Good day, ladies and gentlemen, and welcome to Hancock Whitney Corporation's Third Quarter 2020 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, Tricia Carlson, Investor Relations Manager.
You may begin.
Thank you, and good afternoon. During today's call, we may make forward looking statements. We would like to remind everyone to carefully review the Safe Harbor language that was published with the earnings release and presentation and in the company's most recent 10 ks 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, while predict market or economic development 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. In addition, some of the remarks this afternoon 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 ks 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 Ackerty, CFO and Chris DeLuca, Chief Credit Officer. I will now turn the call over to John Hairston.
Thanks Tricia and good afternoon everyone. We are very pleased to report results today that reflect the execution of the derisking strategy we implemented in the first half of twenty twenty. Earlier this year, we absorbed the impact of building a strong pandemic related reserve, issued additional subordinated debt and downsized future risk by divesting approximately $500,000,000 in energy credits. With those actions taken, we return to profitability this quarter. We expect to return to profitability and de risking strategy should lead to improved returns for our shareholders.
Net income of $79,000,000 or $0.90 per share reflects performance in line with our Q3 expectations for operating in today's pandemic environment. Pre provision net revenue was up 7% linked quarter and our provision for credit losses returned to a more normalized level. NIM was flat quarter to quarter, fees improved across all business lines and we kept expenses under control. Today, our reserve for loan losses is a solid 2.16% or excluding PPP loans, 2.4%. We believe at this point we are adequately reserved for potential losses in our loan portfolio, including the impacts COVID-nineteen can have on our clients.
Loans declined almost $400,000,000 with approximately half the reductions from refinancing mortgage balances and home equity lines into the secondary market and the continued drawdown of the indirect portfolio. Our expectation for the near term is that clients will continue to stay on the sideline until the election has been decided and until a widely distributed vaccine is available and accepted as reliable. So while our expectations for loan growth are a bit tempered in the short term, core deposits on the other hand remained resilient despite a continued narrowing of rates. The reliability and continued growth of core deposits allowed a continued drawdown of wholesale and time deposit funding, which in turn helped to support our NIM. Despite the ongoing challenges for businesses operating in the pandemic environment, several credit metrics showed signs of improvement this quarter.
We reported a significantly lower level of provision expense, a lower level of net charge offs and a 7% decrease in non performing loans. Deferrals remained a manageable level with less than $300,000,000 in active deferrals and falling compared to a $3,600,000,000 number at the peak in May. As expected, criticized loans exhibited pressure of $64,000,000 or 18% this quarter. A little less than 60% of the increase is related to the hospitality sector directly impacted by COVID-nineteen. We expect more credits will move to criticized over time due to COVID, but feel we have adequately reserved, thanks to our posture in the first half of the year.
Today, we can confidently report that our balance sheet reflects less risk with a strong reserve, resilient core deposits and solid capital metrics. We began rebuilding the capital spent in the first half of the year with a tangible common equity ratio of 20 basis points to 7.53 percent or 8.12 percent excluding PPP loans. I expect TCE will approximate 8% by year end 20 20. We will continue to consult with examiners on the quarterly dividend and our intent remains to continue paying dividends at current levels with Board concurrence. Before I turn the call over to Mike, I want to mention the impact from this year's hurricane season.
Three storms hit our markets this year, with 2 storms taking virtually the same path over Southwest Louisiana and 1 storm hitting the beach towns of Gulf Shores in Orange Beach in Alabama and the Pensacola MSA in Florida. We know it has been a difficult summer for many of our clients and colleagues in these markets. I specifically want to thank the hundreds of our team members who volunteered to operate locations while fellow bankers secured their homes, and most locations reopened under generator power the day after the storms hit. Our volunteers cooked over 55,000 meals per citizens and businesses in the impacted areas, once again beginning typically 24 hours after storm winds subsided. We will continue to support our clients, communities and our colleagues in these areas.
