Hancock Whitney Corp

NASDAQ:HWC

Earnings Call Transcript 2022-Q1

[Operator]

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.

[Trisha Carlson, Investor Relations Manager]

Thank you, and good afternoon. During today's call, we may make forward-looking statements. We would like to remind everyone to carefully review the safe harbor language that was published with the earnings release and presentation. And in the company's most recent 10-K and 10-Q, including the risks and uncertainties identified therein. You should keep in mind that any forward-looking statements made by Hancock Whitney speak only as of the date on which they were made. As everyone understands the current economic environment is rapidly evolving and changing.

Hancock Whitney's ability to accurately project results or predict the effects of future plans or strategies, or predict market or economic developments is inherently limited. We believe that the expectations reflected or implied by any forward-looking statements are based on reasonable assumptions, but are not guarantees of performance or results, and our actual results and performance could differ materially from those set forth in our forward-looking statements.

Hancock Whitney undertakes no obligation to update or revise any forward-looking statements, and you are cautioned not to place undue reliance on such forward-looking statements. Some of the remarks contain Non-GAAP financial measures. You can find reconciliations to the most comparable GAAP measures in our earnings release and financial tables. The presentation slides included in our 8-K are also posted with the conference call webcast link on the Investor Relations website. We will reference some of these slides in today's call. Participating in today's call are John Hairston, President and CEO, Mike Achary, CFO, and Chris Ziluca, Chief Credit Officer. I will now turn the call over to John Hairston.

[John Hairston, President and Chief Executive Officer]

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, makes improvement in a stable deposit base, initiation of a widening net interest margin, superior AQ metrics, continuing excellent expense management, improved operating PPNR and solid capital levels. Momentum from 2021 carried until 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 PPP forgiveness impact is a less significant headwind next quarter. Speaking of decreasing headwinds, I'd 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 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, a robust Mardi Gras season, hotels were booked, festival tourist return, and the city rebounded as a national and international destination. March brought relaxed pandemic restrictions and family tourism surge 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. [Indiscernible] 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 the ninth straight quarter of improvement and sit at 0.22% of total loans. And 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 very hard work and de -risking our balance sheet delivered AQ metrics among the best compared to peers. Our capital levels remained solid. I recognize the TCE of 7.15% as well off our internal target of 8%. However, the primary driver of the decline is related to 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. And a trend we expect to see repeated across the banking sector due to rapidly rising rates. Other capital metrics remains 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.

And 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 store front, with that, I will turn the call over to Mike for further comments.

[Michael Achary]

Thanks, John. First-quarter net income totaled $123.5 million. So down $14.3 million from last quarter, but up over 15% from the same quarter a year ago. EPS at a $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 tile asset quality, and stellar expense control. The quarter's $385 million core loan growth continues the momentum began several quarters ago around deploying excess liquidity into loans than bonds.

We also grew the bond portfolio of $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 and NPLs along with effectively 0 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 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, so 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. So now 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. As you can see on Slide 12 in our deck, at quarter-end we split nearly 50/50 between interest-bearing deposits and DDAs. Seasonal runoff in public fund deposits and maturities and 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 re-investments totaled $620 million at yields of 2.13%.

The revaluation of the AFS bond portfolio at March 31st 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 HTM and AFS 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 up AFS bonds. Details on our current hedge positions are noted on Slide 29. 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 cost added eight basis points to the NIM.

However, the impact of PPP runoff in other items offset that widening and compressed the margin 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 increased and we've added supplemental information in our deck on Slide 19. Please note this additionally, 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 downs 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 a solid first quarter and a good start to the year. With that, I'll turn the call back to John.

[John Hairston, President and Chief Executive Officer]

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

[Operator]

Thank you. [Operator Instructions]. We will pause briefly as questions are registered. Our first question is from the line of Brett Rabatin with Thompson Group, your line is open.

[Brett Rabatin, Hovde Group]

Hey, good afternoon everyone.

[John Hairston, President and Chief Executive Officer]

Hey Brett.

[Brett Rabatin, Hovde Group]

Wanted to first ask you if you've got the slide on the hires this quarter and you tweaked the expense guidance down a little bit. I was curious if you could give us an update on -- its nice to see the hires. And obviously that will help your year alone pipeline over time. I assume you have some other plans as indicated that you'll continue to grow that in '22. Have your expectations change for hires as -- has -- how has that affected your expense growth outlook? And then maybe just tell on what's your pipeline does look like from a higher perspective.

