Hancock Whitney Corporation (HWC) Q1 2022 Earnings Call Transcript

Hancock Whitney Corporation (HWC 2.08%)
Q1 2022 Earnings Call
Apr 19, 2022, 6:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to Hancock Whitney Corporation's first quarter 2022 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, this call may be recorded.

I would now like to introduce your host for today's conference, Trisha Carlson, investor relations manager. You may begin.

Trisha Carlson -- Investor Relations Manager

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

As everyone understands, the current economic environment is rapidly evolving and changing. Hancock Whitney's ability to accurately project results or predict the effects of future plans or strategies or predict market or economic developments is inherently limited. We believe that the expectations reflected or implied by any forward-looking statements are based on reasonable assumptions, but are not guarantees of performance or results, and our actual results and performance could differ materially from those set forth in our forward-looking statements. Hancock Whitney undertakes no obligation to update or revise any forward-looking statements, and you are cautioned not to place undue reliance on such forward-looking statements.

Some of the remarks contain non-GAAP financial measures. You can find reconciliations to the most comparable GAAP measures in our earnings release and financial tables. The presentation slides included in our 8-K are also posted with the conference call webcast link on the investor relations website. We will reference some of these slides in today's call.

Participating in today's call are John Hairston, president and CEO; and Mike Achary, CFO; and Chris Ziluca, chief credit officer. I will now turn the call over to John Hairston.

John Hairston -- Chief Executive Officer

Thanks, Trisha, and thanks to everyone for joining us. We hope you had a safe and enjoyable holiday weekend. We are pleased to report another solid quarter and a healthy launch for 2022. The company's first quarter results were on track with core loan growth of 8% linked quarter annualized, mix improvement in a stable deposit base, initiation of a widening net interest margin, superior AQ metrics, continuing excellent expense management, improved operating PPNR, and solid capital levels.

Momentum from 2021 carried into the first quarter with an increase in core loans of $385 million linked quarter. This growth more than offset the almost $200 million in PPP forgiveness. Increasing economic activity in our markets, increasing line utilization and pull-through rates, all led to growth broadly across our markets and lines of business. New loan yields rose a couple of basis points as production levels remain strong.

We expect these trends will continue and be more positively impactful as PPP forgiveness impact is a less significant headwind next quarter. Speaking of decreasing headwinds, I'd like to share an update on the New Orleans MSA. As I pointed out on previous calls, most of our footprint experienced record tourism and very healthy hospitality industry segments throughout the pandemic. New Orleans was an exception due to dependence on convention, trade show and festival business as an economic driver.

We are pleased to report a resurgent New Orleans in 2022, beginning with the New Year's Sugar ball game, a robust Mardi Gras season, hotels were booked, festival tourists returned and the city rebounded as a national and international destination. March brought relaxed pandemic restrictions and family tourism surged during the spring break vacation period. We were proud to host the final four basketball tournament and are preparing for the return of the Jazz & Heritage festival and the Zurich Classic golf tournament. Conventions have returned, guided tours and restaurants are fully available, and we hope to see many of you in a couple of weeks at the Gulf-South Bank conference.

So, the New Orleans MSA has joined the rest of our footprint in economic recovery. We're also pleased to report another quarter of superb asset quality metrics. After peaking in the fourth quarter of 2016 at 10.1%, our commercial criticized loan ratio improved for the sixth straight quarter to 1.7% of total commercial loans. From a high of 2.3% in the first quarter of 2018, nonperforming loans are in the ninth straight quarter of improvement and sit at 0.22% of total loans.

And net charge-offs were again only 1 basis point for the quarter. I'm very proud of our team for maintaining diligence throughout the pandemic disruption. The combination of their very hard work and derisking our balance sheet to deliver AQ metrics among the best compared to peers. Our capital levels remain solid.

I recognize that TCE of 7.15% is well off our internal target of 8%. However, the primary driver of the decline is related to valuation of the available-for-sale portfolio at March 31. This was the primary driver of the 56-basis-point decline in our TCE ratio during the quarter and a trend we expect to see repeated across the banking sector due to rapidly rising rates. Other capital metrics remain solid, however, with an estimated Tier 1 ratio of 11.12%, up 3 basis points linked quarter.

