Good day, ladies and gentlemen, and welcome to Hancock Whitney Corporation's Fourth Quarter 2022 Earnings Conference Call. [Operator Instructions] As a reminder, this call may be recorded. I would now like to pass the call over to your host for today's conference, Tricia Carlson, Investor Relations Manager. You may begin.

Trisha Voltz Carlson - Executive Vice President, 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 M. Hairston - President & Chief Executive Officer

Thank you, Trisha, and good afternoon and Happy New Year to everyone. Thanks for joining us on what I know is a very busy day. While we look forward to the start of the New Year, we also want to celebrate a successful Q4 and a strong conclusion to 2022. We are exceptionally proud of the Hancock Whitney team and the company's overall performance during a remarkable year of volatility. The results revealed not only progress made in '22, but also the culmination of decisions made the last several years to better position the company.

With year-over-year earnings of $61 million, PPNR up nearly $104 million, net loan growth up $2 billion, NIM up 31 basis points and an efficiency ratio in the low 50s, we view 2022 as a very successful year. We see another year of potential macro environment changes coming in 2023, and expect the bulk of investor interest to be more about the future. As such, and as promised, we have updated our three-year corporate strategic objectives, or CSOs, and we provide 2023 guidance on slide 18. Our guidance for '23 shouldn't be a surprise or a trend much different from what you may hear from others in our industry.

Loan growth in the low to mid-single digits reflects the recognition of a likely slowdown in the economy, and we are mindful of managing risk in such an environment. We expect continued hurdles with funding loan growth with deposits and are guiding to an environment where core deposit growth will be available, but perhaps a little bit more rate sensitive. Our intense focus will be on core relationship lending with accompanying deposit relationships, which create meaningful value in our balance sheet through the cycle.

This focus will have the impact of a slowing loan growth in '23, but a better chance of funding lending with deposits. We fell short of that goal in Q4 as loans outperformed and the timing of seasonal deposit inflows and outflows was different than we expected. We said for the last couple of years that line utilization would begin returning to pre-pandemic normal, at the same time, excess commercial deposits are spent, and that trend was evident in the last several quarters, including Q4.

But with that said, we intend to grow deposits in '23 in the low single digits with a downside case of flat where we use cash flow from the bond portfolio to fund any shortfall in deposits. To the extent deposits outperform, we will adjust to reinvesting in bonds or deploying into loans dependent upon the environment at the time. The rate environment, while beneficial to net interest income negatively impacted fee income with secondary mortgage being the hardest hit.

With trending strong performance in wealth and card fees, though, we believe we can grow total non-interest income 3% to 4% in 2023, including in covering the replacement of $10 million to $11 million of lost income from the elimination of certain NSF-OD fees beginning in December of 2022. Inflation pressure, pension expense and notable increases in FDIC assessments are a few of the drivers guiding to a 6% to 7% increase in '23 non-interest expense.

Backing out the pension and FDIC increases, we project a 4% to 5% increase compared to '22. Our efforts over the past three years in reducing expenses have put us in a position to better adjust to these increases and still maintain an efficiency ratio in the very low 50s. And finally, as it relates to guidance, we believe today's results for both the quarter and the year reflect the company positioned well for today's economic environment.

Credit metrics are at historically low levels. Initiatives executed in '20 to '22 helped drive an efficiency ratio below 50% in the fourth quarter. New bankers hired over the past 18 months should help attract and enhance relationships in growth markets. We've proven our ability to proactively manage expenses and are introducing technology focused on scalability and effectiveness. Capital remains solid, our reserve is solid and our balance sheet is de-risked and positioned well.

So with those comments, I'll turn the call over to Mike for further comments.

Michael M. Achary - Chief Financial Officer

Thanks, John, and good afternoon, everyone. We ended 2022 with fourth quarter EPS of $1.65, up $0.10 linked quarter. Net income of $144 million, was up $8.4 million from the third quarter. PPNR was up $10.3 million. And finally, our efficiency ratio came in below 50% at 49.81%, certainly, a nice way to end a very solid 2022. Loan growth came in stronger than expected during the quarter at $528.5 million or up 9% annualized from last quarter. Line utilization continues improving and is trending back to pre-pandemic levels, while our residential onetime close product drove a sizable increase in mortgage loans.

Deposit growth for the company came in lighter than expected at $119 million or 2% annualized from last quarter. Typical seasonality in public funds contributed $494 million while time deposits were up $493 million due to a CD promotion during the quarter. DDA and interest-bearing transaction deposits were down $692 million and $176 million, respectively. We recognize that deposit growth will be a challenge in 2023 for both our company as well as the industry. Commercial clients are deploying excess liquidity into working capital, while consumers are becoming more rate-sensitive.

You can see on slides 13 and 14 in the earnings deck that while we were successful in holding deposit betas relatively low for most of this year, we did see a pivot up in our deposit beta to around 21% in the fourth quarter. Excluding the seasonal increase in public funds, that deposit beta was closer to 14%. We still believe that when the current rate cycle is done, that our cumulative total deposit beta should be no worse than around 25%, so about the same as the last up cycle.

