Good day, ladies and gentlemen, and welcome to Hancock Whitney Corporation's third quarter 2023 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, Kathryn Mistich, Investor Relations Manager. You may begin.
Thank you, and good afternoon. During today's call, we may make forward-looking statements. We would like to remind everyone to carefully review the safe harbor language that was published with the earnings release and presentation, and in the company's most recent 10-K and 10-Q, including the risks and uncertainties identified therein. You should keep in mind that any forward-looking statements made by Hancock Whitney speak only as of the date on which they were made. As everyone understands, the current economic environment is rapidly evolving and changing. Hancock Whitney's ability to accurately project results or predict the effects of future plans or strategies, or predict market or economic developments is inherently limited. We believe that the expectations reflected or implied by any forward-looking statements are based on reasonable assumptions, but are not guarantees of performance or results.
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 Ziluka , Chief Credit Officer. I will now turn the call over to John Hairston.
Thanks, everyone, for joining us this afternoon. Third quarter's results reflect continued growth in capital ratios, fully funding loan growth with core deposit growth, a slowing remix of DDAs, and early but welcome signs of NIM stabilization due to higher loan yields and lower growth in deposit costs. As anticipated, loan growth again moderated this quarter. Total loans were up $194 million, driven mostly by project draws in both multifamily real estate and mortgage. As noted on slide seven, the net growth in both CRE and mortgage relates primarily to migration of in-process construction projects as they are completed. Demand has continued to slow as higher rates and insurance costs have changed client behavior. Today, we are seeing both commercial and consumers either choose to forgo large purchases or use existing funds in lieu of borrowing.
Our own internal appetite also continues to moderate as we remain focused on full service relationships, disciplined pricing, and selective appetite in some sectors. Our path to loan growth will be determined by our ability to fund growth with core deposits and lending within our risk appetite. The credit quality of our loan portfolio remains solid and we continue to be well reserved. Criticized commercial and non-accrual loans remain at low levels, and in fact, criticized ratios are again at a historical low. Despite the one large idiosyncratic charge-off disclosed during the quarter, we have seen no significant or systemic weakening in any sector of the portfolio. That said, we are mindful of the impact of higher for longer rates, inflationary costs in the regulatory environment, thus are proactive in monitoring for any developing risk. Core client deposits grew this quarter, and we continue to maintain our diversified deposit base.
Total deposits were up $277 million, with the remix continuing from DDA to time deposits and other interest-bearing deposit products. The DDA remix did, however, show signs of slowing this quarter, and we ended the quarter with 38% of our deposits in DDAs at the top end of the range contemplated in the mid-quarter update. Promotional CD and interest-bearing money market pricing contributed to the remix this quarter. Our clients do remain rate sensitive, and we don't expect that will significantly moderate until rates stabilize or start to decline. When looking at our balance sheet, our guidance for both loans and deposits is unchanged, and we see the trends from Q3 continuing through year-end. A quick note on capital. Our TCE was down this quarter to 7.34% due to impacts of higher long-term rates on AOCI.
However, we are pleased to report that our Tier 1 ratio ended the quarter above 10% and our CET1 ratio was above 12%. As a reminder, we have no preferred stock shares in our capital stack. As we reflect on the year so far and look into the fourth quarter, we believe our strong deposit base will continue to help support our funding needs. We maintained a robust ACL and continued to build capital, which we believe will help us manage successfully through this cycle. October marks Founders Month, and we look forward to continuing our legacy of commitment and service to the people and communities we operate in, as we have for over 124 years.
Before turning the call over to Mike, I would also like to take a moment to honor the life of George Schloegel, who joined the organization in the mailroom as a high school student, ultimately rising to Chairman and Chief Executive Officer during his long 52-year career. George passed away unexpectedly and peacefully on October the 6th, only weeks after giving interviews to various trade organizations on the history and future of banking... George was a young and particularly vigorous 83 at his passing, and we will dearly miss our longtime friend and colleague. With that, I'll invite Mike to add additional comments.
Thanks, John, and good afternoon, everyone. Third quarter's net income was $98 million or $1.12 per share. That was down $20 million or $0.23 per share from last quarter, and was primarily related to the previously disclosed charge-off of $29.7 million. PPNR for the quarter was $153 million, down just $5 million from last quarter's level of $158 million. In part, due to a significant slowdown in our NIM compression, the rate of decline in our NII also slowed, while a modest increase in fees were nearly offset by a similar increase in expenses. As mentioned, our NIM compression did slow this quarter to three basis points from 25 basis points last quarter, and was better than our previous guide of 5- to 8- basis points of compression.