We opportunistically continued buying back shares during the quarter and repurchased 350,000 shares at $52.79. And finally, before I turn the call back to Mike, I'd like to update you on the strategic decision we made and announced last month, addressing recent trends by others in the industry regarding consumer segment NSF and OD fees. On March 25, we published a press release detailing the decision to proactively eliminate consumer NSF and certain OD fees by the end of 2022. We shared an estimate of an annual impact of $10 million to $11 million in fee income from that decision.

We believe these changes are in line with an evolving retail banking industry, as traditional banks adjust products to meet consumer needs and provide them with the tools needed to help manage their overall finances. We expect to see improving consumer account acquisition rates in 2023 with this change and as we launch additional retail products and features and expand our digital storefront. With that, I'll turn the call over to Mike for further comments.

Mike Achary -- Chief Financial Officer

Thanks, John. First quarter net income totaled $123.5 million, so down $14.3 million from last quarter, but up over 15% from the same quarter a year ago. EPS at $1.40 per share in the first quarter was down $0.15 from last quarter, but was up $0.19 from the first quarter of last year. Drivers of the change from last quarter included a higher overall tax rate, the absence of last quarter's storm-related insurance gain, and finally, a lower negative provision this quarter compared to last quarter.

A few things for this quarter included continued loan and earning asset growth, but we believe we'll prove to be top quartile asset quality and stellar expense control. The quarter's $385 million core loan growth continues the momentum, began several quarters ago, around deploying excess liquidity into loans than bonds. We also grew the bond portfolio $318 million in keeping with previous guidance around our liquidity deployment plans. Continued growth in loans and earning assets going forward along with higher rates, will result in higher revenue that will position us to achieve our profitability goals and targets.

Our asset quality continues to improve and has reached, what we believe to be, top quartile levels of commercial criticized and NPLs, along with effectively zero net charge-offs. We reduced our reserve release this quarter to $23 million compared to $29 million last quarter, and can envision future releases tapering off to near zero in a few quarters. While there's uncertainty in economic and geopolitical environments, we believe we are well positioned for what that may bring. The company's overall operating expenses on a reported basis were down again this quarter to just under $180 million from $183 million last quarter.

Our ongoing efficiency initiatives continue to help us manage overall expense levels and will continue to do so. We have lowered our expense guidance for the year a bit, so now expecting expenses to range between $735 million and $745 million for 2022. We do expect seasonal drivers such as annual merit increases will likely drive expenses higher in the second quarter, but we are committed to expense levels that will support our 55% efficiency ratio target and longer-term profitability goals. Rate hikes in 2022 now present a tailwind to achieving that goal sooner than expected.

So now just a few other comments related to the quarter. While total deposits were virtually unchanged linked quarter, the bigger story is the shift in mix during the quarter. As you can see on Slide 12 in our deck, at quarter end we're split nearly 50-50 between interest-bearing deposits and DDAs. Seasonal runoff in public fund deposits and maturities in CDs left money sitting in noninterest-bearing deposits.

We expect our deposits will remain at these levels over the near term. We continued our strategy of deploying excess liquidity into the bond portfolio and added $318 million in the first quarter. New purchases and reinvestments totaled $620 million at yield of 2.13%. The revaluation of the AFS bond portfolio at March 31 reflected an unrealized pre-tax loss of $387 million, compared to an unrealized gain of $2.2 million at year-end 2021 and also negatively impacted our TCE.

As of quarter end, our mix of HTM and AFS bonds was 28% and 72% respectively. However, we do have some OCI protection with $1.7 billion of fair value hedges on roughly $1.9 billion of AFS bonds. Details on our current hedge positions are noted on Slide 29. Our NIM for the first quarter was 2.81%, an increase of 1 basis point from last quarter.

Net interest income was virtually unchanged despite two fewer business days and PPP forgiveness. Better earning asset yields and mix, as well as lower deposit costs, added 8 basis points to the NIM. However, the impact of PPP runoff and other items offset that widening and compressed the margin 7 basis points, leaving us with a net increase of 1 basis point. We expect the net interest margin will continue to widen as rates increase, and we have added supplemental information in our deck on Slide 19.

Please note this additional information does not include any potential changes in balance sheet composition or deleveraging activities, which could potentially drive additional NIM widening in future quarters. As you would expect, fees were down linked quarter as rising rates continue to impact secondary mortgage fees. We expect fees will be a challenge moving forward and have lowered our guidance for 2022 to reflect both a rising rate environment and our announcement last month regarding the elimination of NSF and certain overdraft fees later this year. So, a solid first quarter and a good start to the year.