Despite 3 hurricanes in 6 weeks, we expect no material provision expense related to these three storms. I will now turn the call over to Mike for additional comments.
Thanks, John. Good afternoon, everyone. So as John noted, earnings for the 3rd quarter totaled $79,400,000 or $0.90 per share, obviously a vast improvement over the 2nd quarter and a nice return to profitability for the company. As a reminder, the 2nd quarter's loss of $117,000,000 included a large provision of nearly $307,000,000 $160,000,000 of which was related to the energy loan sale and an additional 147,000,000 dollars that was mainly COVID-nineteen related. Our PPNR came in at $126,300,000 dollars so up a healthy $7,800,000 or 7% from last quarter.
Consistent with our prior guidance, our provision returned to a more normalized level at $25,000,000 The provision covered our net charge offs of $24,000,000 with the remainder building reserves slightly. For the Q4, we expect the provision to again cover our net charge offs. So at this point, we do not expect to significantly build or release reserves. Our balance sheet was stable at 33,000,000,000 Loans were down $388,000,000 with deposits also down to just under $292,000,000 The decrease in loans was reflected across all markets as well as in mortgage, indirect and energy. There were no PPP loans forgiven in the quarter.
We currently expect that PPP loans will remain relatively stable through the end of the year and then begin to significantly decline in Q1 of 2021 as the forgiveness process ramps up. The primary driver of the 292 $1,000,000 drop in EOP deposits was related to our balance sheet strategy to reduce some of our excess liquidity. So while our EOP deposits were down $292,000,000 $392,000,000 was related to a reduction in more costly brokered CDs. Our mix of deposits was favorable this quarter as well with increases in DDA and other less costly deposit categories and then decreases in more expensive retail and brokered CDs. As a result, we were able to reduce our cost of deposits 9 basis points from last quarter.
We also moved about $600,000,000 of cash held at the Fed to the securities portfolio picking up about 107 basis points of yield. This proactive approach to balance sheet management led to a stable NIM for the quarter of 3.23%. Looking forward, we expect the NIM to continue to remain relatively stable in the Q4. Slide 24 is the greenest slide in the deck. All areas within fee income improved linked quarter.
While not at pre pandemic levels, increased activity in service charges and card fees led to increases in fee income. Mortgage banking fees were up again and were a significant contributor to the quarter's overall fee income growth, as was specialty income, specifically bowling. At this point, we do not expect similar levels of mortgage fees or specialty income in the 4th quarter. We maintained our focus on expense control and reported a lower level of expense this quarter with incentive pay and payroll taxes both down. During the Q3, we also saw an overall decline in headcount of 138.
Initiatives we implemented during the quarter such as the closure of our trust offices in New York and New Jersey and a focus on staffing led to higher vacancy nutrition levels. We also announced the consolidation of 12 branch locations in Mississippi and Louisiana in late October. As these expense reduction efforts continue, we expect expenses to be down in the 4th quarter as well. As John noted, we began rebuilding capital this quarter. Our CET1 ratio was 10.29%, up 51 basis points from June and our total risk based capital came in just under 13% at quarter end.
With that, I'll turn the call back over to John.
Thank you, Mike. Operator, let's open the call for questions.
Thank you. Our first question comes from Michael Rose with Raymond James. Your line is now open.
Hey, good afternoon, guys. Hey, Michael. Hey, how are you? I wanted to start with the increase in criticized commercial loans this quarter. I assume some of it's just migration from some of the at risk exposures.
If we could get some color there? And then if you could give some color on some of the healthcare credits that were charged up this quarter, that'd be great. Thanks.
Okay. Sure. Chris, you want to start with that?
Sure. Yes, I mean, as I indicated in some prior discussions, we really didn't anticipate a lot of migration during the 1st couple of quarters. But as we kind of got our arms around some of the specific account level issues, we knew that there was going to be some migration starting to show in Q3. So you're right, a portion, a reasonable portion of the migration this quarter was our ability to better assess the facts and circumstances of some of the credits in the sector under focus as well as more broadly. And so we did see some migration due to COVID.
