Hancock Whitney Corporation (NASDAQ:HWC) Q2 2022 Earnings Conference Call July 19, 2022 5:00 PM ET
Company Participants
Trisha Carlson – Investor Relations Manager
John Hairston – President and Chief Executive Officer
Michael Achary – Chief Financial Officer
Christopher Ziluca – Chief Credit Officer
Conference Call Participants
Kevin Fitzsimmons – D. A. Davidson
Brett Rabatin – Hovde Group
Jennifer Demba – Truist Securities
Casey Haire – Jefferies
Brad Milsaps – Piper Sandler
Michael Rose – Raymond James
Catherine Mealor – KBW
Christopher Marinac – Janney Montgomery
Matt Olney – Stephens Inc
Operator
Good day, ladies and gentlemen, and welcome to Hancock Whitney Corporation’s Second Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, this call may be recorded.
I will now like to introduce your host for today’s conference, Trisha Carlson, Investor Relations Manager. You may begin.
Trisha Carlson
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 risk and uncertainties identified therein. You should keep in mind that any forward-looking statements made by Hancock Whitney speak only as of the date on which they were made. As everyone understands the current economic environment is rapidly evolving and changing.
Hancock Whitney’s ability to accurately project results or predict the effects of future plans or strategies, or predict market or economic developments is inherently limited. We believe that the expectations reflected or implied by any forward-looking statements are based on reasonable assumptions, but are not guarantees of performance or results, and our actual results and performance could differ materially from those set forth in our forward-looking statements. Hancock Whitney undertakes no obligation to update or revise any forward-looking statements, and you are cautioned not to place undue reliance on such forward-looking statements.
Some of the remarks contain Non-GAAP financial measures. You can find reconciliations to the most comparable GAAP measures in our earnings release and financial tables. The presentation slides included in our 8-K are also posted with the conference call webcast link on the Investor Relations website. We will reference some of these slides in today’s call.
Participating in today’s call are John Hairston, President and CEO, Mike Achary, CFO, and Chris Ziluca, Chief Credit Officer.
I will now turn the call over to John Hairston.
John Hairston
Thank you, Trisha, and thanks to everyone for joining us today to discuss another solid quarter. The momentum we’ve reported the past few quarters continues and we hope you agree reflects a company well positioned for today’s uncertain environment. As expected, the movement in rates served as a tailwind this quarter and helped us beat our targeted efficiency ratio of 55% well ahead of plan.
Also as expected the upward rate migration pushed our NIM back over 3% as earning assets repriced and deposit betas lagged. Core loan growth exceeded our expectations of over $700 million, more than offsetting this quarter’s run off in PPP loans. Improving line utilization, production in all geographic markets across our footprint coupled with a strong showing in healthcare, real estate and mortgage. These were all contributors to the 13% linked quarter annualized growth.
We are especially pleased to report that almost $150 million of the quarter’s growth were from bankers and expansion markets across our footprint particularly Beaumont, Dallas and San Antonio in Texas and Jackson in Mississippi. Even with the strong second quarter however we continued prior guidance for the year at 6% to 8%, but with a clear bias to the high-end of the range. In 3Q, we expect a moderation in pipeline and pull-through rate followed by a rebound in Q4.
So moving onto deposits where we reported a 2% run off. The drivers were commercial clients converting cash on their balance sheet into working capital and some opted to use excess liquidity to pay down debt in light of increasing money rates. We saw normal seasonal reductions from public funds and consumer clients paying taxes and there was a portion of migration elsewhere in pursuit of higher rates. That was relatively no change in our best-in-class deposit mix with almost half in DDA and the other half in low-cost categories.
Credit continued improving despite being at historically low levels last quarter. NPLs and criticized loans declined once again and net charge-offs were actually a recovery for the quarter. As a result of this performance, we finished the quarter with a strong allowance at 1.55%.
I’ll begin my comments saying we believe we are well positioned for today’s environment. I would refer you to Slide 20 in our earnings deck to observe the rationale for that case.
With that I’ll ask Mike to share any further comments.
Michael Achary
Thanks, John. Good afternoon, everyone. The second quarter was another solid quarter with net income of $121 million and EPS of $1.38 per share. The results were down slightly linked quarter mostly due to a lower negative provision for loan losses as we complete our reserve release tapering.