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

John Hairston -- Chief Executive Officer

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

Questions & Answers:

Operator

Thank you. [Operator instructions] We will pause briefly as questions are registered. The first question is from the line of Brett Rabatin with Hovde Group. Your line is open. 

Brett Rabatin -- Hovde Group -- Analyst

Hey, good afternoon everyone.

John Hairston -- Chief Executive Officer

Hey, Brett.

Brett Rabatin -- Hovde Group -- Analyst

I wanted to first ask, you've got the slide on the hires this quarter and you tweaked the expense guidance down a little bit. I was curious if you could give us an update on -- it's nice to see the hires. And obviously, that will help your loan pipeline over time. I assume you have some other plans as indicated that you'll continue to grow that in '22.

Have your expectations changed for hires? How has that affected your expense growth outlook? And then maybe just color on what your pipeline does look like from a hire perspective. 

John Hairston -- Chief Executive Officer

This is John. Thanks for the question, and thanks for recognizing it. Now we've had some good success in the quarter. That's probably the most number of bankers have added in one quarter in a goodly number of time -- a good long time.

I think some of the increase that we've seen is coming from outside interest in us versus just recruiting efforts. And we would expect that to continue as we go through the rest of the year. 

Mike Achary -- Chief Financial Officer

Yeah, Brett, the thing I would add to what John just stated is, relative to the guidance we gave and a little bit of a change certainly, that recognizes, I think, the great start that we had to the year in terms of our ability to further reduce expenses from the fourth quarter of last year. So, getting off to a great start in that regard. But again, we're also guiding for folks to expect the levels of expense to kind of increase as we go through the year. So, we have the normal seasonal things that drive that, such as, raises and the month of April.

So, we'll have a full impact of that in the second quarter. And then, of course, in addition to that, you'll have a full quarter's impact and really a full year's impact of the new hires that we added last year, but we are obviously working hard to achieve that guidance. And certainly, the end result is the 55% efficiency ratio before the end of this year. And you'll note that the ER came in at 56% this quarter.

So again, a pretty good start toward getting that goal accomplished. 

Brett Rabatin -- Hovde Group -- Analyst

OK. I appreciate the color there. And then I want to make sure I'm clear on the margin, and Slide 19, I want to make sure that's a static balance sheet perspective, right? I mean, obviously, with lowered liquidity continuing a strong possibility, it would seem like those numbers could even be conservative. In terms of the margin, which brings me to the question about the balance sheet management, and if you would expect to continue to have the trends you had in the first quarter in terms of reducing liquidity.

And then obviously, your DDA is up $2 billion over the past year. You did make a comment about expecting or had a comment in the press release about expecting that to possibly go back a little bit toward interest-bearing. Maybe you could just give us some color on the balance sheet.

Mike Achary -- Chief Financial Officer

Yeah, I'd be glad to. So certainly, when we look at the size of the balance sheet and think about the guidance that we gave around deposits, we're not really expecting the size of the balance sheet to really increase much from where it is now. In fact, with the guidance on deposits to be flat to slightly down, you can certainly look for the size of the company to kind of mirror that. So really for 2022, the most efficient and effective way, we think of managing our balance sheet is what we began really in the first quarter, and that is the deployment of all of our excess liquidity.

So, our excess liquidity was down a bit from the fourth quarter to the first quarter. We haven't changed our guidance around loan growth, so the 6% to 8%. And then also, we have not changed our guidance with this notion of increasing the size of the bond portfolio on a net basis by about $300 million or so per quarter through the end of this year. So I think all of those dynamics kind of mixed together is the way we're thinking about managing the balance sheet on a go-forward basis.

You also asked about Slide 19 in the earnings deck. And we added that slide really just to give folks a little bit of guidance as to what we're expecting or how we're expecting our NIM to react really for every 25 basis points of rate hikes on a go-forward basis. So your earlier assumption is correct. It really doesn't assume that there are any changes to the composition of the balance sheet on a go-forward basis.

So there's certainly, I think, an opportunity to kind of outperform that, should we continue to be effective in deploying excess liquidity.

Brett Rabatin -- Hovde Group -- Analyst

OK, great. Appreciate all the color.

Mike Achary -- Chief Financial Officer

Thank you.

Operator

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

Catherine Mealor -- Keefe, Bruyette and Woods -- Analyst

Thanks. Good evening, everyone.