Our fourth quarter NIM at 3.68% was up 14 basis points linked quarter. So while that level of widening is impressive on its own, admittedly, it did not move up as much as we expected coming into the quarter. The yield on new loans jumped 134 basis points to 6.27%, and the bond portfolio increased 12 basis points, adding 51 basis points to our earning asset yield compared to last quarter. Funding costs were higher this quarter as expected, mostly due to promotional pricing on a successful CD offering that did result in higher deposit costs and a shift in our funding mix.

We still believe our NIM has room to expand with future rate hikes, but it will be small and very dependent on the level, mix and cost of deposits. Concluding my comments with credit, our metrics trended to historically low levels in 2022 and remain there. Negative provisions ended as future CECL scenarios call for a potential slowdown in possible recessionary environment. Our provisioning has been modest and charge-offs remain low, and we believe we're positioned well with an ACL of 148 basis points. So while that ratio did decline by 2 basis points linked quarter, we actually added $1.5 million to the reserve at year-end.

With that, I'll turn the call back to John.

John M. Hairston - President & Chief Executive Officer

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

Question & Answers

Operator

[Operator Instructions] The first question comes from the line of Brad Milsaps with Piper Sandler. Please proceed.

Brad Milsaps - Piper Sandler - Analyst

Hey, good afternoon.

John M. Hairston - President & Chief Executive Officer

Good afternoon Brad.

Brad Milsaps - Piper Sandler - Analyst

I appreciate all the guidance in the slide deck. I did maybe you want to jump in maybe the fee income guidance first. Obviously, a lot of moving parts this quarter. You note some of the specialty items may be lower than they have been. Typically, you've got the headwind with the NSF fees of about $10 million to $11 million is really the swing factor some of these specialty items coming back or John, are there other segments or endeavors that you have out there that you feel like are going to be able to kind of push that number up higher towards your guidance?.

John M. Hairston - President & Chief Executive Officer

Yeah. Good question, Brad. This is John. I'll start off and Michael is always welcome too. You gave a quick inventory of exactly the right things to point to. The NSF-OD income, we forecasted, I think we talked about that maybe three or four quarters ago, that to be a $10 million to $11 million annualized hit that started in December of '22. So first quarter '23 will bear the full brunt of that run rate. But as balances in consumer business accounts continue easing down a pre-pandemic level, we anticipate that overall service charges from the deposit book and deposit accounts will keep going up throughout the year.

We also anticipate a very strong performance from our wealth management group. Fourth quarter was very promising as we anticipated. And we think we'll go into 2023 with an awful lot of momentum. And then finally, all things card-related continue to outperform, and we expect that to also be a very good performance for the year. So all in all, the 3% to 4% guide is inclusive of covering the downside from the NSF-OD fee changes. You mentioned the other income bucket, and there's a lot of cats and dogs in that bucket. And for the fourth quarter, it was unusual in that virtually every one of those categories was at a lower run rate level or lower level than we typically experience in the run rate.

And we do expect that to bounce back to something more closely to overall 2022 performance or maybe a little bit better so all of those factors are rolled into the 3% to 4% guide for the year. The only area that we're not counting on, Brad, is a secondary fee income for mortgage. It does appear after about a 54% reduction in deal flow quarter four '21 to quarter four '22. We think we're at or pretty near the bottom on that particular fee income source. So while we're not counting on any benefit through '23, any beneficial movement in 30-year rates what obviously be an unexpected benefit. So we don't have that expected at all in our numbers, but that would be a little bit more of an upside or a tailwind. Did that answer your question, okay?

Brad Milsaps - Piper Sandler - Analyst

Yes, John, very helpful. And maybe as a follow-up to Mike, as it relates to the CSOs. I see that you put sort of a framework of kind of your assumptions around Fed funds for the next three years. I know when rates are moving up, initially, you were looking for 4 basis points to 6 basis points of NIM expansion with each 25 basis point increase. Would there be a similar level of contraction on the way down if and when we get there or - I know it's probably a tough question given all the moving parts. But just curious kind of how to think about - I can't believe we're talking about rate cuts already, but just how we would think about that as it relates to the NAV?

Michael M. Achary - Chief Financial Officer

Yeah, I'm glad to, Brad. And just to kind of close the loop on the fee income question. John is right. I mean, I can't think of a quarter in a long, long time where we've kind of had every single component of specialty income kind of down quarter-over-quarter. So BOLI, derivatives were both down to almost $2 million each, and even our SBIC income was also down a little bit north of $1 million. So I think it would be unlikely that we would have another quarter another consecutive quarter where we would have those categories all down again.

So we do look for that area to kind of rebound in 2023. As far as our CSOs - so yeah, the CSOs that are there. Again, as a reminder, those are our goals or targets, really three years down the road. So we kind of think about those in the context of fourth quarter of $25 million. And we've tried to be thoughtful in terms of what we think could happen with the rate environment going forward. And nobody has a crystal ball, and certainly, we don't have one, but this is I think certainly a plausible forecast around rates, and we'll go from there. Related to your NIM question, yeah, it is a tough question.