The quarter's improved NIM performance was driven by a leveling off of deposit costs, a slowing DDA remix, less reliance on wholesale borrowings, and better loan yields. Our cost of deposits increased 34 basis points in the third quarter compared to an increase of 49 basis points in the second quarter. Slide 13 provides additional monthly trend detail for the cost of deposits, reflecting the slowdown in each month of the quarter. We expect deposit costs could be up around 18 basis points or so in the fourth quarter, and would bring the second half of the year's increase to around 52 basis points, compared to 90 basis points in the first half of 2023. Our total deposit beta for the third quarter increased to 127% or about 33% cycle to date. We expect the cumulative level will approach 35% by year end.
How much higher the deposit beta goes from there will, of course, depend on the direction of deposit rates next year. On the asset side of the balance sheet, our loan yield improved to 6.01% this quarter. That was up 20 basis points linked quarter. The coupon rate on new loans increased to 8.03% and was up 63 basis points from last quarter. The previous quarter's increase was 52 basis points, so momentum is building with our new loan rates. As we mentioned throughout the quarter, increasing our loan yields has been a focus point for the company and will continue to be so going forward. As we look forward to the fourth quarter, we do expect an additional 3- to 5- basis points of NIM compression.
We're assuming that the Fed will not raise rates in the fourth quarter, and therefore stays at 5.5% through year end. We expect ongoing headwinds from the continued DDA remix, albeit at a slower pace, as well as the impact of CD maturities in the fourth quarter. We do, however, continue to see positive tailwinds from continued stabilization and deposit cost and higher loan yields. Net charge-offs with $38.3 million this quarter, or 0.64% of average loans, of which 50 basis points was related to the idiosyncratic charge-off mentioned earlier. Reserves were down slightly during the quarter, but still ended the quarter with a robust ACL to loans of 140 basis points. This quarter was our third consecutive quarter of fee income growth from the fourth quarter of 2022.
Our service charges on deposit income improved, and we benefited from a strong quarter of income from our specialty lines of business. Our guide for fee income is unchanged this quarter, and we expect a slight decline in the fourth quarter. Expenses for the company were relatively stable this quarter. We remain confident in our annual guide for 2023 and currently expect expenses in the fourth quarter to be down from the third quarter's level. Finally, all aspects of our forward guidance are summarized on Slide 20 of our earnings deck. I will now turn the call back to John.
Thank you, Mike, and let's open the call for questions.
Thank you. If you have a question, please press star one on your telephone keypad. To withdraw your question, simply press star one again. Your first question comes from the line of Michael Rose with Raymond James. Your line is open.
Hey, good afternoon, everyone. Thanks for taking my questions. Just wanted to start on the reserve release this quarter. You know, certainly understand that the credit, appreciate you guys disclosing that beforehand. But just given, you know, we are seeing some slowing, you know, kind of across the economic landscape and people seem to be getting more cautious. Just can you describe the factors that drove that reserve release? I understand that, you know, criticized classified came down, you know, nonperformers came down. That's all great, but why not just, you know, kind of build reserves here? I just wanted to kind of pick your brain as to, you know, the rationale. Thanks.
Yeah, I'll start, Michael. This is Mike, and then, certainly Chris or John can add some, some commentary as well. You know, no real reason other than we felt the, the reserve where we, where we ended the quarter at 140 basis points was certainly robust enough for our, our view of credit and our view of the economy and all the factors that go into determining the reserve going forward.
... So we did release $9.8 million, but $5.8 million of that overall release was related to the one credit. So I guess, the net release was really just $4 million. So, so that would have been another basis point or two, related to the ACL to total loans. So that, that basically was our, our thinking. And, and, also, you know, the levels of our commercial criticized and NPLs and our view of those asset quality metrics going forward also played into it. But again, I, I think the bottom line is, you know, the 1.40 ACL to loans, we feel is certainly robust enough. So Chris or, or John, if y'all want to add anything?
No, I think that's covered.
That make sense, Mike?
All right. Yep, appreciate it. Appreciate the net amount there. Maybe just as my follow-up, just wanted to talk about, you know, the margin, and specifically, you had talked previously about potentially restructuring the securities portfolio. Looks like the FDIC charge will hit in the fourth quarter. I think you had previously discussed maybe not wanting to do it in the, you know, if you were going to do a restructuring, not in the same quarter as that charge was going to hit. But just wondering if you got any updated thoughts there, and then just what gives you kind of confidence that, given that the margin's already down three basis points, that you can, yeah, kind of maintain it around these levels in the fourth quarter? Thanks.
Yeah. So first, on the NIM guidance. So the guidance for the fourth quarter is really for our NIM to potentially compress another 3- to 5- basis points. And if we think about that level of compression, and we think about it in terms of, you know, positives and negatives, so tailwinds or headwinds, the positives or the tailwinds, you know, really is this notion of deposit costs really beginning to stabilize. And of course, we saw that begin to happen, you know, in earnest over the course of the third quarter. So you may have heard from the earlier comments, you know, we expect our cost of deposits to potentially be up about 18 basis points or so in the fourth quarter. You know, and that's in relation to the 34 that we saw in the third quarter.