John Hairston -- Chief Executive Officer

Hey, Catherine.

Catherine Mealor -- Keefe, Bruyette and Woods -- Analyst

One follow-up on the margin just with Slide 19. Any color you can give us on how you think about deposit betas and what your assumptions are? 

Mike Achary -- Chief Financial Officer

Yeah, Catherine. So, the way we're thinking about our deposit betas, if you go back to Slide 14, we kind of talk about the historical both loan and deposit betas from the last time we were in an up-rate environment. And you'll note that deposit betas were around 25%, and that's on total deposits. So kind of on a go-forward basis, the assumptions that are built into Slide 19 around deposit betas are that we, generally speaking, would mirror that same deposit beta experience that we had the last time rates were up.

So around 25% on a total deposit basis.

Catherine Mealor -- Keefe, Bruyette and Woods -- Analyst

Great. OK. Perfect. And so my way of thinking about the Slide 19 is, if we think that there's another, I guess, fixed hike, then in total, that will get us kind of somewhere between 21 and 30-some basis points of NIM expansion with just kind of a static balance sheet, but then as you deploy excess cash and that move, call it from 10% today to maybe I don't know, somewhere around 5%, 6% or something like that, then you could see additional expansion on top of that.

Is that a fair summary of what this --

Mike Achary -- Chief Financial Officer

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

And what we're kind of assuming at that point is that the deposit betas will probably kick in a little bit, and we would begin paying a little bit more for deposits than for the first 125 basis points or so. 

Catherine Mealor -- Keefe, Bruyette and Woods -- Analyst

Great. And then maybe one last question just on buybacks. How do you think about how the lower TCE just from the AOCI hit, maybe potentially limit share buybacks in the near term? However, your valuation is a really attractive level to be buying back shares today. So how do we kind of think about that push and pull?

Mike Achary -- Chief Financial Officer

Yeah. So, certainly, a fair point to make that 7.15% is not really where we would normally like to operate the company at from a TCE point of view. But to be honest with you, it really doesn't change our thinking around how we manage capital or the priorities around how we go about that. So something like the buybacks, given the kind of opportunistic way we've been looking at that, the last couple of quarters, I think in our minds, TCE at 7.15% really doesn't change that.

So I think you can continue to see us or expect to continue to see us to remain opportunistic and I think if you look back over what we've actually done for the last couple of quarters, that's a good guide to use of what we kind of mean by being opportunistic in terms of how many shares we might look to actually buy back. Of course, a lot of that depends on the disruption that happens during the quarter in the market. And the last two quarters certainly had, I think, more than its fair share of disruption. So you saw the number of shares that we bought back.

Catherine Mealor -- Keefe, Bruyette and Woods -- Analyst

Very helpful. Thank you so much.

John Hairston -- Chief Executive Officer

Thank you.

Operator

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

Michael Rose -- Raymond James -- Analyst

Hey, good afternoon, everyone. Just wanted to go to Slide 6.

John Hairston -- Chief Executive Officer

Hey, Michael.

Michael Rose -- Raymond James -- Analyst

Hi. How are you? So, it's been good to see the line utilization creeping up, looks like we're back to third quarter '20 levels. If you can just give some color on what's driving that? And then just, as kind of a separate question, you did mention the Central Region in the press release was virtually unchanged from the quarter. But John, if I hear your comments, it sounds like everything is open for business.

So, it was just an issue of paydowns versus production levels on Slide 7, so pretty strong and healthy. Thanks.

John Hairston -- Chief Executive Officer

Thanks. And I'll start with the line utilization. If you looked at the trends on Page 6, Michael, you can see that utilization continued to decline throughout '20, really all about the pandemic and the cash inflow from stimulus and the life of spending. And then as we got to the bottom around the early part of '21, it began to expand.

And generally speaking, that pace of utilization, the slope has been pretty consistent all through the last several quarters. And we would expect that to continue as different clients burn through some of their excess liquidity themselves and to lever as opposed to use cash. And so if concern about any economic downturn were to occur more quickly than the utilization may drop up or down a little bit less steadily than it has the last several quarters, but we really based on what we're seeing in economic activity in the southeastern part of the country, which is our footprint, we would anticipate seeing that curve relatively steady, steady in terms of slope upward.

Michael Rose -- Raymond James -- Analyst

OK. And then in the Central region? Just any commentary there?

