Hancock Whitney - Q3 2024
October 15, 2024
Transcript
Operator (participant)
Good day, ladies and gentlemen, and welcome to Hancock Whitney Corporation's Third 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, and I would now like to turn, excuse me. I would now like to introduce your host for today's conference, Kathryn Mistich, Investor Relations Manager. You may begin.
Kathryn Mistich (VP of Investor Relations)
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 (President and CEO)
Thank you all for joining us this afternoon. We are pleased to report our third quarter results, again reflecting improved profitability and efficiency. We achieved an ROA of 1.32% and reported another quarter of NIM expansion, fee income growth, and lower operating expenses. Strong earnings facilitated continued growth in capital ratios, now among top quartile peers. Net interest income was up this quarter due to higher yields on loans and securities and a flat cost of funds. Fee income continues to outperform and expenses remain well controlled and in fact, were down quarter over quarter. In recent years, we made and continue to make strategic investments in fee income lines of business and are very pleased with continued impressive returns.
Turning to the balance sheet, loans were down $450 million, over $250 million of which is related to our purposeful decrease in SNC exposure. We also saw higher payoffs due to refinance and sales transactions within the CRE multifamily and CRE industrial portfolio across the footprint. The balance of overall loan reduction this quarter was largely the completion and liquidation of large industrial projects in the Lake Charles, Louisiana, market. The balance sheet doesn't reflect the full story, though, as we enjoyed very solid production and new credits during the quarter. We are also very pleased to have attained peer levels of SNC exposure a year ahead of the original schedule. So this particular line item will generally cease to be a purposeful headwind to growth.
We are actively recruiting bankers to support growing the balance sheet next year now that we have reached all our goals in earnings, efficiency, and capital. Deposits were down in the quarter, but the DDA outflow remains moderated, and our DDA mix was consistent at around 36%. There was some normal seasonal runoff in public funds deposits, and we experienced growth in interest-bearing transaction accounts and in time deposits, despite a reduction in promotional rates during the quarter. Mike will add more detail in his comments later. Our credit quality metrics continued to normalize with a decrease in non-accrual loans, but an increase in criticized loans, fully reflecting the results of the recent SNC exam, which was impactful to criticized migration. We expect to compare well versus peers in criticized loans and expect to be in the top quartile for non-accrual loans.
Net charge-offs were up quarter over quarter, but we continue to see no significant weakening in any specific portfolio sectors or geography. We continue to enjoy a solid reserve of 1.46%, up slightly from the prior quarter. We maintained our posture of returning capital to investors by repurchasing over 300,000 shares of common stock in the quarter. Even after returning capital, we had strong growth in all of our capital metrics due to solid profitability, ending the quarter with a TCE of 9.56% and a Common Equity Tier 1 ratio of 13.79%. We made modest changes to our guidance for the fourth quarter, and as a reminder, we will give full guidance for 2025 on next quarter's call. October 9th marked the 125th anniversary of our bank charter.
We attained this milestone because of our shareholders' and clients' trust and the efforts of our current and past associates, who live by the core values our founders set forth those many years ago. We are focused on achieving strong profitability, granular revenue sourcing, admirable earnings efficiency, solid capital and ACL reserves, a de-risked loan portfolio, and top quartile capital ratios. As we reflect on our past and celebrate our future, we look forward to another 125 years of strength and stability. Lastly, I would like to acknowledge the incredible efforts of our team during the recent hurricanes impacting our footprint, as we again were the last to close and the first to open locations in storm-impacted areas. I'm exceptionally proud to serve with colleagues who are intensely focused on a commitment to serve our communities in their time of greatest need.
As we speak, our teams are delivering meals, ice, and fuel in hard-hit areas to ensure we do our very best to serve. Our thoughts and our prayers are with those impacted by these storms, and we are committed to being a steadfast partner in the recovery process. For over a century, our bank has been here to help people rebuild and recover, and this time is no different. With that, I'll invite Mike to add additional comments.
Mike Achary (CFO)
Thanks, John, and good afternoon, everyone. Third quarter's net income was $116 million, or $1.33 per share, so up $1 million and $0.02 per share from last quarter. PPNR growth was again strong this quarter and was up $10.1 million, or 10% to $167 million. Express as a return on average assets, that's a peer-leading 1.92%. Our NIM expanded 2 basis points to 3.39%, driving modest growth in NII. As already mentioned, but our fee income businesses had an outstanding quarter and expenses were again very well controlled. As mentioned, the company's NIM expanded 2 basis points from last quarter to 3.39%.
