic recovery. We are also pleased to report another quarter of superb asset quality metrics. After peaking in the fourth quarter of 2016 at 10.1%, our commercial criticized loan ratio improved for the sixth straight quarter to 1.7% of total commercial loans. From a high of 2.3% in the first quarter of 2018, non-performing loans are in their ninth straight quarter of improvement and sit at 0.22% of total loans. Net charge-offs were again only one basis point for the quarter. I'm very proud of our team for maintaining diligence throughout the pandemic disruption. The combination of their hard work and de-risking our balance sheet delivered asset quality metrics among the best compared to peers. Our capital levels remain solid. I recognize the TCE of 7.15% is well off our internal target of 8%. However, the primary driver of the decline is related to the valuation of the available-for-sale portfolio at March 31. This was the primary driver of the 56 basis point decline in our TCE ratio during the quarter, a trend we expect to see repeated across the banking sector due to rapidly rising rates. Other capital metrics remain solid, however, with an estimated Tier One ratio of 11.12%, up three basis points linked quarter. We opportunistically continued buying back shares during the quarter and repurchased 350,000 shares at $52.79. Finally, before I turn the call back to Mike, I'd like to update you on the strategic decision we made and announced last month, addressing recent trends by others in the industry regarding consumer segment NSF and OD fees. On March 25th, we published a press release detailing the decision to proactively eliminate consumer NSF and certain OD fees by the end of 2022. We shared an estimate of an annual impact of $10 million to $11 million in fee income from that decision. We believe these changes are in line with an evolving retail banking industry as traditional banks adjust products to meet consumer needs and provide them with the tools needed to help manage their overall finances. We expect to see improving consumer account acquisition rates in 2023 with this change and as we launch additional retail products and features and expand our digital storefront. With that, I will turn the call over to Mike for further comments.

Thanks, John. First-quarter net income totaled $123.5 million, which is down $14.3 million from last quarter but up over 15% from the same quarter a year ago. EPS at $1.40 per share in the first quarter was down $0.15 from last quarter, but was up $0.19 from the first quarter of last year. Drivers of the change from last quarter included a higher overall tax rate, the absence of last quarter's storm-related insurance gain, and finally a lower negative provision this quarter compared to last quarter. A few themes for this quarter included continued loan and earning asset growth, what we believe will prove to be top core asset quality, and stellar expense control. The quarter's $385 million core loan growth continues the momentum that began several quarters ago around deploying excess liquidity into loans rather than bonds. We also grew the bond portfolio by $318 million in keeping with previous guidance around our liquidity deployment plans. Continued growth in loans and earning assets going forward, along with higher rates, will result in higher revenue that will position us to achieve our profitability goals and targets. Our asset quality continues to improve and has reached what we believe to be top quartile levels of commercial criticized loans and non-performing loans along with effectively zero net charge-offs. We reduced our reserve release this quarter to $23 million compared to $29 million last quarter and can envision future releases tapering off to near zero in a few quarters. While there's uncertainty in the economic and geopolitical environments, we believe we are well positioned for what that may bring. The company's overall operating expenses on a reported basis were down again this quarter to just under $180 million from $183 million last quarter. Our ongoing efficiency initiatives continue to help us manage overall expense levels and will continue to do so. We have lowered our expense guidance for the year a bit, now expecting expenses to range between $735 million and $745 million for 2022. We do expect seasonal drivers such as annual merit increases will likely drive expenses higher in the second quarter, but we are committed to expense levels that will support our 55% efficiency ratio target and longer-term profitability goals. Rate hikes in 2022 now present a tailwind to achieving that goal sooner than expected. Just a few other comments related to the quarter: while total deposits were virtually unchanged linked-quarter, the biggest story is the shift in mix during the quarter. At quarter-end, we split nearly 50/50 between interest-bearing deposits and demand deposits. Seasonal runoff in public fund deposits and maturities of CDs left money sitting in non-interest-bearing deposits. We expect our deposits will remain at these levels over the near term. We continued our strategy of deploying excess liquidity into the bond portfolio and added $318 million in the first quarter. New purchases and reinvestments totaled $620 million at yields of 2.13%. The revaluation of the available-for-sale bond portfolio at March 31 reflected an unrealized pretax loss of $387 million compared to an unrealized gain of $2.2 million at year-end 2021, and also negatively impacted our TCE. As of quarter-end, our mix of held-to-maturity and available-for-sale bonds was 28% and 72% respectively. However, we do have some OCI protection with $1.7 billion of fair value hedges and roughly $1.9 billion of available-for-sale bonds. Details on our current hedge positions are noted in our slides. Our NIM for the first quarter was 2.81%, an increase of one basis point from last quarter. Net interest income was virtually unchanged despite two fewer business days and PPP forgiveness. Better earning asset yields and mix, as well as lower deposit costs added eight basis points to the NIM. However, the impact of PPP runoff and other items offset that widening and compressed the margin by seven basis points, leading us with a net increase of one basis point. We expect the net interest margin will continue to widen as rates increase, and we've added supplemental information in our slides for further guidance. Please note this additional information does not include any potential changes in balance sheet composition or deleveraging activities, which could potentially drive additional NIM widening in future quarters. As you would expect, fees were down linked-quarter as rising rates continued to impact secondary mortgage fees. We expect fees will be a challenge moving forward and have lowered our guidance for 2022 to reflect both a rising rate environment and our announcement last month regarding the elimination of NSF and certain overdraft fees later this year. So, it was a solid first quarter and a good start to the year. With that, I'll turn the call back to John.