John Hairston -- Chief Executive Officer

Specifically, in New Orleans, well, I mean, as I said in the prepared comments, we've always had a little bit more of this fair share, the downturn and the pandemic due to the impact on the largest events in tourism. The restrictions there by the local government were a little bit more arduous in New Orleans than the rest of our footprint. And so that also stymied some of the economic growth occurring quickly. That all really reversed itself as we got to the latter areas of '21.

And so for the first-time last quarter, we got to pretty much a push in New Orleans and in this quarter, enjoyed some good expansion. So I really think when I use the sentence, New Orleans has joined the economic recovery and the footprint has been enjoying that, that's quite literal in terms of that activity. So we feel as if New Orleans is going to expand. Now our market presence there is, we have a very sizable market share.

So it's not like the growth opportunity on a percentage basis, we would see in Dallas or Houston or Tampa or any of the markets we've entered more recently that are high growth. But just the magnitude of the book there and the disruption around it, we would expect New Orleans to be more of a growth story this year than we've had in some time.

Michael Rose -- Raymond James -- Analyst

OK. Helpful. And then maybe just one follow-up question for me. On Slide 20, you talk about moving to that mid-50s efficiency target by the end of the year.

Can you remind us of the puts and takes to that? What could -- I assume rates -- hire rates would obviously get you there faster. But outside of maybe mortgage, what are some of the potential headwinds that you see that could prevent you from getting there? Thanks.

Mike Achary -- Chief Financial Officer

Probably the -- Michael, this is Mike. So probably the biggest headwind I can think of really two, I guess. And one would be that our performance in terms of fees for the next couple of quarters, ends up being a lot worse than the guidance that we've given. We're not expecting that to happen, but that's certainly an area that could be impacted.

The other item would be, I think that maybe the assumptions that we're making around in inflation and wage costs, certainly could again be a little bit higher than what we're expecting on a go-forward basis. Now granted, we're not expecting either of those things to really kind of get in a way or present any kind of significant challenge, but you asked about the headwinds and those are the two that I can think of.

Michael Rose -- Raymond James -- Analyst

Thanks for taking my questions.

Mike Achary -- Chief Financial Officer

Thank you, Mike.

Operator

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

Casey Haire -- Jefferies -- Analyst

Thanks. Good afternoon, everyone. Question on the fee guide. So down 1% to 3%.

That would imply from this run rate, $83.4 million. By my math, that looks like you would need to get that fee run rate back to at least $86 million-plus in the remaining three quarters. I'm just curious, what are the drivers to get you there?

Mike Achary -- Chief Financial Officer

I think the -- this is Mike. I think the biggest thing I can get us from where we are now to that level is this notion of specialty income. So that includes a whole bunch of fee income categories, things like BOLI, derivative fees, unused line fees, things of that future. And that particular fee income category can be pretty volatile quarter-to-quarter.

The first quarter, I think, was a bit low compared to our normal run rate in what we consider specialty fees. So in my mind, that's probably the way we get there.

John Hairston -- Chief Executive Officer

Casey, this is John, just -- I'm sorry, I stepped on you. 

Casey Haire -- Jefferies -- Analyst

No. No. Go ahead. 

John Hairston -- Chief Executive Officer

The only thing I would add -- the only thing I would add to Mike's comment is our Treasury area and Merchant area has had some pretty robust new sales activity over the past several quarters that looks as if it will continue to upwardly trend. And so that business card, merchant income growth is typically going to be a little different in Q1 of the year than the rest of the year, and we would expect to finish the year at a pretty good high clip compared to the past. The other area is inside the wealth management area, remember, Q1, the market really did perform terribly well for a goodly part of the quarter. That has a pretty profound impact on AUM fees and then rebounded in March.

And so, for the second quarter throughout, unless the market falters pretty significantly, we would expect a little bit of performance out of Wealth, given the performance of the market has improved from the first of the year.

Casey Haire -- Jefferies -- Analyst

OK. Very good. And on the cash position, you guys pulled forward -- I mean you guys were targeting $1.2 billion of deployment in the securities book this year. You pulled forward a nice bit in the first quarter here.

Is there -- I'm assuming that was because of the rate backdrop. Is there an opportunity or an appetite rather to accelerate the deployment like you did in the first quarter? 