So some definite stability there. The other thing we think is a positive is this notion of higher loan yields. So if we look at the new coupon rates, we talked about those exceeding 8%, really for the first time in quite some time. But if we kind of look at how those have grown over the past couple of quarters, third quarter to second quarter, we were up 63. Second quarter to first quarter, we were up 52 basis points. So we definitely believe that there is some momentum building with respect to the new loan rates. We've also talked in the past about our fixed-rate loan portfolio repricing up. And if you look at that trend, I think there's a slide in the appendix included.
If you look at that trend, it's a pretty solid 12 basis points or so for the past couple of quarters. So we, we certainly expect that fixed-rate loan portfolio to continue repricing up. Now, as far as the headwinds and the things that are really driving the, the little bit of compression that we expect in the fourth quarter, you know, one of the positives this quarter, we, we thought was the DDA remix slowing a bit, 38%, this quarter, compared to 40 in the previous quarter. You know, we've talked about the end of the year arriving somewhere around 36% or so. So it, it's still a, a negative or a drag on our NIM, but some definite slowing in that regard.
But probably the biggest thing that's impacting the compression that we expect in the fourth quarter is CD maturities. So we have about $1.4 billion of CDs that'll be maturing in the fourth quarter. Those CDs will be coming off at about 4.34%, and then repricing at around 4.92% or so. So that difference in terms of those CDs repricing up, you know, will be a significant factor this quarter. And most of those CDs, just under $1 billion, are actually maturing in the front part of the quarter, so the month of October. So we'll have that impact for most of the fourth quarter. Related to any bond portfolio restructuring, in our view, that's still something that we're considering. It's certainly on the table.
Whether that's something we execute in the fourth quarter or maybe even in the first quarter, remains to be seen. You're right, we do have the potential for the FDIC special assessment in the fourth quarter. That certainly looks like it'll be in the fourth quarter, but there again, we thought it was going to be in the third quarter as well, and it got pushed to the fourth. So we'll see. So really nothing more on the restructuring, other than it certainly is something that we continue to consider and look at.
Thanks for taking my questions. Seems like you were anticipating that question, Mike, so I appreciate all the color. Thanks.
Thanks, Michael.
This isn't my first go.
Your next question comes from the line of Brett Rabatin with Hovde Group. Your line is open.
Hey, good afternoon, everyone. Thanks for the questions.
Hey-
Wanted to start with the non-interest-bearing DDA, and just, you know, obviously, it continues to atrophy a little bit, and you talked some about how that's impacting your guidance. Is there any update on, you know, where you think that might settle in terms of, you know, balances and how you have or do you have any visibility of operating accounts that maybe you think that they've reached their bottom? Just hoping for any color on an update on DDA thoughts.
Yeah, Brett, I'll start, and John can certainly or might want to add some additional color. But again, as I mentioned a little bit earlier, we're expecting that DDA remix, or that non-interest-bearing percent to probably end the year somewhere around 36% or so. When we conclude the fourth quarter and talk about guidance for next year, you know, I think we'll have a little bit more clarity around where we think that trajectory will take us as we go through 2024. So more on that, you know, obviously next quarter. But, you know, we're encouraged by what we're seeing and what kind of transpired this quarter.
So if you look at the percentage declines quarter-over-quarter, second quarter compared to first, we were down about 5.5%, and then that slowed to about 4.5% or so in the third quarter. And if you look at the makeup of our DDA base, really about two-thirds, a little bit less than two-thirds of that is commercial customers. And we saw an even more significant slowing in those balances, so about 7% in the previous quarter, and then that slowed to a little bit under 4% in the fourth quarter. So it absolutely is happening, I think, across our customer base, but obviously more so on the commercial side. So John, anything you want to add to that?
No, that, that was a good answer. And Brett, this is John. The only thing I would add is, we still point towards a trajectory that shows we reach the pre-pandemic average account balances sometime around the end of second quarter or third quarter next year. So you know, where that lands and it's not really possible to say that's when it totally ends, but at least we'll be at a marker that was pretty steady for several years prior to the pandemic's beginning. So, when Mike mentioned the end of year looking like we should be close to 36%, that's actually a little better than the low end of the range that we gave, you know, just a few months ago.
So the updated target for the end of year is maybe a little more attractive than where we were recently. So that's really the diminishment of the mix change that we've encountered so far. So in terms of where it settles, it's really tough to see clearly through the crystal ball, but if we presume that the target is reached when we get to the pre-pandemic average balances, that would suggest a continued slowing. Maybe not every quarter, but a slowing to get you to somewhere around a target in the second quarter, third quarter of next year. If that's helpful.