Thank you, Mike. Let's open the call for questions.

Thank you. We will pause briefly as questions are registered. Our first question is from Brett Rabatin with Thompson Group; your line is open.

Hey, good afternoon, everyone.

Hey Brett.

I wanted to ask if you could provide an update on the new hires this quarter since you've adjusted the expense guidance slightly downward. It's encouraging to see the hires as they will benefit your loan pipeline in the long run. I'm interested in whether your expectations for hiring have changed and how that impacts your expense growth outlook. Additionally, could you share what your hiring pipeline currently looks like?

Thanks for the question and thanks for recognizing it. We've had some good success in the quarter. That's probably the most number of bankers we've added in one quarter in a long time. I think some of the increase we've seen is coming from outside interest in us versus just recruiting efforts. We would expect that to continue as we go through the rest of the year.

Brett, the thing I would add to what John just stated is, relative to the guidance we gave and a little bit of a change, certainly that recognizes I think the great start that we had to the year in terms of our ability to further reduce expenses from the fourth quarter of last year. So getting off to a great start in that regard. But again, we're also guiding for folks to expect the levels of expense to increase as we go through the year. We have the normal seasonal things that drive that, such as raises in the month of April. So we will have a full impact of that in the second quarter. Also, in addition to that, you will have a full quarter's impact and really a full year's impact of the new hires that we added last year. But we are obviously working hard to achieve that guidance. The end result is the 55% efficiency ratio for the end of this year. You'll note that the efficiency ratio came in at 56% this quarter. A pretty good start toward getting that goal accomplished.

Okay. I appreciate the color there. And then I want to make sure I'm clear on the margin in Slide 19; I want to make sure that's a static balance sheet perspective. I mean obviously, with lowered liquidity continuing, a strong possibility it would seem like those numbers could even be conservative in terms of the margin, which brings me to the question about the balance sheet management. If you'd expect to continue to have the trends you had in the first quarter in terms of reducing liquidity. And then, obviously, your demand deposits are up $2 billion over the past year. You did make a comment about expecting or had a comment in the press release about expecting that to possibly go back a little bit towards interest-bearing. Maybe you could just give us some color on the balance sheet.

Yes, I'll be glad to. So certainly, when we look at the size of the balance sheet and think about the guidance that we gave around deposits, we're not really expecting the size of the balance sheet to really increase much from where it is now. In fact, with the guidance on deposits being flat to slightly down, you can certainly look for the size of the company to mirror that. For 2022, the most efficient and effective way we think of managing our balance sheet is what we began really in the first quarter, and that is the deployment of all of our excess liquidity. Our excess liquidity was down a bit from the fourth quarter to the first quarter. We haven't changed our guidance around loan growth, so the 6% to 8%, and then also we have not changed our guidance around the notion of increasing the size of the bond portfolio on a net basis by about $300 million or so per quarter through the end of this year. All of those dynamics mixed together inform how we are thinking about managing the balance sheet on a go-forward basis. You also asked about Slide 19, which is the earnings deck. We added that slide to give folks a little bit of guidance on how we expect our NIM to react for every 25 basis points of rate hikes on a go-forward basis. Your earlier assumption is correct; it really doesn't assume any changes to the composition of the balance sheet on a go-forward basis. So there's certainly an opportunity to outperform that should we continue to be effective in deploying excess liquidity.

Okay, great. Appreciate all the color.