Mike Achary -- Chief Financial Officer

As of now, Casey, I would tell you, the answer to that is, no. But that's a decision that we monitor very closely. And certainly, we could decide in coming quarters to accelerate that a little bit. Especially, if the go-to yields for new bonds remained at the levels that it is now.

So that's certainly a possibility. Although, right now, as of today, we have no plans to accelerate.

John Hairston -- Chief Executive Officer

Yeah. I think in loan growth obviously is a material part of that quarter end, quarter out decision. Q1 typically and seasonally is a very low growth quarter for us in loans, but Q1 outperformed pretty well, and that's on top of the paydowns that leaked from fourth quarter to first quarter that I mentioned on this call three months ago. So we were quite pleased with the growth through historic level in Q1 and it certainly supports the high end of the guidance that we've given for loan growth.

So, the higher that number ends up being through the year, then the less pressure we really have to deploy liquidity through securities. But as Mike said, we really have to make that decision quarter by quarter. I don't think we would be -- we wouldn't object to either one, just depending on the algebra of where the outlook looks on loans.

Casey Haire -- Jefferies -- Analyst

Got it. Thank you.

John Hairston -- Chief Executive Officer

Thank you.

Operator

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

Jennifer Demba -- Truist Securities -- Analyst

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

Chris Ziluca -- Chief Credit Officer

Yeah. So, this is Chris Ziluca. Yes, I mean, I guess, any of our loans that are not -- that are floating rate probably are a little bit more at risk to some degree, but a lot of our customers swap out. So that tends to protect them on the upside.

So I would guess, in general, commercial real estate could be impacted a little bit depending on whether or not it translates into any further -- any cap rate compression or the like, but we don't currently anticipate that. We obviously stress that in our underwriting quite substantially. So, we feel that our portfolio can kind of withstand a reasonable amount of rate increase in that regard. And then as it relates to normalized charge-offs and obviously, we're at essentially zero right now, and we don't really see anything in the immediate future that would suggest a substantial increase or return to historic levels even on average.

So I wouldn't want to speculate where that might end up, but I do believe that it will be on a run rate basis, probably less than we've experienced in the past, if you take out some of the lumpy situations that give rise to some of the higher charge-offs.

Jennifer Demba -- Truist Securities -- Analyst

Thanks so much.

Chris Ziluca -- Chief Credit Officer

You're welcome.

John Hairston -- Chief Executive Officer

Thank you, Jennifer.

Operator

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

Your line is open.

Kevin Fitzsimmons -- D.A. Davidson -- Analyst

Good evening. Thanks for fitting me in here at the end. Just one quick question on the guidance on the provisioning. So with the language now being about tapering off the next few quarters, previously, it was modest reserve releases expected over the next several quarters.

And Mike, I think you kind of characterize that as modest being kind of similar to what you guys had done. So is that -- I mean, I think it's very reasonable, given the uncertainty that's out there that, that might have changed. That -- like maybe, will step down what we were going to do in terms of reserve releasing. But I just want to -- I just wanted to make sure I was interpreting that correctly getting in between the wording and what you were trying to say there.

Mike Achary -- Chief Financial Officer

Yeah, Kevin, I think you kind of articulated that exactly the way we meant it. So really this process or this notion of tapering down our reserve releases really kind of began in the first quarter. So we're down to $23 million or so reserve release from about $28 million or so last quarter. So we've already kind of begun that process.

And in the guidance, we kind of talked about this tapering to continue maybe for a quarter or two. So without providing any hard guidance, I can certainly envision that we could have another quarter or two where we have reserve levels or reserve release levels that step down and eventually in a couple of quarters, be pretty much at zero in terms of reserve releases. So that's how we kind of think about it and what we kind of envision happening. Obviously, that's very dependent on a lot of things that Chris just kind of talked about.

Our levels of charge-offs and certainly, the levels of commercial criticized and NPLs, they are at great levels now. And certainly, if that continues, then the reserve levels will kind of follow. Probably the biggest wildcard out there is, things, like, kind of geopolitical kind of events and implications, and what happens with the macro economy along with the forecast for that on a go-forward basis. So certainly, a lot of uncertainty out there in terms of the impacts from those kinds of things, most of which we really can't control, but what we can control is the things like our own asset quality, and that's what we're focused on. 

John Hairston -- Chief Executive Officer

And the pace of loan growth could affect that as well, like -- you got to -- deal with the Moody's scenario is turning a little bit darker this quarter versus others. The tapering that occurred this quarter was really a map exercise. AQ levels were truly stellar. And so, we really had nothing to do with it.