Compared to a year ago, earnings increased from a $1 per share to $1.38 per share. As a reminder, the same quarter a year ago included $42.2 million or $0.37 per share of net non-operating items related to efficiency initiatives we undertook last year. The successful execution of those initiatives helped the company become more efficient and have positioned us well for today’s uncertain and challenging environment.
Operating pre-provision net revenue or PPNR totaled $147 million, up $12.4 million or 9% linked quarter and up $9.7 million or 7% from a year earlier. Three operating themes we think drove our results in the second quarter. Those included the impact of overall higher rates, the end of reserve releases and higher operating expenses, mainly due to increased personnel costs. The movement up in rates was beneficial to our results as earning assets repriced, new loans and securities were added to the balance sheet at much higher yields, the majority of our floors on loans reset, and we lagged in moving deposit costs up. We also shifted our mix in earning assets as we used excess liquidity to grow loans, invest in the bond portfolio and fund deposit runoff.
In addition, the majority of our remaining federal home loan advances were called during the quarter. As a result of this activity, our NIM for this second quarter widened 23 basis points to 3.04%. Also important to note is that June’s NIM of 3.24% provides a better indication of how the rate moves and mix shift within the balance sheet is impacting our net interest income today. Even more important is our expectation and guidance that the NIM in July should begin the third quarter at around 3.35%. Please refer to Slides 7, 12, 13 and 18 in our earnings deck for additional information on second quarter’s results and future expectations for NIM.
Our asset quality metrics were again improved this quarter with NPLs and levels of commercial criticized loans down slightly to historically low levels. In addition, we saw a net recoveries of 700,000 and our ACL remained very strong at $339 million or 1.56% of loans excluding PPP.
As a result, we did released $9.1 million of reserves this quarter and we believe we have now seen the end of reserve releases. Expectations are that our ongoing provision levels for the next few quarters are likely to be zero or low as model scenarios become more pessimistic.
Another driver for the quarter was higher operating expenses. While most expense categories were stable, personnel expense increased almost $8 million. As noted on Slide 15, there is some seasonality to this line item is annual merit increases are paid in April. This year the average raise is 3.25% and added $2.2 million for the second quarter’s base salary totals.
Incentive pay increased $3.5 million in the quarter as company and individual performance reflected a solid first half of the year. Also an additional day in the quarter increased the total by $1 million and finally we have another $1.1 million of increase related to higher headcount in wages due to inflationary pressures.
The increase in FTEs for the first half of this year has been primarily related to filling vacancies in the Consumer Bank with increases also in commercial banking, technology and our corporate internship program.
It’s important to note that while expenses were up, the improvement in NII and fees more than offset the increase, resulting in an efficiency ratio of 54.95% meeting our target earlier than expected, which takes us to guidance. Slide 17 and 18 are updates to our near-term and NIM guidance and reflect both the impact from past rate moves and our expectations for rates for the remainder of this year.
And finally, a couple of closing comments on capital. Our TCE while again impacted by OCI did increase 6 basis points to 7.21%. Our capital levels remain solid with CET1 over 11% and leverage estimated to be up 30 basis points linked quarter. Again a very solid quarter that’s helped to position us well for today’s environment.
With that I’ll turn the call back to John.
John Hairston
Thanks, Mike. Let’s open the call for questions.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] The first question is from the line of Kevin Fitzsimmons with D. A. Davidson. Your line is now open.
Kevin Fitzsimmons
Hi. Good afternoon, everyone.
John Hairston
Hi, Kevin.
Kevin Fitzsimmons
Just wondering if you can — you guys brought it up earlier John about deposit declines and we’ve seen that from some banks already. And just curious what your thoughts are on that? And related to the ability to grow NII and specifically it seems like the past few years we’ve had NII growth driven by the balance sheet, while the margin has been hurt by this excess liquidity and now that’s reversing? And so are we looking at — I know you don’t give guidance specifically on NII, but do you feel confident that you can grow NII driven by the percentage margin even if average earning assets is relatively limited by that cash being drawn down? And maybe I’m not characterizing right if that’s not what you expect, but if you can just kind of address that topic? Thanks.
Michael Achary
Yes. Hi, Kevin, this is Mike. I’ll start answering the question and certainly John can add some color. Buy yes, I think you have that right. So what we’re expecting from this point for the rest of the year, if you look at our guidance is really for deposits year-over-year to be kind of flat to slightly down. Now that implies over the course of the second half of the year, net-net for deposits probably to be down a bit from where they are now, so not expecting a lot of earning asset growth in the second half of the year. And in fact we still have the last of our home loan advances that will likely be called at the end of this month. So you could see some additional deleveraging in the second half of the year.