This expansion was driven by higher loan and security yields, a flat cost of funds, and a favorable mix of borrowed funds, as shown on slide 14 of the investor deck. Our cost of deposits was up 2 basis points to 2.02% this quarter, mostly due to inflows of high balance money market deposits from the equity markets in August. That, in turn, drove a mid-quarter bump in our cost of deposits to 2.04%. We finished the quarter at an even 2%, which provides a nice glide path to a more significant reduction in the fourth quarter. Also, as expected, we saw $2.6 billion of CD maturities this quarter, which repriced from 5.04% to 4.62%, driving down the rate on time deposits by about 5 basis points.
The pace of DDA outflows continued to slow this quarter, with a drop of only $142 million and a stable DDA mix of 36%. We believe the DDA mix could stay at least at this level through year-end. With the rate cuts in September and the two 25 basis point rate cuts we anticipate in the fourth quarter, we expect our cost of deposits will be down significantly in the coming quarter. Our loan yield was up 3 basis points to 6.27%, reflecting fixed rate loan repricing and new loan originations, partially offset by lower rates on variable rate loans. Given the two additional rate cuts we expect in the fourth quarter, we do expect loan yields will be down next quarter.
Bond yields for the company were up 6 basis points to 2.66% due to our continued reinvestment of cash flows back into our bond portfolio. In the third quarter, 220 million of bonds came off the balance sheet at a yield of 2.69% and were reinvested at 4.74%. Next quarter, we expect about $200 million of cash flows coming off at about 3.10% and will be reinvested at over 4.5%. All this to say that we believe that through the net effect of lower deposit rates, higher bond yields, partially offset by lower loan yields, we do expect to achieve modest NIM expansion in the fourth quarter again, despite two additional rate cuts and limited balance sheet growth.
As mentioned, the fee income was again strong this quarter, up 8% from last quarter. We benefited from higher investment and annuity fees, service charges on deposit accounts, and specialty income. We now expect non-interest income for 2024 will be up between 6% and 7% from 2023's adjusted non-interest income level. Expenses were down 1% this quarter as we continue to focus on controlling costs throughout the company. Our guidance has been updated, and we expect to grow expenses between 1% and 2% year over year, inclusive of our plans to hire additional revenue-generating staff in the coming quarters. Our PPNR guide is to be flat to down slightly from 2023's adjusted levels, reflecting our updated expectations on rate cuts, fee income, and expense guidance. Lastly, a couple of quick comments on capital.
Our capital ratios remain remarkably strong, even after returning capital through continued share repurchases and the recent increase in our common dividend. All things equal, we expect the share repurchases will continue at a similar pace in the fourth quarter. As always, the changes in the growth dynamics of our balance sheet and share valuation could impact that view. I will now turn the call back to John.
John Hairston (President and 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 have dialed in and would like to ask a question, please press star one on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, press star one a second time. If you are called upon to ask your question and are listening via speakerphone on your device, please pick up your handset and ensure that your phone is not on mute when asking your question.
Again, it is star one to join the queue. And your first question comes from the line of Michael Rose with Raymond James. Your line is open.
Michael Rose (Managing Director)
Hey, good afternoon, everyone. Thanks for taking my questions. Maybe we could start with Chris. Saw the uptick in criticized commercial, you know, loans this quarter, and it's been, you know, over the past couple quarters an upward progression. I see you built the reserve a little bit. Can you just talk us through kind of what's driving the increase? And then as we think about the prospects for lower rates, you know, what, what's the driving factor, just to maybe bring, you know, some of those loans, you know, current? And then just separately, does this have anything to do with maybe accelerating some of the disposition of your SNCs? Thanks.
Chris Ziluca (Chief Credit Officer)
Yeah, no problem, Michael. Appreciate the question. You know, first of all, I just really wanna, you know, kind of couch everything with the understanding that we continue to really be pleased overall with our asset quality performance, especially in relationship to peers and where we are in the cycle. And I know in the past, during the calls, we've signaled and anticipated some migration, especially in the commercial loan book as it relates to criticized loans. I do wanna point out that, for the most part, none of the migration really related to our investment commercial real estate book. Most of it was really in our C&I book, and we continue to really analyze and interrogate and assess the drivers for the migration.
And really, I know it seems like a very simple answer, but we really don't see specific sectors that are driving the migration. You know, it really is geographically spread. You know, this quarter, probably more in our Louisiana, Alabama, Texas markets, but even then, it was only 60%, so the other 40% was spread out among the other jurisdictions. And even when you think about the industries, you know, 70% of the migration during the quarter was, you know, spread out among manufacturing companies, retail and wholesale trade, transportation companies, which is a sector that I indicated last quarter, and other banks have as well, are a little under pressure, and then even professional services and information services.
