Hancock Whitney Corp

NASDAQ:HWC

Earnings Call Analysis

Hancock Whitney Q3: Stable NIM & Solid Credit Quality

Hancock Whitney Corporation reported Q3 net income of $98 million, a $20 million drop from the previous quarter due to a significant charge-off. Nonetheless, net interest margin (NIM) compression eased, with improved loan yields and stable deposit costs tempering the decline in net interest income (NII). They expect NIM compression of 3-5 basis points next quarter, assuming stable Fed rates. Fee income grew modestly, but expenses increased similarly. The loan yield rose to 6.01%, with heightened rates for new loans, signaling momentum in loan pricing. Robust allowances for loan and lease losses (ALLL) cover potential credit losses, despite slightly lower reserves. Future guidance anticipates stable deposit and loan trends, with a slight fee income decline expected.

Loan and Deposit Growth Amidst Capital Ratio Improvement

During the third quarter, the company observed consistent enhancement in capital ratios, fully funded by an upswing in core deposit growth, which underpinned the loan expansion. Although loan growth showed a deceleration, it ascended by $194 million, particularly attributed to the advancement of multifamily real estate and mortgage projects reaching completion. Concurrently, core client deposits grew by $277 million, with notable yet diminishing conversion from non-interest-bearing demand deposits (DDAs) to time deposits and other interest-earning products.

Stable Credit Quality

The company continued its strategy of nurturing full-service relationships, maintaining disciplined pricing, and being selectively ravenous in some sectors, leading to moderate internal appetite. The soundness of their loan portfolio’s credit quality has been sustained with historically low criticized loan ratios, representing the company’s prudence in managing risks associated with lending activities.

Solid Profitability Metrics

For the quarter, net income was reported at $98 million, equating to $1.12 per share. This signifies a reduction from the previous quarter, attributed to a specific aforementioned charge-off. However, pre-provision net revenue (PPNR) contracted marginally to $153 million, attributed to a substantial easing in net interest margin (NIM) compression and balanced by modest fee income growth against a similar rise in expenses.

Robust Liquidity and Capitalization

The Tangible Common Equity (TCE) ratio experienced a slight decline to 7.34%, yet the Tier 1 and Common Equity Tier 1 (CET1) ratios concluded the quarter above 10% and 12% respectively. No preferred stock exists in the company's capital composition, supporting the notion that the institution possesses robust capitalization levels bolstered by a strong deposit foundation to meet its funding requirements.

Guidance on Financial Reserves and Metrics

With a regard to financial reserves, the company elected to release $9.8 million, of which $5.8 million was related to a single credit event, suggesting confidence in their ability to sustain credit quality and economic changes. Furthermore, the company anticipates that the DDA mix will level out at around 36% by the year's end, a notable deceleration from previous quarters. Additionally, the FDIC special assessment, previously anticipated in the third quarter, is now expected to be levied in the fourth quarter.

Outlook and Forecasts for Upcoming Quarter

Looking forward, the company projects the NIM to compress by an additional 3 to 5 basis points, with continued CD maturity re-pricing exerting a notable effect. Loan yield improvement remains a focus, bolstered by rising coupon rates on new loans, which is gaining momentum, signaling a positive trajectory. The guidance for fee income remains stable with predictions of a slight downtick in the next quarter. Overall, the company's cautious adjustments and expectations, including a potential bond portfolio restructuring, reflect a strategic approach in anticipation of the future economic climate and regulatory charges.

Earnings Call Transcript 2023-Q3

[Operator]

Good day, ladies and gentlemen, and welcome to Hancock Whitney Corporation's Third Quarter 2023 Earnings Conference Call. [Operator Instructions] 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.

[Kathryn Mistich, executive]

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

As everyone understands, the current economic environment is rapidly evolving and changing. Hancock Whitney's ability to accurately project results or predict the effects of future plans or strategies or predict market or economic developments is inherently limited. We believe that the expectations reflected or implied by any forward-looking statements are based on reasonable assumptions but are not guarantees of performance or results. And our actual results and performance could differ materially from those set forth in our forward-looking statements.

Hancock Whitney undertakes no obligation to update or revise any forward-looking statements. And you are cautioned not to place undue reliance on such forward-looking statements. Some of the remarks contain non-GAAP financial measures. You can find reconciliations to the most comparable GAAP measures in our earnings release and financial tables. The presentation slides included in our 8-K are also posted with the conference call webcast link on the Investor Relations website. We will reference some of these slides in today's call.

Participating in today's call are John Hairston, President and CEO; Mike Achary, CFO; and Chris Ziluca, Chief Credit Officer. I will now turn the call over to John Hairston.