But we absolutely expect the NIM to continue to widen, really with the tailwind of higher rates and for NII to continue to grow as we go through the back half of the year, so those are things that we have high confidence around happening. And certainly as far as deposits go, again, the guide is really for deposit to be flat to slightly down. So that’s how we’re kind of thinking about the second half of the year with respect to NII and the NIM.
John Hairston
Kevin, this is John. The other thing I would add to it is, there is no lack of capacity to grow deposits. The retail franchise and the commercial franchise are very good at doing that. At the same time without a vehicle to deploy it, from this point forward pretty close to dollar for dollar. I think letting the loan deposit ratio ease up a little bit for the purpose of net interest income and overall earnings is a little bit more important to us than bolstering the currently — it’s moderately excessive now versus grossly excessive in terms of liquidity. So that really drives not a capacity, it’s really just balance sheet management leading to that posture.
Michael Achary
And then the last thing I would add is just a reminder around the mix of our deposit base, it’s absolutely tremendous. And we certainly see ourselves holding onto that favorable mix as we go through this environment.
Kevin Fitzsimmons
Yes. And that — listen it’s ironic that I’m talking about shrinkage of excess liquidity is a problem, because we’ve been talking about that as the main headwind for quite some time. So it should be seen as a good thing. But I’m just wondering just to dovetail off that, just wondering if it does — that has happened so quickly at least quicker than I thought. Does they may be accelerate that deposit beta or that or take away that lag on deposit pricing more than you might have otherwise had? And not just you guys, in particular, but all banks and does it. What does it do about likely secure purchases going forward too?
John Hairston
Yes. So in terms of the second question first around the bond portfolio, I mean, if we just think about the composition of our earning asset base and how that’s likely to be deployed in the second half of the year. I mean, you’re right for the most part this notion of excess liquidity really has kind of played out. And we’re kind of back pretty quickly to traditional ways of managing the balance sheet, not having all of that excess liquidity. So certainly the focus is going to be continued on growing our loan book. And we have guidance for additional loan growth in the second half of the year. And as far as the bond portfolio is concerned, we will probably grow with a little bit from where it is right now. But I don’t think you’ll see a lot of net growth for the second half of the year in the bond portfolio, that’s at least how we’re looking at it now.
And then your first question around deposit betas. Yes, they’re starting off I think pretty low for most banks right now. I think most banks are following that same philosophy around, kind of, a controlled way of looking at deposit betas. But I certainly think that, that’s going to pick up as we go through the back half of the year and especially if the Federal Reserve raises rates as expected. So I think that will play out probably more towards the fourth quarter, but we’ll certainly see.
Kevin Fitzsimmons
Okay, great. And one just quick question on the loan growth, I was just curious why you expected at the moderate in third quarter, but then to rebound in fourth quarter? I’m assuming it’s some kind of seasonality, but just if you can add a little there? Thanks.
John Hairston
There is a little seasonality there, Kevin. The primary driver is and as we go through the second quarter obviously growth was — it was very good, it was very diverse, it was spread across geographies and specialties both the pull-through rate and the scaling of the pipeline early in the second quarter was better than we expected. So it was all good news. As the price increases got worked into our modeling especially the 75 bps increase that happened in June and we were modeling another 75 for July. So as that rippled through our pricing for fixed rate lending, we saw a pretty sharp reduction in terms of what the fixed rate pipeline looks like for 3Q.
And if you assume a 60 day average close for something that requires appraisal and such that the pipeline work we do in June reflects what’s going to happen in August, right? So the reason we’re given the guidance for the moderation as we saw competitors pretty significantly lagging in terms of adjusting pricing models for fixed rate deals really beginning in June, they’re only just now. And when I say just now, I mean, the last several days beginning to see bids that are more similar to what we’re suggesting. So the pipeline has a hole in it for the middle of Q3. And we also have some scheduled pay downs of projects on the CRE side that are normal pay downs scheduled for 3Q. So it’s a little bit of seasonality. Some of it is the fact that we’re dealing with pricing with the assumption of a 75 bps.
And then maybe even another quarter or two and the following months in our pricing model and at this point in time we’d rather get priced properly than have any more bulk in terms of just sheer growth. So it isn’t a sentiment take down, it isn’t a lack of demand. I think it really was just a bubble. It lasted about six weeks or so and a pricing gap. And I think that will historically that takes about six to eight weeks and that’s looks like what’s going to happen at this time.