Okay. Yeah, that's helpful. And then the other question I wanted to ask was just around, you guys referenced, Mike, the slide on loan repricing. In Slide 24, you have that 4- to 12- months bucket, and the composition is different than the three months or less, obviously, with that having more consumer in it. So I'm just curious, thinking about, you know, as we're trying to model your loan portfolio increases over the next year, you know, in terms of the existing book, does that weighted average rate... I assume the weighted average rate for that 4- to 12-month bucket is going to be somewhat less than the 8.05, given partly a consumer bent that's in the three month or less piece.
Yeah, I think, I think that's right, and certainly in the three-month or less is where really the lion's share of our variable rate loans are. So, so that's obviously dependent upon the direction of rates, but I, I think you have that right.
Would a number closer to seven or closer to eight, you think, be the right number for that 4- to 12-month bucket, you know, as it reprices?
Well, the way we look at it on a quarterly basis, if you go back to this quarter, the new loan rate was just north of 8%, and then we have that broken out on a previous slide between fixed and variable. So what we have here on 24 is just a little bit longer look of how we view the loan portfolio and how it could reprice over the next couple of years, obviously.
And Brett, this is John.
Okay.
But we just one point that may be helpful or at least interesting is, we're seeing really better than expected performance in terms of our bankers having success with clients, explaining the linkage between the renewal rate and the new loan rate, and the volume of compensating balances and what those rates are. So we'd gladly give up a few basis points on loan yield to get substantial compensating deposits and operating accounts, particularly on the business side. And even more so when you get in the middle market side, as we get compensating accounts. So, either one of those is net positive to NIM and to profitability, so I think the maturity of the banker corps has been impressive so far.
I think that's what led maybe to the NIM compression not being quite as bad this quarter as we initially feared, you know, a quarter ago.
Okay, great. Appreciate the color.
You bet.
Your next question comes from the line of Casey Haire of Jefferies. Your line is open.
Thanks. Good afternoon, everyone. I guess, touching on expenses, so last quarter, you guys talked about, you know, the efficiency ratio, about 55, you know, kicks off. It puts you guys at a different DEFCON level, or, you know, we're now at 56, and obviously some more NIM pressure on the way. Just, any more updated thoughts about, addressing operating leverage, on the expense side of things?
Well, sure. As we go into 2024, I think that'll become, you know, something that that we look at as intently, if, if not more intently, going forward. But in terms of the fourth quarter and our expense increase for the second half of the year, obviously, there's no change in our guidance. We're looking at coming in at about an 8% increase year-over-year. And certainly, as we look into 2024, we would think that that level would come down meaningfully in terms of expense increases year-over-year. So the 8% is not where we want to be. The 56% plus efficiency ratio is not where we want to be. So those are certainly things that we think about and we'll address going forward.
Okay, very good. And then just circling back on the bond book repositioning. You know, you're not the only ones talking about this, obviously, but just wondering, it's very difficult to gauge what you guys could potentially do from the outside. You obviously have a very strong CET1 ratio. Your TCE is, with the unrealized losses up, below that 8% level that you guys want. I'm just wondering, you know, do you have the potential-- is there enough low-hanging fruit to restructure the bond book and get that, you know, lean into that CET1 ratio and get that TCE above 8%, with, like, a reasonable sort of earn back?
Yeah, I think so, Casey, certainly. And again, like we said, I mean, that's a transaction that we've been thinking about and considering, and that's certainly not off the table. It's something we're going to continue to look at intently in the fourth quarter and potentially into the first quarter. So, you know, as soon as we get to the point of executing on a transaction like that, you know, we'll be sure to let everyone know. But right now, I think it's premature to talk about too much in the way of details. I know that you guys would like us to be more explicit in terms of exactly how we're thinking about it, but, you know, we have to be cognizant of providing too much detail, you know, and crossing any FD lines.
So, again, I think we'll leave it at, you know, this is something that continues to be under consideration, and we'll go from there.
Okay, very good. Yeah, no, just, just curious. And then just-
Yeah
... just circling back on, actually, no, on credit quality. On one of the slides you mentioned, the focus has switched from traditional office to medical office. Just wondering what it reads almost as if you're a little bit concerned about what you're seeing in medical office, which I understood to be a pretty strong asset class. Just some color on what's driving that.
Yeah, that might... This is Chris Ziluka . It's probably a misunderstanding in the wording or the language. You know, as an asset class for many years now, you know, we've been a little bit more cautious about general purpose office, and typically more focused on medical office, as an asset class. And clearly, as you indicate, medical office, especially depending on the type of medical work that's done in the office environment, is much stronger than any general purpose office. But as an asset class overall, we're definitely cautious in general on that. We actually saw a little bit of a decline in our overall office exposure.
Not a huge amount, but about, you know, a couple of, you know, 4% type levels, quarter-over-quarter as we, you know, really, you know, shift our focus away from that as an asset class within commercial real estate.
Gotcha. Thank you.
You bet. Thank you, Casey.
