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.

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.

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, some improvement in NIM compression, and improvement in PPNR, 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 selective 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 remnants 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 deleverage these higher-cost deposits. Aside from that, client deposits were roughly flat with the 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.

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 guidance 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 continue to reinvest back into the company, but at a bit slower pace as we allow technology and other investments to mature. 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.

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

Your first question comes from the line of Michael Rose from Raymond James. Please go ahead. Your line is open.

Good afternoon. Thank you for taking my questions. Mike, I think you might have just answered this, but it seems that if I calculate using the midpoints of the ranges, the NII is about 0.5% higher year-on-year, if I'm calculating correctly. I'm looking to understand the sensitivity for each rate hike since the forward curve seems to be factoring in a bit more. I appreciate the sensitivity information you provided, but I wanted to get a clearer picture of the factors affecting the NIM and NII outlook. Thank you.

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.

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

Yes. We're so used to rate hikes. I apologize.

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.

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.

Mike, this is John. Thank you for your question. I'll begin and if Chris and Mike have anything to add, they can do so. If we examine the fourth quarter, the reported end-of-period figures appear relatively flat, but they don't reflect the significant activities happening underneath. As we've discussed in previous calls over the last year, we have been concentrated on transitioning away from credit-only relationships, especially the larger ones, towards more granular relationships that provide liquidity and fee opportunities since liquidity is currently crucial. This shift took place in Q4, where we had close to $200 million, specifically about $196 million, in SNC balances that exited in Q4, which were largely replaced by core relationships. There's a lot of productive activity happening; it just may not be in the large amounts seen in previous outbound activities. I anticipate this trend will persist, although I don't expect the same level of SNC production as earlier. If we consider the adjustments, we might see an additional $300 million to $400 million in SNC balances reduced, distributed fairly evenly over the first half of the year. Moreover, the amount coming in from granular relationships will exceed what is going out in the latter half, driven by rate increases. This is how we arrive at low-single-digit balance sheet growth for the overall year. While the activity is skewed toward the latter part of the year, there is already plenty of successful activity that will continue into the first half. Was that the type of insight you were seeking, or would you like to ask another question?

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.

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.

Great. I appreciate you taking my questions. I'll step back.

You bet, Michael. Thank you for asking.

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

Thanks, good afternoon.

Hi, Catherine.

One follow-up on just the margin outlook. And thinking about how your margin will react in a scenario where we see rate cuts, can you talk to us a little bit about the puts and takes in just loan yields? I would have thought with 60% of your loan book variable, we may see a period of time where your margin actually comes down first? And then maybe as you kind of see growth improve or the back book starting to reprice at a faster pace, then you may see the NIM expansion? But that size of the variable rate loan book could have a near-term kind of negative impact on the margin. Is it just that the CD repricing is enough to offset that? Just kind of talk us through why that's not a bigger negative impact than we may think?

Yes, Catherine, this is Mike. I'll start with that. It's a great question and I think as much as anything else, it really is all about time. So again, if you think about the way we have the rate cuts, you know, kind of choreographed out, the first in June and then a couple of months later, September, and then finally in December. So, as you think about ‘24, the rate drop in December really won't have much of an impact, obviously a bit of an impact in the fourth quarter. But again, the way we're kind of thinking about the second half of the year and the way we're trying to choreograph, again, our CD maturities, we'd like to be in a position where certainly a rate cut of 25 basis points is impactful in terms of our variable loan rate. But again, our fixed rate loans continue to reprice higher, a solid 12 basis points per quarter for the past five or six quarters. And we see that continuing at least through the balance of ‘24, so that is a little bit of an offset to the impact of the variable rate impact from a lower rate environment. But again, the CD maturities we think will also be very helpful. So I think net-net, if the rate drops are spaced out the way we think they could be spaced out, that certainly I think will be helpful to avoid any kind of potential NIM compression in the second half of the year.

That makes a lot of sense. And so then in a scenario where the forward curve is right, and I'm not saying it is, I don't think it is, but if we say that's the way it plays out, so there could be more NIM compression if we do get fixed rate cuts this year that are coming at a faster pace?