Kevin Fitzsimmons
Okay, great. Thank you, everyone.
Michael Achary
You bet. Thank you for the questions.
Operator
Thank you for your question. The next question is from the line of Brett Rabatin with Hovde Group. Your line is now open.
Brett Rabatin
Hey, good afternoon, everyone.
John Hairston
Good afternoon, Brett.
Brett Rabatin
Wanted to — you mentioned deposit betas a little bit. Wanted to just to kind of talk about the progression of the margin from here and I appreciate the 3.35% guidance for July, the math makes sense. As we think about the remaining rate hikes from here, the loan betas and the deposit betas. Can you talk about how fast you expect the deposit betas to accelerate, i.e, at what point do you think that the deposit betas will start to slow the migration upward of the margin in the next six months?
Michael Achary
Hey, Brett. This is Mike. I’ll give you a few comments related to that question. So related to the NIM, I think overall just given the trajectory of what’s happened with rates and what’s likely to happen, not only at the end of this month, but as we move into September and then the potential for the Fed to continue increasing maybe at a slower rate in November and December. I think we’ll see the majority of the margin expansion that we’re anticipating for the second half of the year. I think we’ll see most of that in the third quarter. Not to suggest that we won’t see any in the fourth quarter. I believe we will, but I think all things equal. We will see most of it in the third quarter.
I also think and believe that by the time we get to the fourth quarter, we’ll begin to see, I think the full impact of deposit betas. Not to say there won’t be some impact in the third quarter, but I think again as we look at the second half of the year that impact probably is going to be weighted more toward the last part of the year. So hopefully that’s helpful.
Brett Rabatin
Yes, that’s — Mike, that’s very helpful. Appreciate that. And then just wanted to talk about the guidance for efficiency ratio and you kind of have it staying below 55%, but it would seem like it could migrate based on even the guidance for revenue and expenses from here towards 50%. Is there a reason why you didn’t want to give any different guidance on the efficiency ratio in terms of where it trends in the next six months to a year?
Michael Achary
No. No specific reason at all. We just felt like given the detail of the guidance that we gave on Slide 17 above the efficiency ratio that certainly the math would take that number down to the level that you suggested. So it was really kind of a given as opposed just specifically calling out there.
Brett Rabatin
Okay, great. And then maybe just. I’m sorry, go ahead, John.
John Hairston
I’m sorry, I stepped on you, Brett. The bottom of Page 18 that last bullet point might be one that you are looking for in the earlier question around just what the NIM expansion is as increases go up in the timing. So I think you can back into where you’re headed with that bullet point.
Brett Rabatin
Okay. Well I just was trying to figure — what I guess, John, was trying to figure out on Page 18 what the assumption was for the deposit beta, so that’s all. Everything that you guys have said was very helpful. Just quickly last was just thinking about everyone is talking about recession and what that might mean for our balance sheets and growth or lack thereof? How are you guys thinking about the opportunity for market share movement in a recession? And what do you think happens assuming we are in a recession in ’23? How you respond to that in terms of growth or lack thereof?
John Hairston
Yes. I’ll start and that’s a great question that could go a few different places around the table, but I’ll begin and anybody else can chime in who wants to. In terms of our growth appetite, at this point in time, given sort of the position, we find ourself and we outlined that on Page 20 of the deck. Our offensive hiring, our posture is to continue, there’s a lot of good talent out there. We have a terrific synchronicity between the treasury function and the line leadership. We have great synchronicity between the line and credit leadership. And as we have dialog with incoming bankers with experience, they appreciate the observation of that. And I think that’s led to some really good success of people that have joined the organization in the last four to six quarters.
And so with that success behind us, we would presume that it’s also in front of us and we’ll continue doing offense of hiring and till we — until something changes. So I don’t think that slows, in a recessive environment, there’s always winners and losers in that environment and to the extent that there is any further disruption around us then that would also provide an opportunity for growth. And I think we would probably looking pretty hard at deposit gathering if we went into a recessive environment if we’re still hiring people that would generate loans. So I don’t think you’d be any different than it’s been in prior cycles. It’s nice to go into a cycle, if we have one from a position of strength with the loan loss reserve and the very low levels of credit and an NPL loans. So we got to start off in a good place with a good strong reserve.