Yes. And Michael, this is John on the healthcare question. The healthcare charge was almost all one credit that while not specifically a healthcare credit derived a very large percentage, if not all of its income from healthcare offices and while they were shut down, was somewhat egregiously affected. So we opted, while still out of operation, to charge that credit down.
So more of a real estate credit then?
No, no. Services credit.
Service, okay. Got it. And then maybe just a follow-up for Mike. If you can give us the dollar amounts that you would expect would come out of the run rate for fees and expenses for some of the elevated items this quarter, that'd be appreciated just from a run rate perspective? Thanks.
Michael, I'm not sure I heard the last part of the question.
Just what comes out of the run rate for the elevated expenses this quarter and then what will come out for the severance costs and stuff like that for the closing of the offices? Thanks.
Yes. So for the Q3, in terms of any one time costs, they really did offset one another. So the severance that we had as well as some of the costs related to the closure of some of the facilities we called out was really offset by the reduction in incentive comp and a few other items that were really kind of left over from the MSL acquisition. So all of those items actually did offset one another such that the run rate for the Q3 going forward really was the number that we reported. Now in the Q4, we do expect to continue to execute on the same kinds of cost initiatives, cost saving initiatives that we did in the Q3.
So we do expect, all things equal, for expenses to be down in the Q3, probably at least $2,000,000 or so.
You mean in the Q4, correct?
4th quarter, I'm sorry. 4Q
over 3Q.
Yes. Okay. And then what was the BOLI amount this quarter?
It was right at about $3,000,000 Yes, right at about $3,000,000 And again, a lot of that was mortality gains that we don't expect to repeat in the Q4.
Perfect. Thanks for taking my questions.
Michael, good to hear from you.
Thank you. Our next question comes from Brett Rabatin with Hovde Group. Your line is now open.
Hi, good afternoon, everyone.
Hi, Brett.
Wanted to ask about the growth outlook. And I know that things are a bit uncertain and you've obviously been through a challenging year in terms of the energy book and maybe the focus has been more on making sure credit is good. I guess I'm just trying to figure out what the path for growth might be from here and what loan categories you want to grow and what kind of the loan pipeline looks at this point?
Okay. This is John. I'll start and Chris or Mike may want to add color. But let's talk first about the decline from the Q2 to Q3. It is unusually somewhat evenly split between consumer purpose credit and business credit.
Usually, it's not quite that even when we see growth or decline. But the mortgage refinancing activity continued to outperform in 3Q. And in fact, we had record applications after we thought surely it would subside a bit from the record pace in 2nd and Q1, but it didn't and actually went up. And so the impact of that refinance activity to some degree took out balances that were already in our mortgage portfolio as well as home equity lines that were over on the consumer side. So about half of the overall reduction that you see in categories in the investor deck actually sourced at the mortgage refinance and the continued wind down of the indirect portfolio.
And looking at business credits, it was really somewhat across the board and with very few deferrals left and that fell pretty precipitously during the Q3. The amortization rate has essentially been outpacing production, which is roughly for Q3 50% of what it would have been the previous year's Q3. So a significantly lower level of production. I'd say the causes of that are about 80% demand and about 20% a tightened credit risk appetite, while there's still a little bit of uncertainty. So when you look at growth categories in the future, I think they would be those things that would be somewhat obvious.
The sectors that are under focus, while there's maybe a little more demand there, it's not something that we're excited about growing, not right now. And that despite the fact that the hospitality book through most of our footprint has actually been somewhat resurgent as we went through the Q3 and is performing better than perhaps we would have expected a quarter ago, which was better than quarter before that. But at this point, we just don't think that the crystal ball is clear enough to step on the gas too far in the hospitality related sectors. So I think there's life in particular sectors of commercial real estate in certain markets. There's life in the consumer book that is related to real estate secured credit as valuations begin to respond to tightness in the market and then in various categories of C and I outside those sectors under focus.
