Q3 2024 Hancock Whitney Corp Earnings Call
Speaker Change: Good day, ladies and gentlemen and welcome to Hancock Whitney Corporations, 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.
Kathryn Mistich: As a reminder, this call may be recorded, and I would now like to introduce your host for today's conference, Kathryn Mistich, Investor Relations Manager. You may begin.
Speaker Change: As a reminder, this call may be recorded, and I would now like to, excuse me, I would now like to introduce your host for today's conference, Kathryn Mistich, Investor Relations Manager. You may begin.
Kathryn Mistich: 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.
Kathryn Mistich: 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 10K and 10Q including the risks and uncertainties identified therein.
Kathryn Mistich: You should keep in mind that any four looking statements made by handcuck Whitney speak only as of the date on which they were made. As everyone understands, the current economic environment is rapidly evolving and changing.
Kathryn Mistich: Hancock Whitney's ability to accurately project results or predict the effects of future plans or strategies or predict market or economic development is inherently limited.
Kathryn Mistich: 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-gap financial measures. You can find reconciliation to the most comparable gap measures in our earnings release and financial tables. The presentation slides included in our A.K. are also posted with the conference call webcast link on the Investor Relations website.
Kathryn Mistich: We believe that the expectations reflected or implied by any four-looking statements are at based on reasonable assumptions, but are not guarantees at performance or results. And our actual results and performance could differ materially from those set forth in our four-looking statements.
Kathryn Mistich: Tank Up Whitney undertakes no obligation to update or revise any forlooking statements, and your caution not to place undo reliance on such forlooking statements.
Kathryn Mistich: Some of the remarks contain non-gap financial measures. You can find reconciliation to the most comparable gap measures in our earnings release and financial tables. The presentation slides included in our AK are also posted with the conference call webcast link on the investor relations website.
Kathryn Mistich: We will reference some of these slides in today's call.
Kathryn Mistich: We will reference some of these slides in today's call.
Kathryn Mistich: Participating in today's call are John Harrison, president and CEO, Mike Ackery, CFO, and Chris Aluka, chief credit officer.
Kathryn Mistich: Participating in today's call are John Hairston, President and CEO, Mike Akary, CFO, and Chris Aluka Chief Credit Officer. I will now turn the call over to John Hairston.
John Harrison: I will now turn the call over to John Harrison. 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 R.O.A. of 1.32 percent 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 remained well-controlled, and in fact were down quarter over quarter.
John Hairston: Thank you all for joining us this afternoon.
John Hairston: We are pleased to report our third quarter results again reflecting improved profitability and efficiency.
John Hairston: We achieved an R.O.A. of 1.32 percent 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.
John Hairston: Fe-income continues to outperform and expenses remained well-controlled, and in fact, we're down quarter of a quarter. In recent years, we made and continue to make strategic investments in the income lines of business, and are very pleased with continued impressive returns.
John Harrison: In recent years, we made and continued 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 SNICK exposure. We also saw higher payoffs due to refinance and sales transactions within the Siri multifamily and Siri 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.
John Hairston: Turning to the balance sheet, loans were down 450 million, over 250 million of which is related to our purposeful decrease in snick exposure. We also saw higher payoffs due to refinance and sales transactions within the Siri multifamily and Siri 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.
John Hairston: The balance sheet doesn't reflect the full story, though, as we enjoyed very solid production and new credits during the quarter. We're also very pleased to have attained a peer levels of snake exposure, a year ahead of the original schedule. So this particular line item will generally cease to be a purposeful headwind to grow.
John Harrison: We're also very pleased to have attained peer levels of sneak 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've reached all our goals and earnings efficiency in capital deposits were down in the quarter, but the DDA outflow remains moderated. And our DDA mix was consistent at around 36 percent. 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.
John Hairston: We are actively recruiting bankers to support growing the balance each next year. Now that we've reached all our goals and earnings efficiency in capital.
John Hairston: 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. Michael had more detail in his comments later.
John Harrison: Michael added 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 sneak exam, which was impactful to critics. We expect to compare well versus peers in criticized loans and expect to be in the top quartile for non-accrual loans. Net charge also for up quarter of a 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 percent, up slightly from the prior quarter.