And so I think with all that rolled together, we will keep doing exactly what we’re doing today with the exception is we would respond to protect the deposit book. So we’d see betas begin to climb up as we ensure we hold on to those core relationships in the future. Did I answer what you were looking at or would you like some more clarity?
Brett Rabatin
No, that’s really helpful John. I appreciate all the color.
John Hairston
You bet. Thanks for the question.
Operator
Thank you for your question. The next question is from the line of Jennifer Demba with Truist Securities. Your line is now open.
Jennifer Demba
Thank you. Good afternoon. Just curious on your share repurchase appetite. At this point, I know you got about 2.7 million shares left on the authorization?
Michael Achary
Yes, Jennifer. This is Mike, so that will absolutely continue I think in the second half of the year. We’ve always kind of described our appetite is being opportunistic. And admittedly we probably bought maybe more shares in the second quarter than we expected. But certainly given the amount and level of market disruption, we saw that opportunity to do so. So we will continue to be opportunistic in the second half of the year. Just maybe not at the same level that we bought shares back in the second quarter.
Jennifer Demba
Okay, thanks. And back on the hiring topic for just a second. Are there any particular markets where you’re seeing relatively more opportunities right now?
Michael Achary
That’s a good question, Jennifer. Our focus is really on the growth markets just simply, because as we hire teams and individuals and the book in areas of the company where the natural expected organic growth rate is higher. To the extent we can find folks there and particularly teams, we’d like to take advantage of that. But here in the last quarter, you noticed the mix of people is a little different with about half the people we hired were in those growth markets. And about half in the core and the folks that are in the Louisiana, Mississippi, Alabama area of the footprint that were added were really more opportunistic hires. So I would probably say it’s going to be by the time you look at one year’s view, probably 80% or so of those hires will be in very high growth markets where we have low market share, but very good opportunity.
Jennifer Demba
Thank you.
Michael Achary
Yes, ma’am. Thanks for the question.
Operator
Thank you for your question. The next question is from the line of Casey Haire with Jefferies. Your line is now open.
Casey Haire
Hi. Yes, thanks. Good afternoon, everyone. So I guess question on the bond book. If deposit growth I know you guys are kind of looking to add to that going forward. If deposit growth remains tough in a Fed tightening cycle you know what is the — you guys have a decent size bond book at 27% of the balance sheet. How much of there — is there an opportunity to fund out of that — fund the loan growth out of that like how willing — how small are you willing to run that portfolio as a percentage of balance sheet?
Michael Achary
Casey, this is Mike. So we’ve run the bond portfolio probably as low as maybe 20% to 22% of earning assets. Admittedly a 27% is probably on the high end. Our sweet spot probably is around 25% or so. Those are just kind of broad parameters. But again giving that the intent right now based on how we look at the second half of the year is to grow the bond book, I would say modestly from where it is now. So that’s kind of how we think about that.
Casey Haire
Okay, understood. And then just on the indirect book, which is amortizing, is that due to less demand or just less appetite on your part or a combination of both? And how big is that portfolio?
Michael Achary
It’s — Casey that’s a business we exited or exited new production in maybe six, eight quarters ago. I believe it was the year for last, there’s about $160 million less in the book and it’s been running off at — it started at $40 million a quarter is down with a two handle now in the — I think probably three more quarters of that and the amortization is going to become immaterial.
In terms of strategy, I mean, that the risk adjusted returns begin to skinny up and what we saw coming were higher prices, too many different features getting built into the principal of the note. And if we went into a credit cycle we were seeing losses per instrument that didn’t look terribly attractive to us and so we opted to get out and use that liquidity for other purposes. So that’s the reason it’s amortizing.
Casey Haire
Got you. Thank you.
Michael Achary
You bet. Thanks for the question.
Operator
Thank you for your question. The next question is from the line of Brad Milsaps with Piper Sandler. Your line is now open.
Brad Milsaps
Hey, good evening.
Michael Achary
Hi, Brad.
Brad Milsaps
Mike, I just wanted to follow up on Casey’s bond question. Just curious it look like the yield stayed relatively flat linked quarter that you’re doing some reinvesting there not buying a lot of new, but just could you comment on that the ability to see that maybe some lift there as well or is that kind of we think sort of stuck in this range?
Michael Achary
No. Thanks for the question, Brad. And no I don’t think we’re stuck in that range, but the yield on the bond portfolio was up 2 basis points quarter-over-quarter. We did buy about $472 million of bonds that contributed obviously to the growth, as well as reinvested any maturities or pay downs. The new bonds that we bought came on at $342 million, so certainly a very, very nice yield. I think part of the issue is a lot of those purchases tended to happen later in the quarter. So the impact in the second quarter was a little bit muted. I think you’ll see a little bit more of a significant yield pickup in the coming quarter.