[John Hairston, President and Chief Executive Officer]

This is John. Thanks for the question and thanks for recognizing it. Now, 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 goodly number of time -- a good long time. I think some of the increase we've seen is coming from outside interest in us versus just recruiting efforts. And we would expect that to continue as we go through the rest of the year.

[Michael Achary]

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.

And then of course, in addition to that, you will have a full quarters 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. And certainly, the end result is the 55% efficiency ratio for the end of this year. And you'll note that the ER came in at 56% this quarter. So again, a pretty good start toward getting that goal accomplished.

[Brett Rabatin, Hovde Group]

Okay. I appreciate the color there. And then 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. And if you'd expect contain to have the trends you had in the first quarter in terms of reducing liquidity. And then, obviously, your DDA is 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.

[Michael Achary]

Yes, I'll be glad too. 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 to be flat to slightly down, you can certainly look for the size of the company to mirror that. So really 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. So 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 with this notion of increasing to size of the bond portfolio on a net basis by about $300 million or so per quarter through the end of this year.

So I think all of those dynamics kind of mixed together. The way we are thinking about managing the balance sheet on a go-forward basis. You also asked about Slide 19, it's the earnings deck. And we added that slide really just to give folks a little bit of guidance as to what we're expecting or how we're expecting our NIM to react really for every 25 basis points of a rate hikes on a go-forward basis. So your earlier assumption is correct, it really doesn't assume that there are any changes to the composition of the balance sheet on a go-forward basis. So there's certainly, I think an opportunity to outperform that should we continue to be effect in deploying excess liquidity.

[Brett Rabatin, Hovde Group]

Okay great appreciate all the color.

[Michael Achary]

Thank you.

[Operator]

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

[Catherine Mealor, Keefe, Bruyette and Woods]

Thanks. Good evening, everyone?

[John Hairston, President and Chief Executive Officer]

Hey Catherine.

[Catherine Mealor, Keefe, Bruyette and Woods]

One follow-up on the margin just described 19, any color you can give us on how you think about deposit dates. And what your assumptions are?

[Michael Achary]

Yes, Catherine. So the way we are thinking about our deposit date is if you go back to slide 14, we kind of talked about the historical both loan and deposit date as to the last time we were in an up rate environment. And you noticed deposit data were around 25% and that's on total deposits. So on a go-forward basis, the assumptions that are built into slide 19 around the positive date is or that we generally speaking would mirror that same deposit beta experience that we had the last time rates for us. So around 25% On a total deposit basis.

[Catherine Mealor, Keefe, Bruyette and Woods]

Great. Perfect. And so my way of thinking about Slide 19 is, if we think that there is 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 move, call it from 10% today, that maybe somewhere around 5%, 6% or something like that, then you could see additional expansion on top of that. Is that a fair summary of what this might encounter?

[Michael Achary]

I think so. I think that's fair. That's fair and correct. And the other thing I would point out on Slide 19 is, you'll note after we get to a Fed funds rate of about 125 basis points, you see that the expected NIM impact begins to narrow just a little bit. And 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 for the first 25 basis points or so.

[Catherine Mealor, Keefe, Bruyette and Woods]

Great. And then maybe one last question just on buybacks. How do you think about how the lower TCE just from the AOCI hit may -- maybe potentially limit share buybacks in the near-term however your valuation is or your truck is level to be buying back shares today? How are you guys thinking about that question pool?

[Michael Achary]

Yes. So certainly a fair point to make that 715 is not where we would normally like to operate. The company had from the TCE point-of-view. But to be honest with you, really doesn't change our thinking around how we manage capital or the priorities around how we go about that. So 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 715 really doesn't change that.

So I think you can continue to see us or expect to continue to see us to remain opportunistic. And I think if you look back over what we've actually 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 actually buy back. Of course, a lot of that depends on the disruption that happens during the quarter in the market. And the last two quarters certainly had I think more than its fair share of disruption. So you saw the number of shares that we bought back.

[Catherine Mealor, Keefe, Bruyette and Woods]

Very helpful. Thank you so much.

[John Hairston, President and Chief Executive Officer]

Thank you.

[Operator]

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

[Michael Rose, Raymond James]

Hey, good afternoon, everyone. Just wanted to go to -

[John Hairston, President and Chief Executive Officer]

[Indiscernible].