So I don't want to give the idea that we're not interested in production. We're keenly interested in production. But at this point in time, we're focused on making sure it's sturdy from a credit risk perspective and in markets that we feel like are going to resurge a little bit faster than some of the ones where we may have a larger concentration today. Anything to add to that, Chris or Bob?
The only thing I would add, John, is that certainly the areas that we're not interested in growing continue to be ones that we've kind of called out in the past. So indirect mortgages you just mentioned and then certainly energy.
Would it be fair to assume that you're expecting originations to more than offset payoffs from here?
It's a little hard to tell.
This is John
again. 4Q seasonally can be daunting in terms of production offsets. And this particular Q4 with the election uncertainty has created what appears to be more consternation than one would have expected. A lot of that is because people don't know how to model taxes next year. So while it may be priced into the market from an investor point of view, It's still a degree of uncertainty for those people considering retooling and expanding.
The only exception to that is, I think just because money is so cheap, we are seeing a fair amount of increase in real estate related expansions, but they're not big enough at this point in time to offset production or offset pay downs. Now that being said, there's a fairly significant debate internally over where the trough actually happens. I don't want to get too much into it because we haven't really reached a consensus and I don't think we will until after the election. But certainly, the pace of paydowns versus production is slowing. And I think perhaps the peak of that offset might have been in 3Q.
But it's way too early to call out when the inflection point really occurs.
Okay, great. Thanks for the color.
Of course. Thank you.
Thank you. Our next question comes from Jay Davidson. Your line is now open.
Hey, good evening, everybody.
Hi, Kevin.
I guess, if we can look a little further out on the margin, and I don't know that's tough to do, there's so many moving parts, but beyond Q4, as we look into next year, and let's for now put PPP to the side, but I would think if you think you start growing the loan portfolio over time, some of the excess liquidity continues to fall off. Do you envision being able to keep the margins stable over the next several quarters? Or is that just too tall an order here if we're in a lower for longer rate environment?
Thanks. Yes, Kevin, this is Mike. So certainly, the guidance that we've given kind of go forward really just goes to the Q4. And we feel pretty certain around our ability to maintain the NIM somewhere around where it is right now, so through 'twenty three. Going into 2021 at this point, the visibility and the clarity is pretty murky for the reasons you just mentioned as well as a whole bunch of other things out there, including when meaningful loan growth might resume, things like a full opening of all of our regional economies.
Certainly, that's very dependent upon a vaccine that's available and effective as well as the rate environment. And certainly, if we assume the rate environment stays where it is right now, growing the margin in that environment certainly is going to be a challenge. But it really is too soon I think for us to step out there with guidance right now beyond the Q4. So we'll talk a little bit more about 'twenty one guidance after our Q4 release.
Okay. Thanks, Mike. And you had mentioned before about PPP forgiveness process ramping up and how we should look at the loans staying roughly stable in Q4, but then falling off relatively quickly in Q1. So is it fair to assume the bulk of the remaining origination fee will we should expect to flow through to the margin mostly in Q1 of 'twenty one?
Yes, they'll certainly under the scenario we've outlined related to the forgiveness process and how that plays out, if it does play out that way, then certainly, we'll have some fee recognition a little bit on the outsized basis in the Q1 of next year. Now to the extent that we do have any forgiveness in the Q4, then there will be some fees that will be pulled forward to the Q4 from the Q1 of next year. But as of right now, we're really not assuming that to be a material amount.
And Kevin, it's helpful. There were no PPP loans repaid in 3Q. And thus far, as of this morning in Q4, only about $1,000,000 have been paid down from SBA. But there's $105,000,000 that have already been submitted and we're waiting for resolution. So it's definitely picking up.