Brad Milsaps
Great. Very helpful. And then just a follow-up on the loan beta discussion. Is there any reason this cycle, you wouldn’t think you would see a sort of a 48% loan beta as you saw last cycle. Just the rate increases are coming so quickly. Do you think it will be difficult to pass along or some of the way competed away or in your mind you think you can sort of achieve that same beta that you saw last time around?
Michael Achary
Yes, absolutely, on the loan book, our intent is to have our loan beta match. The last time when we were in a break cycle and really right now we have no reason to believe that it would be any different. And so far our experience is proving that out, but obviously we’re early.
Brad Milsaps
Sure and thank you for that. And maybe just one final one for me. There are a lot of kind of puts and takes on fees this quarter. Do you kind of have the seasonal trust lift from tax prep fees, a couple of things went the other way. It looks like the guidance would imply that quarterly fees sort of stay flat from here. Can you guys kind of discuss just a little color on that? I assume you think there is some offset coming to maybe the trust, the seasonal trust fees coming back down. But just kind of curious any additional color there would be great? Thank you.
John Hairston
Yes. Great observation, and thanks for that question. Yes, the cards, investments, and trust business all had pretty outsized performance in Q2. The account services number was a little down, but we would expect that to bounce back in the third quarter. So I think just from a put and take, I think we will probably see is unless we see a little bit more business that we think trust would be down by the amount that was in the seasonal tax planning fees and then the account services categories ought to be up that amount or maybe better.
So I think your overall observation is accurate. It will just be delivered a little differently. The only category in there that’s really challenged I think for the third quarter, fourth quarter really a secondary mortgage simply because of the environment. Not a lack of interest or activity. It’s just that on the secondary side with rates being what they are over 6%. It’s a little bit more muted in terms of how much we’re selling.
Brad Milsaps
Great. Thank you, guys. Appreciate all the color.
Operator
Thank you for your question. The next question is from the line of Michael Rose with Raymond James. Your line is now open.
Michael Rose
Hey, good afternoon, everyone. Thanks for taking my questions. Just two quick ones, just on credit, so things are really good right now. Any sort of signs on the horizon that would give you any sort of pause. I know you guys have done a lot of de-risking, getting out of energy scaling back on the consumer that gave you trouble a couple of years ago. Losses have been really low the past four quarters. NPAs are down substantially criticized, classified pretty stable to trending lower. Any reason to think that we would see at least in the near-term a pickup in charge-off levels at this point? Thanks.
Christopher Ziluca
Yes. Hi, Michael , it’s Chris Ziluca. Yes, I don’t — at this point in time, I think, obviously we’re at a very low level from a historical perspective on our asset quality. And it’s hard to imagine that it’s going to get a lot lower just because we’re really balancing essentially on the bottom. But from a charge-off perspective, they tend to be kind of lagging indicators and we don’t really see a lot of that in the immediate future. Obviously, it really just depends on exactly how the current environment as it relates to inflationary pressures and supply chain issues impact individual customers. And then also whether or not a recession really starts to take hold or not. But at this point in time, we’ve done a lot of due diligence on our portfolio. We have a lot of routines in place to surveil exactly what’s going on with our customers and with individual segment. So we’re feeling confident at least being able to identify issues and deal with them earlier in the process.
Michael Rose
That’s helpful. Maybe just one final one for me, just on the three-year CSOs, the footnote around not including future rate increases was not in the slide deck this quarter. I didn’t know if there is anything to read into it obviously if you look at in the futures curve, I mean, there is some expectation that we could see some rate cuts. Any plans to update those I know you typically do that annually. And then just wanted to confirm that those targets do not include rate increases? Thanks.
Michael Achary
Yes. Michael, this is Mike. Yes, the CSO I’ll confirm for you that they continue to not include any assumptions around higher rates. And as far as updating the CSO, you’re correct, we typically update those on an annual basis. So you’ll certainly see an update when we release earnings after the fourth quarter.
Michael Rose
Okay, great. Thanks for taking my questions.
Michael Achary
Okay.
John Hairston
Thank you.
Operator
Thank you for your question. The next question is from the line of Catherine Mealor with KBW. Your line is now open.