[John Hairston, executive]

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 7, 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 and lowered 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 nonaccrual loans remain at low levels, and in fact, criticized ratios are again at a historical low. Despite the 1 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 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 continue 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 mail room 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 6, only weeks after giving interviews to various trade organizations on the history and the future of banking. George was a young and particularly vigorous 83 in his passing, and we will dearly miss our long-time friend and colleague.

With that, I'll invite Mike to add additional comments.

[Michael Achary, executive]

Thanks, John. 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 3 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 cost, 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 8.3% 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 to 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 in deposit costs and higher loan yields. Net charge-offs were $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. And 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.

[John Hairston, executive]

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

[Operator]

[Operator Instructions] Your first question comes from the line of Michael Rose with Raymond James.

[Michael Rose, analyst]

Just wanted to start on the reserve release this quarter. I certainly understand the credit, I appreciate you guys disclosing that beforehand. But just given we are seeing some slowing 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 criticized classified came down, nonperformers came down. That's all great. But why not just kind of build reserves here? I just wanted to kind of pick your brain as to the rationale.

[Michael Achary, executive]

Yes, I'll start, Michael, this is Mike. And then certainly, Chris or John can add some commentary as well. No real reason other than we felt the reserve where we ended the quarter at 140 basis points was certainly robust enough for 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 1 credit. So I guess the net release was really just $4 million. So that would have been another basis point or 2 related to the OCL-to-total loans. So that basically was our thinking.

And also, the levels of our commercial criticized and NPLs in our view of those asset quality metrics going forward, also played into it. But again, I think the bottom line is the $140 million ACL-to-loans we feel is certainly robust enough.

So Chris or John, if you want to add anything?

[John Hairston, executive]

No. I think that's covered.

[Christopher Ziluca, executive]

That makes sense, Mike.

[Michael Rose, analyst]

Yes. Appreciate it. I appreciate the net amount there. Maybe just as my follow-up, just wanted to talk about the margin. And specifically, you talked previously about potentially restructuring the securities portfolio. It looks like the FDIC charge will hit in the fourth quarter.

I think you had previously discussed maybe not wanting to do it. And that 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 is already down 3 bps that you can kind of maintain around these levels in the fourth quarter?

[Michael Achary, executive]

Yes. 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 positives and negatives, so tailwinds or headwinds, the positives of the tailwinds really is this notion of deposit costs really beginning to stabilize. And of course, we saw that begin to happen in earnest over the course of the third quarter.

So you may have heard from the earlier comments, we expect our cost of deposits to potentially be up about 18 basis points or so in the fourth quarter, 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 that we included. If you look at that trend, it's a pretty solid 1000 basis points or so for the past couple of quarters. So we certainly expect that fixed rate loan portfolio to continue repricing.

Now, as far as the headwind to the things that are really driving the -- a little bit of compression that we expect in the fourth quarter. One of the positives this quarter we thought was the DDA remix slowing a bit, 38% this quarter compared to 40% in the previous quarter. We've talked about the end of the year arriving somewhere around 36% or so. So it's still 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 will 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 were pricing up 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 will 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 is 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 will 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.

[Michael Rose, analyst]

It seems like you were anticipating that question, Mike. So I appreciate all the color.

[Michael Achary, executive]

Thanks, Michael. This is my first call.

[Operator]

Your next question comes from the line of Brett Rabatin with Hovde Group.

[Brett Rabatin, analyst]

Good afternoon, everyone. Thanks for the questions. Wanted to start with the noninterest-bearing DDA. And just obviously, it continues to atrophy a little bit and you talk some about how that's impacting your guidance.

Is there any update on where you think that might settle in terms of balances and how you -- or do you have any visibility of operating accounts that maybe you think that they've reached their bottom. Just was hoping for any color or an update on DDA thoughts.

[Michael Achary, executive]

Yes, 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, so that noninterest-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, I think we'll have a little bit more clarity around where we think that trajectory will take us as we go through '24. So more on that obviously next quarter. But 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 it slowed to about 4.5% or so in the third quarter.

And if you look at the makeup of our DDA base, really about 2/3, a little bit less than 2/3 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?

[John Hairston, executive]

No, 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 reached the pre-pandemic average account balances sometime around in the second quarter or third quarter next year.

So 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 beginning. So when Mike mentioned the end of the 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 just a few months ago. So the updated target for the end of the 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 and third quarter of next year. If that's helpful.