It was all around Moody's scenarios and also, thankfully, a second quarter of net loan growth above the PPP forgiveness. If you -- we've got a deck page in there around PPP forgiveness impact on Page 8. And you can see the trend where the amount of headwind we're suffering from PPP, declined precipitously from 4Q to our first quarter, and then it declines to getting pretty close to immaterial next quarter. That's really because the contra to growth as PPP forgiveness is going down.

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

Mike Achary -- Chief Financial Officer

That makes sense, Kevin? 

Kevin Fitzsimmons -- D.A. Davidson -- Analyst

Yes. No. Perfectly. Thank you.

John Hairston -- Chief Executive Officer

Thank you.

Operator

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

Brad Milsaps -- Piper Sandler -- Analyst

Hey, good afternoon.

John Hairston -- Chief Executive Officer

Hey, there.

Brad Milsaps -- Piper Sandler -- Analyst

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

John Hairston -- Chief Executive Officer

It's a great question. It's a fair question. And I hate to say it's too early to tell, but it really is a little early. The account acquisition activity, I mentioned in the prepared remarks, really comes from a couple of sources.

One of those would be new products. Another is the growth of our digital channel. We really have underperformed in terms of digital sales. It's a lower percentage of our total new accounts than many of our peers.

And the reason for that is, we spent a fair amount of time and money for a couple of years getting all of the infrastructure of the company, whether it was in financial systems, people systems, core technology, sales technology, and all that built out, and intended to have the digital channels ride those same rails, so it was more efficient. And then as we kept new technology developing, we could do it for a lesser cost for change than we would have, if we were trying to support the old legacy systems and the new stuff. And so I think we made the right call, but ultimately, and then we rolled out fewer activities on the digital side when it comes to sales. So as we get closer to the end of the year and all the new digital tech for sales rolls out, although it'd be automatic underwriting, screening and whatnot occurs, then I believe we will see happening is a natural lift, because our growth in digital sales, given where we're coming from, will be a little bit steeper slope to the good than some of our peers.

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

Does that help?

Brad Milsaps -- Piper Sandler -- Analyst

Yes, thanks, John. And maybe just two follow-ups for Mike on the funding side of the balance sheet. Mike, I noticed that the cost of public funds were down about 10 basis points linked quarter. Can you talk about maybe the driver there? And then I think historically, those deposits have been fairly rate sensitive, but also I know it's subject to longer-term contracts.

Can you talk about how those will react as rates rise? And then second question is, I think you guys have about $1.1 billion in borrowings that are puttable back to you by the FHLB at their option. Do you need to think about, you're marking some of the cash that you have on the balance sheet to sort of absorb those if, in fact, they do put those back to you?

Mike Achary -- Chief Financial Officer

Sure. I'd be glad to, Brad. So the first question about public funds. So it's a great question.

So part of the way that we've been able to reduce the total cost of that line of business around funding costs is really contracts that have expired and basically new pricing in place, based on the current rate environment. So how those deposits react on a go-forward basis to the extent that they are variable, then obviously, they'll float back up to some extent, to the extent that they're on the fixed side than some of that cost is kind of been locked in. So it really just kind of depends on the individual depositor and the contract that's in place for them. As far as our home loan borrowings, that's another good question.

Yes, we have that $1.1 billion of borrowings that has been in place for quite some time. We're paying around 50 basis points for that. That could get called really as soon as the current quarter, we'll see. Kind of depends, if the home loan bank, if they have that hedged, it's potentially how they have that hedge.

But certainly, I think it will be an advantage to us, certainly, if we can get that called and get that cost off the balance sheet. We are -- although, we have kind of earmarked that $1.1 billion as a potential use of the excess liquidity we currently have on the balance sheet. So if it does happen, obviously, we have liquidity to fund that outflow.

Brad Milsaps -- Piper Sandler -- Analyst

Absolutely. Thanks, Michael, really appreciate it.

Mike Achary -- Chief Financial Officer

You bet.

Operator

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

Matt Olney -- Stephens, Inc. -- Analyst

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

John Hairston -- Chief Executive Officer

Thanks for the question. It's -- what we put in the guidance was -- or the press release was before the end of the year. And I mean, there's an operating exercise we have to go through the build out, the testing, do the disclosures, and all that. So, there's a little bit of that in the fourth quarter with the assumption that we'll begin it in 4Q, and that's cooked into the fee guidance that Mike gave a little earlier.