Yes, especially if they are bunched up together or in an environment where the rate cuts are maybe more than 25 basis points. You know, so we'll see. But again, the way we're thinking about it is kind of the way I described. So that's the way we have it kind of planned out.

Yes, that makes perfect sense. And then my other question is just in the NII guide, any change to kind of the size of the bond book outside of the ministry's restructure and how you're thinking about liquidity size, just kind of trying to think about how you're thinking about size of average earning assets as we look to that NII growth.

Yes, in terms of managing the balance sheet next year related to the bond portfolio, it's down significantly due to the restructuring transaction we implemented in the fourth quarter. Looking ahead to next year, we plan to resume reinvesting paydowns and maturities back into the bond book. Unless there are other activities in the bond portfolio, we expect it to remain relatively stable from where it ends this year. Regarding average earning assets, based on the loan growth we anticipate next year and the level of deposit growth, we aim for loan growth to be funded as closely as possible by deposit growth. Taking all these factors into account, including the bond portfolio being down compared to last year, we foresee average earning assets being mostly flat year-over-year.

Great. That makes sense. All right. Thank you for the clarification.

Thanks, Catherine.

Your next question comes from the line of Casey Haire from Jefferies. Please go ahead. Your line is open.

Thank you. Good afternoon, everyone. I wanted to follow up on net interest margin. If I understand correctly, the slight increase in net interest margin you expect this year is based on some initial deposit beta pressure, followed by active management of funding costs once the Federal Reserve begins cutting rates. Can you provide some clarity on whether the speed of deposit beta in the first half is modest, and will the pace increase as you manage it after the Fed cuts?

Yes, I agree with you, Casey. We anticipate that the impact of deposit beta will be quite modest and likely flat compared to where it finished last year. Therefore, we don't expect significant changes in our cost of deposits in the first quarter. The year ended with a rate of 1.99 in December and 1.93 for the quarter. Looking into the first quarter, it could increase slightly, perhaps even a bit less than that. Much of this will depend on our CD maturities throughout the year, both in the first half and the second half, as well as how they align with any potential rate cuts later in the year. Overall, I think your assessment is accurate.

Okay great and on the CD maturities which is there any color you can provide on this on the maturity schedule in terms of balances and, you know, what the rate they're running off at is?

Yes, so in the first quarter we have about $1.8 billion of maturities and they'll be running off at about $4.77 billion. That goes down by about half in the second quarter. The runoff rate is about the same. And then the second half of the year, we have about a $1.5 billion coming off. And the other runoff rate is just a bit higher right now. And again, the way we're thinking about those maturities lined up with the promotional rates that we have in place is that the plan really is to have a lot of the CD maturities that happen in the first quarter come back on or renew in relatively short maturities such that when those mature we're in the second half of the year in potentially a lower rate environment. So that, that's a little bit of color around how that's kind of choreographed.

Okay, yes, that's helpful. Apologies if I missed this. What is the promotional rate versus that $4.70?

We're at about $5.25, you know, and that will be a relatively short maturity. Now, we also have promo rates, in the $4.75, $4.25 range that stretch out those maturities just a little bit.

Okay, so the CD maturities basically don't start to benefit the NIM until the back half when we get…

That's right. That's correct. Okay. Casey, presume in a June initiation of rights going down. If that happened earlier, obviously the benefits would be quite different.

Can you provide the spot yield on the bond book as of December 31? I know the figure was 2.57%, but I would like to know the exit rate for a more accurate understanding.

Well, it was 2.57% for the month of December. Is that what you're asking?

Yes, I know it’s 2.57%. I saw that in the deck. I was wondering what it was at 12/31?

Well, we were at 2.47% for the quarter, 2.57% for the month of December. And the way I'll share that information is for the first quarter, we're looking at that yield to be just a couple of basis points lower than when it ended the month of December. So call it 2.55% or so.

Okay, gotcha. Thank you.

Your next question comes from the line of Brett Rabatin from Hovde Group. Please go ahead. Your line is open.