Certainly as rates begin to come down, it becomes harder, obviously, for us to maintain a NIM at a stable level because we are so asset-sensitive, but we've done a lot of work in the last year or so - last two years, really, in terms of extending the duration of our assets. And I do think on the way down, we'll probably do better on this rate cycle down whenever it happens, then probably in past rate cycles. And really, the reason for that again is the work we've done to extend the duration of our assets. So we'll see once we get to that environment.

Brad Milsaps - Piper Sandler - Analyst

Great. Thank you guys. I'll hop back in queue.

John M. Hairston - President & Chief Executive Officer

Thanks Brad.

Operator

Thank you. The next question comes from the line of Kevin Fitzsimmons with D.A. Davison. Please proceed.

Kevin P. Fitzsimmons - D.A. Davidson & Co. - Analyst

Hey, good evening everyone.

John M. Hairston - President & Chief Executive Officer

Good evening.

Kevin P. Fitzsimmons - D.A. Davidson & Co. - Analyst

Hey Mike, I think I heard you earlier - and forgive me if I'm wrong on this, but I think you said that the margin had expanded but not as much as you would have expected. So I'm just curious what - if that's true, what was that driver? Because I know, as you outlined, funding costs did go higher, but you guys expected that and you probably had built in the CD promotion or maybe you didn't. And maybe that's why it was not as much as expected. If you can just go through that? Thank you.

Michael M. Achary - Chief Financial Officer

Yeah. I think yeah, Kevin, I think if you go back and look at our guidance coming out of the third quarter, it probably would have pointed to a NIM, maybe about 5 basis points or so higher than where we came in. And look, we're pleased with where we came in at 3.68%. It's still impressive on its own that we could move our NIM up 14 basis points in one quarter, not as impressive as the prior quarter at 50 basis points, but still 14 is a nice increase.

I think the main reason is really why it probably didn't move up as much as we had thought coming into the quarter, it really was more around the loss that we experienced in DDA balances. So we were down about $700 million between the end of last quarter and this quarter. And on our balance sheet, those deposits - those free deposits are extremely impactful. So I think that plus the 4% 9-month CD as well as a need to kind of pivot up probably a little bit higher than we expected in our overall deposit costs. So I think those factors combined really contributed to the NIM not coming in, maybe is quite as high as we thought it would coming into the quarter.

Kevin P. Fitzsimmons - D.A. Davidson & Co. - Analyst

Okay. That's great. And I appreciate the guide on your outlook for deposit growth and the fact that the bond portfolio can supplement. But based on what you see now - like on the one hand, the balance sheet is still very liquid and with the loan-to-deposit ratio down at like 80% or a little below, actually. When you think about allowing that loan-to-deposit ratio to move higher so in other words, maybe you'll go after deposits, maybe you won't versus a strategy of getting out in front of it.

Like some banks have taken a hit to the margin in the short term because they're kind of front-loading that deposit beta in effect where we're maybe that's not the situation you guys are in because of the liquidity. So can you speak to those moving parts in terms of how you view that loan-to-deposit ratio and whether you expect to grow deposits each quarter or if it doesn't make sense, you won't necessarily.

Michael M. Achary - Chief Financial Officer

Yeah. I'll start, Kevin, and I'll pivot over to John after to let him talk a little bit about our strategy to grow DDA deposits from core customers. But certainly, the way we're looking at 2023 is really to be in a position where between the runoff from the bond portfolio that we'll use to fund loan growth between that and any difference really coming from deposit growth. That would really be kind of the most optimum way that we'd like to manage the balance sheet from a loan deposit perspective. And I think that we're certainly doing some proactive things to ensure that we kind of get a jump on that.

We talked about the nine-month CD at 4% that we did last quarter. And even right now, we have a 4.5% nine-month CD that we think will be very helpful in terms of adding some liquidity to the balance sheet. We're not really willing to give up a lot of NIM on the front end, certainly not a significant amount of it to kind of warehouse liquidity. But we do think that what we're doing is a good mix between some proactive actions and then certainly some ability to maintain a little bit higher NIM going forward. So hopefully, that makes sense. So John, if you want to talk a little bit about DDA?

John M. Hairston - President & Chief Executive Officer

Sure. Just a couple of points to add. And Kevin, to your prior question about 4Q NIM, for some time, we kind of given guidance to expect as the commercial line utilization numbers begin to go back up towards pre-pandemic levels, which we still got a long way to go to get to that number. As that happens, and typically, in other rate cycles, you see some of the free money from those same relationships off just as people spend it. So there's not - there's some disintermediation of free money to IBTs, but the primary leakage in that bucket is not account loss, it's really just people spending money, which is not necessarily a bad thing for the economy.