Your next question comes from the line of Stephen Scouten with Piper Sandler . Your line is open.
Yeah. Thanks, everyone. Appreciate it. I guess one more question kind of around capital usage. I mean, you guys kind of outlined your capital priorities in your slide deck, and I would kind of view the potential for this securities restructuring somewhere within that. I'm not, I'm not really sure. I guess maybe below organic growth, above dividends is kind of what I'm hearing. But can you talk about how you think about the math versus a buyback at this point? I mean, it seems like with your stock at, you know, $115 tangible or something like that, it might be more attractive at these levels. So just kind of curious how you're thinking about the various uses of the capital, especially relative to the buyback.
Yeah. Yeah, Steven. So again, on Slide 18, as you mentioned, we have kind of the priorities and, you know, we're careful in terms of how we think about those and, you know, really haven't changed or adjusted those priorities. So I think they really do kind of speak for themselves. And, you know, you asked about buybacks, and certainly buybacks is something we think about and consider. But I don't know that in this environment, it's something that, you know, we're going to rise to the level of actually executing on buybacks right now. I'm not sure that, you know, the environment in terms of how examiners look at that in the context of bank failures back in March, and in the context of wanting to continue to kind of build capital going forward, really fit right now.
So, you know, certainly aside from those things, buybacks are an attractive way to deploy capital. We've done that in the past, and I dare say at some point in the future, we'll reenter that method of deploying capital. So, you know, back to the bond restructure, I mean, that is and could be an attractive way of deploying some capital. Again, not going to go into too much in the way of details of that, but, you know, that's out there and under consideration, as you kind of mentioned.
Yeah, I guess, I guess my question is more like as you evaluate those, I mean, is there a, is there an earn back calculation? Is that what you're thinking about? Or it sounds like maybe, maybe more of the bond restructuring or other things could be more palatable to regulators versus a share repurchase. I'm just trying to understand the dynamics of, of what creates that priority step.
Well, in terms of a bond restructuring, the way we would think about that is having to earn back or pay back, you know, somewhere in the 24- to a little bit less than 30-month range. We think that makes sense and, you know, pulls those kinds of transactions to the point of serious execution. So-
Got it. Got it. That's helpful. And then if we could talk about the SNC exposure briefly. I think, what is it? $2.8 billion, I think you noted at 9/30. Can you give us any more detail there in terms of what percentage of those loans you guys might be the lead on, or if there's a geographic focus primarily within that book? And kind of, you know, obviously, we saw just one kind of go bad, and that doesn't mean there's some greater issue, but that becomes the fear, I think, for some. So just wondering if you can give us any color that might provide comfort, if you will.
Yeah, this is Chris Ziluka . Yeah, I mean, geographically, obviously, we're, you know, more focused on the markets that we generally operate in. So kind of Texas to Florida. But, you know, we also do have a healthcare specialty group that does participate in some transactions that would have more of a national focus. So there's a little bit of a mix there. There really isn't any sort of geographic or industry focus. You know, we took a deeper look into that, you know, kind of anticipating this call, and some discussions on it since we highlighted it here on the page, on page eight.
But, you know, we feel pretty good overall about the SNC book, and I certainly can understand, you know, the question, given, you know, what happened recently. But, you know, as I think we've all indicated, it is a bit idiosyncratic, and I think the final chapter of that book hasn't been written yet anyway. So we'll learn more over time. But, but we, you know, we have, you know, in the buildup of liquidity during the kind of pandemic period there, you know, we deployed some of that excess capacity in that area. And as we kind of look forward, since many of those relationships don't necessarily have full service, you know, opportunities, you know, we'll look to dial that back over time.
Okay. That's extremely helpful. And, and is the reserve against those loans, I mean, kind of in line with the 1.28 loan loss reserve overall? Or is it maybe... Yeah, I guess, the commercial reserve's like 1.30 as well. So is it kind of fair to assume it's in that, that range of commercial loans?
Yeah. I mean, we don't necessarily segment the portfolio that way when we're deriving our reserve estimates. So they're, you know, generally sprinkled in with our C&I based on their, you know, asset quality.
Yeah.
Sure.
Steven, this is John.
Sure.
Just to add maybe a little more clarity. As rates began to go up last year, we knew as we got into the second half of this year, that the desire for any type of and not just SNC, but syndications in general growth, would begin to get upside down, just given the cost of funds, right? We'd want to preserve that liquidity for use in core growth and clients that have a little deeper wallet share with us. And so the dial back that Chris mentioned a few minutes ago, that was going to happen with or without the aforementioned idiosyncratic bad news on that one credit. So we expected it to top out somewhere around the 15% of commercial loan levels.
That's where it topped out, and the expectation is that it would dial back in terms of percentage and probably absolute exposure, as we repatriate those credits with smaller slices or maybe a few less credits that we're in, coupled with the amortization, and redeploy the liquidity gains from that into things that have a little bit more of an annuitized value over the long term. So I want to make sure we're clear that that one charge-off had nothing to do with our posture on syndications. That's really around the balance sheet.