Hey, good afternoon, everyone. Thanks for the questions. I wanted to ask first on slide 28, you have the deposit account size, and one of the variables I'm not sure if I'm clear on is the expectation for continued atrophy maybe in DDA from here? Are you guys thinking that DDA levels have almost troughed or maybe give us some color given that the size relative to 1Q or I guess the 4Q ‘19 is still about 23% higher today?

Yes, so obviously one of the positives for the fourth quarter was the notion of our NIB remix kind of leveling off. So in the prior quarter, we were at 38%. We finished the fourth quarter at 37%. And as we think about next year, Brett, we expect there to be continued remixing, but at a much, much slower pace. So potentially we could see ourselves at around 33%, 34% or so by the fourth quarter of next year. So that's obviously a big help and has been a big help and I think will continue to be helpful to this notion of potential NIM expansion next year.

But Mike, to be clear it sounds like you're not expecting the average balances to maybe go back to prior levels completely? Is that fair in your assessment?

Yes, I think so.

Yes, I think I'll jump in and help. This is John, the consumer balances are a lot closer now to where they were pre-pandemic, Brett. The wholesale balances, because of the volume of operating accounts we are adding and hoping to add on a faster clip this year have higher balances and that skews the total if you would on an average a little bit higher. So there's more than just the same volume of accounts from 2019, compared to now because the mix has changed some. The business deposit accounts on the smaller end, we expect to hit pre-pandemic in around June or so. That's the run rate extrapolating. So we'll see if the expectations around the rate environment change that any. And then on the larger side, you're right, those average balances seem to have held. And it's somewhat curious, because the balance sheet, the balance sheets more than cover the earnings analysis fees that we have on the treasury side. And you would think that they would have flown back out to cover that, but I think just the absence of investment on the wholesale side the last six months or so has tempered that outflow. If rates begin to go down and the environment gets a little bit more optimistic, then I think we may turn more to those 2019 balances simply, because people are spending the money and investing into things and want to use their money versus ours for the time being. Does that all make sense?

Yes, that's really helpful. The other question I wanted to ask was just around the expense guidance 3% or 4%. And you've obviously made a lot of effort and results in getting more efficient in the past couple of years, but you've also talked about maybe some technology spending upcoming. Can you talk about you know what you're looking at in terms of spending with technology relative to that guidance and then does that 3% to 4%, does that kind of exclude any potential pickups of talent of lenders in any markets? Maybe a little more color around that guidance?

Okay, thanks for the question. This is John. I'll start it and Mike can color if he likes. I wouldn't want to break the 3% to 4% down between different sectors, because it gets a little complex. But what I'll share is that on the technology side, the bulk of the increase in technology expenses ‘24 over ‘23 is the carry cost to a large extent of all the technology we already completed and put into service in the early part of the year. So when you get a full year of the amortization of the capital and the contracts, that impact on ‘24 carries over to the year-over-year comparisons. So there's a good bit of tech expense that isn't really new. It's simply the full 12-month impact of all of that. As Mike said in his earlier comments, our expectation is that as that technology, as the company really matures in using that tech, then we get more efficient, more effective, and to the degree more effective on the revenue-generating side, then we see a bit of a tailwind, top line revenue as the environment improves. So that's the tech part. In terms of additional spending, we really have done all the heavy lifting. I mean, what I call the big systems are all done. They're current. It's running well. We're very happy with the investments that we made. And in terms of just new stuff, we're really down to, I guess I'll call them dogs and cats. So, you know, our ability to compete with a fewer number of larger banks, we believe is helpful to, we believe it is helpful to continue spending more in our digital front office, to continue to invest in fraud detection early to manage any charges that we could have avoided by having good tools to help both our clients and our bankers and our risk professionals identify problems before it's too late to get the money back. And so I think a lot of that type of work is what's left. So the preponderance of the big stuff is actually all the big stuff is done and we're now I think we're adding things that just enhance value for our clients in the future. In terms of people, the average time it takes in terms of months for a banker to cover themselves got extended a bit during the degradation and spreads as rates began to go back up. But the investments that we made in SBA and in business banking continue to bear fruit. And in fact, because of the liquidity coming in with those relationships, the time it takes to cover the cost of a new banker has held on its own and maybe even got a little shorter, shorter being more attractive on the business banking side. So we haven't set a number that we're ready to talk about in terms of adding those folks, but I can tell you that if there were an area, if I could create a little bit more room and expenses to add people, it would probably be in those areas, because frankly the returns have been so good. The fourth quarter was the best quarter in our history in SBA income. It was also the best quarter in our history for annuities income from the Cetera investment we made back in 2022. So overall, I think we would continue investing in those things that are working.

