Hancock Whitney - Q1 2024
April 16, 2024
Transcript
Operator (participant)
Good day, ladies and gentlemen. Welcome to Hancock Whitney Corporation's first quarter 2024 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.
Kathryn Mistich (Investor Relations Manager)
Thank you, and good afternoon. During today's call, we may make forward-looking statements. We would like to remind everyone to carefully review the Safe Harbor language that was published with the earnings release and presentation and in the company's most recent 10-K and 10-Q, including the risks and uncertainties identified therein. You should keep in mind that any forward-looking statements made by Hancock Whitney speak only as of the date on which they were made. As everyone understands, the current economic environment is rapidly evolving and changing. Hancock Whitney's ability to accurately project results or predict the effects of future plans or strategies, or predict market or economic developments, is inherently limited.
We believe that the expectations reflected or implied by any forward-looking statements are based on reasonable assumptions but are not guarantees of performance or results, and our actual results and performance could differ materially from those set forth in our forward-looking statements. Hancock Whitney undertakes no obligation to update or revise any forward-looking statements, and you are cautioned not to place undue reliance on such forward-looking statements.
Some of the remarks contain non-GAAP financial measures. You can find reconciliations to the most comparable GAAP measures in our earnings release and financial tables. The presentation slides included in our 8-K are also posted with the conference call webcast link on the Investor Relations website. We will reference some of these slides in today's call. Participating in today's call are John Hairston, President and CEO, Mike Achary, CFO, and Chris Ziluka, Chief Credit Officer. I will now turn the call over to John Hairston.
John Hairston (CEO)
Thank you, Kathryn, and thanks to everyone for joining us today. We are pleased to report a solid start to 2024, which marks our 125th anniversary of helping people achieve their dreams under a charter our founders established in 1899. The first quarter results reflect our efforts to continue to grow capital and to reposition our balance sheet, all while maintaining solid profitability and earnings.
Fee income and expenses were both flat this quarter, demonstrating our ability to take advantage of fee income opportunities and, at the same time, control expenses. Net interest income was down slightly this quarter, driven by lower average earning assets due to the impact of a portfolio restructure. The decrease was partially offset by a more attractive mix of earning assets, stabilization in deposit costs, and lower short-term borrowings. We ended the quarter with no wholesale borrowings except the remaining brokered CDs.
Our continued focus on repositioning our balance sheet and prudent pricing efforts has led to NIM expansion. We are delighted with these results and believe we are well positioned to take advantage of future rate decreases should they happen this year. Loan growth was modest this quarter and in line with what we expected for the first half of the year. We continued our focus on more granular, full relationship loans and are de-emphasizing large loan-only relationships.
The team was successful at producing the loan volumes necessary to overcome our more select credit appetite and achieve overall growth, with mortgage driving the growth this quarter. Loan pricing remains a top priority, and we believe focusing on more granular credit deals will drive improved pricing on new loans. As expected, our credit quality metrics continued to normalize during the quarter, and net charge-offs were modest.
Despite the uptick in criticized commercial and non-accrual loans, we remain in the top quartile of our peers. Our loan portfolio is diverse, and we still see no significant weakening in any specific portfolio sectors or geography. We remain proactive in monitoring portfolio risk and are mindful of potential macroeconomic environments. We continue to maintain a solid reserve of 1.42%, up slightly from the prior quarter.
We are pleased with our deposit growth during the quarter of $86 million, which included the maturity of $195 million in brokered deposits. Excluding the impact of brokered deposits, client deposits were up $281 million this quarter. We saw growth in money markets and in CDs due to promotional pricing we offered on both of these account types. The DDA remix continued, but overall pace continues to slow. We ended the quarter with 36% of our deposits in DDAs.
We are also proud to report continued improvement in all of our capital ratios. Our TCE grew to 8.62%, and our Common Equity Tier 1 ratio ended the quarter at 12.67%. Our capital metrics continue to be supported by our solid earnings. We remain well capitalized, inclusive of all AOCI and unrealized losses. A quick note on guidance: we did not make any updates to our guidance this quarter, which Mike will further address in his commentary next. As we look forward to celebrating our 125th year and beyond, we believe we continue to position ourselves to effectively navigate any operating environment. With that, I'll invite Mike to add additional color.
Mike Achary (CFO)
Thanks, John. Good afternoon, everyone. First quarter's reported net income was $109 million or $1.24 per share. We did accrue an additional net charge of $3.8 million or $0.04 per share for the FDIC special assessment this quarter. Excluding this item, net income would have been $112 million or $1.28 per share. Adjusted PPNR was $153 million, down about $3 million from the prior quarter, but in line with expectations. Our NIM did expand 5 basis points this quarter, but NII was down mostly due to a smaller average earning asset base. Fees and expenses were in line and flat with last quarter. As mentioned, we saw NIM expansion this quarter with NIM of 3.32%, up five basis points from the prior quarter.
As shown on slide 15 of the investor deck, our NIM performance was driven by higher securities yields following our bond portfolio restructuring last quarter, a slower rate of deposit cost increases in NIB remix, improved funding mix, and then finally higher loan yields. NII was down primarily due to lower average earning assets following the bond portfolio restructuring, but the decline was partially offset by improved earning asset mix and lower levels of wholesale funding. In fact, we ended the quarter with zero FHLB advances. After the brokered CD maturity of $195 million this quarter, we only have $395 million remaining. Those mature in May. Our intent as of now would be to not renew the May brokered CD maturities. Deposit costs were up eight basis points to 2.01% from 1.93% in the fourth quarter.