Got it. That's a really helpful point of clarification. Thanks so much for the color, guy.
You bet. Thank you.
Your next question comes from the line of Brandon King with Truist Securities. Your line is open.
Hey, good evening.
Good evening.
Yeah. So I appreciate the guidance on, you know, the CD renewal rates, but I just wanted to get a sense of how those renewal rates have trended over the last couple of months. Have we seen some stabilization in what the renewal rates have been, and are you anticipating any potential increases going forward?
Yeah, Brandon, this is Mike. And you know, they have... Again, as I mentioned, with respect to deposit rates in total, you know, things have absolutely stabilized as we've gone through the last four or five months or so, you know, leading up to the third quarter. But specifically, if we look at the CD maturities, again, in the third quarter, we've got the...
Well, in the third quarter, we had just under $1.004 billion that matured at 3.95% and repriced at about 4.75%. So there was an 80 basis point difference there in the fourth quarter. We think that difference will shrink to about 58 basis points. And again, that's the difference between the rate that the CDs are maturing and where we think they're-- they will, they will renew at. And then just taking a peek into the fourth quarter, I'm sorry, the first quarter of next year, we think that difference will shrink even more to about 23 basis points. So the stabilization of deposit rates is really coming to life, so to speak, in terms of how our CDs reprice as we've gone through, not only the last quarter, but looking ahead to the next couple of quarters.
Okay. Very helpful. And then on credit quality, I noticed that accruing loans 90 days past due and modified loans still accruing, there was a noticeable increase in those two items. Just wanted to get some more details around what's going on there.
Yeah, I mean, just at a high level, a lot of those are loans that, you know, we're working through maturities. And so they end up kind of crossing over in that process of processing a maturity or arranging a maturity, you know, the maturity to be extended in its normal course.
Okay. So the expectation that those will end up paying off or-
Or just being rewritten and then getting back to, you know, payment status. Maturity oftentimes drives it falling into a, quote-unquote, "past due" bucket that may not otherwise really be past due.
Okay. And what about the modified? Is that the same situation for the modified loans as well?
Yes. Yeah.
Okay.
Yeah. So to be clear, Brandon, this is a little picky, just in the way we obviously report things, but a loan can be past due without necessarily having a payment past due, right? Just because it's past maturity. So they sometimes will cross over the end of quarter, and that's the reason for that. So there's not really a linkage between call it reserve appetite and that amount of past dues, unless the payment itself is late. Does that make sense? Hence, there's no real concern there.
Okay. We should be expecting that to kind of trend lower going forward, is that fair?
It goes up and down based on timing. I don't know if it's still this way, Chris can correct me if I'm wrong, but there's a fair amount of seasonality in some of the book on the middle market side. So there's larger numbers of renewals that occur in different parts of the year. And typically, in the second and third quarter is when we seem to have a little bigger bucket of those that all renew. And unfortunately, they're all kind of stacked in a quarter. So if everything doesn't come together perfectly, they will sometimes drag over the first day of the quarter and therefore get reported that way. Chris, am I? Is that still accurate?
Yeah.
Yeah. Okay.
Okay.
Sometimes it's just time.
All right. Thank you very much for taking my questions.
You bet. Thanks for asking.
Your next question comes from the line of Catherine Mealor with KBW. Your line is open.
Thanks. One follow-up just to the deposit cost discussion. Can you remind us, seasonality around your public fund balances and any impact that might have on your NIM guidance, for next quarter?
Yeah, I'd be glad to, Catherine. So, we have a pretty robust public fund business. Those deposits average around $3 billion or so, as you look through the year. Typically, those deposit inflows will begin to ramp up a bit in the fourth quarter, so they can range from about $150 million to about $175 million in the fourth quarter. And as we get into the new year, they begin to kind of trail off as municipalities begin to kind of allocate and spend those dollars. So every one of those relationships are contractual, and the vast majority are tied to primarily spreads to short Treasury bills. So there is a bit of an impact in the fourth quarter in terms of the deposit inflows, but then also related to deposit rates.
The dynamic around our public fund book was built into the guidance we gave for the fourth quarter in terms of deposit cost and potential NIM compression.
Okay, perfect. And then my other question, just on loan growth. Just, you know, loan growth has slowed, as it has for everybody, the back half of this year. Just— Can you just give us some color around the new ones that you are putting on? You know, typically, what kind of credits you're comfortable with, type of credits that you are doing less of, and maybe an initial peek at how you're thinking about loan growth, how it could look as we move into next year in a higher for longer scenario?
Okay. Thanks for the question. It's John. I'll let Chris speak to sector appetite, and then I'll come back on just sentiment and whatnot. So Chris, on just sectors in focus or appetite for or not.