Brett.

Yes, I think that’s really helpful. Thanks.

The only other thing I would add to that is we're not seeing a repeat, we're certainly not expecting a repeat of some of the things that drove our expense levels last year to the uncomfortable levels of around 8%. So it's things like, you know, kind of other regulatory costs and some of the FDIC increases outside of the special assessment. We don't see that repeating. We also had some increases related to our pension and other retirement plans that we don't see a repeat. And finally, we did have a pretty big increase in our insurance costs related to our own properties last year that we don't see at least right now repeated. And some of those increases were related to some of the storms that we had in the prior couple of years. So that's also very helpful to have those things not repeat this year. And puts us in a place where we feel comfortable about the guidance of between 3% and 4% for the year.

Okay. That's really helpful. Thanks for all the guidance.

You bet. Thank you.

Your next question comes from the line of Brandon King from Truist Securities. Please go ahead. Your line is open.

Hey, good evening. Thanks for taking my questions.

Hi, Brandon.

So following up on deposits, are there any deposit categories besides CD that is a part of your strategy as far as managing costs lower? Just how are you thinking about the deposit beta lag on the downside, excluding what you expect on the CD front?

Yes, so as we said before, Brandon, when rates start to come down, you know, our posture and plan and this is the way we've kind of approached it in prior environments where rates were down, is to be fairly proactive in reducing our deposit costs and that the lead there would be on the CD side especially as we try to, you know, aggregate the CD maturities in an environment where rates are potentially lower than they are now. So that's probably the biggest driver of what we're trying to do. We're also very, very mindful of the rates on our money market accounts. And we'll start to come off of some of our promotional rates related to that category of deposits at the appropriate time. So that's kind of how we think about that.

Okay. And are there any sort of customer segments that you envision you could be more proactive in, regarding consumer versus commercial?

Right, and this is John. In terms of rate or just focus?

Rate.

On rate, I mean, the segment that's enjoyed the best spread over year-over-year was in the segment we call business banking. So really it's the lower end of a commercial. And the reason we feel pretty good about is because even though they've enjoyed the highest growth in lending, because we've added resources in some of our growth markets for that purpose is they've been very successful at covering on literally a par basis with incoming deposits that are carrying a cost well below our total cost of funds. So it's really been on both sides of the balance sheet that the small business sector has been performing. In terms of retail, and we define retail as consumer and micro businesses, all of which are handled inside our financial centers, our branches. Those segments were really under siege from a pay down perspective through the excess liquidity portions of the pandemic recovery. And in Q3, they began to get better. And in Q4, particularly on the very small business side, that began to also dampen to the degree that we're actually expecting retail growth in 2024. It's modest, but it's growth. And it's really been in pay down or in reduction, really for the past three years or so during the pandemic. So on a year-to-year comparison, the absence of that vacuum is very helpful. And just as a reminder, the indirect portfolio, which had been amortizing as we shut that business down, that impact in 2024 is relatively immaterial, really for the first time on a year-to-year basis.

Okay, and just lastly on the CD strategy, how much flexibility do you have in adjusting that strategy depending on the timing and potential magnitude of rate cuts as we look for this year?

Yes, I think it's a pretty nimble strategy, Brandon, and I think we have lots of flexibility in how we think about adjusting our promotional rates to kind of deal with, you know, any differences that the rate environment may present us with versus what we're kind of assuming. So obviously the CD maturities are in place and there's no flexibility related to those. But certainly, our, you know, our main way of dealing with that is going to be our promotional rates. Not only the rate, but the maturity that we attach to a specific rate. So I think we have good flexibility to deal with whatever is kind of thrown at us.