The month of March actually came in a bit lower at 2%, an indicator that we have reached a peak this quarter and deposit costs may begin to turn over. The moderation in deposit costs was driven by slower DDA deposit remix, higher growth in lower-cost interest-bearing transaction accounts, and the brokered CD maturity. Our total deposit beta remains at 37% cycle to date.
The most significant driver of deposit costs going forward will be repricing activity on CDs. On the earning asset side, our securities yield was up nine basis points to 2.56%, primarily due to the full quarter's realization of the bond portfolio restructuring transaction. The yield in the month of March was 2.58%, and we expect to see further yield improvement with portfolio reinvestments this year. We expect just under $600 million in principal cash flow from the bond portfolio over the next three quarters.
Those cash flows will come off at around 2.9% and could get reinvested at yields of around 200 basis points higher. Our loan yield improved to 6.16% this quarter, up five basis points linked quarter. The rate of yield growth on loans has slowed as much as the impact of 2023's rate hikes were fully priced in during the fourth quarter.
However, we remain focused on maximizing loan pricing. As we think about our NIM in 2024, our guidance remains unchanged and includes three rate cuts at 25 basis points each in June, September, and December this year. We continue to expect modest NIM expansion across the next three quarters. Headwinds include some level of continuing deposit remix, which has slowed, but we do expect that any rate cuts will be a tailwind as we are able to reprice CD maturities lower in the second half of the year.
Fee income was flat this quarter as we benefited from strong activity in investment and annuity income. Expenses excluding the special FDIC assessment were up less than 1% this quarter, reflecting our focus on controlling costs throughout the company. As noted, we have not changed our forward guidance this quarter, which is summarized on slide 22 of the investor deck.
However, we have included a disclosure around what we believe the impact on PP&R will be if there are no rate cuts this year. Lastly, a quick comment on capital. As John mentioned, our capital ratios remain remarkably strong and continue to grow. In our efforts to manage capital in the best interest of our company and our shareholders, we may pivot to looking at our common dividend and the potential resumption of buybacks under our current authority at some point later this year. I will now turn the call back to John.
John Hairston (CEO)
Thanks, Mike. Let's open the call for questions.
Operator (participant)
Thank you. We will now begin the question-and-answer session. If you would like to ask a question, please press star on your tone key to raise your hand and join the queue. If you would like to withdraw your question, simply press one of the options. For the podcast, asking and are listening via loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. Please ask one question and one follow-up. Your first question comes from Catherine Mealor from KBW. Please go ahead.
Catherine Mealor (Managing Director)
Thanks. Good afternoon.
John Hairston (CEO)
Hi, Kathryn.
Catherine Mealor (Managing Director)
I wanted to start on credit. Just wanted to see if you could give us some more color on the increase in non-performers and criticized assets that you show in the slide deck.
Chris Ziluca (Chief Credit Officer)
Yeah. Thanks, Kathryn. It's Chris Ziluca. One of the things that I wanted to point out is we continue to really operate at historically low levels, both in criticized and non-accrual loans. Also wanted to point out that we also have a pretty low level of modified loans. We're at about 16 basis points of modified loans. But we did see, as you noted, and the slide deck points out on page 12, that we did have an increase in criticized loans movement, net movement in during the quarter.
We spent some time kind of looking at the various categories and geographies and really couldn't find any continued common factor between any of them. I guess what I would say is, from my perspective, I think a lot of companies, in general, have been enjoying, historically, the high level of liquidity, which has kind of burned down.
With the current economic environment and the higher interest rates, I think operating costs are a little bit higher for some. And so there's probably some challenges in general. And I guess I would say that that's probably mostly the common theme that I would be seeing in the movement to criticized, but I don't really see anything substantial that's within even those movements in. As a matter of fact, I believe that over time, they'll probably resolve themselves. And similarly, with non-accruals during the quarter, really was driven by single commercial credit. We appropriately charged that credit down to a point where we feel confident in its ongoing success after the charge down.
Catherine Mealor (Managing Director)
Okay. Great. Would you say that non-performers that moved most of the charge-offs this quarter were related to that one credit?
Chris Ziluca (Chief Credit Officer)
Yes, they were.
Catherine Mealor (Managing Director)
Okay. And then in the, I think, criticized, it looks like it's about a $66 million increase. Are there any larger credits within there, or is it mostly just smaller credits? To your point, it was no real trend, but just curious if there are any kind of lumpy credits within there.
Chris Ziluca (Chief Credit Officer)
Yeah. It's probably a mix. I mean, I think there are some, I guess, medium-sized credits, I would call them, that are in there. But I think a lot of, I mean, even when I look at some of the larger credits, the really medium-sized, I would call them, I see them as kind of a transitory situation for those larger ones where they've maybe had a little bit of a revenue challenge that needs to be dealt with through the right sizing of their operating expense load.
Catherine Mealor (Managing Director)
Okay. Okay. Great. And you've talked a lot the past couple of quarters about just your desire to lower your reliance on kind of non-relationship credits and move towards a more granular loan portfolio. As we think about your Shared National Credit portfolio, that's, I think, about 11% of loans, is there a level to where you think that could move to over time? And I'm just trying to kind of frame the size of a headwind that is to you getting the growth spigot to turn back on once we get to maybe a little more stabilization in the industry.
John Hairston (CEO)
Okay, Catherine, this is John. I'll take that one. Thanks for the question. Good to hear your voice. So in terms of comparative to peers, I mean, as you know, not everybody reports. So when we look to see how we compare to others, and occasionally we've noted on notes where we're deemed as being a little heavy in that category, which it's always bothersome to be considered heavy, anything that may be considered something less than good.
Our reliance on syndications is never intended to be because we couldn't produce enough otherwise. It was because we had so much excess liquidity during the aftermath of the PPP credits that our desire to get something better than zero with the Fed overnight, we did a little bit more liquidity development because we had a little more liquidity to deploy. So that's now coming down.