[Michael Rose, Raymond James]

-Slide 6. Hi, how are? 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. So was it just an issue of pay downs because the production levels on Slide 7 still look pretty strong and healthy? Thanks.

[John Hairston, President and Chief Executive Officer]

Thanks. And I'll start with the line utilization. If you look at the trends on Page 6, Michael, you will see that utilization continued to climb throughout '20, really all about the pandemic and the cash inflow from stimulus and the lack of spending. And then as we got to the bottom around the early part of '21, it began to expand. And generally speaking, that pace of utilization, the slope has been pretty consistent all through the last several quarters. And we expect that to continue as different clients burn through some of their excess liquidity themselves in order to lever as opposed to use cash. And so if concerned about any economic downturn were to occur more quickly than the utilization may bump up or down a little bit, unless steadily than it has the less several quarters.

But we really thanks to what we're seeing an economic activity in the southeastern part of the country, which is our footprint. We would anticipate seeing that curve relatively steady. Steady in terms of slope upward.

[Michael Rose, Raymond James]

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

[John Hairston, President and Chief Executive Officer]

Specifically, in New Orleans -- well, I mean, 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 the larger events and tourism. The restrictions there by the local government were a little bit more arduous in New Orleans than the rest of our footprint. And so that also expounding some of the economic growth occurring quickly. That all really reversed itself as we got to the latter areas of '21. And so for the first time last quarter we got pretty much a push in New Orleans and this quarter enjoyed some good expansion.

So I really think when I use the [Indiscernible], New Orleans has joined the economic recovery in the last quarter, has been enjoying that -- that's quite literal in terms of that activity. So we feel as if now it's going to expand now. Our market presence there is we have a very sizable market share. So it's not like the growth opportunity on a percentage basis we would see in Dallas or Houston or Tampa or any of the markets we've entered more recently that are high-growth. But just the magnitude of the book there and the disruption around it, we would expect now to be more of a growth story this year that we've had in some time.

[Michael Rose, Raymond James]

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? Well, because I assume rates, higher rates. We 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.

[Michael Achary]

Probably the -- hi Michael, this is Mike. So probably the biggest headwind I can think really to our guests and one would be the 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. The other item would be I think that maybe the assumptions that we're making around inflation and wage costs certainly could again be a little bit higher than what we were expecting on a go-forward basis. Now, granted, we're not expecting either those things to really get in a way or present any significant challenge. But you asked about the headwinds in those are the two that I can think of.

[Michael Rose, Raymond James]

Thanks for taking my questions.

[Michael Achary]

Thank you, Mike

[Operator]

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

[Casey Haire, Jefferies]

Thanks. Good afternoon, everyone. I have a question on the fee guide. So down 1% to 3%, that would imply from this run rate, 83.4, 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?

[Michael Achary]

I think the -- this is Mike. I think the biggest thing that can get us from where we are now to that level is this notion of specialty income. So that includes a whole bunch of fee income categories, things like BOLI, derivative fees, unused line fees, things of that feature. And 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 in what we consider specialty fees. So in my mind, that's probably the way we get there.

[John Hairston, President and Chief Executive Officer]

Casey, this is John just -- I'm sorry, I stepped on you. The only thing I would add to Mike's comment is our treasury area and merchant area has had some pretty robust new sales activity over the past several quarters that looks as if it'll continue to upwardly trend, and so that business card and merchant income growth is typically going to be a little different in Q1 of the year than the rest of the year and we would expect to finish the year at a pretty good high [Indiscernible] compared to the past.

The other area is inside the wealth management area. I remember Q1 the market really did perform terribly well for a goodly part of the quarter that has a pretty profound impact on AUM fees and then rebounded in March. And so for the second quarter throughout, unless the market falters pretty significantly, we would expect a little bit performance out of wealth, given the performance of the market has improved from the first of the year.

[Casey Haire, Jefferies]

Okay. Very good. And on the cash position, you guys pulled forward, I mean, you guys were targeting $1 billion, $2 billion of deployment in the securities book this year. You pulled forward a nice bit in the first quarter here. Is there -- I'm assuming that was because of the rate backdrop. Is there an opportunity or an appetite rather to accelerate the deployment like you did in the first quarter?