You know, again, some of it was, you know, as John mentioned during his opening comments, a result of our SNC exam and the results that came from that. But even then, you know, only, you know, 60% really came from that exam process. And so it was a little bit more diversified in that regard. But you know, we continue to really take a hard look at, we really do. We've enhanced our, and this was done, you know, a year or two ago, enhanced our watch process to include a lot more early dialogue around issues that might be starting to percolate below the surface.
And then the one thing we did look at was, you know, kind of the composition of the recent migration in the past couple of quarters, and whether or not we really see any sort of near-term material issues with those credits. And really, we don't, you know, we don't identify any at this point in time. It's just kind of, you know, where we are in the cycle with respect to kind of slackening of demand off of that kind of buildup during the post-pandemic period, and just higher operating costs. And, you know, you asked about rates and how that might have some benefit. And, you know, obviously, it happened late in the quarter, so any of our customers that, you know, have higher borrowing costs aren't gonna benefit from it in their current metrics.
To the extent that there is some further easing in interest rates, you know, we believe or I believe that there will be some benefit. But, you know, some of the issues that our customers are experiencing aren't just interest rates. They are obviously a little bit of softening of demand and just general higher operating costs. But we still feel pretty confident in the book and also in relationship to where we've been historically and where we are relative to peers, we feel okay.
Michael Rose (Managing Director)
That's great color. Thanks for that, Chris, and then maybe just as my follow-up, how should we think about, you know, loan growth from here? I know you guys have worked down the SNC portfolio. It's down kind of close to your target range. You know, the guidance unchanged kind of implies maybe a little bit of growth, but maybe some flatness in the fourth quarter. But assuming that, you know, the fourth quarter is kind of the end of the SNC runoff, understanding that, you know, you had some projects that paid down as well outside of the SNCs this quarter, and you're gonna be hiring some people, how should we? I know it's early for 2025, but how should we be thinking about loan growth, you know, from here?
Does it, you know, kind of incorporate the forward curve in terms of what your outlook, you know, might be, assuming, you know, you'd have greater growth as rates would come down? Thanks.
John Hairston (President and CEO)
Okay, Michael, sure. This is John. I'll take that one. You mentioned the SNC part, so I'll start there. Page eight breaks down the loan growth numbers for the quarter by sector, but I can provide some color that may more directly answer your question. So I think, as I said in the prepared comments, $250 million of the total reduction was in the SNC portfolio. That was planned. It's been something we've been trying to do for the past several quarters. And frankly, I'm pleased to get to the point where we can kind of call it even to peers now, relative to exposure to our peers, and we can kind of stop having that self-inflicted headwind for growth at this point.
There may be a little bit of runoff left in the fourth quarter, but that would just be in terms of the timing of when we're bringing deals in and taking them out. I think we can kinda call the SNC self-induced headwind pretty much over. Now, and within terms of growth, Michael, I wouldn't suggest that that's gonna be a book that grows much, but I do think it'll be held relatively flat as a percentage of overall loans as we move into a little bit more growth year numbers in total credits.
The second one you mentioned was those project paydowns, and you may remember there was a lot of press around the very large LNG projects that occurred in the Lake Charles area of Louisiana that were extremely beneficial to that market and the state in general. The projects that we partly financed have been wrapped up. Those contractors have been paid, and they, in turn, paid down their operating lines, so the little downward jump you see on page eight in the top right of line utilization is materially all that amount of paydowns, and so that was the second chunk and really, the only thing unplanned in terms of or unexpected in terms of overall loan growth was we did see more pressure on the CRE book in terms of payoffs.
There's always a lot of churn in it, but this quarter, and it started really the prior quarter, we saw the private equity market as well as bridge lenders come in very strong, very aggressive in both pricing and terms. And so the paydowns occurred there at a little higher level than we anticipated. Given that the pipeline has begun to improve in C&I, and we are booking more new projects, that diminishment overall C&I you see on page eight is really more the timing between the paydowns that occurred and the time it takes for borrowers to run through their own equity before they begin to borrow on their lines that we've already approved. So we'll begin to see that come in as we get into 2025.
So, I guess if I try to put overall tone, I would say demand is still a bit tepid, but there's definitely green shoots of progress out there. Our commercial banking pipelines are beginning to build. It's too early to know the timing of when people begin to feel a little bit better, but I suspect we'll need to get the election behind us and maybe a little more demonstration of a rate movement downward by the Federal Reserve to see the, the projects on the fence finally tip over to get executed. But the pipeline is building. In more granular sectors of our business purpose lending book, still having terrific success there. The business banking group, the SBA group, are a quarter over quarter, really doing terrific work.