I think over the course of the next couple of years, it should moderate down to something in the neighborhood of what we see as reported peer levels, which is a couple of hundred basis points as expressed as a percentage of loans. If you apply dollars to that, it's about $250 million per year for a couple of years if you put it in that context.
That's not a size that we are concerned, not a size that we're concerned about our production being able to replace. We have the ability to moderate that up or moderate that down just as we participate in renew and look at new relationships, if that makes sense. Not insurmountable, but it's out there as a contra. If we can redeploy credit-only money into full relationship money, ultimately, we're ahead in overall revenue, if that makes sense.
Catherine Mealor (Managing Director)
It does. All right. Great.
John Hairston (CEO)
Was that specific enough for what you were looking for?
Catherine Mealor (Managing Director)
It does. Yes. The $250 million was exactly what I was looking for. Thank you.
John Hairston (CEO)
Okay. You bet. Thank you.
Operator (participant)
Your next question comes from the line of Michael Rose from Raymond James. Please go ahead.
Michael Rose (Managing Director)
Hey. Good afternoon, everyone. Thanks for taking my questions. Just wanted to follow up on the SNC commentary. It looks like it kind of accounted for kind of all this quarter's loan growth. I think the balances were about $2.6 billion last quarter. And you've talked about or reiterated again kind of acceleration in the back half of the year on loan growth. But I think there's growing signs that the economy's slowing. Just what gives you confidence that you will see that acceleration? Is it something in the pipelines? Is it what you're hearing from your customers? And what could be the puts and the takes to that output? And then what should we think or contemplate SNC growth as part of that guidance? Thanks.
John Hairston (CEO)
Sure, Michael. And to be clear, the net growth you show quarter-over-quarter, there's a good bit of credit just moving into the category that are not new. So as you know, it's somewhat of a technical designation. So if even under a common exposure, if the outstanding balances creep above the line of demarcation where it's considered an SNC, or if there's a couple, three banks, and then they add a bank that pushes over to SNC, then we have to classify as an SNC. Does that make sense? So that's not the vast majority of what you see as the increase is not new money. It's simply class change into the SNC category. Does that make sense?
Michael Rose (Managing Director)
Yep. Totally, totally got it.
John Hairston (CEO)
So at this point in time, we are in the posture of, on a net basis, quarter-over-quarter, decreasing the large credit-only relationships. They're not that big, but it's higher than we'd like it to be. And frankly, we need the liquidity to put into other things that we think are better and more valuable to investors over the course of time. Did that answer your question, Michael?
Michael Rose (Managing Director)
Yeah. And then just the puts and the takes to kind of the back half acceleration and growth, just given some of the macro headwinds?
John Hairston (CEO)
Oh, sure. Well, if you look at it overall, and when you get into puts and takes, I could talk probably with more detail than you want to hear, but I'll try to summarize it. At this point in time, there's a number of tailwinds that are helpful. And the ones that I'll call out for the first quarter, which we haven't talked about a lot lately, is we did enjoy a modest amount of line utilization improvement. You see that on page eight. I think it's been five quarters since we saw line utilization improve. And so one data point isn't a trend. And I'd be early and premature to say that that's a sustainable trend.
But we anticipated way back when that as deposits on average per account began to moderate back toward pre-pandemic levels, call it 2019 levels, that logically, we should see line utilization begin to creep back up a little bit to the good. And that's pretty much exactly what's happening. Whether that continues or not, I wouldn't want to bet one way or the other, but we did expect utilization to go up when we normalized deposit account sizes.
And that happens to be now. And so it wasn't a surprise, but it was welcome. So that's a pretty good tailwind. And it really didn't cost us anything to get that additional income. Secondly, given the rate environment, we're seeing paydowns that are unexpected in nature, very, very much minimal. There's very few operating company divestitures happening, at least in our book of business.
We don't see much wire-in to pay off a loan because a business has been sold, certainly not as much as we saw in 2022 in the first half of 2023. That's been very close to zero. As we get to the back half of the year, there'll be two drivers for increase. It would be across most of our categories of lending. One would be if the rate environment does finally begin to moderate some, that those people who have been on the fence or waiting for a better deal time, I think they'll probably take action.
Secondly, even if the rate environment doesn't go down, that I would anticipate there's enough pent-up demand to go do things as a business owner that they'll simply say, "I really don't want to wait any longer because there may not be a better deal a quarter or two down the road.
And we'll go ahead and pull that trigger now." So I would think it'd be a better environment for growth if rates go down. But even if they don't go down, I think the more likely question will be, how much are we willing to concede on rate to get the business to grow the balance sheet? And it's a little early for us to be able to tell that at this point in time. Right now, we're still focused on getting good rate given that the cost of deposits is what it is today.
Michael Rose (Managing Director)
Great. That's great color, John. Maybe one for Mike before I step back. Appreciate the color on PP&R rate cuts. Looks like consensus is already within that range, implying that you would do better with rate cuts. Is that the way to read it in any sense of what PP&R could look like? Kind of, well, I guess you said it down 1%-2%. Just sort of any just broad strokes on what the puts and takes are to that outlook with no cuts because obviously, there'd be other pieces that move if we don't get any cuts. So would there be some offsets in fee income or things like that?
Mike Achary (CFO)
Yeah. Thank you, Michael. Appreciate the question. And we did add that disclosure this quarter around what we view PP&R to do with zero rate cuts versus the three that really is embedded in the original guidance. And the difference isn't big. It amounts to about $7 million or so of NII for the last three quarters of the year. So again, it's not a real big difference. And most of that difference would be weighted really toward the second half of the year. And to be honest with you, a lot of it really is in the fourth quarter. So the way we think about our NIM going forward, really in the second quarter, I think we expect pretty modest to a handful of basis points expansion.