How quickly all those get resolved and repaid is kind of tough to forecast, but it does appear that SBA is beginning to expedite that process. So I don't think any of us have clarity as to what that PPA is beginning. And that could plateau out, so who knows.
Let me just ask one quick question on the statement on the dividend. I just want to be clear, is this are you guys just really kind of including that in there? Or does it signal? Any because on one hand, I thought you said pretty clearly intend to pay it. I think last quarter on this call, it came across that it might be at risk and then you guys came out pretty definitively and said you intend to pay it.
Now capital is increasing, you're back to profitability. So is that more just a out of an abundance of caution, you're always having that conversation and consultation with regulators on how we should look at that?
Yes, absolutely, absolutely, Kevin. So it goes without saying that our number one capital priority at this point in time is earning support to the common dividend. That was the case last quarter and that will be the case really on a go forward basis. Because of the losses that we had in the first half of the year, we go through a kind of consultation process with the Federal Reserve and that will continue at least for another couple of quarters. But as we said in the earlier comments and we reiterate it right now, we are very confident in our ability to continue the common dividend at the current levels.
Great. Thanks, Mike. Appreciate it.
Thanks, Matt.
Thank you. Our next question comes from Catherine Mealor with KBW. Your line is now open.
Thanks. Good
evening. Good evening, Catherine.
One follow-up on the margin. I'm just kind of thinking about loan yield. If I back out accretable yield and PPP, I'm getting a loan yield of around 3.88%. So how should we think about where new and renewed loan yields, although I know loan growth is slow, but just as you're kind of thinking where the portfolio is churning, where is that? Are we close to the bottom on new loan yields?
Or how much kind of more downside do you think we have from that 388
Not sure how much downside we have, but certainly your math is correct and kind of backing down to about a 3.88 yield or so. And that also happens to be the yield that in the Q3, we put new loans on the books. So our production levels were about $900,000,000 or so and those loans came on at about $387,000,000 or so. So there should be good support to maintain that loan yield more or less going forward. Now of course, our NIM for the quarter was flat at 3.23%, but if we back out our purchase accounting accretion, the core NIM was actually up a basis point.
So obviously, that's something that's variable.
Got it. Okay. That's helpful. And then your tax rate is 19%. How do you think about what your tax rate would look like if the corporate tax rate went up to 28%?
Well, that's something we're still working through, Catherine. So you're correct again. I mean the 3rd quarter effective rate came in at 19%. We do expect that rate to be a bit lower in the 4th quarter as we're kind of focused on different tax strategies in terms of evaluating and implementing them. But we're not ready right now to come out with what the Q4 effective tax rate might be.
And as we move into next year, if it does go up to 28%, we do have a deferred tax liability at the end of the third quarter that stands at about $47,000,000 So certainly under that scenario that will have to be evaluated. But no guidance on that just yet.
Okay, great. Thank you.
Okay.
Thank you. Our next question comes from Brad Milsaps with Piper Sandler. Your line is now open.
Hey, good evening, guys.
Hey, Brad.
Mike, appreciate all the details around the branch consolidation and some of the headcount reduction. Just kind of curious in the kind of bigger picture, is this sort of the tip of the iceberg kind of on what you guys could potentially have in the works in terms of maybe additional branch consolidation? I know you're not going to give me guidance for next year yet, but just kind of thinking about how you're looking at sort of the expense structure from a bigger picture standpoint. Is this sort of the beginning of something larger? Or is this kind of the end of a plan that you guys have been working on for a while?
No, absolutely not the end. So we continue to focus on these kinds of things, Brad. And what you saw us do in the Q3, I think that you see us do similar kinds of things in the Q4, but there's nothing obviously we're ready to announce right now. And then on kind of a go forward basis, we continue to evaluate other options. And that could be in the form of some larger efficiency kind of exercise.
But again, those are things we're evaluating right now and certainly not in a position to announce.