John Hairston: Our credit quality metrics continue to normalize with a decrease in non-acrual loans, but an increase in criticized loans, fully reflecting the results of the recent snake exam, which was impactful to criticize migration. We expect to compare well versus peers in criticized loans and expect to be in the top court aisle for non-acrual loans.
John Hairston: Netchard Jaws were up quarter of a quarter but we continue to see no significant awakening in any specific portfolio sectors or geography.
John Hairston: We continue to enjoy a solid reserve of 1.46% of slightly from the prior quarter.
John Harrison: 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 with strong growth in all of our capital metrics due to solid profitability, ending the quarter with a TCE of 9.56 percent and a common equity tier 1 ratio of 13.79 percent. We made modest changes to our goddess for the fourth quarter, and as a reminder, we will give full goddess for 2025 on next quarter's call.
John Hairston: 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 with 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 goddess for the fourth quarter, and as a reminder, we will give full goddess for 2025 on next quarter's call.
John Harrison: 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 lived by the core values our founder set forth those many years ago. We have focused on achieving strong profitability, granular revenue sourcing, admirable earnings efficiencies, solid capital and ACL reserves, a de-risk 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.
John Hairston: October 9, mark 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 are found or set forth those many years ago.
John Hairston: We have focused on achieving strong profitability, granular revenue sourcing, admirable earnings efficiency, solid capital and ACO reserves, a de-risk loan portfolio, and top quartile capital ratios.
John Hairston: As we reflect on our past and celebrate our future, we look forward to another 125 years of strength and stability.
John Harrison: 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 great need. As we speak, our teams are delivering meals, ice, and fuel in hard-hit areas to assure we do our very best to serve. Our thoughts and prayers are with those impacted by these storms, and we are committed to being a steadfast partner in the recovery process.
John Hairston: 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.
John Hairston: 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, and heart hit areas to assure we do our very best to serve.
John Hairston: I've thoughts in our prayers with those impacted by these storms and we're 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.
John Harrison: For over a century, our bank has been here to help people rebuild and recover, and this time is no different.
Mike Ackery: With that, I'll invite Mike to add additional comments. Thanks, Sean.
Mike Ackery: Good afternoon, everyone. Third quarter's net income was $116 million or $33 per share, so up $1 million and $2 cents per share from last quarter. PPR growth was again strong this quarter, and was up $10.1 million, or 10%, to $167 million. Hexpress is a return on average assets that's a peer-leading 1.92 percent. Hiding in expanded two basis points to 3.39, driving modest growth in NII. As I already mentioned, our fee income businesses had an outstanding quarter and expenses were again very well controlled. As mentioned, but the company's NIM expanded two basis points from last quarter to 3.39 percent.
Mike Akary: Thanks John, good afternoon everyone. Third quarter's net income was 116 million, our doll of 33 per share, so up 1 million and two cents per share from last quarter. PPNR growth was again strong this quarter and was up 10.1 million or 10% to 167 million.
Mike Akary: Expresses a return on average assets that's a pure leading 1.92%.
Mike Akary: Our NINX fan did two basis points to 3.39 driving modest growth in NINI. As I already mentioned, but our fiancum businesses had an outstanding quarter and expenses were again very well controlled.
Mike Akary: As mentioned, the company's name expanded two 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 borrow funds, as shown on slide 14 of the investor deck.
Mike Ackery: 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 debt. Our cost of deposits was up two basis points to 2.02 this quarter, mostly due to inflows of high-balanced money-market deposits from the equity markets in August. That in turn drove them the quarter bump in our cost of deposits to 2.04 percent. We finished the quarter and an even 2 percent, which provides a nice glide path to a more significant reduction in the fourth quarter. Also, as expected, we saw 2.6 billion of seeding maturities this quarter, which reprised from 5.04 percent to 4.62 percent, driving down the rate on time deposits by about 5 basis points.
Mike Akary: Our cost of deposits was up two bases points to 2.02, this quarter mostly due to inflows of high-balanced money market deposits from the equity markets in August.
Mike Akary: That in turn drove and they quarter bump in our cost of the positive, the 2.04%.
Mike Akary: We've finished the quarter and an even 2% which provides a nice glide path to a more significant reduction in the fourth quarter.
Mike Akary: Also, as expected, we saw 2.6 billion of seeding maturities this quarter, which reprise from 5.04% to 4.62% driving down the rate on time deposits by about 5 basis points.