And in fact, we have another quarter, record quarter of SBA volumes and fee income that's reflected on page 17 in the fee bucket. So we feel pretty good about where we are with loan numbers, I think, with some of the headwinds out of the way, and the new bankers coming online as we get to 2025. We certainly expect to have a better story next year, which we'll cover on the January call, or in the, yeah, when we cover the end of year numbers, the updated CSOs and some guidance for the year. Did I answer what you were looking for there, Michael, or do you want to ask a question?
Michael Rose (Managing Director)
No, that's good. I appreciate all the color. I'll step back. Thanks for taking my questions.
John Hairston (President and CEO)
Thank you, Michael. Appreciate the questions.
Operator (participant)
And your next question comes from the line of Catherine Mealor with KBW. Your line is open.
Catherine Mealor (Managing Director)
Thanks. Good evening.
John Hairston (President and CEO)
Hi, Catherine.
Catherine Mealor (Managing Director)
Wanted to go back to the margin and appreciate the guidance for fourth quarter, and glad to see that we can still see the NIM move higher next quarter. Was just wondering if you could just kind of talk us through how you're thinking about the margin structurally as we move into next year? Without just giving the exact guidance, you know, how do you think about. It feels like you're kind of generally asset sensitive, maybe liability sensitive in the near term. Is there a scenario we can still see the margin increasing through next year? Or is this increase really just a result of some of the things you can do from, on your CD book, and it's more likely that we'll see some NIM compression as we move into 2025? Thanks.
Mike Achary (CFO)
Hey, Catherine, it's Mike. I think the way to think about it is to first kind of talk about the fourth quarter and what we're expecting. Look, some of those themes, I think, will certainly carry forward into 2025. Just as we've experienced the last couple of quarters, you know, our NIM continues to be driven by really our fixed asset repricing and then a repricing of our CD portfolio. So those things, you know, help drive the NIM expansion in the third quarter. They'll, again, help drive, you know, the modest NIM expansion that we've kind of guided to for the fourth quarter. Then as we head into 2025, you know, again, as John mentioned, we'll talk in much more detail about guidance for 2025 in January.
But that theme, I think, continues into 2025 around, you know, having a lot of opportunities to reprice our bond book, just for 2025. And these numbers, I think, will change or evolve a little bit, but, you know, we have the better part of $700 million of principal cash flow coming back to us from the bond portfolio next year. You can probably add to that another $300 million or $400 million, where our fair value hedges on specific bonds become effective. So, you know, that'll be a real, I think, headwind toward. I'm sorry, tailwind toward, helping with, you know, NIM expansion into next year. And then on our CD book, you know, in the prepared comments, I already kind of talked about you know, the third quarter repricing of the $2.6 billion.
In the fourth quarter, we've got a little bit north of $3 billion repricing at an advantage of close to 100 basis points. And then into 2025, you know, there's gonna be some significant turnover in our CD book, so call it close to $10 billion of CDs repricing, again, at an advantage of, we think, at least 100 basis points. So all those things combined, you know, give us a pretty good tailwind as we go through 2025. And certainly, that helps with some of our near-term liability sensitivity. But just as we've talked about, you know, throughout really the second half of the year, the missing ingredient, really, for us to continue NIM expansion and NII expansion, you know, in a down rate environment, really needs to be balance sheet growth.
Certainly, John has already kind of talked about how we're thinking about growing the loan book into next year, so if we're successful in doing that, you know, we certainly have, I think, a pretty good chance of, as a modestly asset-sensitive company, being able to continue NIM expansion in a down rate environment.
Catherine Mealor (Managing Director)
Okay, great. And then is it all hires and organic growth as a primary way to get there? Or does M&A become more of an interest to you? I think one thing that John has said many times, he's more worried about revenue growth than credit risk. And so in an environment where we still feel pretty good about credit, and we're really looking at revenue growth, do you think you can hit your targets just organically, or does M&A become a bigger piece of your story?
Mike Achary (CFO)
When we think about our plans and the way we put together our business plan for next year and for 2026, we really think about it first and foremost from an organic perspective. So the plan that we put together is built on organic balance sheet growth. So we don't plan for M&A. You know, certainly, if those kinds of opportunities present themselves in the next year or two, you know, that's something that we, we certainly would take a look at, but it's not anything we're planning for, per se, if that's helpful.
Catherine Mealor (Managing Director)
It is. Great. Thanks for the color.
Mike Achary (CFO)
Thanks for the question.
Operator (participant)
Your next question comes from the line of Brett Rabatin with Hovde Group. Your line is open.