[Brett Rabatin, analyst]

Okay. Yes, that's helpful. And then the other question I wanted to ask was just around -- you guys referenced, Mike, the slide on loan repricing on Slide 24, you have that 4- to 12-month bucket and the composition is different than the 3 months or less, obviously, without having more consumer in it.

So I'm just curious thinking about as we're trying to model your loan portfolio increases over the next year 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 805 given partly a consumer benefits in the 3 months or less piece.

[Michael Achary, executive]

Yes, I think that's right. And certainly, in the 3 months or less is where the -- really the lion's share of our variable rate loans are. So that's obviously dependent upon the direction of rates. But I think you have that right.

[Brett Rabatin, analyst]

So would a number closer to 7 or closer to 8, do you think would be the right number for that 4- to 12-month bucket as it reprices?

[Michael Achary, executive]

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 in the 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.

[John Hairston, executive]

And Brett, this is John, but we -- just on 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're glad to give up a few bps on loan yield to get substantial compensating deposits and operating accounts, particularly on the business side and even more so when you get into the middle market size, when you get cooperative accounts. So either one of those is net positive to NIM and to profitability. So I think the maturity of the banker core has been impressive so far. And I think that's what led maybe to the NIM compression not being quite as bad this quarter as we initially feared a quarter ago.

[Operator]

Your next question comes from the line of Casey Haire of Jefferies.

[Casey Haire, analyst]

I guess, touching on expenses. So last quarter, you guys talked about the efficiency ratio about 55% kicks off. It puts you guys at a different debt time level. 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?

[Michael Achary, executive]

Well, sure. As we go into 2024, I think that will become something that we look at has intently 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 that 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.

[Casey Haire, analyst]

Okay. Very good. And then just circling back on the bond book repositioning. 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 is below that 8% level that you guys want.

I'm just wondering, do you have the potential -- is there enough low-hanging fruit to restructure the bond book and get that -- lean into that CET1 ratio and get that TCE above 8%, with like a reasonable sort of earn back?

[Michael Achary, executive]

Yes, 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 as soon as we get to the point of executing on a transaction like that, 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 we have to be cognizant of providing too much detail in crossing any FD lines.

So again, I think we'll leave it at -- this is something that continues to be under consideration, and we will go from there.

[Casey Haire, analyst]

Okay. Very good. Yes. No, just curious. And then just circling back on the -- I guess, actually, 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.

[Christopher Ziluca, executive]

Yes, Mike (sic) [ Casey ]. This is Chris Ziluca. It's probably a misunderstanding in the wording of the language. As an asset class for many years now, 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 a couple of 4%-type levels quarter-over-quarter as we really shift our focus away from that as an asset class within commercial real estate.

[Operator]

Your next question comes from the line of Stephen Scouten with Piper Sandler.

[Stephen Scouten, analyst]

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 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 [ 115 ] intangible or something like that, it might be more attractive at these levels. So just kind of curious how you're thinking about the various pieces of the capital, especially relative to the buyback?

[Michael Achary, executive]

Yes. Yes, Stephen. So again, on Slide 18, as you mentioned, we have kind of the priorities. And we're careful in terms of how we think about those. And really haven't changed or adjusted those priorities. So I think they really do kind of speak for themselves.

And 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 we're going to rise to the level of actually executing on buybacks right now. I'm not sure that 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 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 back to the bond restructuring, 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 that's out there under consideration as we kind of mentioned.

[Stephen Scouten, analyst]

Yes. I guess my question is more like as you evaluate those, I mean is there an earn back calculation? Is that what you're thinking about? Or it sounds like maybe more of the bond restructuring or other things to be more palatable to regulators versus share repurchase? I'm just trying to understand the dynamics of what creates that priority set.

[Michael Achary, executive]

Well, in terms of a bond restructuring, the way we would think about that is having to earn back or pay back somewhere in the 24, a little bit less than 30-month range. We think that makes sense and pull those kinds of transactions to the point of serious execution.

[Stephen Scouten, analyst]

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 $930 million. 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, 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.

[Christopher Ziluca, executive]

Yes. This is Chris Ziluca. Yes, I mean geographically, obviously, we're more focused on the markets that we generally operate in. So kind of Texas to Florida. But we also do have a health care 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. We took a deeper look into that, kind of anticipating this call and some discussions on it since we highlighted it here on the page, on Page 8, but we feel pretty good overall about the SNC book.

And I certainly can understand the question, given what happened recently. But 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 we have in the buildup of liquidity during the kind of pandemic period there. 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 opportunities, we'll look to dial that back over time.