Thank you, Mr. Rabatin. The next question is from Catherine Mealor with KBW; your line is open.

Thanks. Good evening, everyone?

Hey, Catherine.

One follow-up on the margin just described 19; any color you can give us on how you think about deposit betas and what your assumptions are?

Yes, Catherine. So the way we are thinking about our deposit betas, if you go back to slide 14, we talked about the historical loan and deposit betas during the last time we were in an up-rate environment. You noticed deposit betas were around 25% of total deposits. So on a go-forward basis, the assumptions that are built into slide 19 around the deposit betas will generally mirror that same deposit beta experience that we had the last time rates rose. So around 25% on a total deposit basis.

Great. Perfect. So my way of thinking about Slide 19 is if we think that there are another, I guess, six hikes then in total that will get us somewhere between 21 and 30 basis points of NIM expansion with just a static balance sheet. But then as you deploy excess cash and that moves, call it, from 10% today, that maybe somewhere around 5%, 6%, then you could see additional expansion on top of that. Is that a fair summary of what this might entail?

I think so. I think that's fair and correct. One thing I would point out on Slide 19 is after we get to a Fed funds rate of about 125 basis points, you see that the expected NIM impact begins to narrow a bit. What we're assuming at that point is that the deposit betas will probably kick in a little bit, and we will begin paying a little bit more for deposits than we did for the first 25 basis points or so.

Great. Lastly, on buybacks; how do you think about how the lower TCE just from the AOCI hit may possibly limit share buybacks in the near term? However, your valuation is or your stock level to buy back shares today? How are you guys thinking about that question?

Yes. So certainly a fair point to make that our TCE at 7.15% is not where we would normally like to operate. However, to be honest with you, it really doesn't change our thinking around how we manage capital or the priorities around how we go about that. So with something like the buybacks, given the opportunistic way we've been looking at that the last couple of quarters, I think in our minds TCE at 7.15% really doesn't change that. You can continue to expect us to remain opportunistic. If you look back over what we've done for the last couple of quarters, that's a good guide to use of what we mean by being opportunistic in terms of how many shares we might look to buy back. Of course, a lot of that depends on the disruption that occurs during the quarter. The last two quarters certainly had more than their fair share of disruption, leading to the number of shares that we bought back.

Very helpful. Thank you so much.

Thank you.

Thank you, Ms. Mealor. The next question is from Michael Rose with Raymond James; your line is open.

Hey, good afternoon, everyone. Just wanted to go to Slide 6. Hi, how are you? So it's been good to see the line utilization creeping up; looks like we're back to third quarter '20 levels. If you can just give some color on what's driving that? And then just as a separate question, you did mention the central region in the press release was virtually unchanged from the quarter. But, John, if I hear your comments, it sounds like everything is open for business. Was it just an issue of pay downs? Because the production levels on Slide 7 still look pretty strong and healthy? Thanks.

Thanks. And I'll start with the line utilization. If you look at the trends on Page 6, you will see that utilization continued to climb throughout '20, all about the pandemic and the cash inflow from stimulus and the lack of spending. As we got to the bottom around the early part of '21, it began to expand. That pace of utilization, the slope has been pretty consistent throughout the last several quarters. We expect that to continue as different clients burn through some of their excess liquidity to leverage rather than use cash. If there's concern about an economic downturn occurring more quickly, then utilization may bump up or down a little bit less steadily than it has in the past. But thanks to the economic activity we're seeing in the southeastern part of the country, which is our footprint, we would anticipate that curve to remain relatively steady in terms of slope upward.

And then in the central region, just any comment there, I guess?

Specifically, in New Orleans — as I said in the prepared comments, New Orleans had a little bit more of its fair share of the downturn in the pandemic due to the impact on larger events and tourism. The restrictions there by the local government were a little more arduous in New Orleans than in the rest of our footprint. That all really reversed itself as we got to the latter parts of '21. For the first time last quarter, we got a push in New Orleans and this quarter enjoyed some good expansion. I really think when I say New Orleans has joined the economic recovery in the last quarter, it's quite literal in terms of that activity. We feel that now it's going to expand. Our market presence there is significant. It's not like the growth opportunity on a percentage basis would be observed in Dallas or Houston or Tampa or in any of the markets we've entered more recently that are high growth. Just the magnitude of the book there and the disruption around it lead us to expect that it will be more of a growth story this year than we've seen in some time.