Okay. And then, wanted to follow-up on some of your comments around the bond purchase. It looks like a lot of that occurred maybe late in the quarter, if I'm looking at the averages correct. Can you give me a sense of kind of where the average yields were of the bonds that you were putting on kind of relative to the current yield
of the book? Sure. I'd be glad to. So the bond portfolio finished the quarter at right at about $6,800,000,000 So it was up just a little bit under $700,000,000 quarter over quarter. We like to keep the bond portfolio somewhere between 20% to 25 percent of average earning assets.
So it's kind of right smack in the middle of that range, if you will. The yield was down 16 basis points, of course. 9 of that was related to higher premium amortization in the quarter. And then the other 7 was basically lower reinvestment yields. So the total amount of money that we reinvested back into the bond portfolio was just north of about 1,000,000,000 dollars About $400,000,000 of that was really just reinvested cash flows, from prepayments and those were up pretty significantly as you can imagine in the Q3 compared to the 2nd.
And then the other $600,000,000 that I called out earlier was running really that we really moved from the Fed earning 10 basis points to the bond portfolio. We picked up about 107 basis points I mentioned earlier. So the kinds of things that we invested back into in the bond portfolio really is characteristic of the portfolio itself. Probably about 2 thirds of that money got reinvested back in mortgage backed securities. The yield there was about 119 basis points.
And then there was another quarter or so that we reinvested in commercial mortgage backed. The yield there was about 105 basis points.
Great. Thank you, guys. I appreciate it.
Sure. Thank you. Our next
I just had a couple
of follow-up questions. 1 on expenses. Did I hear you correctly, Mike, that you expect the decline that you expect in the Q4 is about $2,000,000 sequentially in terms of the expense, Andre?
Yes, that's correct, Ebrahim.
And should it not be more than that given all the actions you've taken? Or was some of that already baked into 3rd quarter numbers, which is why we don't see a greater impact from the expense savings on the branch gains or headcount reductions?
Yes. There's certainly some of that, but a lot of it is timing. And for example, the 12 branches that we announced the consolidation of, those will be closed until really the middle of Q4. So you won't see a full impact a full quarter's impact of that really until you get to the Q1 of 2021. And really the same goes for some of the attrition levels that we were able to achieve as well as the vacancy rates.
So I think most of that you'll see kind of a full quarter and a full year's impact in 2021. So again, once we close the Q4 on the Q4 call, I would expect that we'll give a little bit more granular guidance around expenses as well as other items.
Got it. Plus I would assume there's some pickup on the expense savings if mortgage banking is slower in the Q4 and 1Q, so you should get some benefit there as well?
Right. That's correct.
And I guess just moving to margin to your I guess your response to Catherine's question around the core loan yield. So when we look at sort of the balance sheet and the pressure from the lower interest rate backdrop, is it fair to say that it's essentially tied to the investment securities book given that loan yields are close to bottom and funding costs probably have a little bit more room lower? But beyond all of this, the incremental pressure point is essentially the securities book?
Yes, I think so. But if we look at the Q4 and again, our ability to keep our NIM flat quarter over quarter, kind of the tailwinds that we think about the things that we'll be able to continue to execute on that will offset things like the lower yield in the bond portfolio, deposit costs for 1. I mean, we've had, I think, a pretty good run this year of being able to proactively reduce our deposit costs. We got it down 9 basis points 3rd quarter over the second quarter. The previous quarter was down 30.
So at the level we're at now, certainly we're beginning to run out of runway at 20 basis points. But we do believe that there's additional room to reduce the cost of our deposits. And I think you'll see that in the Q4. We kind of called out a forecast of 17 basis points by December and that's the number that we're kind of hanging our hat on. But certainly there's some ability or capability to outperform that number a little bit.