Yeah, I mean, you know, again, we're obviously very mindful of the sectors that, you know, are potentially most impacted by higher interest rates, you know, the wage and employment challenges, and then just higher operating costs. And, you know, in some instances, the customer is able to pass them on, and others, they may be more challenged to be able to do so. I mean, you know, clearly, when we look at consumer discretionary, I think we're obviously a little bit more thoughtful about, you know, what we're looking at there, you know, things like hospitality. And then even the asset classes that we sort of talked about earlier, about office....
and retail, both retail as a C&I product and C&I as a CRE product is something that, you know, we continue to be a little bit more, you know, tighter on, I guess, in that regard. You know, we have pretty robust discussions, and a lot of the larger credits go through kind of a pre-screen process, and so there's a lot of healthy debate before we look to either, you know, pursue an opportunity or maybe even renew an opportunity in those areas or in general.
Catherine, any question back on that before I give you some more, or would you—you want me to—
No, well, one follow-up, and this might be where you're going, John, too, is also just on that mortgage one-time close product. I know that's been a piece of your loan growth over the past year. I'm just curious if that's something you would expect to slow as you just look at the pipeline into next year, or still kind of keeping you kind of at a level of growth over the next few quarters?
Yeah, I'll start there. But thanks for asking about it.
Okay.
So the one-time close product, and I think I've said this a couple times in the comments, just 'cause sometimes people forget about it, but it originally comes in the construction classification because it's an in-construction designation until the completion of the project and the owner, you know, takes residence. So that amount of balance sheet in the construction project is clearly in the, I call it fourth quarter of the game. We're in football season, so fourth quarter of the football game. And so we'll still see some mortgage growth net and probably another, I would say, two quarters maybe before it begins to plane over and we see mortgage portfolio shrinkage in the second half of the year.
So it'll give some net growth over time in the mortgage category, and there's still enough projects on the multifamily construction side that will be drawing down and covering the outflow from mortgage. So I would expect to see the construction of a C&D category continue to grow a bit, and then as we get into next year, you know, that too somewhat becomes a contra. Now, the drivers for those two things are totally different, so I'll then go to multifamily. You know, we get a lot of questions on the road about market by market absorption rates, rental rates, and the difference in ask versus book, are people doing specials? In most of the markets that show any degradation whatsoever in absorption or in pricing is primarily in the one, two, and in some markets, three-star category projects.
We're about 95% one- and two-star. So across our whole footprint in the markets where we have any meaningful concentration, we are still seeing absorption, both in absolute absorption, and then and the market would support absorption of additional projects coming online. So if we were down in the one- and two-star business, then, you know, we'd be maybe a little more concerned. So our appetite for multifamily really hasn't waned that much. The problem is the number of investors and developers who are interested in doing additional projects, given the cost of money and the cost of property insurance, that has somewhat waned.
So, it's not really our appetite as much as the opportunity has come down, and the type of projects that we do see really just don't screen within our current risk appetite. So, you know, we're expecting equity in the deals, we're expecting commitments in terms of construction cost, and insurability, and then really only from proven developers. So, those folks are a little bit on the sideline waiting for a little better environment, I think, to come in a year or two. So once you move outside of that, it's curious, but at this point in time, our consumer, our home equity line products, which is all consumer, is at the lowest utilization I ever remember it to be.
You would think with the average deposit account balances beginning to plain towards pre-pandemic levels, you would see that utilization begin to come up. But the bottom line is people aren't doing as many big-ticket purchases today as they were a year, and certainly two or three years ago. And they primarily use home equity lines for those purchases, at least in our book, because they got the tax benefit of doing that. And right now, they've just slowed down. They're slowing down. They have slowed down on big-ticket purchases. So we're seeing that utilization trend down a little lower. At some point in time, that's going to flip back, and it probably flips back when there's this notion that rates are either not going to go up anymore, or they begin to come down slightly.
So as long as the Fed can negotiate into a safe landing. I didn't say soft landing, I said safe landing. I don't know if there's such a thing as a soft landing, but as long as they can get to a safe landing, then I think we'll begin to see loan growth opportunities pick up a bit, as sentiment, I think, reaches that conclusion. Was that helpful color, or did you want to hear maybe a little something else?
It was. That was all really helpful. I like the safe landing, commentary.
Yeah, that's the target.
The soft landing-
We coined it first.
The soft landing phrase-
We want royalties.
has been overused.
That's right. Yeah.
I love it. I think it's really helpful. Thank you, John.
You bet. You bet.
Your next question comes from the line of Kevin Fitzsimmons with D.A. Davidson. Your line is open.
Hey, good afternoon, everyone.
Yes, hi.