[John Hairston, President and Chief Executive Officer]

[Indiscernible], Casey, I would tell you the answer to that is no, but that's a decision that we monitor very closely and certainly we could decide in coming quarters to accelerate that a little bit, especially if the go-to yields for new but new bonds remain at the levels that it is now. So that's certainly a possibility, although right now, as of today, we have no plans to accelerate. And loan growth, obviously as 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 and that's on top of the pay downs that linked from fourth quarter to first quarter that are mentioned on this call three month ago. So we were quite pleased with the growth level in Q1, and it certainly supports the high end of the guidance that we've given for loan growth. So the higher that number ends up being through the year then the less pressure will really have to deploy liquidity for the securities. But as Mike said, we really have to make that decision quarter-by-quarter. I don't think we would be -- we wouldn't object to either one just depending on the algebra of where the outlook looks on loans.

[Casey Haire, Jefferies]

Got it. Thank you.

[John Hairston, President and Chief Executive Officer]

Thank you.

[Operator]

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

[Jennifer Demba, Truist Securities]

Thanks. Good afternoon. The asset quality improvement really has been pretty 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?

[Chris Ziluca, Chief Credit Officer]

This is Chris Ziluca. I guess any of our loans that are not -- that are floating rate probably are a little bit more at risk. They're something that a lot of our customers swap out. So that tends to protect them on the upside. So I would guess, in general, commercial real estate could be impacted a little bit depending on whether or not it translates into any further -- any cap rate compression or the like. But we don't currently anticipate that. We obviously stress that in our underwriting quite substantially. So we feel that our portfolio can withstand a reasonable amount of rate increase in that regard.

And then as it relates to normalized charge-offs, and obviously, we're at essentially zero right now, we don't really see anything in the immediate future that would suggest a substantial increase or return to historic levels, even on average. So I wouldn't want to speculate where that might end up, but I do believe that it will be on a run rate basis probably less than we've experienced in the past if we take out some of the lumpy situations that go -- give rise to some of the higher charge-offs.

[Jennifer Demba, Truist Securities]

Thanks so much.

[Chris Ziluca, Chief Credit Officer]

Your welcome.

[John Hairston, President and Chief Executive Officer]

Thank you Jennifer.

[Operator]

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

[Kevin Fitzsimmons, D. A. Davidson]

Good evening. Thanks for fitting me in here at the end. Just one quick question on the guidance on the provisioning. So with the language now being about tapering off the next few quarters. Previously it was modest reserve releases expected over the next several quarters. And Mike, I think you characterize that as modest being kind of similar to what you guys had done. So is that I mean, I think it's very reasonable given the uncertainty that's out there that that might have changed that -- like or maybe will step down what we were going to do in in terms of reserve releasing, but I just want to -- I just wanted to make sure I was interpreting that correctly, getting in between the wording and what you were trying to say there?

[John Hairston, President and Chief Executive Officer]

Yeah, Kevin, I think you articulated that exactly the way we meant it. So really there's this process of this notion of tapering down our reserve releases really will kind of began in the first quarter. So we're down to $23 million or so reserve release from about $28 million or so last quarter, so we've already kind of begun that process. And in the guidance we've kind of talked about this tapering to continue maybe for a quarter or two. So without providing any hard guidance consistently envision that we could have another quarter to where we have reserve levels or reserve release levels that stepped down, and eventually in a couple of quarters, be pretty much at zero in terms of their considerable leases.

So that's how we kind of think about it and what we envision happening. Obviously, that's very dependent on a lot of things that Chris just talked about, levels of charge-offs and incidentally the levels of commercial criticized in NPLs, they are at great levels now, and incidentally if that continues then the reserve levels will follow. Probably the biggest problem cards out there is things like geopolitical events and implications. And what happens with the macro economy along with the forecast for that on a go-forward basis. So certainly a lot of uncertainty out there in terms of the impacts from those kinds of things. Most of which we really can't control, but what we can control is the things like our own asset quality and that's what we're focused on.

[Michael Achary]

In the face of loan growth could affect that as well --

[Kevin Fitzsimmons, D. A. Davidson]

Sure you got it.

[Michael Achary]

-- with familiar scenario is turning a little bit darker this quarter versus others. That tapering that occurred this quarter, which really a math exercise, and key levels for were truly stellar. And so it really had nothing to do with it. It was all around maybe scenarios and also thankfully, second quarter of net loan growth above the PPP forgiveness. If you, we've got a deck page in there around PPP forgiveness. Impact on page 8, and you can see the trend where the amount of headwind we're suffering from PPP declined precipitously from Q4 to our first quarter and then it declines to getting pretty close to immaterial next quarter.