Catherine Mealor
Thanks. Good evening, everyone.
John Hairston
Catherine, how are you?
Catherine Mealor
Good. My follow-up question on just the size of the balance sheet. You gave guidance that you think PPNR is going to be up 16% to 18% year-over-year. And so as I think about — I think we’ve gotten a lot of the different components of that, we’ve got kind of where margins going in the back half of the year. We’ve got loan growth. We’ve got fees and expenses. So I think the one missing piece of that is maybe just the size of the balance sheet. And so is it fair to assume within that PPNR guide, we’re kind of keeping the securities portfolio relatively flat. And then but being a pretty significant decline in your excess liquidity. Is there a — I guess and it is a question is, is there a level that you think the excess liquidity will hit by year-end, kind of, baked into that guidance?
Michael Achary
Yes, Catherine, this is Mike. So as I kind of mentioned before, I really do think we’re at the point where we’ve kind of return to more traditional ways of managing the balance sheet. And by that I mean without the benefit of all the excess liquidity, that we had going into the quarter. So we deployed a lot of that excess liquidity this quarter. We started with the better part of $3.9 billion and ended with just under $900 million of course a bunch of that was deployed in terms of growing loans. We continue to grow the bond book, we funded deposit outflows. And then we had the better part of $1 billion of our home loan advances were called during the quarter.
So that brought us to the level that I mentioned at June 30th and then from there going forward I think the broad assumptions you just kind of articulated, absolutely makes sense and is consistent with really how we’re looking at the second half of the year. So the excess liquidity I think probably over the course of the next quarter will be largely gone and the balance sheet again at that point I think kind of operates in a more traditional fashion potentially with some level of borrowed funds by the end of the year.
Catherine Mealor
Great. That’s helpful. And then if we think about the June margin, what were loan yields for the month of June?
Michael Achary
I don’t have that with me again for the quarter, it was 3.86%, and certainly I think the information we gave around at the month of June shows continued margin expansion, as well as kind of what we’re expecting in the month of July and the 3.35% or so.
Catherine Mealor
Okay, got it. And then assuming most of that’s coming. I guess I’m just trying to figure how much of that kind of 3.35% that we’re going to get in 3Q is coming from the full quarter’s impact of the excess liquidity versus backing into what’s happening with loan yields. And securities have two deducted line, that have a lot this quarter?
Michael Achary
Yes, a major part of it is really, you know, LIBOR resetting after the big rate hike that recently happened.
Catherine Mealor
Okay. I think everything else was in there. Thank you so much. Great quarter.
Michael Achary
Thank you.
Operator
Thank you for your question. The next question is from the line of Christopher Marinac with Janney Montgomery. Your line is now open.
Christopher Marinac
Thanks. Good evening. Mike and team I wanted to ask about the scenario where the floors all expire next year once the fed funds rate gets us 3.50%. Can customers take on floors today, what can you sort of get through and how do you envision the environment where there was a fed stops raising rates or perhaps rate started to go back down?
John Hairston
Yes. It’s a great question. It’s amazing to here just six or eight months that we’re contemplating women rights really begin to rise. We’re actually talking about being all the way through our floors in the space of next quarter. So that’s we’ve had to rapidly figure out what we actually can do. So what’s reported so far and this is literally in the last two or three weeks is that we’re able to get floors, but we haven’t been far enough into having those conversations with clients to set any kind of an expectation into 2023. So I’ll be able to give you a better answer to that probably in a couple of three months when we get to the end of this quarter. We obviously are trying to set it and it’s not a hard conversation, given where rates are, which really too early to be able to tell right now.
Christopher Marinac
That’s fair, John, and I guess just a general question related is do you presume that the general mix between floating and variable would be the same or do you think you’re able to perhaps influence that mix of these next few quarters?
John Hairston
Another good question. So if you look at the — I can’t remember which page it is, but we show the breakdown between variable and fixed rates is Page seven of the deck, you’ll see the last five quarters or so that shows how much is fixed, how much is variable. The second quarter of this year was the highest percentage and the highest number of variable loans that we book and the fixed amount was the lowest percentage and one of the lower numbers, so certainly the trend toward a higher variable mix happen. And if you look back over time, we probably are at the most variable rate as a percentage of the book that we’ve been at in our modern history. So that was purposeful and it’s serving us pretty well right now as you see by the NIM expansion.
