Hancock Whitney Corp
NASDAQ:HWC
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Hancock Whitney Corp
Earnings Call Analysis
Q4-2023 Analysis
Hancock Whitney Corp
The company is expecting loan growth to be weighted towards the second half of the year as market conditions begin to soften midyear. Despite flat credit quality metrics quarter-over-quarter with low levels of criticized commercial and nonaccrual loans, there is an awareness of the economic environment and a proactive approach to monitor risks, maintaining a solid reserve of 1.41% to ensure preparedness.
There was a notable decrease in total deposits, down $630 million this quarter, yet the stability of the deposit base, with 37% in demand deposit accounts (DDAs), is considered a strength moving forward. The company looks forward to low single-digit growth in deposit balances year-over-year to fund loan growth. Capital ratios have improved, with a tangible common equity (TCE) ratio growing over 8% and a total risk-based capital ratio reaching 14%, indicative of a well-capitalized position.
The net interest margin (NIM) has held steady with no compression this quarter, aided by higher loan yields and a strategic bond portfolio restructuring. A modest NIM expansion is seen as possible for the first half of 2024. However, some concerns remain about increasing deposit costs, though they are expected to level off when rates start declining in the second half of the year.
With a total of three rate hikes of 25 basis points each built into the forecast for the next year, the company anticipates modest NIM expansion during the first half followed by a potentially more significant expansion in the second half, predicated on the expected lower interest rate environment. The net interest income (NII) trajectory is set to mirror the NIM trends. Planning efforts are in place to align certificate of deposit (CD) maturities with the forthcoming rate cuts to mitigate margin compression.
The company has undergone substantial capital growth in recent quarters and intends to maintain this trajectory. Although there is a buyback plan in place through the end of the year, there is no immediate intention to participate in the market, partly due to the potential impact of an economic downturn in the second half of the year. The company is thus taking a cautious stance, opting to continue building capital reserves as a protective measure.
The company remains steadfast in the strength of its loan book, confident that it can navigate through possible near-term loan growth headwinds. The management team has adapted to the current economic conditions. Forward guidance and revised current expected credit losses (CECL) estimates are provided in detail on Slide 22 of the earnings deck. Overall, the company is carefully planning to weather the challenges of rate fluctuations and economic uncertainty.
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Good day, ladies and gentlemen, and welcome to Hancock Whitney Corporation's Fourth Quarter 2023 Earnings Conference Call. [Operator Instructions]. As a reminder, this conference call 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. Hopefully, in the 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 3-year corporate strategic objectives, or CSOs, and provide an updated guidance for 2024, both of which are detailed on Slide 22 of the Investor Day.
Starting with the balance sheet. Loan balances were relatively flat this quarter as loan demand once again was tepid in Q4, similar to the last several quarters. Under the surface, however, the team was successful at producing loans at a volume necessary to hold our own and overcome a more select credit appetite, continued focus on pricing and in replacing large credit-only relationships with granular relationships.
Business Banking continued to impress on both sides of the balance sheet and consumer lending volume has begun to cover the remnant of pandemic recovery paydowns. As we look forward into 2024, we expect loan demand will return after rates begin to soften midyear. 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 nonaccrual loans at very low levels. As mentioned in the mid-quarter update, charge-offs began to normalize in Q4, but we still see no significant weakening in any portfolio sector.
Despite impressive AQ ratios, we continue to be mindful of the current and potential macroeconomic environments. We are proactive in monitoring risks, and we continue to maintain a solid reserve of 1.41%.
Total deposits were down $630 million this quarter, driven primarily by the maturity of $567 million in broker deposits. We were able to use the proceeds from the bond portfolio restructuring to delever these higher-cost deposits. Aside from that, client deposits were roughly flat with prior quarter. Seasonal inflows of public funds did occur as expected. The DDA remix continued but pleasantly at a slower pace. We ended the quarter with 37% of our deposits in DDAs and we're pleased to finish Q4 at the top end of the range contemplated in the mid-quarter update.