Brandon, this is John. Will that add too much on CDs? A little earlier, one of Mike's answers to the question about the timing of CDs alluded to how high a concentration of those renewals are in the first half of the year and the expectation that we are offering a pretty good promotional rate to keep all that money and perhaps gather more, but it's got a very short duration to the point that we would be repricing a lot more of that money in the second half of the year in a better rate environment. So whether you use flexible or nimble, as Mike said, whichever word you prefer, one of those items of flexibility is how much we're prepared to pay for how short a duration to allow us to benefit from the repricing opportunity in the second half of the year. So that's why we feel pretty good about it is because the book's already short and it has a pretty good likelihood that it's going to get shorter in the first half of the year as we reset.

That's very helpful. Thanks for taking my questions.

You bet. Thank you, Brandon.

Your next question comes from the line of Matt Olney from Stephens. Please go ahead. Your line is open.

Yes. Thanks, guys. Just a quick follow-up on the credit front. The charge-offs, I think there were $16 million of charge-offs, of which around $13 million was commercial. Any more color on kind of what those commercial charge-offs were in the fourth quarter? Thanks.

Yes, Matt, Matt is Chris Ziluca. Really it was kind of a handful of accounts that we've been tracking for a while, so they weren't really kind of any sort of surprise for us. And many of them were really post-pandemic impacted and kind of had to get resolved as we kind of move forward in time. And it was compounded by the fact, and I think I've mentioned this previously, that we are experiencing lower recoveries during earlier periods. We had a higher rate of charge-offs that allowed us an opportunity to generate greater recoveries. But at this point in time, we're down pretty substantially on the recovery front, which is a good news, bad news thing. More bad news than good news on the NCO side, but certainly kind of supports the good performance that we had in that regard during the past couple of years.

Okay thanks for that Chris and I guess the second part of that would be those charge-offs higher in the fourth quarter. How much of that is just kind of an interviewer cleanup? Or is this more the normalization of the charge-offs that you've been talking about for a while? Is that what we saw in the fourth quarter? And is this kind of 27 bps of charge-offs for the quarter? Is that something that's a reasonable assumption moving forward from here?

Yes, I mean, there's, again, it's Chris. We don't really kind of handle clean up in some respects. Obviously, we take charges when it's appropriate and necessary. You know, we did have probably more as a result of kind of end of the year activity that occurs as people make decisions. Mostly our customers make decisions around what they're going to do in the way of selling parts of their business or selling themselves, that sort of thing. And a lot of that stuff does kind of bunch up towards the end of the year. So, you know, it's hopeful. I mean, we're never happy with any sort of significant level of charge off. So, we're hopeful that we can get below that number. But there is a normalization going on for sure.

Matt, this is John. The only thing I'd add to it, I think Chris said was accurate, what I would add to it is when we describe something as normalization, there is a certain chunk of NCO level we're concluding as part of normal of things that we just don't know about yet. And so we're trying to count in the guidance for the types of activity that occurs when the economy is performing the way it is right now where even though we may get a little rate relief in the back half of the year it's still somewhat higher for longer relative to the last decade or so of debt service requirements. So we're presuming that the number of unanticipated charge-offs that occur on a very short degree of notice are inclusive in the guidance that we gave. So that's another way of saying that we're trying to factor in what we don't know, but not just what we know about, because we would otherwise give you a number that may be a little optimistic in this type of an economy.

Sure, okay. Thanks, guys. Appreciate the commentary.

Of course, thank you. Thanks for the question.

Your next question comes from the line of Christopher Marinac from Janney Montgomery Scott. Please go ahead. Your line is open.

Hey, thanks. Good afternoon. Mike, I just wanted you to go back to the AOCI change this quarter. Is there any way to either predict further gains in the next quarter or two? Or just anything just to explain the mechanics on why that was maybe putative at 9/30 and quite a change this quarter?