But the line utilization up about - I think it was up 106 basis points for the quarter is one of the larger ones for the past three or four quarters. And while fourth quarter typically has a bit of a run-up, it was pretty handsome. So some of the runoff really just companies the same type of behavior and oversight decisions paid by commercial clients as they look at their own balance sheet. So with free money out and 100% variable money getting charged up as part of the line utilization increase the spread on that is not going to be quite as attractive as it is if you still have that free money sitting on the books. So that's just one additional point for you to ponder.

In terms of a going-forward strategy, we had almost no digital capacity to gather deposit accounts just a year ago. A lot of the tech uplift has occurred in the past 12 months as it draws to completion, we would anticipate gathering more client accounts digitally. Secondly, the treasury services area competes extremely well with both our size and very large organizations and - we continue to add treasury service and treasury sales professionals to that team added one yesterday, in fact, to focus purely on payment cards. And so as a result, I would expect to see more operating accounts come in.

And in the areas of our franchise that experienced disruption and as integrations occur, I think we'll be pretty busy trying to move folks into the book that actually help us with some of the offset to the outflow. One item that may be too far in the weeds for this call but our incentive plans are engineered to be quite flexible. And obviously, one year ago, deployment of liquidity was very important in to the gathering liquidity is obviously very important. And so we'll see a fairly significant shift or already have shifted to deposit campaigns driving compensation for our bankers, which I'm sure will yield a very good result, it usually does. And so the capacity of the company to gather deposits and loans is greater than the guidance that we're giving, but it's primarily driven. The guidance is driven around the expectation that the quality of what's in the book is going to be more valuable overall than just sheer growth.

And so our focus for '23 and maybe for '24, we'll see how the economic outlook looks at the time is really on stability and earnings, good credit outcomes, very effective and efficient sales staff and maintaining very strong profitability compared to peer as we go through the cycle. And the CSOs somewhat overlay the same time period for what people think the recessive period may be. And so that's pretty much where we'd expect to earn as we get through that period. That may be more than you asked for, but I wanted to make sure we completely answer.

Kevin P. Fitzsimmons - D.A. Davidson & Co. - Analyst

No. Very helpful. Yeah. Very helpful, John. One quick follow-up to what Brad had asked about before, that the impact to the margin when rates start going down. But you guided in here on the margin that the margin peaks when the Fed is done or after the Fed is done. But if we don't have a pivot right away to cutting rates, when we're just stable like that, can you and would you expect to be able to keep the margin stable or is it more likely that we have some grinding lower, just given the lag of funded costs going higher?

Michael M. Achary - Chief Financial Officer

Yeah, Kevin, this is Mike again. Certainly, our intention and the way we look at managing the balance sheet and the company would be in that environment to maintain a stable NIM. Now stable NIM could mean that we could have a quarter where it could be up a basis point or two or down a basis point or two. And so other than things like loan growth and what we're able to do in terms of expanding customer relationships. Probably the biggest determinant of really what happens when the Fed stops is what happens to our deposit balances, namely DDAs. And so again, you can appreciate the focus that we have on that component of our customer relationships and a desire to continue to build on that.

Kevin P. Fitzsimmons - D.A. Davidson & Co. - Analyst

Yeah, okay. Thanks very much.

Michael M. Achary - Chief Financial Officer

Okay, I'll stop before I pick up another question then - this topic a little later. Thank you Kevin.

Kevin P. Fitzsimmons - D.A. Davidson & Co. - Analyst

Thank you.

Operator

Thank you. The next question comes from the line of Jennifer Demba with Truist Securities. Please proceed.

Jennifer H. Demba - Truist Securities - Analyst

Good afternoon everybody.

John M. Hairston - President & Chief Executive Officer

Hi Jennifer.

Jennifer H. Demba - Truist Securities - Analyst

Just curious as to you made some comments in your forward guidance on loan loss reserve and provisioning and net charge-offs. I'm wondering, John, how you're feeling about the loan portfolio right now? And what pockets you feel are most vulnerable in a higher rate environment. And some companies have pointed out they're worried about office down the road. I'm curious how you guys would characterize your office exposure at this point.

John M. Hairston - President & Chief Executive Officer

Great question, Jennifer. I'm going to let Chris take the first whack at that one and then I'll follow up.

Christopher S. Ziluca - Chief Credit Officer

Yeah. So as it relates to kind of segments of the portfolio that might be more vulnerable and your comment about office, Obviously, those customers that are probably in a fully rate environment, are maybe a little bit more levered are things that we've been looking at, and we've stress tested those loans in our portfolio and feel confident that they could largely withstand the current environment and maybe the rate rises that are anticipated in early 2023.

But we continue to watch that and think about the impact there as well as, obviously, those customers that are impacted by some of the rising costs that are being incurred especially ones that are more labor-intensive with labor costs going up, just really keeping an eye on that, but no specific worries or concerns in that regard. And then as it relates to kind of our office portfolio, I think one of the things that we've been stressing for a long time now, even before I got here almost five years ago, is that we've been shifting our focus away from traditional office to more medical office, which I think has helped us a lot.

And a lot of our office tends to be kind of mid-rise type office, not necessarily the high-rise type buildings that rely upon large tenants to take large amounts of space or the [Indecipherable] risk. It's not to say that there may be some risk in office in general, but we feel fairly confident that in the markets that we operate in as well as the type of office that we've done and the more focus around medical office that we're probably less worried than some would be.