[Stephen Scouten, analyst]

Okay. That's extremely helpful. And is the reserve against those loans, I mean, kind of in line with the $128 million loan loss reserve overall? Or is it maybe I guess, the commercial reserves like $130 million as well. So is it kind of fair to assume it's in that range of commercial loans?

[Christopher Ziluca, executive]

Yes. I mean, we don't necessarily segment the portfolio that way when we're deriving our reserve estimates. So they're generally sprinkled in with our C&I based on their asset quality.

[John Hairston, executive]

And Steve, this is John. Just to add maybe a little more clarity. As rates begin 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 and general growth would begin to get upside down just given the cost of funds, right? We 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 1 credit. So we expect 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 one charge-off had nothing to do with our posture on syndications. That's really around the balance sheet.

[Operator]

Your next question comes from the line of Brandon King with Truist Securities.

[Brandon King, analyst]

Yes. So I appreciate the guidance on 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 where the renewal rates have been? And are you anticipating any potential increases going forward?

[Michael Achary, executive]

Yes, Brandon, this is Mike. And they have -- again, as I mentioned, with respect to deposit rates in total, things have absolutely stabilized as we've gone through the last 4, 5 months or so leading up to the third quarter.

But specifically, if we look at the CD maturities, again, in the third quarter, we've got the -- in the third quarter, we had just under $1.4 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 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 -- reprices we've gone through, not only the last quarter but looking ahead to the next couple of quarters.

[Brandon King, analyst]

Okay. Very helpful. And then on credit quality, I noticed that accruing loans 90 days pass through and modified loans still accruing, there was a noticeable increase in those 2 items. Just wanted to get some more details around what's going on there.

[Christopher Ziluca, executive]

Yes. I mean, just at a high level, a lot of those are loans that we're working through maturities. And so they end up kind of crossing over in that process of processing a maturity or arranging the maturity to be extended in its normal course.

[Brandon King, analyst]

Okay. So the anticipation of those will end up paying off or?

[Christopher Ziluca, executive]

Or just being rewritten and then getting back to payment status. And maturity oftentimes drives it falling into a "past due" bucket that may not otherwise really be past due.

[Brandon King, analyst]

Okay. And what about the modifier, is that the same situation for the modified loans as well?

[Christopher Ziluca, executive]

Yes. Yes.

[John Hairston, executive]

To be clear, Brandon, it's a little picky just of the way we obviously report things, but a loan could 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 light. Does that make sense?

[Brandon King, analyst]

Yes.

[John Hairston, executive]

No real concern there.

[Brandon King, analyst]

Okay. So we should be expecting that to kind of trend lower going forward is that...

[John Hairston, executive]

It goes up and down based on timing. And 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 stacking in the 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 is that still accurate?

[Christopher Ziluca, executive]

Yes.

[Operator]

Your next question comes from the line of Catherine Mealor with KBW.

[Catherine Mealor, analyst]

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?

[Michael Achary, executive]

Yes, 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 the 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. And the dynamic around our public fund book was built into the guidance we gave for the fourth quarter in terms of deposit costs and potential NIM compression.

[Catherine Mealor, analyst]

Okay. Perfect. And then my other question just on loan growth, just -- loan growth has slowed as it has for everybody in the back half of this year. Just -- can you just give us some color around the new ones that you are putting on, typically, what kind of credit you're comfortable with, type of credits that you are doing less of, and maybe an initial peak at how you're thinking about loan growth, how it could look as we move into next year in that higher-for-longer scenario?

[John Hairston, executive]

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 what not. So Chris, on just sectors in focus or appetite for or not.

[Christopher Ziluca, executive]

Yes. I mean again, we're obviously very mindful of the sectors that are potentially most impacted by higher interest rates, the wage and employment challenges and then just higher operating costs.

In some instances, the customers are able to pass them on and others may be more challenged to be able to do so. I mean, clearly, when we look at consumer discretionary, I think we're obviously a little bit more thoughtful about what we're looking at there, 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 we continue to be a little bit more tighter on, I guess, in that regard.

We have pretty robust discussions and a lot of the larger credits go through kind of a prescreen process, and so there's a lot of healthy debate before we look to either pursue an opportunity or maybe even renew an opportunity in those areas or in general.

[John Hairston, executive]

Catherine, any question back on that before I give you some more? Or would you...

[Catherine Mealor, analyst]

Well, one follow-up, this might be where you're going, John, too, is also just on that mortgage onetime closed 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 new -- kind of at a level of growth over the next few...

[John Hairston, executive]

Yes. I'll start there. Thanks for asking about it. So the onetime close product, and I think I said this a couple of times in the comments just because sometimes people forget about it.