As we move forward, I suspect, third quarter will probably be and again we’re a month in even more pronounced given the pricing competitive that we saw in June and the effect on the pipeline I mentioned in answering one of the earlier questions. And then in terms of the fourth quarter, it’ll probably go back down to the average of the previous three. So that’s a little bit of crystal ball work. It has a lot to do with who we hired, where we hired and how much progress we make in marketing at some of the disrupted organizations for variable rate loans. But we like keeping that percentage pretty high and then we’ll hedge the risk on the downside as we get into ’23 and ’24.
Christopher Marinac
Great. That’s really helpful, John. I appreciate that and just the last quick one for Mike is just on the CET1 capital ratio. With buybacks and future quarters growth kind of caused that number to come down or would you imagine that 11% level can stay stable?
Michael Achary
Absolutely. Believe that we can keep that level 11% or higher as we go forward through the second half of the year. Really the reason it was down slightly quarter-over-quarter was really an increase in our risk weighted assets as we traded excess liquidity for loans primarily. So given the excess liquidity is probably played out, you probably won’t have that trade to that same extent going forward. But to answer the question 11% plus is absolutely where we think we’ll operate that ratio at going forward.
Christopher Marinac
Good. Thank you all very much for the time today.
John Hairston
You bet. Thank you for the questions.
Operator
Thank you for your question. The next question is from the line of Matt Olney with Stephens Inc. Your line is now open.
Matt Olney
Yes, thanks for taking the question. I just want to go back to the deposit discussion. On deposit, John, you gave us good guidance on deposit balances. Help us appreciate the mix of deposits and directionally what you expect. I think the NIB balances are now 49% of total deposits. If we go back a few years ago, it was 39%, so quite the improvement over the last two or three years. We’d love to hear more about your expectations of maintaining that mix of NIBs around these current levels? Thanks.
John Hairston
Sure. I’ll start and Mike can jump in. Historically I think you called out the correct number a few years ago and when we talk around the table around, where we think that will settle as the remnant of the Ida Hurricane money is spent and the remnant of the PPP liquidity is either invest in working capital or spend on enhancements or used for some other purposes. It would be conceivable to see that mix in the mid to low-40%. At the same time, we continue to add a good bit of variable rate loan business and when we do that we expect to get operating accounts along with it and the very bulk of all that is in DDAs. So I think a four handle is a reasonable expectation may not stay at 49.5% or and that kind of range, but a mid-40% to something that we would love to target as we move forward. Mike any comments?
Michael Achary
Yes, I agree completely, John. I think the 49%, 50% is extraordinarily high and may not be sustainable in a higher rate environment. So a lot of the dynamics that John just described probably depends on how high rates go and how long before they start to come down again, down the road, but certainly believe and think that when it’s all said and done through this rate cycle that we are somewhere I don’t know let’s say 42% to 45% somewhere in that range, but also and in the days when we ran 39%, we had a little bit less density in the C&I variable rate book. We have more clients and we have more markets to generate those types of clients and more bankers in those markets and we had just a few years ago. So I’d be disappointed if we returned all the way back down to where we were before given the change in the book. And I would expect that the enhancements in the loan book to generate better mix overall in deposits as we get to the up to a more normal cycle season. Does that makes sense?
Matt Olney
And John follow-up on that. Yes, that makes sense. You mentioned the insurance proceeds is one of the impacts there. Are you seeing the insurance proceeds move out yet. And if not when do you expect to see more of that impact?
John Hairston
What we do we are and not to get too far in the geographic leads, but the storm really hit in the lower parishes of Louisiana and the bulk of the real devastation where you see buildings destroyed in that sort of thing. Those take two or three years for that liquidity to really flow out the impact of the storm in New Orleans and then Jefferson Parish proper was really tied more to rooftop damage and that sort of thing that gets repaired and so I would say a 12-month period. Is that makes sense? So the chunk of it that’s in New Orleans is largely already spent and the chunk of it that is down in Homeland area of the — as we call it the lower parishes, is still under underway and it probably will go another year, year and a half.
Matt Olney
Okay, that’s helpful. Thank you guys.
John Hairston
Okay. You bet. Thank you.
Operator
Thank you for your questions. There are no additional questions waiting at this time. So I’ll pass the conference back to John Hairston for closing remarks.
John Hairston
Thanks Matthew for running the call and thanks to everyone for your interest and dialing in late in the day after a long day. We hope you have a terrific evening and we look forward to seeing you on the road.
Operator
That concludes the conference call. Thank you for your participation. You may now disconnect your lines.
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