Retail time deposits grew and interest-bearing transaction and savings accounts were stable thanks to the promotional pricing we offered on CDs and money market accounts. Our clients remain rate sensitive, and we really don't expect a significant moderation until rates begin to decline in the second half of this year. Mike will make a few comments in a moment regarding our future expectations for rates.
In 2024, we expect low single-digit growth in our deposit balances year-over-year used to fund loan growth. Another bright spot for the quarter was growth in all of our capital ratios. Our TCE grew to over 8% due to lower longer-term yields and the benefits of our bond portfolio restructuring. Our total risk-based capital ratio reached 14% this quarter, and we remain well capitalized, inclusive of all AOCI and unrealized losses.
As we look back on 2023 and forward into 2024, we believe we have positioned ourselves to effectively navigate the operating environment this year. Our deposit base has been remarkably stable, and we expect it will continue to support our funding needs. Our ACL is quite robust, and our capital levels grew throughout the year, which we feel will help position us for success in 2024.
With that, I'll invite Mike to add additional comments.
Thanks, John. Good afternoon, everyone. Fourth quarter's reported net income was $51 million or $0.58 per share. Adjusting for the 3 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 1 month's impact from our bond portfolio restructuring transaction and continued slowing of our noninterest-bearing deposit remix.
Deposit costs for the company were up 19 basis points to 1.93%, but we're pleased at 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 3x 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 CDs 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 fee income growth beginning with the fourth quarter of 2022. We benefited from strong activity in investment in annuity income this quarter, and we remain focused on finding opportunities to grow fee income.
Our guide for fee income in 2024 is continued growth of between 3% and 4% from the adjusted noninterest 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 have continued to reinvest back into the company. We'll continue to do so but at a bit slower pace as we allow technology and other investments to mature.
And finally, all aspects of our forward guidance, including our revised CSOs are summarized on Slide 22 of our earnings deck.
I will now turn the call back to John.
Thanks, Mike. Let's open the call for questions. .
[Operator Instructions] Your first question comes from the line of Michael Rose from Raymond James.
Mike, I think you might have just answered this, but it looks like if I use kind of the midpoint of the ranges back into the NII -- it's about -- it's up about 0.5% year-on-year if I'm doing my math right. I just wanted to get a sense for if -- what the sensitivity is kind of per rate hike since the forward curve is kind of baking in a little bit more. I appreciate the sensitivity you provided on, I forget what slide it was, but just wanted to kind of see what the puts and takes were to the NIM and NII outlook.
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 3 rate hikes built into the forecast for next year. The first one in June, then September and then lastly, in December. So those are 3 rate hikes of 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 maturity such that we have a fair amount of those maturities happening in the second half of next year, where, obviously, the rate environment will be a little bit 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. [indiscernible].
We're so used to rate hikes. I apologize
no worries to get it. Just as a follow-up, 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.
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 kind of that soft landing or as John says, safe landing.
Mike, this is John. Thanks for the question. I'll start it, and then Chris and Mike want to add any more color to it there are welcome to. But if we look at the fourth quarter and see a reported EOP is relatively flat it somewhat discusses all the activity under the surface. And as mentioned in several calls in the past year or so, we've had a fairly acute focus on replacing credit-only relationships, particularly larger ones with more granular relationships that bring liquidity and fee opportunities where right now, liquidity, obviously, is the most important. And that happened in Q4. And so we had about, I think, about $200 million. I think the number I have in my mind is $196 million in SNC balances that left in Q4 and will replace nearly entirely by core relationships.
So there's a lot of productivity occurring it just isn't in the same sized chunks as some of the outbound activity. And I would expect to see that continue, although I don't expect the SNC reduction to be at the pace it was in Q4. So if you think about in terms of puts and takes.
If you think about another, say, $300 million or $400 million SNC balances reduced offset somewhat evenly over the first half of the year. And then more than the going out, we'll be coming in and granular relationships the back half due to rate increases. That's really where you kind of get to the low single-digit production -- single-digit balance sheet growth for the overall year.