And then if we do get the rate cuts, we have a tailwind that helps us with the CD repricing in the back half of the year. And so from there, you'll see a little bit in the way of modest NIM expansion. If we don't get the rate cuts, then again, after a handful of basis points in the second quarter, we're likely to be flat through the rest of the year.
So that really is what drives that difference in guidance. The other things, though, that are certainly helpful as we kind of go through the year that aren't really impacted by whether there'll be a difference in rate cuts or not is really the repricing of the bond portfolio as well as the repricing that continues to occur in our fixed-rate loan portfolio. So we gave some information about the bond portfolio.
We have about $600 million or so of bonds that'll reprice from around 2.90% weighted average to probably right around 5%. Now, if we don't get the rate cuts and the Treasury yields increase, then that reinvestment rate will likely be a little bit better. On the fixed-rate loan side, we continue to enjoy the benefits of repricing that portfolio.
So for the balance of the year, we're probably talking about $550 million or so in fixed-rate loans that are going to reprice from, call it, 4.75% or so to probably about 7.5%. So it's pretty important and a pretty good tailwind to have that repricing of both the bond portfolio as well as the fixed-rate loan portfolio. And then the CDs, the benefit there really comes from the potential for rate cuts. And again, if those rate cuts don't happen, we'll have that difference that I mentioned. Hopefully, that's helpful.
Michael Rose (Managing Director)
Yeah. Very helpful, Mike. Thanks, guys, for taking my questions. Appreciate it.
John Hairston (CEO)
Thank you, Mike.
Operator (participant)
Your next question comes from the line of Casey Haire from Jefferies. Please go ahead.
Casey Haire (VP)
Great. Thanks. Good afternoon, everyone. Mike wanted to follow up on the CD repricing. You guys mentioned that as a major factor on the NIM. I think last quarter, and you might have said in the prepared remarks, but $900 million comes due this quarter. I believe it was a 4.77% rate. What is the expectation that rolls over? We've been hearing that CD prices have come in a little.
Mike Achary (CFO)
Yeah. They've definitely come in. Our best promo rate is 5% for five months. So that continues to be probably our best-selling CDs. We also have a nine-month at 4.75% and an 11-month at 4.25%. But as far as the CD maturities, those numbers are constantly moving around depending on the reinvestment or the renewal rates going forward. So what the numbers look like now is for the second quarter, we actually have about $2 billion of CDs maturing. Those are coming off at 4.88%. Third quarter, that goes down to about $1.3 billion, coming off at 5.11%.
And in the fourth quarter, about $900 million, coming off at about 4.69%. So the way we're looking at the renewals of those CDs, the second quarter, there'll be some benefit, but it'll be pretty minor for the most part. For the third and fourth quarter, those benefits do become a little bit more significant, especially in an environment where we do have more and more rate cuts during that time period.
Casey Haire (VP)
Okay. Very good. So in other words, it's still a little bit of a headwind, but obviously diminishing. And then at some point, yeah, you're pretty much at market levels.
Mike Achary (CFO)
Yeah. I think so. I think that's right.
Casey Haire (VP)
Okay. All right. And then just your comments on capital, I'm just wondering, what is the timing around the back half of the year? I mean, your capital ratios are in great shape. You're tracking to your guide. I know it's an election year, but what is so special about the back half of the year to turn on the buyback? Yeah.
Mike Achary (CFO)
Yeah. I don't know that it's necessarily the back half of the year. I think that's something that will be considered as we even go through the next quarter. Obviously, on the dividend and any change there, that's a board decision. Related to the buybacks, I think it's a pretty good option that we would probably resume buybacks at some level at some point in the next quarter or so. I don't think that's necessarily constrained or going to be delayed to the back half of the year. Some of those things could start to occur as early as this quarter.
Casey Haire (VP)
Oh, all right. Great. Okay. And then just last one from me on the fee guide. Still, you held that flat. If I run-rate the first quarter result here, you're kind of right at the high end of the range. You guys did pretty well in other. Just wondering, is that just conservative, or do you expect a little bit of a pullback?
Mike Achary (CFO)
Yeah. I think it's conservative. So we didn't change the guidance on fees or expenses. But I would suggest, especially on fees, that there's probably a bias toward the upper end of that range. And even on expenses, a little bit of a bias toward the bottom end of the range without changing the range itself. If that makes sense.
Casey Haire (VP)
Yes. All right. Great. Thanks, guys.
John Hairston (CEO)
Yeah. Casey, this is John. I'll just add one other point that's just maybe interesting, if not helpful. The components of the first quarter fee income included a couple of categories that are the best we've ever had. SBA continues to set records pretty much every quarter. At the pace that that fee income bucket is improving, that pushes some of the guide high. Then secondly, our wealth management area now makes up a full third of our fee income. I mean, it was probably less than 10% just seven or eight years ago. Now it's almost a third. That includes record sales and annuities this quarter after record sales and annuities last quarter.
You kind of hate to increase the guidance above the top end of the range on record performance after record performance two quarters in a row, particularly given the interest rate environment, could curtail some of that. You get the benefit of the net interest income side, right? We probably are being a little conservative by leaving the guide alone. We'd like to see more about what the rate environment looks like before we would evaluate changing anything. Hopefully, that's helpful.
Operator (participant)
Your next question comes from the line of Stephen Scouten from Piper Sandler. Please go ahead.