The primary factor was clearly lower rates. The 10-year treasury decreased by about 70 basis points between September 30 and December 31. Additionally, the restructuring transaction significantly impacted our bond portfolio, contributing to our unrealized loss on available-for-sale securities. When combined with improvements on the HCM side, we saw a pretax effect of around $411 million, which translated to a 77 basis point impact on our tangible common equity from accumulated other comprehensive income and also greatly enhanced our tangible book value per share, showing an increase of approximately 11% to 12% quarter-over-quarter. Looking ahead, without considering any similar transactions to what we executed in the fourth quarter, any further improvement will largely rely on rates decreasing from their December 31 levels. Currently, the 10-year is slightly higher than it was at year-end, by about 8 or 9 basis points. The direction of rates in the first quarter will be crucial to our outlook.

Got it, perfect. And then I had a question for Chris on the credit side. What is the time frame and impact of sort of the annual review process of your accounts for both stress testing, commercial borrowers in addition to just new appraisals that come through on the CRE side?

Yes, that's a great question. We aim to distribute the annual review process throughout the year. The timing is influenced by when we receive financial statements from customers, particularly if they are audited or accountant-prepared, which usually arrive around the middle of the second quarter. Tax return-related statements often get delayed, as many people file extensions, resulting in them coming in later in the year. We also depend on business-prepared information regarding performance, especially for commercial real estate, which typically spreads across the first and second quarters. We routinely conduct stress tests on our portfolio, not just relying on the incoming financial data. Updated appraisals are primarily obtained when we face specific issues or renewals. We do not get appraisals for every loan in the commercial real estate segment unless we identify a problem and want to proactively manage it. In summary, we do update our stress testing, risk ratings, and assessments of individual credits consistently throughout the year, but this process generally peaks in the middle of the year unless an event triggers an earlier review.

Great. That's a helpful background. Thank you for sharing that. And that concludes my questions.

Thank you. Good questions.

Thank you.

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

Thanks. Good afternoon. Hey guys, I'm wondering what you're seeing in terms of kind of customer acceptance of higher loan rates. I mean, you guys laid it out nicely on slide 16 of what your new loan rates have been and kind of you can see how that's affecting production. But I'm curious what you're seeing, hearing from customers and if there's any sort of wait-and-see approach from many customers are saying, "hey, we think rates might be lower in the future so we might hold off for the time being? Just kind of how that affects overall demand?

Thanks for the question. Yes, that's definitely the situation. In terms of new real estate transactions, whether it's for consumers or investors, the demand is very weak. This is largely due to the high costs associated with construction and borrowing. There's a significant interest in housing, especially for multifamily and residential projects, but the current costs are discouraging activity. Investors seem to be waiting for a few months to see how the market plays out. There was some hope tied to anticipated rate decreases starting in March, which we were skeptical about, and it looks like we may be correct. Investors might move ahead in the second quarter, thinking they'll be able to renegotiate deals as rates drop. On the real estate and mortgage side, that's certainly true. When we look at revolving lines of credit, utilization is at an all-time low for both consumers and businesses. This reflects prudent money management, as clients are managing their revolvers carefully. We're expecting that as this mindset shifts, one factor that could boost net interest income will be an increase in line utilization. I'm surprised that hasn't happened yet, especially as average balances have decreased in deposits. Every quarter, we expect a slight increase, but it remains flat or declines, which was the case in the fourth quarter. Additionally, acquisition financing is minimal right now as companies navigate what the right valuations are for various businesses that may be up for sale. This trend is likely to persist until after the election, when people have more clarity on the potential tax implications for these types of transactions in 2025 and 2026.

Yes, that makes sense. That's a lot of good color. And then just one clarifying question for me. Mike, I think when you were answering Michael's question earlier, you were talking about the trajectory of NII should be fairly similar to what you expect the trajectory of the NIM to do. Would that imply that NII could be kind of flat to down on a year-over-year basis given the tough comp in the first part of the year? Or how would you kind of look at that from a year-over-year NII growth perspective?

Yes, great question. I think year-over-year, flat to slightly up would be the way to look at it. And I don't know that we'll have a core experience, kind of, a quarter-over-quarter decline. But certainly, in the first half of the year, I think more flat than not, if that makes sense.

It does very much. Thanks so much for clarifying. Appreciate the time.