Mike Ackery: The pace of DDA outflows continued to slow this quarter, with a drop of only 142 million and a stable DDA mix of 36 percent. We believe the DDA mix could stay at least at this level through year end. With the rate cuts in September in the two 25 basis point rate cuts, we anticipated in the fourth quarter we expect our cost of deposits will be down significantly in the coming quarter. Our loan yield was up three basis points to 6.27 percent, reflecting fixed rate loan repricing and new loan originations, partially offset by lower rates on variable rate loans.
Mike Akary: The pace of DDA outflows continued to slow this quarter with a drop of only 142 million and stable DDA next of 36%
Mike Akary: We believe the DDA mix could stay at least at this level through your rent. With the rate cuts in September in the 225 basis point rate cuts, we anticipate in the fourth quarter we expect our cost of the positive will be down significantly in the coming quarter.
Mike Akary: Our loan yield was up three basis points to 6.27%, reflecting fixed rate loan repricing and new loan originations, partially offset by lower rates on variable rate loans.
Mike Ackery: 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 six basis points to 2.66 percent 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 percent and were reinvested at 4.74 percent. Next quarter, we expect about 200 million of cash flows coming off at about 3.10 percent and will be reinvested at over 4.5 percent. 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 minimum expansion in the fourth quarter again, despite two additional rate cuts and limited balance sheet growth.
Mike Akary: Given the two additional rate cuts we expect in the fourth quarter, we do expect loan yields will be down next quarter.
Mike Akary: Bon yields for the company were up six basis points, the 2.66% due to our continued reinvestment of cash flows back into our bond portfolio.
Mike Akary: and the third quarter, 220 million of bonds came off the balance sheet had a yield of 2.69% and were reinvested at 4.74%.
Mike Akary: Next quarter, we expect about 200 million of cash flows, coming off at about 3.10%.
Mike Akary: and will be reinvasted at over 4.5%.
Mike Akary: 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 and expansion in the fourth quarter again, despite two additional rate cuts and limited balance sheet growth.
Mike Ackery: As mentioned, but the income was again strong in this quarter, up 8 percent from last quarter. We benefited from higher investment and annuity fees, service charges on deposit accounts, and specialty in. We now expect non-interest income for 2024 to 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.
Mike Akary: As mentioned that the income was again strong this quarter, up 8% from last quarter. We benefited from higher investment in the newty fees, service charges on the positive accounts, and specialty income.
Mike Akary: We now expect not interested in comfort 2024 will be up between 6 and 7% from 2023's adjusted non-interest income level.
Mike Akary: 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 into coming quarters.
Mike Ackery: Our PPNR guide has to be flat to down slightly from 2023's adjusted levels, reflecting our updated expectations on rate cuts, the income and expense guidance.
Mike Akary: Our PPNR guide is to be flat to down slightly from 2023's adjusted levels reflecting our updated expectations on Raycuts, B-N-Com, and Expense Guides.
Mike Ackery: 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 to 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.
Mike Akary: Lastly, a couple of quick comments on Capitol.
Mike Akary: Our capital ratios remain remarkably strong, even after returning capital, we continue to share purchases and the recent increase in our common dividend.
Mike Akary: All things equal we expect to share repurchases will continue at a similar pace in the fourth quarter. As always, we're 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 Harrison: I will now turn the call back to John. Thanks, Mike.
Operator: Let's open the call for questions. And 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 1 on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, press star 1 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 1 to join the queue, and your first question comes from the line of Michael Rose with Raymond James.
Mike Akary: i
John Hairston: Thanks Mike, let's open the call for questions.
Speaker Change: And 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 1 on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, press star 1 a second time.
Speaker Change: If you are called upon to ask your question and are listening to be a speaker phone on your device, please pick up your handset and ensure that your phone is not on mute when asking your question.
Speaker Change: Again, it is Star One to join the queue.
Speaker Change: and your first question comes from the line of Michael Rose with Raymond James. So your line is open.
Michael Rose: Your line is open. Hey, good afternoon, everyone. Thanks for taking my questions.
Michael Rose: Hey, good afternoon, everyone. Thanks for taking my questions. Maybe we could start with Chris. Saw the uptick and criticize commercial loans this quarter and it's been over the past couple quarters and upward progression. I see you built the reserve a little bit.