So that continues to be one of the linchpins, if you will, of how we're able to keep our NIM basically stable at 3.23. In terms of shedding liquidity, the vast majority of that I think is really kind of played out to some extent, but there's still some opportunity to run off some liquidity, which is certainly going to be helpful to the NIM. And then we have great support from our PPP loans. And I think as I mentioned earlier, if there's any PPP loans forgiveness that happens in the 4th quarter, that will be helpful for the NIM because that will certainly pull forward some fees from Q1 of 2021. So those are the things we're thinking about and kind of how we think about our ability to keep NIM stable in the Q4.
Got it. That was helpful. And we had another bank this morning talk about 80% of PPP loans sitting in deposits. What would that number be for you? And should we expect a good amount of deposit runoff when PPP loans are forgiven?
Well, certainly, I think as the PPP loans are forgiven, we'll see money certainly move from the loan portfolio to other areas in terms of average earning assets. How much of that flows out of the deposit base? Certainly, you would think that some would, maybe a material amount. But until that plays out, it really is hard to tell.
Ebrahim, this is John. We tend to look at it more as when spending picks up as opposed to when PPP forgiveness actually happens. And so far, the book has been a lot stickier than we actually anticipated, which has been somewhat of an impediment to deposit service charges, right, because in the CFO, these fees and recurring monthly charges and our fees have been less because the average balance has been higher. So there are puts and takes to when that flow actually begins to occur. But at this point in time, it's been quite resilient, which has in turn helped us to pay down some of the more expensive funding that Mike mentioned earlier.
Thank you. Our next question comes from Matt Olney with Stephens. Your line is now open.
Hey, thanks guys. I want to circle back on credit. And John, you mentioned that criticized loans increased around 18% this quarter. And it sounds like you expect additional migration in the near term. I'm curious what the expectations are from here.
Are we talking another 18% and then just to level off? Or I'm trying to figure out how far along you are in the evaluation of credits that could potentially be downgraded.
Yes. So this is Chris, Luca. Yes, I really I mean, I think we're being cautious in many respects in how we're addressing it because there's always unknown things that can kind of surface that depending on whether or not they roll back any sort of closures of businesses and things like that. But we've gone through our full portfolio and done a pretty thorough analysis of all the credits in our portfolio. We feel pretty good about how we've risk weighted the loans thus far.
So although as you can imagine, given both the COVID and the economic cycle we're in, there will be some impact to customers and it will be somewhat uneven. We really don't see at this stage, and there's plenty of days in the quarter any sort of significant migration downward. There will be some, and then there will also be opportunities to upgrade some credits. Some of our credits have actually done pretty well during the cycle. But as we work through the deferral process and the structured solutions that we put in place, we've used that opportunity in addition to our normal portfolio management process to really be certain about our risk rating.
So it's a little bit of a roundabout answer, but the reality is that I think the bigger migration at this point we saw in Q3 and although things can surface, I don't think we're going to see quite the level of migration at this juncture.
Okay. That's helpful.
Yes. And Matt, this is John. Part of the reason for what Chris shared, and it's obviously based on what we know today, is that about 60% of that migration specifically was hospitality and a lot of that migration was hotel, which is understandable given the situation that we're in. And if you look out over the footprint, occupancy levels tend to be 50%, 60% or better projected for year, which is obviously tremendously better than we saw in the middle parts of 2020. So that migration that happened this year will probably be led by hotels.
And then as we get into next year, it's likely to be things like attractions, event management organizations, people that really are driven by festivals and convention and trade shows more narrowly. And so there'll be several bumps depending on what sector that it is. But I think I would agree with Chris. Obviously, as a company who is looking to improve its image and asset quality given our energy experience over the last 5 years, the review has been in-depth and the expectation and candor in the way we deal with credits is very high. And so I think the 18% migration very accurately reflects what we actually had this quarter.
There's no reaching deeper for effect or pushing anything or kicking a can down the street. So I think it is exactly what we stated.
Okay. All very fair points. And then going back to the healthcare credit that was charged off this quarter, I think in the past, you've divided healthcare into different segments. Which segment was this from? And was this out of the Nashville office?