Jennifer H. Demba - Truist Securities - Analyst

Thanks so much.

Christopher S. Ziluca - Chief Credit Officer

Thank you.

Operator

Thank you. The next question comes from the line of Brett Rabatin with Hovde Group. You may proceed.

Brett Rabatin - Hovde Group - Analyst

Hey, good afternoon everyone.

John M. Hairston - President & Chief Executive Officer

Hey Brett. How are you?

Brett Rabatin - Hovde Group - Analyst

I'm great, thanks. I wanted to ask about the expense guide, 6% to 7% and 4% to 5%, excluding the FDIC and pension. You look at the past two years, and you've been able to manage expenses flat, and I noticed you took out slide 28 that showed the hires. Can you maybe walk through and give us some color on what things you're going to have higher expenses on in the coming year, maybe any initiatives that might be taking place that might also benefit the longer-term profitability of the company.

Michael M. Achary - Chief Financial Officer

Yeah, Brett, this is Mike. So yeah, again, the guide - we gave the guide two ways. One was obviously including the higher pension and FDIC expense. And look, those amounts aren't insignificant pension, that's a $18 million difference - I'm sorry, an $11 million difference. And on FDIC, it's about $5.5 million difference. So those are significant items that really kind of add to the expense base. So if we take a step back and kind of back those out and look at expenses up 4% to 5%.

And again, this is after a year where we're actually down 1% between '22 and '21. I think the biggest driver is going to be personnel expenses and just the normal raises that we'll be looking at for '23 and those will be around 4% or so. Aside from that, I think the biggest drivers will be some technology investments that we continue to make and to continue to invest in the company in that regard.

We have some new hires planned for next year, probably not as many new bankers in '23 all things equal compared to '22. But I think overall, we'll continue to be opportunistic in terms of how we look at those kinds of opportunities. So overall, I think when we look at expenses in '23, it really kind of represents a little bit of a normalization of what we think our expense base probably is on a go-forward basis, excluding kind of the extraordinary increases in pension and FDIC.

Brett Rabatin - Hovde Group - Analyst

That's [Indecipherable] Mike and - I'm sorry, go ahead.

John M. Hairston - President & Chief Executive Officer

You go ahead. It's okay. If you have a same question, let's take that.

Brett Rabatin - Hovde Group - Analyst

No, no, no. I didn't mean to cut you off there. Go ahead.

John M. Hairston - President & Chief Executive Officer

That's okay. I was - what I was going to add to it was just when you look at the two largest ones, which are pension and FDIC, obviously, you don't get the FDIC expense back, right, on the pension side. there's a likelihood that as the market may change a little bit this year or next year, to some degree, those changes swap back the other way. So it's painful to all for this year, but it should swing back and be much more positive, but it will swing back and be more positive contributor at some point next year or the year after that.

The other point, Brett, you mentioned the new investment. I mean, Mike's right, we have been investing a lot of money in technology, and it's really not like catch-up technology core systems. They're all forward-looking technical upgrades that help us to be more effective, more scalable help our bankers to be faster and turnaround business. And a lot of that deployment is continuing to occur as we wrap up last year, and it should be principally done early this year.

And then that actually creates some efficiencies that can benefit on the expense side as we get towards the end of the year. And so I don't want to call it a bubble, but there's the patient overlay to it kind of bore the number up somewhat artificially and the remainder of it are really investments in our future. In terms of the banker adds, right now, the numbers 10 to 20 or so in the plan. The big difference is the types of people that we would anticipate adding in next year. Back when we were sitting on $2 billion or $3 billion of excess liquidity the desire to add bankers that can deploy liquidity, let us more tours middle market and specialty bankers, and that was helping us to start up some of the new markets we expanded to.

As we look at '23, where our focus is more on the sectors that include full relationships. That's going to be more bankers on the smaller end than the middle market. So that $10 million to $20 million will be made up primarily what we call business bankers, commercial bankers and treasury sales staff. So a little different mix, but continued investment in how well we are - we do that talent, and we depend on the availability of people and the alignment with our values and credit posture. But I'm confident we'll see some pretty good gains in good talent as we go through '23.

Brett Rabatin - Hovde Group - Analyst

Okay. Yeah, that's great color. And obviously, you've managed the efficiency ratio well here in the past two years, downward. Wanted to maybe take the deposit question in a different way. I was just thinking about the EDA and non-print that being hard to predict. Would you happen to have handy balances for commercial or retail pre-during and maybe post pandemic current quarter in terms of the size is maybe a way to see how much liquidity like customers have drained out of their accounts.

Michael M. Achary - Chief Financial Officer

I don't have that per se, Brett, what I can share in the way of color is, if you look at our deposit book and kind of think about it in DDA deposits and then basically everything else. When you look at EDA, about 70% of our DDA deposits are commercial in nature. So 30% consumer. When you look at everything else, it flips a little bit, and it's about 60% consumer and about 40% commercial. So if you think about the pandemic impacts and you think about things like surge deposits and if you assume that most of that came from the commercial side.