Okay. Helpful. And then maybe just one follow-up question for me on Slide 20. You talked about moving to that mid-50s efficiency target by the end of the year. Can you remind us of the puts and takes to that? Because I assume higher rates would obviously get you there faster, but outside of maybe mortgage, what are some of the potential headwinds that you see that could prevent you from getting there? Thanks.

Probably the biggest headwind I can think of to our guidance would be if performance in terms of fees for the next couple of quarters ends up being a lot worse than the guidance that we've given. We're not expecting that to happen, but that's certainly an area that could be impacted. Another item would be that the assumptions we have around inflation and wage costs could be higher than what we were expecting on a go-forward basis. We're not expecting those things to really hinder us but you asked about the headwinds, and those are the two that come to mind.

Thanks for taking my questions.

Thank you.

Thank you, Mr. Rose. The next question is from Casey Haire with Jefferies; your line is open.

Thanks. Good afternoon, everyone. I have a question on the fee guidance. So down 1% to 3%, that would imply from this run rate, $83.4 million, by my math, that looks like you would need to get that fee run rate back to at least $86 million plus in the remaining three quarters. I'm just curious, what are the drivers to get you there?

I think the biggest thing that can get us from where we are now to that level is this notion of specialty income. That includes a whole bunch of fee income categories, things like BOLI, derivative fees, unused line fees, etc. That particular fee income category can be pretty volatile quarter to quarter. The first quarter, I think, was a bit low compared to our normal run rate for what we consider specialty fees. So in my mind, that's probably the way we get there.

Casey, this is John. Just to add to Mike's comment, our treasury area and merchant area have seen some pretty robust new sales activity over the past several quarters that looks as if it'll continue to trend upward. That business card and merchant income growth is typically a little different in Q1 than the rest of the year, and we expect to finish the year at a pretty good high mark compared to the past. Another area worth mentioning is within the wealth management area. I remember Q1, the market didn't perform well for a good part of the quarter; that has a profound impact on AUM fees and then rebounded in March. For the second quarter, unless the market falters, we would expect a better performance out of wealth, given the performance of the market has improved since the start of the year.

Okay. Very good. And on the cash position, you guys pulled forward; I mean, you targeted $1 billion to $2 billion of deployment in the securities book this year. You pulled forward nicely in the first quarter here. Is there an opportunity or an appetite rather to accelerate the deployment like you did in the first quarter?

Casey, I would tell you the answer to that is no. But that's a decision that we monitor closely, and we could decide in coming quarters to accelerate that a little bit, especially if the yields on new bonds remain at the levels they are now. So that's certainly a possibility, although right now, as of today, we have no plans to accelerate. Loan growth, obviously, is a material part of that quarter-end quarter-out decision. Q1 typically and seasonally is a very low growth quarter for us in loans, but Q1 outperformed pretty well. That's on top of the pay downs that linked from fourth quarter to first quarter that are mentioned on this call three months ago. So we were quite pleased with the growth level in Q1, and that supports the high end of the guidance we've given for loan growth. The higher that number is through the year, the less pressure we will have to deploy liquidity for the securities. But as Mike said, we really make that decision quarter-by-quarter. I don't think we would object to either outcome, just depending on the circumstances.

Got it. Thank you.

Thank you.

Thank you, Mr. Haire. The next question is from Jennifer Demba with Truist; your line is open.

Thanks. Good afternoon. The asset quality improvement has been impressive over the last several quarters. As rates rise, what areas of the loan portfolio do you think would be the most vulnerable, and what do you think are normalized levels of net charge-offs for this company?

This is Chris Ziluca. I guess any of our loans that are not fixed rate but are floating rate probably are a little bit more at risk, as many of our customers use swaps to protect themselves on the upside. In general, I would say that commercial real estate could be impacted depending on whether it translates into cap rate compression or the like. However, we don't currently anticipate that. We stress that in our underwriting quite substantially, and we feel our portfolio can withstand a reasonable amount of rate increase in that regard. As for normalized charge-offs, we're currently at essentially zero, and we don't see anything suggesting a substantial increase or return to historic levels in the immediate future. I wouldn't want to speculate where that might end up, but it's likely to be on a run rate basis probably less than we've experienced in the past if we exclude some of the lumpy situations that have led to higher charge-offs.

Thanks so much.

You're welcome.

Thank you, Jennifer.

Thank you, Ms. Demba. The next question is from the line of Kevin Fitzsimmons with D.A. Davidson; your line is open.