Brett Rabatin (Director of Research)
Hey, good afternoon, everyone. Wanted to start with fee income and just with the guidance in the fourth quarter and, and the, you know, the annuity income usually being higher in 4Q. I'm curious if you could give some more color on the other bucket in 3Q, specifically, you know, how much derivative income, SBIC, BOLI, and SBA, you know, might have been unusual in 3Q? And then just maybe how much that might come down in 4Q to reconcile that 6%-7% for the full year.
Mike Achary (CFO)
Sure, Brett. This is Mike. I'll get started, and certainly John can add some color. So if we look at the third quarter, again, an absolutely excellent quarter across the board, really, for fee income growth. So it's certainly something, you know, we're very pleased to be able to report, and again, really, I think shows the success of the investments that we've made the past couple of years in our fee income businesses. So again, if we look at the third quarter, slide 17 in the deck kind of outlines or outlines through that waterfall graph the various components. And, you know, certainly, the other income does stick out. This quarter, it was up $5.6 million, quarter over quarter, and the vast majority of that increase really came from what we refer to as our specialty fee income lines.
So talking about things like, SBA fees being up about $1.6 million. Our SBIC income or venture capital income was up about $700,000. BOLI showed a nice increase of about $500,000, and then derivatives were up almost $2 million. So that's the better part of the $5 million that was showing this $5.6 million growth quarter over quarter. So as we think about the fourth quarter, you know, certainly, we would expect to see continued growth in wealth management, so our trust fees as well as our annuity income to some extent.
Certainly, you know, when you look at quarter over quarter, considering the fourth quarter, really can't necessarily count on some of these specialty lines, you know, to again show the level of increase that we showed in the third quarter. When we think about fee income in the fourth quarter, we would expect to see somewhat of a modest drop between the third and fourth quarter. John, anything you want to add to that?
John Hairston (President and CEO)
Okay.
Mike Achary (CFO)
Okay.
John Hairston (President and CEO)
Yeah. Is the question on the fees, and we can clarify for you, Brett?
Brett Rabatin (Director of Research)
No, that's helpful, guys. And then just wanted to talk about capital for a second. And, you know, I know with the L for the fourth quarter in a flattish balance sheet, and then maybe in 2025, you know, the growth becomes more prevalent again at some point. But it feels like, given your level of profitability, you could continue to have some capital accumulation, you know, even despite the share buyback. Any thoughts on just capital accumulation and maybe what the right number might be for capital as you view it, as core versus excess, you want to try and figure out how to invest?
Mike Achary (CFO)
Sure, Brett. So when we think about capital, obviously, as we've talked about in many venues, really going back four years or so, that really has been one of our strategic focus points, to build capital to top quartile levels. And I think certainly we've been able to accomplish that over this time period. So from the numerical perspective, you know, TCE is certainly knocking on the door of 10%. And
Common Tier 1 nearly 14%. So those are attractive levels, and we view those capital levels as things that really just give us a lot of optionality around how we think about managing capital going forward. So in the past couple of quarters, we've increased the common, and we presume buybacks and really have guided to, you know, looking at both of those things as we move into 2025, with really the top priority for deploying capital really to be support organic balance sheet growth. So that's something that we're looking forward to being able to support next year. And again, we've talked a lot about the different things that we're putting in place to ensure that we're able to grow the balance sheet, specifically loans next year.
So certainly, if that growth, you know, for whatever reason, isn't as attractive as what we're planning for, you know, certainly, we could certainly look at increasing the buybacks or the common dividend or things of that nature. So again, the levels of capital that we have, I think first and foremost, give us a lot of optionality with respect to how we think about managing the balance sheet, and I think that's important.
Brett Rabatin (Director of Research)
Okay, that's really helpful. Thanks for all the color.
Mike Achary (CFO)
Yes, sir. Thank you for asking the question.
Operator (participant)
Your next question comes from the line of Ben Gerlinger with Citi. Your line is open.
Ben Gerlinger (VP of Equity Research)
Hey, good afternoon, guys.
John Hairston (President and CEO)
Hey, Ben.
Ben Gerlinger (VP of Equity Research)
I know we're kind of beating a dead horse here on the credit, but kind of the responses thus far. I mean, I think it was 60% of the increase was SNC-related. Obviously, that's rounding or ballpark, however you guys want to phrase it. When you think about just kind of going forward, so that would back out roughly, I don't know, $75 million of the roughly $130 million linked quarter criticized. Do you have any thoughts on kind of what we should expect going forward, especially with lower rates? I know that some of this is economically dependent and that it's something you just can't tell six or nine, 12 months from now.
But when you think about lower rates and kind of the cleaning up of the balance sheet, do you feel like you've appropriately addressed a lot of the credit or presumably could be, so it could potentially be over-marked, or is it still kind of more fluid than that?