And yes, we probably had our fair share of that. And certainly, that was helpful in increasing our mix of DDA deposits to nearly half. And certainly, that's come down a little bit. We're at around 47% or so at the end of the quarter. And we certainly have guided to that number probably continuing to trail down a little bit as we go through an environment where rates kind of stabilize at a higher level. So not a direct answer to your question, but hopefully, that's some helpful information.

Brett Rabatin - Hovde Group - Analyst

That's helpful. Appreciate all the color.

John M. Hairston - President & Chief Executive Officer

You bet.

Operator

Thank you. The next question comes from the line of Michael Rose with Raymond James. Please proceed.

Michael Rose - Raymond James - Analyst

Hey, good afternoon. Thanks for taking my questions. Just wanted to dig into slide 7 a little bit. So understanding that the growth is going to slow next year, but you've had some nice tailwind from mortgage. You kind of pointed that out in the slide there. Just wanted to see what the expectations are there?

And then can you just kind of talk about what specific areas you're limiting CRE growth and what some of the headwinds are just looking for some of the puts and takes? And then you mentioned as one of the tailwinds continued line utilization growth. But how much of that is going to be a function of maybe reducing some of those lines versus your lenders actually your customer is actually drawn down just given the economic backdrop that we're in. Thanks.

John M. Hairston - President & Chief Executive Officer

You can start on mortgage and I'll get back to the rest.

Michael M. Achary - Chief Financial Officer

Yeah. So on more mortgage, Mike, you can see that we're up about $250 million or so this quarter. And really about two-thirds of that is really attributable to our onetime close product, again, on the mortgage loan side. We'll have those kinds of impacts. In fact, they will probably increase a little bit related to that product in the first quarter and second quarter, and then really kind of begin to trail down. So the components of our overall growth attributable to mortgage and that onetime product will be rather significant for the next quarter to and then again kind of trail off.

John M. Hairston - President & Chief Executive Officer

So for everything else, I'll start with line utilization. I do not expect to see the overall line availability crash down because we're taking down the limits. I mean that's really a customer-by-customer decision made as we approached renewal or whether there were any covenant issues. That really hadn't been an issue so far, and I don't think it's going to be an issue in the future other than the occasional cat and dog situation occurs up. So if you look at page 7 of the top right, you see kind of where we were pre-pandemic was a little over 48%. So if the trend in '21 and '22 is probably a good one, I think it's dependable.

So depending on the quarter, it may be between 50 and 150 basis points of line utilization increase without much that's going to drive that back down less because sours just tremendously, which we don't anticipate that happening. So we'll still have a tailwind for the better part of probably three years at that current rate to get utilization back to where it was. So that will be a tailwind. Our business banking and commercial banking sectors are likely to continue growing. And our middle market group will be tied to those accounts that typically bring their operating accounts with them.

So all - what I'll call the core business of the company that provides the opportunity to full-service relationships will continue to grow. And frankly, we're directing much more attention to that because of the need for liquidity over the next couple of years to fund loan growth. The sectors that will be more of a push for the year will be those that don't off excess liquidity. So presuming no real downturn in the economy that makes us get more [Indecipherable] about the sector.

I would expect to see CRE health care, the capital market side of equipment finance more flattish for the year. They've been growing at a pretty nice clip for the last several years when liquidity was cheap, and it's just not cheap anymore. So even though the yields of those businesses tend to be very good, if we have to raise liquidity at an unattractive price, then we're dampening NIM as the rate environment goes up and then it stabilizes. So our driver for slower growth isn't a lack of capacity to grow, Michael. It's really all around making sure that the profitability and the earnings efficiency and the NIM itself is insulated while we go through a period of volatility.

And we may be overcautious and to the extent that we're able to gather deposits at a better clip than we're guiding to, then we probably grow loans at a faster clip that we're guiding to. But it's just impossible at this juncture with all the different opinions about which direction the economy is going to go to guide to anything other than what we think is a reasonable level, and that's what we put and the numbers for 23. But if wherewithal the economy allows us to grow deposits quicker than the balance sheet may grow a little quicker than we've anticipated.

Michael Rose - Raymond James - Analyst

Very helpful. And then maybe just - yes, it does. Thank you for all the color. Maybe just one quick follow-up. It looks like you guys benefited from some storm-related gains this quarter on the expenses. Do you have a sense for what the dollar impact of that was? Thanks.

Michael M. Achary - Chief Financial Officer

Yeah, Michael. So for this quarter, that was right around $3 million, and that was related to Hurricane Laura. And as a reminder, it seems like these days, we pretty much have those kinds of recoveries almost every year now. We had one last year in the fourth quarter related to Hurricane Michael, and we're likely to have another one at the end of this year related to hurricane item. So hopefully, that's helpful.

John M. Hairston - President & Chief Executive Officer

Not part of the core business model we intend to have, but it does tend to happen frequently.