Good evening. Thanks for fitting me in here at the end. Just one quick question on the guidance on provisioning. The language now indicates tapering off over the next few quarters. Previously, it was modest reserve releases expected over the next several quarters. Mike, I think you characterized modest as being kind of similar to what you guys had done. Is that a reasonable interpretation given the uncertainty out there in that we want to step down what we were going to do in terms of reserve releases? I just want to make sure I was interpreting that correctly.

Yeah, Kevin, I think you articulated that exactly the way we meant it. The process of tapering down our reserve releases really began in the first quarter. We went down to $23 million in reserve release from about $28 million last quarter. We've already begun that process. In our guidance, we kind of talked about this tapering to continue for a quarter or two. Without providing hard guidance, we envision that we could have another quarter where we have reserve levels or reserve release levels that step down, and eventually in a couple of quarters be close to zero in terms of any reserve releases. That's how we think about it and envision what will happen. Obviously, that's very dependent on a lot of factors that Chris just mentioned, such as levels of charge-offs and the levels of commercial criticized loans and non-performing loans. While we are at great levels now, if that continues, then the reserve levels will follow. The biggest wild card is geopolitical events and implications along with the macroeconomy and forecasts on a go-forward basis, which we can't really control. What we can control is our own asset quality, and that's our focus.

In the face of loan growth, that could also affect that. A more familiar scenario could be turning a little darker this quarter versus others. The tapering that occurred this quarter was really a math exercise, and the key levels were stellar. It had nothing to do with scenarios but thankfully due to the second quarter of net loan growth above the PPP forgiveness. If you look at the deck page around PPP forgiveness impact on page 8, you can see the trend where the amount of headwind we were experiencing from the PPP program declined significantly from Q4 to Q1 and it will probably be immaterial next quarter. The indirect amortization runs off, which leads to a net loan growth boost from Q4 and Q1 forward. That guidance includes the expectation that we're reserving for a larger loan book. If the economy interrupts that forecast, guidance may change.

Sure, you got it.

Thank you.

Thank you, Mr. Fitzsimmons. The next question is from Brad Milsaps with Piper Sandler; your line is open.

Hey. Good afternoon.

Hey, there.

John, in your prepared remarks, you talked about products that the bank may be developing to offset some of the lost NSF and overdraft revenue in 2023. Do you think that you'll have enough in place by the end of this year to fully offset that lost revenue, or do you think it's going to be something that we see gradually replaced over time?

It's a great question. It's fair to ask. I hate to say it's too early to tell, but it really is a little early. The account acquisition activity I mentioned in prepared remarks comes from a couple of sources. One is new products; another is the growth of our digital channel. We really have underperformed in terms of digital sales. It's a lower percentage of our total new accounts compared to many of our peers. The reason for that is we spent time and money for a couple of years getting all the infrastructure of the company, whether it was in financial systems, people systems, core technology, sales technology, etc., built out. We intended to have the digital channels run on the same infrastructure for improved efficiency. Once we scale the new technology, we could do it at a lower cost for change than we would have had to do if supporting legacy systems and new ones. I think we made the right call, but it meant rolling out fewer activities on the digital side for sales. As we approach the end of the year, with digital tech for sales rolling out such as automatic underwriting and screenings, we'll see a natural uplift as our growth in digital sales has room for improvement from where we're starting. Part of that basis includes new products, expected growth in the digital channel, and I am mostly ignoring potential growth in new markets because our strategy in those high-growth areas has been predominantly business-purpose clients, which will change as those investments become profitable and begin to scale up. We may add financial centers to improve retail penetration in some of those growth markets in '23 and '24. Does that help?

Yes, thanks, John. Maybe just two follow-ups for Mike on the funding side of the balance sheet. I noticed that the cost of public funds was down about 10 basis points in the quarter. Can you talk about maybe the driver there? Historically, those deposits have been fairly rate-sensitive, but also I know are subject to longer-term contracts? Can you talk about how those might react as rates rise? Second question is, I think you guys have about $1 billion in borrowings that are puttable back to you by the FHLB at their option. Do you need to think about marketing some of the cash that you have on the balance sheet that absorb those if in fact they do put those back to you?

Sure. I'll be glad to, Brad. So first question about public funds, it's a great question. We've been able to reduce the total cost of that line of business around funding costs through the expiration of contracts and implementing new pricing based on the current rate environment. For deposits that are variable, they will float up accordingly; for fixed rates, costs have been locked in. That depends on the individual depositor and the contract in place. Regarding our home loan borrowing, that's another good question. We have $1.1 billion in borrowings, paying around 50 basis points. That could be called as soon as the current quarter; we'll see. It depends on whether the home loan bank has that hedge and how they have that hedged. If they do, it will certainly benefit us if those funds are called back and we can remove those costs from our balance sheet. We have earmarked that $1 billion as part of the potential use of excess liquidity on the balance sheet, so if it happens, we have liquidity to fund that outlook.