Chris Ziluca (Chief Credit Officer)
Yeah, it's definitely a crystal ball-type question. You know, we address credit, you know, kind of on a daily, monthly, quarterly basis, and we make sure that we have our portfolio and our individual relationships and loans classified correctly. You know, if we kind of look forward, you know, as I mentioned in one of my earlier comments, you know, interest rates, you know, definitely have had and do have an impact on the performance of our customers, you know, some more than others. You know, if you think about consumer in general, they're probably, if they're kind of a borrower, a net borrower, they're definitely going to be impacted and benefit from lower interest rates.
On the commercial side, you know, many of our customers either hedge or enter into fixed rate obligations. Some are floating. Obviously, the floating ones will definitely benefit. The fixed ones will obviously have to kind of reprice over time. You know, obviously, the buildup in interest rates that we saw over the past year or two was much more dramatic than I think we're going to see in interest rates coming back down. And so the benefit is probably going to be a little bit slower to realize from our customers' perspective on the C&I side of things. And so, you know, I think one of the things that they're going to have to kind of face into is general demand for their goods and services.
And if there's a, you know, kind of a forward view of continued slowness in that regard, then they're going to have to kind of rationalize their expense base as they manage through that. And we're seeing that. I mean, we're seeing some customers managing their inventory levels down because of just a slowness in demand, especially for heavy, you know, heavy equipment and things like vehicles and more durable goods. And then others are going to have to manage their expenses through just a, you know, a payroll, and many are taking that step as well. So, you know, my view, sitting where I am right now is, you know, I think we have our credit book appropriately, you know, marked or classified.
You know, and it just remains to be seen, you know, what happens, you know, as, as, either rates help, or, any sort of kind of a twist in the economic cycle, manifests itself in, in a particular sector. But, but as I indicated, I mean, we're pretty spread out from industry-specific issues, so I think they're very situational at this point, and rather than being geographic or industry specific, outside of, transportation, which I still think is. You know, we're not heavily weighted in that area, but we are definitely seeing, some things in that, in that space.
John Hairston (President and CEO)
Ben, this is John. Just to add a little color, and maybe this is more in line with what you're looking for, but clearly, inflation, reducing the cost of workforce becoming a little bit more reasonable or certainly not going up as fast as it was, and the cost of variable rate money coming down are certainly tailwinds to improving the bottom line for clients. But as you know, we have to risk rate based on current and prior, you know, previous financials. And so the outlook for how well things may get, unfortunately, can't be inclusive in the ratings. So it's a little bit of a rear view.
The comments we're giving you are a rear view look on ratings and a forward view on confidence of things working out pretty well. Hopefully, that's helpful.
Ben Gerlinger (VP of Equity Research)
Yeah, I thought it was helpful. I mean, I got a few emails. The criticism jump spooks some people, but I think the SNC review, and then, like you said, credit is a little backward-looking in this respect, especially when there's kind of rate focus, probably assuage some of the fears. Kind of a little more nuanced sort of question. I saw modified loans continue to go up, not a huge amount. Any color that would be helpful?
Chris Ziluca (Chief Credit Officer)
Sure. Yeah, this is Chris again. You know, just in, you know, by its nature, if you imagine a special assets department, you know, we tend to, you know, manage the portfolio kind of on a short duration basis as we work through individual issues. So as loans mature with customers that we're looking to, either encourage to refinance elsewhere or to allow them to get to a better place, we keep the duration of the maturity short. And so most of our modifications are term-related because we roll them forward, you know, in 90- and 120-day increments. And over a period of time, you then have to classify those loans as modifications, even though it's part of the strategy that we work through with those customers.
Ben Gerlinger (VP of Equity Research)
Gotcha. That's helpful. I'll step back. Appreciate the time, guys.
John Hairston (President and CEO)
Thanks, Ben.
Operator (participant)
Your next question comes from the line of Gary Tenner with D.A. Davidson. Your line is open.
Gary Tenner (Managing Director and Senior Research Analyst)
Thanks. Good afternoon.
John Hairston (President and CEO)
Hey, Gary.
Gary Tenner (Managing Director and Senior Research Analyst)
Hey, I wanted to ask about kind of the overall guide on PPNR, you know, as it is now versus where it was last quarter. If you kind of look at the midpoints of what you provided for fees and expenses in the last quarter on PPNR, with the changes now, it, you know, certainly, you know, would appear that NII for a full year is coming in lower than what you would have thought a quarter ago, despite the fact that you, you know, still are guiding to, you know, additional modest NIM expansion and the loan growth, that hasn't really changed. So is it a function of maybe just the balance sheet not growing at all, really, kind of back half of the year?
Or what's the primary item there, just as kind of then we're thinking about rolling forward into 2025?