Stephen Scouten (Managing Director)
Hey, guys. Thanks for the time here. I guess I'm curious about the movements in non-expiring deposits. You guys talked about the pace of decline there is slowing. I guess I'm curious how you're thinking about the ultimate level of projected non-expiring deposits as a percentage of deposits today versus maybe previous quarter or prior.
Mike Achary (CFO)
Yeah, Stephen. This is Mike. I'm happy to chat about that for a minute or two. So our DDA mix definitely is slowing. There's no doubt that that's occurring. And his support for that, I mean, obviously, you can see the numbers. But our percentage of deposits that are DDA moved from 37% last quarter to 36% this quarter. But the rate of decline was really less than half of the previous quarter. So in the fourth quarter, we were down about $600 million. This quarter, we were down only about $230 million or so. So on a percentage basis, that went from 5% to about 2%. So on last quarter's call, we had talked about looking at the end of the year and suggesting that maybe that DDA percentage would be somewhere around 33%.
Obviously, with the way that the remix is slowing, we would look at that number as being probably something closer to 35% or so as of now. And one additional point that certainly was a significant item, we think, is in the month of March, we really saw our first increase in DDA deposits on an average basis in really almost two years. So I think that's further evidence that that remix is absolutely slowing and could be turning over at some point.
Stephen Scouten (Managing Director)
Okay. That's really helpful. And I guess with that 35%, would that be kind of within the context of assuming three rate cuts? And do you think that would get maybe marginally worse if we were to get no cuts for whatever reason?
Mike Achary (CFO)
I don't know that right now whether we get 3 rate cuts or 0 rate cuts is going to have a real big impact on that number. I think that we see some things in motion, again, around the slowing of that remix and those numbers beginning to move a little bit in the opposite direction, obviously, in an environment where there are no rate cuts, which is today.
Okay. Then going back to credit briefly, you guys had talked, even in your release, you talked about credit metrics normalizing. I guess I'm just kind of curious what that looks like for you because you still only had 15 basis points in net charge-offs. And some of these numbers are still historically low. What do you feel like that normalization level really looks like for you all?
Chris Ziluca (Chief Credit Officer)
Yeah. Thanks for the questions, Chris Ziluca. It really is a good question. I guess what I would say is that because we've been operating at such historically low levels for both us and also really in comparison to our peer set, that even normalization would probably be just getting towards maybe pure average. And I think we have a long way to go before we get there, from my perspective. But I think we've been very successful and very lucky in many respects with all of the liquidity that's been pumped into the system to allow us to get to the level that we're at. And so it wouldn't surprise me that we would continue to see some level of migration in. Now, the reality is that the wild card is how do peers perform also.
And so if we're kind of performing in Tandem with them, then maybe we don't get to pure average. So it really is just a matter of we've had such a low level, and we continue to try to strive for that, that any sort of movement would probably be considered kind of a normalization.
John Hairston (CEO)
Stephen, this is John. I'll just add to that. Just internally, the way we look at this is more outrunning the other hunters versus the bear, if you know what I mean. So what we consider successful through this cycle is remaining in the top quartile in terms of low levels of criticized and NPL credit. And anything below peer median would be a deep surprise and disappointment. So if you kind of look at it that way, that sort of the bookends of what our expectations are is somewhere between the first and second quartile. But obviously, top quartile is what we deem as success.
Stephen Scouten (Managing Director)
Got it. That's really helpful. If I could squeeze in one more, maybe I was just curious what drove, if anything specific, the decline in new loan yields quarter-over-quarter. It'd kind of been trending up at a fairly radical pace. And looks like this quarter fell down to 791 versus 815. So I'm wondering if that's a mix issue, maybe more of these single-close mortgages that you mentioned, or what kind of drove that decline?
John Hairston (CEO)
Yeah. Great question. This is John. I'll take a swing at it. I think the answer is about half mix, just differences in Q1. Q1 does typically have a little bit different mix than the other quarters of the year.
And then secondly, and this is, I think, going to be the same with our competitors as well, is right now, with a rate environment that the news media is talking every day about when will rates begin to go down, that's a pretty stark change from a year ago when they were talking about how far will they go up. So when we're negotiating terms or specifically rate terms with clients, it really is a tailwind to getting better pricing when there's a thought that rates are going to be flat or higher. In this environment, rates are expected to go down.
So that's creating a little bit more pushback on rates upon renewal and new deals. And frankly, the competition is also just as interested in getting new bids as they can to at least hold the loan book flat. And so I think competition's higher. Awareness of what rate direction is happening in the market is a little higher. And I think both of those are driving that down a little bit. But our posture right now, to be clear, is we still want to get as good a rate as we can possibly get. And we're giving up a little volume in order to get a higher rate.
As we get later in the year, if rates do indeed stay flat, or the belief is that they'll still go down, then I think we may see some rate concession across the banks environment, particularly midsize bank environment, to show growth. It's hard to really tell at this point in time. But if you go back through history, when people begin to expect a rate cut, it's harder and harder to get new deal rates at the level that you may want. And I think we saw a little bit of that in Q1. But again, about half of it or a little more was mix.
Stephen Scouten (Managing Director)
Really helpful, Color. Thanks for the time, y'all.
Mike Achary (CFO)
You bet. Thank you for the question.
Operator (participant)
Your next question comes from the line of Ben Gerlinger from Citi. Please go ahead.
Ben Gerlinger (VP)
Hey. Good afternoon, everyone.
Mike Achary (CFO)
Hi, Ben.
Ben Gerlinger (VP)
I was curious. I know you gave a little bit of a tilt in your hand here on guidance on the lower end for expenses. But even if you just take this quarter and annualize it, there's about a $20 million gap. So I come up with around $816 million and then $836 million. So I was just kind of curious. I get that the expenses are probably closer to the lower end. But do you think there'd be a little bit of a ramp from here? Or where should we see that build? Is it technology? Is it potentially staffing or anything you could do to have it be in the lower end of the range or, sorry, below the low end of the range?