Absolutely. Thanks, Michael. Really appreciate it.

You bet.

Thank you, Mr. Milsaps. The next question is from Matt Olney with Stephens; your line is open.

Yeah. Thanks for taking the question. Just remind me of the timing of when you expect the changes on the NSF Audi products, and when should we expect to see the impact of that?

Thanks for the question. In the guidance we communicated, we said before the end of the year. There's an operational exercise we have to go through with building, testing, due disclosures, and so forth. So there's a little bit of work in Q4 with the assumption that will begin in that quarter. That’s included in the fee guidance Mike gave earlier. If we finalize ahead of December, it could play in, but if it drags, we wouldn’t make any significant co-changes towards the end of the holiday season. If we don't get it done before December, it'll likely be effective January 1 or 12.

Okay. That's helpful. And then on Slide 20, several of the new hires that you've disclosed more recently, I think last year and then this year, have been throughout the markets in Texas. Just remind us what is the strategy of the bank in the Texas market? I assume it's a branch light commercial lending focus, but I haven't heard much discussion recently. Thanks.

Glad to share that. I'll be brief on some background: a few years ago, we noted that through good transactions, acquisitions, and organic growth, we developed quite a high concentration along the Gulf of Mexico. From an investor standpoint, some people were concerned about the resiliency of the marketplace during stormy hurricane seasons. We generally see positive impacts from storms, but they can be quite disruptive during bad storms. To decrease our risk footprint and stabilize created value for investors, we opted to expand into Texas for two reasons. One, to spread our risks and, secondly, because the growth rates in several Texas markets we are focusing on are significantly higher than the GDP growth for our existing markets. That was all planned before the pandemic and became accelerated due to the excess liquidity built up during that time. Our entry into Texas and our increasing number of bankers is due to liquidity deployment and reducing risk. You're correct that it's initially branch light with a focus on commercial lending, and we quickly follow that with treasury offerings because we excel in treasury. We provide extensive treasury services sales and card deployments for business purposes. After that, we plan to tackle wealth management while ensuring we comply with CRA and serve underserved communities. We won't rush branching until we're more established in those areas, so you won't see significant expense increases beyond personnel in Texas in the coming two or three years unless we're more successful at building the book than anticipated. So far, that plan has been working beautifully and is contributing positively to our efficiency ratio targets compared to our expected timelines.

Okay. That's all. Great color. I appreciate that. Thanks again and nice quarter.

Thank you very much. I appreciate the question.

Thank you, Mr. Olney. The next question is from Christopher Marinac with JMS; your line is open.

Hey, good afternoon, Mike and John. Just a quick one for you back on this AOCI issue; can you pinpoint securities that are likely to get called in future quarters or that you just expect would get paid off and therefore have that recognition back of the unrealized loss?

Yes, Chris. Good question. I don't have a specific number for you, but I can tell you that we aren't expecting a lot of bonds being called. We will continue to have pay downs and maturities, with rates higher now, and we expect the pay downs to slow relative to prior quarters.

But there's a natural shift back in your favor because I don't think any of us have credit concerns on these losses. It's more just about when you get that back in value.

Absolutely. The structure of our bond portfolio is almost all mortgage-backed securities, residential, and commercial. So we really take negligible credit risks in the bond portfolio in that regard.

Great. One more quick one back on Slide 7. I know you talked earlier in the call about the modest improvement in the new loan yield. Should that change significantly if the Fed funds rate is materially higher one or two quarters ahead?

Well, if you look back at the nature of our production, we have a little bit more than half, about 56%, of that production at adjustable rates. So as rates increase in a higher rate environment, we expect the yield on new loans to rise accordingly.

Sounds great. Just wanted to confirm that. Thank you very much for all the time and disclosure today.

You bet.

Thank you, Mr. Marinac. There are no additional questions waiting at this time. I will now turn the conference over to John Hairston for any closing remarks.

Thanks, Taunia, for running the call, and thanks to everyone for your interest. We certainly wish you a safe and happy quarter, and we look forward to seeing many of you next time we're together.

Thank you to everyone for your interest in Hancock Whitney. Have a terrific evening.