You bet.

You bet. Thanks, Stephen.

Your next question comes from the line of Ben Gerlinger from Citi. Please go ahead. Your line is open.

Hey, guys. Good afternoon.

Hi Ben, and welcome to coverage. We appreciate you picking us up.

Yes, thanks. I was curious if you could just take a quick second here. I'm trying to square Circle to some extent because I know that you guys have 3 cuts in the forward curve is, let's call it, 6% at this point. So the 6% is correct. What I'm getting at or what I'm kind of coming up with the model is that you have a flat is margin for the full year and then your PPNR is probably a little bit more compression than the 1% to 2% you gave guidance. Obviously, your guidance is based off up of 3 kind of layered throughout the back half of the year or starting in the middle of the back half of the year. So, one, just kind of confirming that thought process, but two, is there anything from an expense perspective that you could kind of push out a little bit further. Potentially towards the year ended into '25, if that revenue is a little bit softer than expected?

Yes, Ben, this is Mike. And in short, I think what you're describing is more or less correct, that if we do have more rate drops and they're kind of bunched up the way the forward curve is that, that would be a bit more negative than the way we think it's actually going to be planned out. So I think that trajectory of what you described is, again, more or less correct. And certainly, if we have shortfalls and expectations around revenue, we're not here to say specifically what kind of actions, I think we would take on the expense side. But I do believe that we would obviously address that as those kind of conditions warrant, whatever action we might want to take in terms of further curtailing expense growth. So that's always something, I think, that we would consider in those kinds of circumstances. Anything you want to add to that, John.

No, I agree with what you said.

And then the follow-up I had was one along the line of just lending in general. I guess from the first half of this year, you have some headwinds from just balance sheet items in general. But when you think about growth in the back half of the year, are there areas where you're just kind of avoiding in general that because the risk-adjusted spreads are is not nearly as appealing in terms of a credit. And I get that looking six months down the road is probably pretty difficult at this point as the new starting point. But when you just think about lending today, are there areas where you're kind of tapping the brakes or just really not pressing the gas pedal? I guess that there are some stronger areas in general that have seen more appealing than you've already referenced, but just from a credit perspective that you're avoiding?

Yes, Ben, this is John. I'll start, and Chris can add if he likes. I think generally speaking, almost regardless of the rate environment, barring a really significant macroeconomic downside where the rates collapsed because of concern. Barring that, I think of using your analogy of what have we tapped the brakes on, what are we hitting the gas on, I think it's going to be the same all year almost regardless of whether we have six adjustments, three adjustments or no adjustments. The sectors that we're very interested in growing are rather granular. I think the only one that might change a bit would be investor CRE, but it wouldn't be because a fear of the rates would be because there just probably won't be that much demand if the environment was worse. But the things that we're focused on right now I think short of a really significant macro event will be the things that we're focused on, even as rates begin to get better, it will just be more of it. So that would probably stimulate more growth, given where our footprint is and given the investments we've made in growth markets. Did I answer your question or were you headed down a different road?

No, no, no, that is helpful. I was going to say if you could throw in geography, but you just did. So that's helpful.

Yes, we operate in markets where we have a strong presence. When conditions improve, we see a significant boost in those areas because our brand is well recognized and valued as a local bank. This means we tend to capture more of the business we desire when the environment is more favorable. In terms of growth markets, it has taken us some time to build the teams we need, and we are very pleased with the talented individuals who have joined us there. However, we currently have fewer locations than ideal. A better economic environment would expand the opportunities for our bankers, allowing them to compete more effectively against those with a stronger financial center presence. Therefore, a more positive macro environment is likely to benefit us more than in the past, especially since we have added promising new markets that offer considerable growth potential.

That's helpful color. I'll step back, thanks.

You bet. Thank you for the question, and welcome to coverage.

We have no further questions in our queue at this time. I will now turn the call back over to John Hairston for closing remarks.

Thanks, Christa. I appreciate you moderating the call. Thanks to everyone for your interest in Hancock Whitney. And we'll see you on the road soon.

And this concludes today's conference call. Thank you for your participation, and you may now disconnect.