So while it's weighted to the back half of the year, it's not like there's not a lot of activity that's already been successful and will continue to be successful in the first half of the year. Was that the kind of color you were looking for? Or you want to ask a final question?
No, it's no, that's very helpful. I appreciate that. And maybe just one final one for me. .
TCE above 8%. You guys have the buyback 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 continue to cooperate? Or is it capital rules are changing for the largest banks, there's thought process that could come downhill. And are you looking to build capital here? Just trying to figure out how you guys are thinking about it.
So Michael, we're extremely pleased with our ability to grow capital over the last couple of quarters. And certainly, rates have kind of 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 kind of 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, we're 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.
Your next question comes from the line of Catherine Mealor from KBW.
Good afternoon. 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 just 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 dies of a variable rate loan book, could have a near-term and a negative impact on the margin? Is it just that the CD repricing is enough to offset that? Just can you 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. And 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 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 seating 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 5 or 6 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 NIM 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 it stay the way it plays out, there could be more NIM compression if that -- if we do get fixed rate cuts this year that are coming at us at a faster pace.
Yes, especially if they're bunched up together or in an environment where the rate cuts are maybe more than 25 basis points. 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 kind of planned on.
Yes, 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 most recent restructure and how you're thinking about liquidity side? Just kind of trying to think about -- how you're thinking about size of average earning assets as we look to that NII growth [indiscernible]
Sure, sure. In terms of kind of managing the balance sheet next year, related to the bond portfolio, especially, I mean, obviously, it's down considerably because of the restructuring transaction that we affected in the fourth quarter. But as we think about next year, we're really going to be in the mode of kind of resuming reinvesting paydowns and maturities back into the bond book.
So unless there's some other activity in the bond portfolio, we would expect that to be pretty flat from where to end the year. And in terms of average earning assets, given the guidance we've given around kind of loan growth we're expecting next year as well as the level of deposit growth.
Again, what we're striving for is for loan growth to be funded kind of dollar for dollar or as close to that as possible through deposit growth. And if you put all those dynamics together, including the bond book on balance compared to last year being down, we would envision a scenario where average earning assets year-over-year would be kind of flattish for the most part.
Your next question comes from the line of Casey Haire from Jefferies.
Yes. Great. Thanks. Good afternoon, everyone. So just another follow-up on NIM. So if I'm understanding this correctly, the modest NIM expansion that you guys are expecting this year is predicated on a little bit of deposit beta pressure in the early going and then proactive management of funding costs -- deposit costs down once you start to get Fed cuts. I'm just -- wanted to get some color is the velocity of the deposit beta in the first half, is that pretty modest? And then it's going to be pretty -- it's going to be more -- the velocity is going to be faster on the way down as you guys manage once you get fed cuts?
Yes. I think on balance, Casey, that's right. So we would expect the deposit beta impact to be pretty modest, if not kind of flattish from where it ended the year. We don't see a whole lot of change in terms of our cost of deposits really in the first quarter with the end of the year at 199 in terms of December, 193 for the quarter. And I think as we think about the first quarter, that could be up a handful of basis points, potentially even a little bit less than that.
And again, a lot of this depends on our CD maturities that we have across the year. Not only for the first half of the year, but the second half of the year and how that will line up with any potential rate cuts in the second half of the year. So I think overall, what you said is pretty spot on.
Okay. Great. And on the CD maturities, which -- is there any color you can provide on the maturity schedule in terms of balances and what the rate they're running off at as is?
Yes. So in the first quarter, we have about $1.8 billion of maturities and they'll be running off at about 477. That goes down by about half in the second quarter, the runoff rate is about the same. And then in the second half of the year, we have about $1.5 billion coming off and the runoff rate is just a bit higher right now. .
And again, the way we're thinking about those maturities are 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 happened in the first quarter come back on or renew and relatively short maturities such that when those mature, we're in the second half of the year and potentially a lower rate environment. So that's a little bit of color around how that's kind of choreographed.
Okay. Yes. That's helpful. And apologies if I missed this, what is the promotional rate versus that 4.70?