Mike Achary (CFO)
Yeah. Hey, Gary, this is Mike. Great question. So when we think about PPNR, I mean, obviously, the guidance that we're giving is kind of annual guidance, but at this point, it's pretty easy to back into what we're expecting for the fourth quarter. So, so I think you're right in terms of the size of the balance sheet and the fact that it really hasn't grown at all, and really has deleveraged a little bit in the second half of the year. So I think that's driving, certainly some of the leveling off, if you will, around NII that we're expecting in the fourth quarter.
You know, add to that, we already kind of talked about fees, where we had the better part of $5 million of kind of specialty items that really can't be counted on, on a quarter-over-quarter basis. I do think we'll have some of that, repeat in the fourth quarter, but it really is hard to pinpoint exactly what that might be. On the expense side, I do think, while we had an absolutely tremendous quarter in terms of actually reducing expenses quarter over quarter, I think we're more likely than not to see a little bit of an increase in the fourth quarter.
So, I think if you kind of put all that together, again, while we had, again, a great quarter for PPNR growth in the third quarter, that's likely to come down a little bit in the fourth quarter, I think.
Gary Tenner (Managing Director and Senior Research Analyst)
Got it. No, and that helps. I mean, the question is really focused on the NII piece, but you answered that, and the nuance on the expenses is helpful as well. And then just a second question, as it relates to the comments, John, about you know, recruiting efforts. You know, can you give any context around kind of numbers that you're targeting or how you're thinking about you know, how many folks you could add to staff and what kind of talent that could be as you're looking out into next year?
John Hairston (President and CEO)
Yeah, this is John. Thanks, Gary, for the redirect. In terms of hiring, we really aren't ready to talk about the numbers yet. We plan to do that in January. Our expectation is to be recruiting right now, and although we have made some hires, we want to get all the recruiting efforts done for four or five months and then report both progress and what our expectations are for 2025, as part of the 2025 guidance. So it'd be a little premature to do it now. We got a fair number of offers out, but as you know, pull-through rate is not going to be 100%. So I'll step away from numbers right now.
But I can say that the recruiting efforts have been very, very warmly received so far. We do offer a somewhat unique environment where there's a really terrific partnership between the line credit and the treasury function in terms of helping set rates and being creative in terms of putting packages together that are attractive to new clients when they first come in the door, and for those clients that are looking to expand. So the effort's been pretty warmly received, and we look forward to talking about it as we get into 2025.
In terms of where, I think you asked where, we're glad to accept good talent, particularly if it's experienced, really, in any of our markets, but our recruiting efforts have been more focused in the areas of our footprint that have a natural, higher organic growth rate.
... and so that would be Texas and Florida. And generally speaking, we're recruiting bankers in the a little less than the middle market size relationships, what we call commercial business banking and SBA. And also wealth advisors. Given the success of our wealth management offering, we still have places where we think we can add wealth advisors and get it created pretty quickly. So it takes about 12 months for new bankers to begin adding kind of on a flywheel basis profitability, and between 18 and 24 months for them to become materially profitable and closer to the target operating model. And we've had that in place for about 10 years, and it tends to be really good and predictive after just four or five months in terms of whether it's going to work out well or not.
So, I think the recruiting effort is going to be something good to talk about, when we get to January. Do you want to get any clarifying questions on that, or?
Gary Tenner (Managing Director and Senior Research Analyst)
No, that was great, John. Thanks, guys.
John Hairston (President and CEO)
Yeah, thank you.
Operator (participant)
Your next question comes from the line of Matt Olney with Stephens. Your line is open.
Matt Olney (Managing Director)
Yeah, thanks for taking the question. Mike, it sounds like you feel good about deposit pricing so far. It's obviously early in the cycle, but just would love to hear any updated thoughts you have on deposit betas throughout the cycle in this kind of down cycle, maybe as compared to the, the past betas that you disclosed in your presentation.
Mike Achary (CFO)
Sure, Matt. And, yeah, I think you're right. We do feel good about our ability to continue to control deposit costs going forward. So, you know, we were pretty proactive in reducing our, promotional rates, especially on CDs, you know, coming into the, the Fed move. So our top promotional CD rate is a three-month at 4.5%, and we lowered that 50 basis points. We also have a five-month at 4.15%, and then eight and 11 months at 4%. So, those rates I think are attractive. They're all at that kind of almost magical number of above 4% now. So we'll see where that goes from here. Our guidance for the fourth quarter really includes two 25 basis point rate cuts.