Chris Ziluca: Maybe we could start with Chris. Saw the uptick in criticized commercial loans this quarter, and it's been over the past couple quarters and upward progression. I see you built the reserve a little bit.
Chris Ziluca: Can you just talk to talk us through kind of what's driving the increase and then, as we think about the prospects for lower rates.
Speaker Change: Talk us through kind of what's driving the increase and then as we think about the prospects for lower rates
Speaker Change: What's the driving factor to maybe bring some of those loans current and then just separately just to have anything to do with maybe accelerating some of the disposition of your lecture.
Michael Rose: What's the driving factor to maybe bring some of those loans current, and then just separately, does this have anything to do with maybe accelerating some of the disposition of your snacks? Thanks.
Speaker Change: Yeah, no problem, Michael. Appreciate the question. First of all, I just really want to 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 criticize loans. I do want to 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 CNI book. And we continue to really analyze and interrogate and assess the drivers.
Chris Ziluca: No problem, Michael. Appreciate the question.
Chris Ziluca: First of all, I just really want to 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 want to 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 CNI book.
Chris Ziluca: 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 migration. It really is geographically spread. 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, 70% of the migration during the quarter was spread out among manufacturing companies, retail and wholesale trade, transportation companies, which is a sector that I indicated.
Speaker Change: 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 migration. It really is geographically spread. 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, 70% of the migration during the quarter was 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.
Chris Ziluca: Last quarter and other banks have as well are a little under pressure, and even professional services and information services.
Speaker Change: are a little under pressure and they're even professional services and information services. You know, again,
Chris Ziluca: You know, again. Some of it was, as John mentioned during his opening comments, the result of our snake exam and the results that came from that; but even then, only 60% really came from that exam process, and so it was a little bit more diversified in that regard.
Speaker Change: Some of it was, you know, as John mentioned during his opening comments, a result of our, our snake exam and the results that came from that, but even then, you know, only, you know, 60% really came from that exam process.
Speaker Change: and so it was a little bit more diversified in that regard.
Chris Ziluca: But we continued to really take a hard look at; we really do. We've enhanced our, and this was done 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 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 identify any at this point in time. It's just kind of where we are in the cycle with respect to kind of slackening of demand off of that kind of build up during the post-pandemic period and just higher operating costs.
Speaker Change: You know, we continued 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.
Speaker Change: 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 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 identify any at this point in time. It's just kind of where we are in the cycle with respect to kind of slackening of demand off of that kind of build up during the post pandemic period and just higher operating costs. You know, you asked about rates and how that might have some
Chris Ziluca: You asked about rates and how that might have some benefit, and obviously it happened late in the quarter, so any of our customers that have higher borrowing costs aren't going to benefit from it and their current metrics. And to the extent that there is some further easing and interest rates. We believe, or I believe, that there will be some benefit, but 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.
Speaker Change: Benefit, and obviously it happened late in the quarter, so any of our customers that have higher borrowing costs aren't going to benefit from it in their current metrics, and to the extent that there is some further easing and interest rates, we believe or I believe that there will be some benefit, but 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
Chris Ziluca: Because we feel okay.
Michael Rose: That's great, Collar. Thanks for that, Chris.
Speaker Change: 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 SNCC 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 SNCC, you know, runoff. Understanding that, you know, you had some projects that paid down as well outside of the SNCCs.
John Harrison: And then maybe just as my follow-up, how should we think about loan growth from here? I know you guys have worked down the snake portfolio. It's down kind of close to your target range. The guidance on change kind of implies maybe a little bit of growth, but maybe some flatness in the fourth quarter. But assuming that the fourth quarter is kind of the end of the snake runoff, understanding that you have some projects that pay down as well outside of the snakes this quarter and you're going to be hiring some people. I know it's early for 2025, but how should we be thinking about loan growth from here, and does this kind of incorporate the forward curve in terms of what your outlook might be, assuming you'd have greater growth as rates would come down.
Speaker Change: This is this quarter and you're going to be hiring some people. How should we, I know it's early for 2025, but how should we be thinking about long growth, you know, from here and, and does is, you know, kind of incorporate the forward curve in terms of what your outlook, you know, might be assuming, you know, you have greater growth as rates would come down. Thanks.