Mike Achary (CFO)
Yeah, Ben. This is Mike. I think the way the trajectory of that will likely work is we kind of go through the year. Recall that like many banks, we award raises on April 1st. So you will see a pretty healthy increase in expenses quarter over quarter related to those raises. So you'll have a full quarter's impact of that in the second quarter. And then from there, I would expect to see kind of modest increases as we go into the third and fourth quarter. And again, that should put us really at the bottom end of the range of 3%-4% and maybe a hair even below that 3%. So that's how we're kind of thinking about it.
John Hairston (CEO)
Ben, this is John. I'll add this to it. Right now, we're having some really good and impressive success in some areas of the granular deployment balance sheet in loans, particularly in Texas and areas and particularly Dallas. So there's a bit of a notion that as we get to the back of the year, depending on what the economic environment looks like, we may very well increase our deployment in adding new bankers and a small amount of new facility to continue that momentum because it simply has been so good. So there's a little bit of cushion built in that guidance as we sit now in the event that we do make those investments.
We want to be very transparent about it. It might not happen given how the economy could change on us. Right now, we feel really, really good about the progress in the granular side of our loan balance sheet. We believe that there's some good talent out there in different places that may be a disruption by the back half of the year that we'd like to avail ourselves of their assistance.
Mike Achary (CFO)
Ben, if we take the route that John just kind of articulated, obviously, we'll be transparent and modify the guidance accordingly.
John Hairston (CEO)
Yeah. That's not a signal we're going to do it. It's a signal that that explains some of the reason for the range.
Ben Gerlinger (VP)
Gotcha. Okay. That makes a lot of sense. If you just kind of look to your crystal ball here, it seems like growth is a little bit back half of the year weighted. I mean, pricing looks to be pretty healthy. Mixed shift on deposits is really kind of the only incremental headwind at this point because across the deposits are working pretty flat month-over-month when you gave that cadence for the first quarter. Just kind of curious, when you think about exit of the year, and I get you might not answer this directly, but is 3.40% achievable in the margin?
Mike Achary (CFO)
Yeah. That's a great question. And as we kind of think about our NIM, and if you kind of go back to my earlier comments, under the scenario where there's a couple of rate cuts, that's certainly, I think, a possibility. If the zero rate cut scenario happens, then the 340 NIM might be a little bit of a reach, is the way I would kind of think about that.
Catherine Mealor (Managing Director)
Gotcha. That's helpful. I'll step back. Appreciate the time.
John Hairston (CEO)
Okay.
Mike Achary (CFO)
Thank you.
Operator (participant)
Your next question comes from the line of Brandon King from Truist Securities. Please go ahead.
Brandon King (Senior Equity Research Analyst)
Thank you. Good afternoon.
Mike Achary (CFO)
Hi, Brandon.
Brandon King (Senior Equity Research Analyst)
Just a question on the expectations for loan yields. The pace of increase slowed in the quarter to around six basis points. I was wondering, just given your expectations for fixed-rate loan repricing going forward and the commentary around new loan yields, is that a good sort of running rate to expect maybe in the next couple of quarters, and particularly if kind of rates hold from here?
Mike Achary (CFO)
Yeah, Brandon. This is Mike. And I do think it is, especially if there aren't any rate cuts from this point forward, that we should see some stability on the variable side. But we should still see, as I mentioned earlier, some yield improvement on the fixed-rate side as we continue to have those loans reprice as we go through the year.
Brandon King (Senior Equity Research Analyst)
Okay. And as far as the fixed-rate repricing, is that sort of ratable through the year? Or do you have sort of chunkier repricing impacts in certain quarters?
Mike Achary (CFO)
Yes. Right. The way we're looking at it now, it is pretty pro-rata across the remaining quarters of the year. And if you look at the last couple of quarters, it's been amazingly consistent around 12 basis points or so per quarter. It did narrow a little bit in the first quarter to about 9 basis points, but still pretty strong on the size of that portfolio.
Brandon King (Senior Equity Research Analyst)
Okay. And then I recognize the headwinds to CD repricing. But just how are you thinking about the total cost of deposits? Looks like you're on pace to potentially hold that stable in the second quarter. But if we are in kind of this stable rate environment, do you think you continue to keep that pretty stable in the back half of the year?
Mike Achary (CFO)
Yeah. Absolutely. So again, if you look at the first quarter, we came in at 2.01%. But the month of March came in at an even 2%. And again, as we think about the second quarter, we're looking at somewhere near that same 2% for the second quarter's total cost of deposits. And then from there, it really kind of depends on whether we get rate cuts or not.
So in an environment where we do get rate cuts, similar to the impact on the NIM, you'll see that cost of deposits continue to fall in the third and fourth quarter. If we don't get rate cuts, then it's going to probably be flattish to maybe down just a bit as we go through the rest of the year. So again, very similar to kind of the trajectory that we described earlier around the NIM.
Brandon King (Senior Equity Research Analyst)
Okay. Very helpful. That answers my questions.
John Hairston (CEO)
Okay.
Mike Achary (CFO)
Thank you.
Operator (participant)
Your next question comes from the line of Brett Rabatin from Hovde Group. Please go ahead.
Brett Rabatin (Managing Director)
Hey. Good afternoon. Wanted to ask, we've seen a few office towers reprice or change hands at lower levels than where they were last transacted. And on slide 10, you show that you've got 88% of the portfolio in office with $5 million or less of exposure and that the office buildings tend to be more mid-rise. I was curious, how much of the office book would be bigger than $20 million or $25 million from a loan count perspective?