Michael Rose - Raymond James - Analyst

Understood. Thanks for taking my questions.

John M. Hairston - President & Chief Executive Officer

You bet. Thank you Michael.

Operator

Thank you. The next question comes from the line of Catherine Mealor with KBW. Please proceed.

Catherine Mealor - Keefe Bruyette & Woods Inc. - Analyst

Thanks. Good evening everybody.

John M. Hairston - President & Chief Executive Officer

Hi, Catherine.

Catherine Mealor - Keefe Bruyette & Woods Inc. - Analyst

Well, I want to circle back to the guidance chart. And I thought it was interesting in that your ranges for fees and expenses are pretty tight ranges. But then the PPNR range is a little bit wider, which would have given you a little bit more of a room for what the spread if you kind of back into that, what the spread could be on the low end of the guide and on the high end of the guide.

And so the only way to get kind of to the low end of that guide would be if your - if the margin maybe increases a little bit in the first half of the year and then falls from maybe current levels. And so just kind of curious how you're thinking about that and what kind of assumptions you were thinking about in your margin as you kind of - as you came up with that range. And is it more of a margin piece or is it more of a balance sheet size piece that's driving the bottom end of that PPNR range? I'm having a really hard time even getting to a scenario where you'd have 13% PPNR growth with the other things you lay out?

Michael M. Achary - Chief Financial Officer

Yeah. I think the answer to the question is obviously an NII, Catherine, this is Mike. And I would say it's probably a little bit more dependent right now as we see it on what happens with the balance sheet and specifically deposits over the course of '23 than really the resulting NIM. I mean, certainly, those things impacted them.

But I think it's really what happens with our balance sheet, whether we're able to grow loans, as John mentioned before, a little bit faster clip than maybe what the guidance is suggesting and that will be very dependent upon our ability to retain and even grow deposits. And certainly, as we mentioned a little bit earlier, some of the change in terms of how we're thinking about managing the balance sheet is the introduction of using cash flows from the bond portfolio to fund loan growth.

And if - as we go through the year, we have better - we have a better experience with growing deposits, then it's certainly likely that we could kind of scale back on relying on the bond portfolio as much. So I think it's very dynamic. It has a lot of different moving pieces and parts. And we try to be very thoughtful around establishing ranges on all the components of our earnings going forward. And again, I think to kind of close the loop the missing piece is really on net interest income and kind of how we think that might happen in trail in terms of how we go through next year. So hopefully, that was helpful. Gave you a little bit of color [Indecipherable]

Catherine Mealor - Keefe Bruyette & Woods Inc. - Analyst

Yeah, very much so. And then on your loan betas, last quarter you were talking about over the cycle kind of 50%, 52% cumulative loan beta. Has anything changed to date with how you're seeing loan pricing? It seems like your new loan yields are coming up significantly higher. So any kind of update on that would be helpful.

Michael M. Achary - Chief Financial Officer

Yeah. As of right now, where we stand, really no change in the overall guidance around both our deposit and loan betas in terms of how we think we'll end up on a cumulative basis for this cycle. So that's probably no worse than about 25% or so on deposits. And then as far as loans somewhere in the low 50s so really no change in that regard.

Catherine Mealor - Keefe Bruyette & Woods Inc. - Analyst

Great. And then lastly, on your CSO goals. Thank you for updating that and having the updated rate environment included in those goals. I found it interesting that you - in this assumption, it looks like you're saying Fed funds have cut in '24 and '25. And even in that scenario, you could still have an ROA above 155 and an ROE over 18. So just kind of curious kind of your thoughts on there and just overall profitability strategies to kind of hit those goals even if rates pull back 2% or 3% level as you indicated on your slide?

Michael M. Achary - Chief Financial Officer

Yeah. Again, as a reminder, the goals are really kind of fashioned to be three-year goals. So we're looking at the fourth quarter of 25%. And certainly, while we see some challenges in 2023. I think the way we're looking at '24, and '24 right now is a little bit more optimistically. And so while we may be in a lower rate environment, we think that we may be in an environment that may be more conducive to us growing the balance sheet more in those two years than in '23. So again, it's - some of this is crystal ball kind of work. But it really is the goals that we've established for ourselves, and this is the way that we're managing the company and holding ourselves accountable.

John M. Hairston - President & Chief Executive Officer

And Catherine, this is John.

Catherine Mealor - Keefe Bruyette & Woods Inc. - Analyst

And would it be fair to assume in that scenario - go ahead.

John M. Hairston - President & Chief Executive Officer

I'm sorry. There is a time lag, I think, I'm sorry, Catherine, I didn't interrupt you. The other color I would add is the work that we did on the expense and the efficiency side that was real. There really were no gimmicks to it. And so as we get to a little bit better time with an expectation of growing the balance sheet, the scalability of the operating footprint should show itself. And so as a result, we really shouldn't experience the type of expense increases that we had in the last expansion period to be as - we would expect those to be lower when you get to the next expansion period.