We're at about 5.25. And that will be a relatively short maturity. 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 to the back half when we get right?
That's correct.
Casey, presuming a June initiation of rates going down. If that happened earlier, obviously, the benefits would be quite different.
Okay. All right. Great. And just last one. The bond book -- can you give us a spot yield on the bond book at 12/31? I know you gave it at 2.57%, but I was just wondering what the exit rate was so we could have a better pinpoint on?
Well, it was 2.57% for the month of December. Is that what you're asking?
Yes. I know it was too I saw that in the deck. I was wondering what it was at 12/31 .
Well, we were 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 to be -- 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. .
Your next question comes from the line of Brett Rabatin from Hovde Group.
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 continuing atrophy maybe in DDA from here? Are you guys thinking that DDA levels have almost troughed? Or can you 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 prepandemic. 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 average, a little bit higher. So there's more than just the same volume of accounts for 2019 compared to now because the mix has changed some.
The business to pop some accounts, on the smaller end, we expect to hit prepandemic in around June or so. That's the run rate extrapolating. So we'll see if the expectations around the rate environment changes 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 sheet more than cover the earnings analysis fees that we have on the treasury side. You think that they would have flown back out to company debt. But I think just the absence of investment on the wholesale side in the last 6 months or so has tempered that outlook.
If rates begin to go down in the environment, gets a little bit more optimistic than 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% to 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 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 and Mike can add color if he likes. I wouldn't want to break the 3% to 4% down to two different sectors because it's a little complex. But I will 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 of 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. And 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 than 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'll 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 the dogs and cats. So 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 in spreads as rates begin 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 is 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 in expenses, to add people, it would probably be in those areas because, frankly, 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 history for annuities income from the Cetera investment we made back in '22. So overall, I think we would continue investing in those things that are working.
Yes, 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 -- 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 repeating. 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.
Your next question comes from the line of Brandon King from Truist Securities.
So following up on deposits, are there any deposit categories besides CDs 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, 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 the lead there would be on the CD side, especially as we try to 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 will 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 mentioned you could be more proactive in running consumer versus commercial?
Bran, 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 commercial. And the reason we feel pretty good about it is because even though they've enjoyed the highest growth and 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 seeds from a paydown perspective through the excess liquidity portion of the pandemic recovery. And in Q4 -- 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 3 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 you 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 any differences that the rate environment may present us with versus what we're assuming.
So obviously, the CD maturities are in place, and there's no flexibility related to those. But certainly, 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. With that I'd 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 and the year in a better rate environment.
So one of the -- 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 in duration to allow us to benefit of the repricing opportunity in the second half of the year.
So that's why we feel pretty good about it. is because the book is already short and it has a pretty good likelihood it's going to get shorter in the first half of the year as we reset.
Your next question comes from the line of Matt Olney from Stephens.
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? .
Yes, Matt. It's Chris Ziluca. Really 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 kind of 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 and 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.
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 end of year cleanup? Or is this more that 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 cleanup in some respects. Obviously, we take charges when it's appropriate and necessary. 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 it's hopeful. I mean, we're never happy with any sort of significant level of charge-offs. 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, that was accurate. What I would add to it is when we describe something is 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. And so we're presuming that the number of unanticipated charge-offs that occur under 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. Not just what we know about because we would otherwise give you a number that may be a little optimistic in this type of economy.
Your next question comes from the line of Christopher Marinac from Jane McMerth .
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?
Well, I think the big driver there was obviously lower rates. So the 10-year treasury was down, what, 70 basis points between 9/30 and 12/31. And so that -- and certainly the impact of restructuring transaction affected the bond portfolio. had the impact of producing our unrealized loss on AFS pretty significantly. And when you combine that with the improvement on the HCM side, on a pretax basis, it was somewhere in the neighborhood of $411 million or so.
And so that had the impact of 77 basis points on our TCE from AOCI and also was extremely helpful in improving our tangible book value per share. So that was some 11%, 12% kind of quarter-over-quarter.