Chris Ziluca (Chief Credit Officer)
Yeah. Thanks for the question, Brett. This is Chris Ziluca. We only have 14 credits that are over $10 million, and none of them are over $25 million in exposure. So I think that pretty much answers the question around, are we participating in or doing larger office tower transactions?
Brett Rabatin (Managing Director)
Okay. That's helpful. Then the other question I wanted to ask was just one of the pushbacks I get is if we did have a recession, it doesn't seem like a lot of folks were thinking maybe no recession now. But if we did have one, then maybe some of the Gulf South economies might underperform relative to the Texas and Florida pieces of your franchise. Any thoughts on what you guys are seeing in the core Louisiana or Mississippi markets and just how you think that those markets might react if the economy gets softened?
John Hairston (CEO)
Yeah. I'll start. Admittedly, it's a crystal ball look. But typically, Mississippi and Louisiana are not high-growth markets, which means valuations don't just spike up when they may spike up elsewhere. For the handicap there is they don't grow as quickly as some of our other markets. On the other side, they typically don't bounce down very harshly in periods of recession.
We can just use the last financial recession as an example. We had very, very little loss in Mississippi, Louisiana, or Alabama during that period of time. In fact, were it not for energy, our losses would have been better than peer by good measures. With energy certainly very de-emphasized in our book, and now I think we're well below 1% of loans in that sector, I would expect those markets to perform very well in a recessive period.
Chris Ziluca (Chief Credit Officer)
Okay. Okay. That's helpful. And then, just, I'm sorry. Just one last one back on this next question. It sounds like a lot of that portfolio is actually very customer-oriented. How much of that portfolio would you have a primary deposit relationship or kind of you're one of the leads on the credit?
Mike Achary (CFO)
A goodly portion of it. The primary purpose of syndications for us is to lay off credit with organizations we've had for a while that the total amount of hold is just bigger than we want to hold by ourselves. We do lead a chunk of syndications. But I mean, the core book is still pretty granular in terms of what we have that is credit-only.
And I'm going to take out specialties like commercial real estate because there are some credits that are syndications there that typically don't live on the books very long before the project's completed and then go off to the perm market somewhere else. But we do have a healthcare group that participates a little more heavily in syndications. And those balances in exposure have been declining as we didn't need to deploy the liquidity.
But I want to be clear in saying our concern about syndications are not as much about fear of credit as it is that the liquidity could be repurposed to other things that we're particularly good at. Internally, we talk about our corporate strategic objectives and CSOs, and we publicly share those. But we don't talk about some of the other types of things that we seek and aspire to get to.
And one of those things is I'd like us and I think our team is dedicated to being the best bank in the Southeast for privately owned businesses. And to do that, we need to have liquidity available to very competitively bring those types of organizations on. And we're having that kind of result in some of the bookend markets I spoke about earlier. So the rebalancing away from SNCs is not because they're SNCs.
The only rebalancing is we're trying to get away from credit-only relationships to more core because ultimately, we're really good at the fee business, but we can't get the fees if we don't have a core relationship. And so that's the driver for that change in thoughts moving forward. Did I help you or do you want to repeat?
Chris Ziluca (Chief Credit Officer)
Yeah. Yeah. That's really helpful. Thanks so much, guys.
Mike Achary (CFO)
Okay. You bet.
Operator (participant)
Your next question comes from the line of Matt Olney from Stephens Inc. Please go ahead.
Matt Olney (Managing Director)
Hey. Thanks. Mike, you went through some of your promotional rates on time deposits earlier on the call. I appreciate you disclosing that. Can you help us appreciate any changes that you've made to these promotional rates more recently? Are those rates you gave us from a few months ago, or were those after some recent changes you've made?
Mike Achary (CFO)
No. Those are the current rates, Matt. Just to give you some context of kind of where we've come from, if you go back to the end of last year, our best CD rate was 5.4% for nine months. We had actually shortened that in the first quarter to 5% for three months and then recently introduced the 5% at five months. We've kind of obviously lowered the overall rate and shortened the maturity and then lengthened it a little bit. Those variations are really related to what we're seeing in the market in terms of what customers and consumers kind of prefer. It's obviously also an effort on our part to try to choreograph these maturities such that they occur in an environment where hopefully rates are a little bit lower.
Even without rate cuts, I mean, we're seeing that contraction in rates overall in the market. So certainly, rate cuts will help in the second half of the year when these maturities occur. But if we don't have rate cuts, it's not necessarily the end of the world. I mean, we'll still benefit somewhat from CD repricing. It's just not at the same level as if we had rate cuts.
Matt Olney (Managing Director)
So it sounds like you moved your deposit or your promotional pricing down a little bit, shortened the maturities. Would you consider moving the promotional pricing down again before the Fed were to cut? Or do you think it's now moved down to a point where it's comfortable and we have to see the Fed start to cut before you would move again?
Mike Achary (CFO)
Well, my opinion is there's a little bit of a line of demarcation, it seems like, at 5% for short CDs. But we'll pay close attention, as we always do, to the market and the things that are going on, both the headwinds and tailwinds. Personally, I could certainly see a scenario where we would probably want to breach that 5% at some point.
John Hairston (CEO)
Matt, this is John, just to add a little more color that may be helpful. Mike described before that we managed to cover more than 100% of the broker's CD departure in Q1 with client deposits at the rates that we mentioned. We have another slug, and the final slug of brokered CDs coming up in May. And so part of maintaining the current posture is to try to eliminate as much of those as we can. We're not really, really say that'll definitely happen, but that's our desire. But getting rid of that takes us to 100% core money, if that makes sense. And so it's a little early to try to get too aggressive on taking them down until we get past Q2. Hopefully, that's helpful.