That's really because the contra to growth as PPP forgiveness is going down. And while we have relatively low amounts of reserve for PPP still has been a contra to growth overall. So without those contracts in there and it is the indirect amortization runs off net loan growth probably goes up all things being held equal from 4Q and first Q forward. And so built into that guidance on provision is really the expectation that we're reserving for a little bit larger loan book. Economy interrupts that and for guidance may change.

[John Hairston, President and Chief Executive Officer]

That makes sense, Kevin?

[Kevin Fitzsimmons, D. A. Davidson]

Yes. No. Perfectly thank you.

[John Hairston, President and Chief Executive Officer]

Thank you.

[Operator]

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

[Brad Milsaps, Piper Sandler]

Hey. Good afternoon.

[John Hairston, President and Chief Executive Officer]

Hey, there.

[Brad Milsaps, Piper Sandler]

John, in your prepared remarks, you talked about products that the bank may be developing to maybe offset some of the lost NSF and overdraft revenue in 2023. Do you think that you'll have enough in place maybe 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?

[John Hairston, President and Chief Executive Officer]

It's a great question. It's a fair question. And 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 really comes from a couple of sources. One of those would be 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 than many of our peers. And the reason for that is we spent a fair amount of 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 and all that built out, and intended to have the digital channels right those same rails so it was more efficient.

And then as we kept new technology developing, we could do it for a lesser cost for change than we would have if we were trying to support the old legacy systems and the new stuff. And so I think we made the right call, but ultimately, it meant we rolled out fewer activities on the digital side when it comes to sales. So as we get closer to the end of the year and all the new digital tech for sales rolls out, all the automatic underwriting screening and whatnot occurs, then I believe what we'll see happening is a natural lift because our growth in digital sales, given where we're coming from, will be a little bit steeper slope to the good than some of our peers.

And so part of the basis is new products, part of the basis is expected growth in the digital channel. I'm pretty much ignoring the potential growth in new markets there because our play in new markets for high-growth has been predominantly business purpose clients for now, that will change as those investments turned profitable and begin to scale up. And then we'll maybe add financial centers to improve the retail penetration in some of those growth markets in '23, '24. Does that help?

[Brad Milsaps, Piper Sandler]

Yes, thanks, John. Maybe just two follow-ups for Mike on the funding side of the balance sheet. And Mike, 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 and then I think historically those deposits have been fairly rate-sensitive, but also I know are subject to longer-term contracts? Can you talk about how those were reacted as rates rise? And then second question is, I think you guys have about a $1 billion in borrowings that are puttable back to you by the FHLB at their option. Do you need to think about your marking some of the cash that you have on the balance sheet that absorb those if in fact they do put those back to you?

[Michael Achary]

Sure. I'll be glad to, Brad. So first question about public funds, it's a great question. So part of the way that we've been able to reduce the total cost of that line of business around funding cost is really contracts that have expired and basically new pricing in place based on the current rate environment. So how those deposits react on a go-forward basis to the extent that they are variable, then obviously they'll float back up to some extent. To the extent that they're on the fixed side, then some of that cost has been locked in. So it really just depends on the individual depositor and the contract that's in place for them. As far as our home loan borrowing, it's another good question. We have that $1.1 billion of borrowing that has been in place for quite some time. We're paying around 50 basis points for that. That could be called as soon as the current quarter, we'll see.

Depends with the home loan bank, if they have that hedge to potentially how they have that hedge. But certainly, I think it will be an advantage to us certainly if we can get that called and get that cost off the balance sheet. We are or we have earmarked that $1 billion as a potential use of the excess liquidity we currently have on the balance sheet. So if it does happen, obviously, we have liquidity to fund that outlook.

[Brad Milsaps, Piper Sandler]

Absolutely. Thanks, Michael, really appreciate it.

[Michael Achary]

You bet.

[Operator]

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

[Matt Olney, Stephens Inc.]

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

[John Hairston, President and Chief Executive Officer]

Thanks for the question. It's -- what we put in the guidance was or the press release was before the end of the year. And I mean, there's operating exercise we have to go through to build out the testing due to disclosures and all that. So there's a little bit of that in the fourth quarter with the assumption that will begin in 4Q. And that's cooked into the fee guidance that Mike gave a little earlier. To the extent we get it done earlier in the quarter, it could be more to the extent a slight, might be a little later on. So the $10 million to $11 million we gave for the expectation of 2023 to -- it's pretty a pretty simple interpolation down to the monthly run rate.