Most of my questions have been asked and answered. I just as a follow-up on the bond restructuring topic, and I understand the sensitivity with not giving specifics, but maybe, Mike, you can help us understand just the different variables that are at play or in your guys' heads in determining when to pull the trigger, whether to pull the trigger? I mean, imagine it's rates, it's your capital levels and comfort there, the curve. I know months ago there was more of a sensitivity about in the wake of the bank failures, that banks probably were hesitant to go out and sell securities because it might create some misperception. But you know, that's far enough in the rearview now. So just, just without getting into specifics, just curious how those variables play.
Or maybe it's just more, is it an internal discussion or debate about whether it's the right thing to do? Because I guess there would be different opinions about that. So just wanted to see your thoughts on that. Thanks.
Sure. Be glad to, Kevin. So, I think as a company, we think and believe that from a philosophical point of view, it's the right thing to do in terms of potentially selling some bonds and reinvesting the proceeds. You know, the consideration becomes this notion of whether you pay down debt, whether it's brokered CDs or home loan borrowings, or you reinvest all the proceeds back into the bond portfolio, or some combination of those two. So those are the things that we kind of think about and talk about. Certainly, you know, the charge that you might consider taking is something that's out there for discussion and analysis.
You know, the impact that that has on our earnings, the impact that has on our capital, it really doesn't have much of an impact on TCE immediately because you're selling AFS bonds. But, you know, certainly on a regulatory ratio basis, you know, it is something that can be impactful going forward. So those, I think, are the things we think about. I mean, you know, certainly if you look at, you know, the volume of bonds that you could sell for any given charge, that's less now than when it was before you had the significant increase in the Treasury curve .
So, you know, that's something that's a little bit of a part of the overall equation, you know, just where those rates are gonna go over the next couple of weeks, months, quarters, those kinds of things. So, you know, again, those are the things I think we think about and consider in terms of a transaction like that. And, you know, I'll wrap up those comments by just stating again that it's under consideration and, you know, as soon as we effect a transaction, we'll let everyone know, certainly.
Okay. That's all I had. Thanks very much.
You bet.
Thank you, Kevin.
Your next question comes from the line of Christopher Marinac with JMS. Your line is open.
Hey, thanks. Good afternoon. Had a question for Chris on credit quality, and particularly from how you stress test C&I and CRE, and what's the difference between, you know, today's criticized level and sort of what they would be on a stress scenario, and how much of that, you know, would move the reserve level?
Yeah, it's a good question. And we constantly look at different slices of stress testing. You know, on the commercial real estate side, some of the things that we'll look to stress test is not only the impact of kind of you know, rewriting of interest rates on some of the loans that would have to reprice under the current rate environment. But we also look and stress test net operating income and the impact that that might have on the individual's ability to debt service cover. And then we also on a on the C&I basis, we tend to stress test more of the probability of default on those individual borrowers. And we use that information to really kind of inform us as to how we view our reserving.
There's no direct linkage into the reserving, but it is part of the evaluation process as we go through our quarterly assessment of reserve and reserve levels. You know, at this point in time, I mean, what I've, what I've been pleasantly surprised with is that, you know, when we've done stress tests in these different slices, you know, the results haven't been as alarming, I guess, as I would have thought they would have been. And that gives me comfort that there's, you know, probably a little bit more cushion in there, at least in kind of a normal stressed environment. Obviously, if you stress them for, you know, something more significant, you know, a severe scenario, you know, you're gonna see a lot more in the way of, you know, theoretical defaults and losses.
But we don't really anticipate that. We do do those stresses, just to kind of understand the outer boundaries, but we tend to focus on the realistic stresses that might then help us think about our reserving levels and approaches.
Okay, great. That's helpful. Then, Chris, just a follow-up on the SNC conversation and the disclosure in the slides. Are there other loans that would be kind of like, you know, club deals that are not the SNC definition, but are, you know, sort of non-organically originated by Hancock that you have above and beyond the 11%?
Yeah, definitely there's, you know, not even, probably more than a handful of accounts that fall into that category. That's kind of the normal course that you do, as you are presented with an opportunity that may be a little bit larger than you'd like to do, but you want to support that relationship. You'll bring in a partner, and vice versa, those, you know, so-called club deals. And that to us is, you know, oftentimes with banks that we regularly, you know, trade with, as it were, rather than kind of the broadly syndicated transactions, which oftentimes are led by, you know, much larger institutions.
Would those loans have a higher default rate across a cycle, or is it kind of too early to comment on those?
Yeah, I mean, I don't, I don't view them any differently, to be honest with you. And I don't, I don't see them as having any materially different default rate.
Okay, great. Well, thank you for all the information this afternoon. It's been great.
You bet. Thank you. Thanks for the call. Thanks for your patience.
There are no further questions at this time. I will turn the call back to John for closing remarks.
Thank you, Sarah, for moderating today, and thanks everyone for your interest. We look forward to seeing you on the road soon. Have a great night.
This concludes today's conference call. Thank you for joining. You may now disconnect your lines.