So going forward, without the consideration of any additional transactions where something similar to what we did in the fourth quarter, more than anything else, any kind of further improvement will depend on rates coming down a bit compared to where they were at 12/31. So that's a bit of a crystal ball right now. from where the 10 year stands right now, it's up a bit from where it was at year-end, something like 8 or 9 basis points. But it will depend on where rates go up, I think, in the first quarter.
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 just 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. Good question. Obviously, the annual review cycle in general, we try to spread it out across the year. Some of it is driven by the timing of getting various financial statements from customers to the extent that they're audited or accountant prepared financial statements they tend to -- kind of in the middle of the second quarter. If their tax return type statements, they tend to get pushed out. A lot of people file extension, so they come a little bit later in the year.
And if -- we're also relying upon kind of business prepared information around the performance, especially if you're talking about commercial real estate, around end of year performance, which will get spread throughout the first and second quarter of the year.
We regularly stress test our portfolio outside of just getting the financial information in to be able to do that. And we'll -- a lot of times, we're only getting updated appraisals, if there's an issue that we're dealing with or if there's a renewal situation, that sort of thing. We're not getting appraisals per se on every loan on the commercial real estate book unless we perceive an issue and we want to get our arms around it and get ahead of it a little bit.
So it's kind of a mix of an answer for you there, but we do update our stress testing and our risk ratings and our view of individual credits spread throughout the year, but usually tends to kind of come in the middle of the year, unless there's an event that occurs.
Your next question comes from the line of Stephen Scouten from Piper Sandler. .
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. Good question. I mean, certainly, that's the case. For new real estate transactions, both consumer and investor CRE. There's very much -- I wouldn't even call it tepid, I would say, anemic demand and that type of activity, primarily because even though there's a tremendous housing demand for building multifamily and Resi construction the cost right now to do that in addition to the debt costs are just really high.
So I think investors are interested in waiting a couple of 3 months to see what's really going to happen. Now some of that hope was based on buying into the 6 rate decreases starting in March activity, which we never really believe, and I'm afraid we're going to be proven right. And so they may move forward in Q2 with that realization thinking that they'll renegotiate the deal when they can as rates begin to decline.
So on the real estate and mortgage side, that's absolutely the case. When we get into revolvers, line utilization is as low now as it's ever been, both on the consumer and the business side. And that's simply just good money management on the part of our clients, both business and consumer. Where they prefer not to have any more than the revolvers than they can manage, and that's what they're doing. So as those attitudes change, we would expect one of the tailwinds to NII will be line utilization actually going up.
I'm surprised it hadn't happened already as average balances came down on the deposit side. But in reality, really hadn't stayed, it went down low. And every quarter, we think it's going to finally creep back up a bit it stays flat or goes lower, and that was the case in Q4.
The other item is acquisition finance is obviously very low right now as people struggle with what the appropriate valuation is for different businesses that could be available for sale for whatever reason. And I think that, that's going to probably continue to occur until we get past the election and people understand what the tax posture might be in terms of those types of transactions and income getting to '25 and '26.
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. .
Your next question comes from the line of Ben Gerlinger from Citi.
Hi Ben, and welcome to coverage. We appreciate you picking us up.
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 panned 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 6 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, far in 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 6 adjustments, 3 adjustments or no adjustments. The sectors that we're very interested in growing or 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. The markets we're in that we have pretty high density in. When things get better, we get a really good lift in those markets because the brand is very well known. It's very much appreciated as it's kind of a hometown bank in those core markets. And so we'll always get more than our fair share of the business we want when the environment looks brighter. .
And in the growth markets, it's taken us a while, I think, to flesh out the teams that we want. We're very proud and happy with the folks that have joined the company in those areas. But we're operating with a lesser number of of locations and footprint than optimal. And so a better environment makes a little bit bigger of a hunting ground, if you will, for our bankers to compete with those people who have a better financial center coverage numbers that we have. But -- so a more optimistic macro is probably going to award us a little better than it did the last time we went from a downside to an upside because we've added all those new markets that are really terrific growth opportunities.
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.