To the extent we get it done earlier in the quarter, it could be more, to the extent it is late, might be a little later on. So, the $10 million to $11 million we gave for the expectation of 2023, it's a pretty simple interpolation down to the monthly run rate. That's pretty reasonable, not for every month, like a short month in February and longer months like July, the numbers fluctuate. But if you just take an average for December, that would be a pretty good measure to use.

So, while we -- again, we don't expect necessarily December 1, if we get too far into the Central, we never really put any significant code changes in as we get into the holiday season. So, if we don't get it done before the first of December, it will likely be effective January 1 or 12/31.

Matt Olney -- Stephens, Inc. -- Analyst

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

Thanks.

John Hairston -- Chief Executive Officer

Sure. Glad to share that. And I'll be brief on some of the history. But a few years ago, we noted that we had developed through a lot of good transactions, good acquisitions, good organic growth.

We had quite a high concentration really right along the Gulf of Mexico. So from an investor point of view, sometimes when we had a stormy hurricane season, we would get a little pressure from people concerned about the resiliency of the marketplace. We usually see a net positive impact from storms, but certainly, they can be disruptive, particularly in a bad storm season. And so purely to decrease our risk footprint and also we thought to stabilize value creation for investors, we opted to begin expanding in the markets in Texas for really two reasons.

One, to spread our risk. And then secondly, because the growth rate in several of the Texas markets that we have a profound interest in, is a good bit higher of a GDP annual run rate basis of growth in the markets we were already in. And so it was really both from a growth perspective and then from a derisking perspective. That was all done deal and in the plans before the pandemic occurred.

Certainly, that got accelerated by the pandemic as we built so much excess liquidity. And so our entry into several markets in Texas and the pace with which we're adding bankers has as much to do with the recent pandemic buildup of liquidity and the desire to deploy it correctly, as it is to derisk and to get into other markets besides the ones we're in. So you're correct, and it's branch-light. Initially, it's more business or commercial-focused.

We quickly chase that with a treasury offering, because we're really good at treasury. So, we do an awful lot of treasury services sales and card deployment for business purposes like purchasing card. Right after that, a wealth management play, all of which we tackle with CRA in mind to ensure that we don't run afoul of our corporate commitments to the Community Reinvestment Act and to underserved communities, in those more urban markets. And so we really don't do a lot of branching outside CRA service plays until we get a little bit more of a material book.

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

Matt Olney -- Stephens, Inc. -- Analyst

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

John Hairston -- Chief Executive Officer

Thank you very much. Appreciate the question.

Operator

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

Christopher Marinac -- Janney Montgomery Scott -- Analyst

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

Mike Achary -- Chief Financial Officer

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

Christopher Marinac -- Janney Montgomery Scott -- Analyst

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

Mike Achary -- Chief Financial Officer

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

Christopher Marinac -- Janney Montgomery Scott -- Analyst

Great. And then just one more quick one. Back on Slide 7. I know you talked earlier in the call about the modest improvement in the new loan yield.

Should that change a lot if Fed funds rate is materially higher one or two quarters ahead?

Mike Achary -- Chief Financial Officer

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

Christopher Marinac -- Janney Montgomery Scott -- Analyst

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

Mike Achary -- Chief Financial Officer

You bet.

Christopher Marinac -- Janney Montgomery Scott -- Analyst

Thank you.

Mike Achary -- Chief Financial Officer

You're welcome.

Operator

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

John Hairston -- Chief Executive Officer

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

Operator

[Operator signoff]

Duration: 52 minutes

Call participants:

Trisha Carlson -- Investor Relations Manager

John Hairston -- Chief Executive Officer

Mike Achary -- Chief Financial Officer

Brett Rabatin -- Hovde Group -- Analyst

Catherine Mealor -- Keefe, Bruyette and Woods -- Analyst

Michael Rose -- Raymond James -- Analyst

Casey Haire -- Jefferies -- Analyst

Jennifer Demba -- Truist Securities -- Analyst

Chris Ziluca -- Chief Credit Officer

Kevin Fitzsimmons -- D.A. Davidson -- Analyst

Brad Milsaps -- Piper Sandler -- Analyst

Matt Olney -- Stephens, Inc. -- Analyst

Christopher Marinac -- Janney Montgomery Scott -- Analyst

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