That's a pretty reasonable not for every month, like a short month in February or longer like July. The numbers fluctuate but if you just take an average for December, that would be a pretty good measure to use. So while we, again, we don't expect necessarily get to December 1, if we get too far into December, we never really put any significant co-changes in as we get into the holiday season. So if we don't get it done before the first of December, it'll likely be effective January 1 or 12.

[Matt Olney, Stephens Inc.]

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 haven't heard any discussion recently. Thanks.

[John Hairston, President and Chief Executive Officer]

Sure glad to share that. And I'll be brief on some of the history, but a few years ago. We noted that we had developed through a lot of good transactions, good acquisitions, good organic growth, we had quite a high concentration, really right along the Gulf of Mexico. So from an investor point of view, sometimes when we had a stormy hurricane season, we would get a little pressure from people concerned about the resiliency of the marketplace, we usually see a net positive impact from storms, but certainly they can be disruptive, particularly in a bad storm season. And so purely to decrease our risk footprint and also we thought stabilized value creation for investors. We opted to begin expanding in the markets in Texas for really two reasons.

One, to spread our risks and then secondly, because the growth rate in several of the Texas markets that we have a profound interest in is a good bit higher or the GDP annual run rate basis of growth in the markets we were already in, and so it was really both from a growth perspective and then from a de -risking perspective. That was all a done deal and in the plans before the pandemic occurred, certainly that got accelerated by the pandemic as we built so much excess liquidity. And so our entry into several markets in Texas and the pace with which we're adding bankers. has as much to do with the recent pandemic buildup in liquidity and the desire to deploy correctly as it is to the risk to get into other markets besides the ones we were in.

So you're correct. It's branch wide initially. It's more business or commercial focused. We quickly chase that with a treasury offering because we're really good at treasury. So we do an awful lot of treasury services sales and card deployment for business purposes like purchasing card. Right after that, wealth management play. All of which we tackle with CRA in mind to ensure that we don't run a file of our corporate commitments to the Community Reinvestment Act into underserved communities in those other markets. And so we really don't do a lot of branching outside CRA service plays until we get a little bit more of a material growth.

So where is that? In Houston, we would expect to see branching coming a little quicker, followed by Dallas, and then finally, Austin, San Antonio would be a couple of years out before we develop a lot of facilities that are more retail oriented. So you really wouldn't look to see a big expense load increase beyond people in Texas for the next couple three years, unless we're very successful at building a book faster than we anticipate. So far that plan has worked beautifully and has a good bit to do with the fact that our efficiency ratio targets have done pretty well so far compared to our expected timeline.

[Matt Olney, Stephens Inc.]

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

[John Hairston, President and Chief Executive Officer]

Thank you very much. Appreciate the question.

[Operator]

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

[Christopher Marinac]

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, your kind of have that recognition back of the unrealized loss?

[Michael Achary]

Yes, Chris. Good question. I don't have a number for you, but I can tell you that there's not an expectation of a lot bonds being called. Certainly we continue to have pay downs and maturities with rates higher now, certainly would expect the pay downs to slow a bit, at least relative to prior quarters.

[Christopher Marinac]

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

[Michael Achary]

No, absolutely. I mean, the structure of our bond portfolio, again, is almost all mortgage-backed security, residential and then commercial. So we really take no credit risks to speak of in the bond portfolio in that regard.

[Christopher Marinac]

Great. And then just one more quick one back on slide seven, I know you talked earlier in the call about the modest improvement in the news loan yield. Should that change a lot if Fed funds rate is materially higher, one or two quarters ahead?

[Michael Achary]

Well, if you look back on the nature of our production and I'll use first quarter as an example. A little bit more than half to call it about 56% or so of that production was up plus floating rate, the remaining fixed rate. So in our higher rate environment with the Fed, hiking rates anywhere from 50 to maybe even some talk at 75 in May, certainly we would expect that the yield on new loans to rise accordingly.

[Christopher Marinac]

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

[Michael Achary]

You bet.

[Christopher Marinac]

Thank you.

[Michael Achary]

Your welcome.

[Operator]

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.

[John Hairston, President and Chief Executive Officer]

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

[Operator]

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