So that's really the fuel behind both the ROA and the ER being pretty solid is the expectation that we can have a pretty good expense number. I know the guide for '23 doesn't look that way, but we wouldn't see that type of expense growth, I think, in the future, presuming that salary costs and that sort of stuff, don't escalate in '23 and '24 like they necessarily had to '22. So a big chunk of that '23 number is just the full year's impact of tellers becoming 60% more expensive and apply that throughout the rest of the hourly workforce. So, but that shouldn't recur as we get into '24 to '25. Does that help?

Catherine Mealor - Keefe Bruyette & Woods Inc. - Analyst

It does [Phonetic] and that's exactly where I was going. I was assuming that the expense growth wouldn't be at the 6% to 7% pace in future years. So that all rounds up perfectly right. Alright, great. Thank you so much.

Michael M. Achary - Chief Financial Officer

You bet. Thank you Catherine.

Operator

Thank you. The next question comes from the line of Christopher Marinac with Janney Montgomery Scott. Please proceed.

Christopher W. Marinac - Janney Montgomery Scott LLC - Analyst

Hey, thanks very much for all the information today. I just want to piggyback on Catherine's question on loan yields. When you look at the 6.25% new loan yield on variable, does that put any strain on borrowers at this point? Is there any upper bound? Does that most likely reset again in the first quarter in terms of just the ability for customers to handle that and/or their demand at that rate level?

John M. Hairston - President & Chief Executive Officer

I don't think so at this point in time - this is John. The - as Luca mentioned earlier, when we stress test the book that we have right now and do that in some of the different specialty sectors, the forecast as we have it right now really doesn't point to much additional stress. We're not presuming the Fed goes up to a 10% overnight rate, right with that, that'd be a little different world. But - and what we expect now the Fed futures curve, we don't anticipate a lot of stress. Where you'll see the byproduct is where you see them begin to manage spending, and start to - in our expectations, they begin to warehouse operating capital on their own balance sheet versus depending on lending alone. So I think it would be more of an impact on our underwriting going forward and our expectation is the way the customers manage their own balance sheet.

Michael M. Achary - Chief Financial Officer

Yeah, I think that's right. And as John pointed out, I mean we tend to stress our borrowers when we're doing new underwritings or even renewals on existing loans just to make sure that they can withstand what is the anticipated rate rises in the portfolio.

Christopher W. Marinac - Janney Montgomery Scott LLC - Analyst

Okay, great.

Michael M. Achary - Chief Financial Officer

Did I answer the question?

Christopher W. Marinac - Janney Montgomery Scott LLC - Analyst

Yeah. And is it fair to say then that the leverage of your borrowers really is not at a worrisome level, just given their ability to handle from your stress scenarios?

Christopher S. Ziluca - Chief Credit Officer

Yeah. No. I mean, obviously, some individual customers, depending on some of their other challenges that they may be experiencing from an operating cost standpoint that we may not even be aware of could have some challenges. But as I pointed out, we're not really aware of any that have kind of a combination of all of those factors at this point in time.

John M. Hairston - President & Chief Executive Officer

I mean to be fair, Chris, there are always dogs and cats that show up as rates continue to go up. And none of us really know what that ceiling is going to end up. But from a systemic viewpoint or a sector viewpoint, there doesn't appear to be a dragon on its way due to rates or really due to any other strips. So our confidence right now is pretty high, and we'll have to see where we stand as the future [Indecipherable].

Part of the reason that almost reserve is sitting out there in [Indecipherable] is the desire to manage the ACL to about a 75% slower growth scenario with Moody's. And if you look at the way our customers and our markets are behaving right now, they're acting as if it's going to be a soft landing. And I don't know if that's going to happen. None of us really do. But when we build the ACL, the assumptions are a little bit more caustic, which keeps the ACL at a level that we think acts as sort of third base to the environment that we just - we're talking about. Does that make sense?

Christopher W. Marinac - Janney Montgomery Scott LLC - Analyst

No, it does. And just one quick related question back to the Moody's baseline. So you have the same weightings this quarter as you did last quarter. What would have to happen for you to shift to something higher on the slower growth as to go just from 75 to 80 just to pick a number.

Michael M. Achary - Chief Financial Officer

Chris, this is Mike. I think a little bit more conviction and certainty about a recession in the second half of the year. So the Moody's S2 scenario does call for a mild recession in the second half. And we haven't weighted, we think, appropriately right now at 75%, which, by the way, we've kept these weightings in place for three quarters now. So we haven't changed those. But I think, again, to answer your question, a little bit more conviction around a recession in the second half of the year.

Christopher W. Marinac - Janney Montgomery Scott LLC - Analyst

Perfect. Thank you very much for that additional background.

John M. Hairston - President & Chief Executive Officer

You bet. Thank you for the questions.

Operator

Thank you. There are no additional questions at this time. I will pass the call back to John Hairston for final remarks.

John M. Hairston - President & Chief Executive Officer

Thanks Teah, for moderating the call, and thanks to everyone for your interest. We hope to see you all on the road over the next several months. Be safe and be healthy and take care.

Operator

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Q4 2022

Earnings Transcript

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