Matt Olney (Managing Director)
Yes. That is helpful. Thanks for clarifying that. And then I guess switching gears, Chris, on credit, I think you answered all my questions around the criticized loan bucket. And I think you noted that the charge-offs were mostly from a single credit. But I was surprised to see that the recoveries were quite a bit higher in the first quarter. I think it was around $14 million. It had been trending well below that in recent quarters. Just any color on the more sizable recovery you got this quarter?
Chris Ziluca (Chief Credit Officer)
Yeah. I mean, we have a certain amount of flow recoveries. But we did have an opportunity this quarter to kind of relook at an existing previously charged-off account and kind of resolve that matter maybe more permanently. And so that helped us to get probably what is going to be somewhat of an abnormal level of recovery but certainly fortuitous for the quarter.
Matt Olney (Managing Director)
Okay. Thank you.
Mike Achary (CFO)
Thanks, Matt.
Operator (participant)
Your next question comes from the line of Christopher Marinac from Janney Montgomery Scott. Please go ahead.
Christopher Marinac (Analyst)
Hey. Thanks. Good afternoon. Chris, wanted to ask you one more credit question. When we go back to the quarterly and annual disclosures, you've mentioned a Pass Watch category. Would that have gone down at the end of March, which therefore would compensate it for the increase in the criticized?
Chris Ziluca (Chief Credit Officer)
Not necessarily. I mean, we certainly have things that flow through the Pass Watch category. But some skip over that because of just the credit metrics that drive our risk-rating models. So not necessarily all just from that category, although certainly a substantial portion and count-wise came from that category.
Christopher Marinac (Analyst)
Okay. Does the past watch drive at all provision levels or rather the reserve as you go forward?
Chris Ziluca (Chief Credit Officer)
It has a component to it. I mean, our models don't specifically tie at this juncture to risk ratings. But we factor in migration in a lot of the qualitative component to our reserving methodology.
Christopher Marinac (Analyst)
Okay. Great. And then last question from me just goes back to kind of the PP&R guide for this year. If we think about the guide for 2024, would the future years in 2025 and 2026 kind of be higher from this year? Or do you see a scenario where the PP&R would shrink further in the next year?
Mike Achary (CFO)
Chris, this is Mike. That's a great question and involves, at this point, I think, a lot of crystal ball kind of viewing. But at this point, I don't know that we're ready to really talk about guidance for 2025. But I would suggest that if we think about 2025 and we think about that being a year where potentially we're able to grow the balance sheet more than just the low single digits, then that certainly, I think, bodes well for our ability to expand PP&R into next year.
Chris Ziluca (Chief Credit Officer)
Gotcha. That's helpful. Thanks for thinking out loud on that, Mike. I appreciate it.
John Hairston (CEO)
You're welcome.
Operator (participant)
Your next question comes from the line of Gary Tenner from DA Davidson. Please go ahead.
Gary Tenner (Managing Director)
Thanks. Good afternoon. I wanted to ask a follow-up just on the loan growth guide. Sounds like the low single digit holds in your mind with or without rates, even though I think a lot of folks think of a second-half inflection for the group overall as being a little more reliant on rate cuts. Are your lenders kind of hearing pretty clearly from borrowers that, "Look, we're being patient on rates, but we feel good enough about our business and opportunities that we're going to pull the trigger in the back half of the year even if we don't get some moderation in rates"?
John Hairston (CEO)
The first part of your answer, yes, we're hearing pretty clearly we think the environment may be a little better for us back half of the year. And some of that is because I think organizations are looking at their debt service. And from their perspective, they have more room to spend if they're spending less on debt service. And so it just invigorates them to maybe tackle a little bit more in terms of re-upping equipment, expanding buildings, and doing things that businesses do to grow their top-line revenue. So I think that's really more the driver. I don't think it's more I mean, 75 basis points doesn't light up the world, right? So it doesn't make all of a sudden math get a lot better.
It more signals that we have successfully navigated a safe landing economically, and we can kind of think a little bit more positively about the next couple, three years. And that spurs people to begin taking a little bit more risk in terms of spreading their wings and investing. But as you know, I mean, at some point in time, you can't just not spend money. So my thought is that by the time we get into the latter parts of this year, if the environment looks we go from higher for longer to higher for much longer, it's still going to cause people to go ahead and move forward with some decisions simply because they need to. And they've got to manage their operating expenses accordingly to afford that higher level of debt service.
Gary Tenner (Managing Director)
Thanks. I appreciate the thoughts on that. And then kind of a quasi-related follow-up in terms of the PP&R guide with and without rates, is that figure with no rate cuts purely the math on kind of the yield and rate impact of cuts and no change in mix of the balance sheet in that scenario?
Mike Achary (CFO)
Gary, this is Mike. It's a little bit of both. It's not just the pure math of what happens and what doesn't happen in terms of rates and repricing. I mean, we're modifying the mix a bit to account for what we think is going to happen or not happen. But I would suggest, though, it's not a big, big impact or a big change, certainly in the size of the balance sheet for the second half of the year, cuts versus no cuts. That's why we didn't change our guidance both on the loan or deposit side, at least not as of yet.
Gary Tenner (Managing Director)
Got it. Okay. I appreciate it.
John Hairston (CEO)
Okay.
Operator (participant)
That concludes our question-and-answer session. I will now turn the conference over to John Hairston for closing remarks.
John Hairston (CEO)
Thank you, Christopher, for managing the call. Thanks to everyone for your interest. Looks like a good year shaping up. And we're glad to share more with you when we see you on the road. We'll see you all very soon.
Operator (participant)
This concludes today's conference call. Thank you for your participation. You may now disconnect.