Thanks.
It was not. And obviously, I don't want to get too much into one credit. That'd be a little inappropriate. But I can tell you it's not out of the Nashville Group. It was a regional credit and it was an organization that while not in the healthcare business derived their income from a multitude of offices that are in the healthcare business.
And so with as much closure as we had across our footprint, a lot of physicians in dental offices were basically closed for the better part of 4, 5 months. And so with that revenue curtailment, we felt the P and L was in position to where we were better off going ahead and trading the treatment of the account now. Okay. That's helpful.
Okay. I think
that's it. Thank you.
Just one more for me. On Slide 15, you gave us a nice graph there of the deferrals and those are obviously coming down and highlights about $222,000,000
of structured solutions.
Do you still anticipate that amount to grow as we get towards the year end? Or you think that $222,000,000 will be relatively stable between now and year end? Yes.
I mean, I'll respond to that, Luca. Yes. I mean, for the most part, I think we've addressed the structured solutions necessary for a lot of our customers. I think we'll continue to look at that as customers that are still in the deferral. We still have active deferrals there of 284,000,000 dollars And if the structured solution is really the right answer for them, then we'll entertain it.
But I don't really anticipate that number increasing substantially between now and the end of the year. And it might go up certainly as we try to put things in the right place and really do the right thing for the customer and for ourselves. But in reality, I think we spent the vast majority of our time in Q3 trying to put the building blocks in place for being able to deal with 2021.
And that
was part of the criticized update as we evaluate which of the restructuring solutions would yield the criticized credit and which did not. So that's where all interlinked.
Okay, great.
I hope that helps you, Matt.
Yes, that's great guys. Thanks, Chip. I appreciate it.
Yes, sir. Thank you for the questions.
Thank you. Our next question comes from Jennifer Demba with Truist Securities. Your line is now open. Thank you. Good evening.
Hi, Jennifer.
I'm just curious as to what kind of trends you're seeing you think you'll see in the Q4, in service charges and card income and mortgage fees. Are you going to continue to see more improvement in those core banking fees? Or and you think seasonality is going to hurt the mortgage income line?
Well, that's a terrific question. And this is John. When we look at fee income, obviously, Q3 was much better than Q2. And even as we take out the outperformance once again in secondary mortgage and in the other income categories, there were a number of BOLI we talked about because it tends to be more lumpy. And so Mike wanted to call that one out.
When you get to the other categories, they were all up. Service charges were up 16%, car fees up 7%, annuities and investments up 10%. But when you compare that same run rate to the Q3 of last year, service charges are down 19%. And so that would indicate that there's still a fair amount of upside in those fee income categories with the exception of secondary mortgage as that production begins to wane. So I would look for a little bit of improvement over time in categories that I've mentioned, because I think there's still upside there as average balances and accounts come down and as we have more foot traffic into the locations and meeting with various investment team members that generate both annuities and investment accounts.
So we just need more traffic to get that particular number up. So I think as deposits migrate out or get spent, we'll see stronger service charge income. As more people get into the seasonal season for shopping, we'll see card fees go up And then investment in news will go up when we can see more traffic. And that's been the toughest one to predict. In terms of secondary, that's you asked that question last quarter and it was a great question then.
I think I said every time we say we think it will go down, it goes up again. So I'm almost hesitant to say it will go down other than the basis that the secondary mortgage income typically seasonally drops off as we get into the holiday season. So I think for that reason, if no other reason alone, we should see it mediate down or moderate down a little bit more than it did last year same time. Did I answer your question?
Yes. Thank you, John. Appreciate it.
Okay. You bet. Thank you for the question.
Thank you. I'm not showing any further questions at this time. I would now like to turn the call back over to John Harrison for closing remarks.
Okay. And thank you, Joelle, for running the call. And thanks to everyone for your interest. Be safe, and we look forward to seeing you live sometime in the future. Take care.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.