So, obviously, we'll address deposit pricing as we go through the rest of the quarter. As far as our deposit betas or really our betas for this cycle, you can see at the bottom of 16, you know, kind of for the last three cycles. And, you know, this isn't per se, guidance, but just, let's just call it expectations. So expectations for the current cycle around our total deposit beta, probably something between 37% and 38%. When we look at our interest-bearing deposit betas, 57% to 58%, and then on the loan side, somewhere around 49% to 50%. So those are our expectations. That's what we're, those are the things we're striving for through this cycle. And, you know, it'll be interesting to see, you know, how the cycle progresses post-election and through next year.
Matt Olney (Managing Director)
Okay. Appreciate that, Mike. And then going back to the credit discussion, I heard all the great commentary on the criticized loans and the deterioration there. Did I miss the details behind the commercial loan charge-off in the third quarter? I just looking for any kind of color behind that.
Chris Ziluca (Chief Credit Officer)
Yeah. Yeah, Matt, it's Chris Ziluca. No, you didn't miss the question. Yeah, so, you know, charge-offs were a little bit higher this past quarter. We had a couple of C&I credits that we've been kind of working through and made the decision that now is the best time to kind of charge them down, given, you know, where they are. We're still working through those issues with those customers, but wanted to make sure that it was kind of in the right spot moving forward. So we took some partial charges to kind of address that. The rest were pretty run rate oriented in nature, much smaller, so not much to talk about there.
Matt Olney (Managing Director)
Okay. Thank you.
Chris Ziluca (Chief Credit Officer)
Yeah, thanks, Matt.
Operator (participant)
And your next question comes from the line of Christopher Marinac with Janney Montgomery Scott. Your line is open.
Christopher Marinac (Director of Research)
Hey, thanks. Good afternoon. I wanted to ask about risk-adjusted returns based particularly on risk-adjusted yields in the commercial book as rates fall. I mean, as you look out a couple of quarters, would you imagine it gets easier to get your longer-term risk-adjusted deals, or does it get harder?
Chris Ziluca (Chief Credit Officer)
Yeah, this is Chris Ziluca. I'll attempt that, even though I'm, you know, much more credit risk-focused than that. But yeah, I mean, I think what you see is oftentimes during kind of periods of turmoil that, you know, risk and return don't always perfectly line up. And, you know, I think, you know, as time moves on, you know, we're going to continue to see them get better aligned. I think right now, people are focused on certain sectors more than others, and so they can get a little crazy with the types of yields and the returns that they're willing to accept in those areas.
But, you know, as we start to see a broader demand across C&I and CRE, I think you'll see a little bit more rationalization on risk-adjusted returns. You know, we continue to be focused on that. I mean, it's one of our you know key mandates here, which is making sure that we get paid for the risk. You know, if the risk is perceived to be lower from a credit quality standpoint, you know, then we'll accept a little bit better or lower rate on a transaction. But, we won't sacrifice rate for credit quality.
Christopher Marinac (Director of Research)
Great, Chris, thank you for going through that. And then, just for either you or Mike, what are you seeing in terms of fraud from, you know, sort of small business-related deposits? And is that showing up at all in some of the sundry expense lines?
John Hairston (President and CEO)
And, Chris, did you-- this is John, did you say fraud?
Christopher Marinac (Director of Research)
Yes, fraud.
John Hairston (President and CEO)
I'll take that if Mike can jump in, or Chris, if they like. You know, fraud, both on the consumer and the small business side, has been a challenge for the last several years. I think during the pandemic, people were distracted, and I think the bad actors began to make some pretty good headway. Actually, the way this year is going, our fraud losses have been less this year than they were last year or the year before. But it wasn't because there were less attempts, it's because we spent a good bit of money building tools and people to try to detect issues before they turned into a loss.
But it's a real virus on the industry and on the economy of the country, and I think all of us are going to have to continue investing into it to try to protect our clients. But a lot of it, and a lot of the expense that we're having to add over time, is just in the education of our clients in terms of how they put in internal controls that banks have been using for a long time, but that they need to implement in their own businesses.
Mike Achary (CFO)
Chris, this is Mike. The only thing I would add to that is that there was nothing specific in the third quarter that rose to the level of being called out. In fact, I think our fraud, overall check fraud expense is really down a bit.
Christopher Marinac (Director of Research)
Great, Mike. Thank you, and John, thank you as well.
John Hairston (President and CEO)
Thanks for the questions.
Operator (participant)
That is all the time we have for questions today. I would like to turn the conference back over to Mr. John Hairston for closing remarks.
John Hairston (President and CEO)
Okay. Thanks, Abby. Thanks for moderating the call. Thanks, everyone, for your interest on a, I know, a busy release day. We look forward to seeing you on the road soon.
Operator (participant)
Ladies and gentlemen, this concludes today's call, and we thank you for your participation. You may now disconnect.