But it originally comes into construction classification because it's an in-construction designation until the completion of the project and the owner takes residents. So that amount of balance sheet in the construction project is clearly in the, I'll 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, 2 quarters maybe before it begins to play over and we see mortgage portfolio shrinkage in the second half of the year. So it will give some net growth over time in the mortgage category, and there's still enough projects on the multifamily construction side that we'll be drawing down and covering the outflow from mortgage. So I would expect to see the construction of the C&D category continue to grow a bit. And then as we get into next year, that too somewhat becomes a contra.

Now the drivers for those 2 things are totally different. So I'll then go to multifamily. We get a lot of questions on the road about market-by-market absorption rates, rental rates and the difference in us versus book or people doing specials in most of the markets that show any degradation whatsoever absorption or in pricing is primarily in the 1, 2 and in some markets, 3-star category projects.

We're about 95%, 1 and 2 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 when we -- and the market would support absorption of additional projects coming online. So if we were down in the 1- and 2-star business, then 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 is somewhat weighed. 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 we're expecting equity in the deals. We're expecting commitments in terms of construction costs 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 2. So once you move outside 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 have remembered it to be.

And you would think with the average deposit account balances beginning to plan 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 2 or 3 years ago, and they primarily use from 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 trade 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.

And so, as long as the Fed can negotiate into a safe land. I didn't say soft landing, I said safe landing. I don't know such 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 a sentiment, I think, reaches that conclusion.

Was that helpful color? Or did you want to hear maybe a little something?

[Catherine Mealor, analyst]

It was. That was all really helpful. I like the safe landing commentary.

[John Hairston, executive]

That's the target. [indiscernible]

[Catherine Mealor, analyst]

The soft landing phrase has been overused. That's really helpful. Thank you, John.

[Operator]

Your next question comes from the line of Kevin Fitzsimmons with D.A. Davidson.

[Kevin Fitzsimmons, analyst]

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 without -- 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, I 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 we're -- that's far enough in the rearview now. So just without getting into specifics, just curious how those variables play?

Or maybe it's just -- it's 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.

[Michael Achary, executive]

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. 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 the charge that you might consider taking is something that's out there for discussion and analysis, the impact that, that has on our earnings, the impact that has on our capital really doesn't have much of an impact on TCE immediately because you're selling AFS bonds, but certainly on a regulatory ratio basis, it is something that can be impactful going forward.

So those I think are the things we think about. I mean, certainly, if you look at 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 that's something that's a little bit of a part of the overall equation, just where those rates are going to go over the next couple of weeks, months, quarters, those kinds of things.

So again, those are the things I think we think about and consider in terms of a transaction like that. And I'll wrap up those comments by just stating again that it's under consideration. And as we effect the transaction, we'll let everyone know certainly.

[Operator]

Your next question comes from the line of Christopher Marinac with JMS.

[Christopher Marinac, analyst]

I Question for Chris on credit quality and particularly from how you stress test C&I and CRE? And what's the difference between today's criticized level and sort of what they would be on the stress scenario? And how much of that would move the reserve level?

[Christopher Ziluca, executive]

Yes, it's a good question. I mean, we constantly look at different slices of stress testing. 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 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 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.

At this point in time, I mean, what I've been pleasantly surprised with is that -- when we've done stress tests in these different slices, 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 probably a little bit more cushion in there, at least in kind of a normal stressed environment.

Obviously, if you stress them for something more significant, a severe scenario, you're going to see a lot more in the way of theoretical defaults and losses. But we don't really anticipate that. We 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.

[Christopher Marinac, analyst]

Okay. Great. That's helpful. And 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 club deals that are not the SNC definition, but are sort of nonorganically originated by Hancock that you have above and beyond the 11%?

[Christopher Ziluca, executive]

Yes, definitely, there's -- 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 so-called club deals. And that, to us, is oftentimes with banks that we regularly trade with as it were rather than kind of the broadly syndicated transactions which oftentimes are led by much larger institutions.

[Christopher Marinac, analyst]

Would those loans have a higher default rate across the cycle? Or is it kind of too early to comment on those?

[Christopher Ziluca, executive]

I mean, I don't view them any differently to be honest with you. And I don't see them as having any materially different default rate.

[Christopher Marinac, analyst]

Okay. Great. Well, thank you for all the information this afternoon. It's been great.

[Operator]

There are no further questions at this time. I will turn the call back to John for closing remarks.

[John Hairston, executive]

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.

[Operator]

This concludes today's conference call. Thank you for joining. You may now disconnect your lines. This concludes today's conference call. Thank you.