John Harrison: Thanks. Michael, sure.
John Harrison: This is John. I'll take that one. You mentioned the snake parts. I'll start there. Pay Jay 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 prepared comments, about 250 million of the total reduction was in the snake 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 to where we can kind of call it even to peer now related relative to exposure to our peers or with our peers.
John Hairston: Michael Sher, this is John . I'll take that one. You mentioned the snake parts. I'll start there. Page A, breaks down the long road 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 prepared comments about 250 million of the total reduction was in the snake 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 to where we can kind of call it even to peer now relative to exposure to our peers with our peers.
John Harrison: and we can kind of stop having that self-inflicted headwind for growth at this point. So there may be a little bit of runoff left in the fourth quarter, but that would just be just in terms of the timing of when we're bringing deals in and taking them out. So I think we can kind of call the snake self-induced headwind pretty much over. Now, in terms of growth, Michael, I wouldn't suggest that that's going to be a bloated growth much, but I do think it'll be health-relative and flat as a percentage of overall loans as we move into a little bit more growthier numbers in total credits.
John Hairston: and we can stop having that self-inflicted.
John Hairston: Penn went for growth at this point so 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 so I think we can kind of call the snake.
John Hairston: Self-induced headwind pretty much over. Now, in terms of growth, Michael, I wouldn't suggest that that's going to be a growth 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 here 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 in the state in general, the projects that we've brought forward.
John Harrison: The second one you mentioned was those project pay-downs, and you may have remembered 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 in the state in general. The projects that we, partly financed, have been wrapped up; those contractors have been paid, and they in turn pay down their operating lines. So the little downward jump you see on page A and the top right of line utilization is materially all that amount of pay-downs. So that was the second chunk.
John Hairston: of Partly Finance have been wrapped up, those contractors have been paid and they in term pay down their operating lines. So the little downward jump you see on pay chain and the top right of line utilization is materially all that amount of pay down. So that was the second chunk. And really the only thing unplanned in terms are inspected in terms of a raw loan growth was we did see well pressure on the Cerebook in terms of payoffs.
John Harrison: And really the only thing unplanned in terms of expected 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 started really the prior quarter. We saw the private equity market as well as breach lenders come in very strong, very aggressive, and both pricing in terms. And so the pay-downs occurred there at a little higher level than we anticipated. Given that the pipeline has begun to improve in C&D, we are looking more into projects. That diminishment overall C&D, COPAJ, is really more the timing between the pay-downs that occurred and the timing takes for borrowers to run through their own equity before they begin to borrow on the lines that we've already approved.
John Hairston: I'm as well with a lot of churn it.
John Hairston: but this quarter 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.
John Hairston: and so the pay-downs occurred there a little higher level than we anticipated.
John Hairston: Given that the pipeline is, again, you've proven see and day, we are looking more deep projects.
John Hairston: of that diminishment. Overall, C&D, CLPJ is really more the timing between the payouts that occurred and the time it takes for borrowers to run through their own equity before they begin to borrow on the lines that we've already approved. So, we'll begin to see that come in as we get into 25. 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. Too early to know the timing of when people begin to fill a bit better, but I suspect we'll need to get the election behind this. It may be a little more demonstration of a rate movement downward by the Federal Reserve to see the projects on the fence finally tip over to get executed.
John Harrison: So we'll begin to see that come in as we get into 25. 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 too early to know the timing of when people begin to feel a bit better, but I suspect we'll need to get the election behind us. It may be a little more demonstration of a rate movement downward by the Federal Reserve to see the projects on the fence finally tip over to get executed, but the pipeline is building.
John Harrison: In a more granular sectors of our business purpose lending book, still having terrific success there, the business banking group, the SBA group, our quarter of a quarter, really doing terrific work. In fact, we have another quarter, a record quarter of SBA volumes and fee income that are reflected on page 17 and fee pockets. 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 on lines are getting 25.
John Hairston: and the pipeline is building.
John Hairston: and more granular sectors of our business purpose lending book still haven't terrific success there. The business banking group, the SBA group, are a quarter of a quarter, really doing terrific work. In fact, we have another record quarter of SBA volumes and fee income that are reflected on page 17 and fee pockets. 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 at 25. We certainly expect to have a better story next year, which we'll cover on the January call. Well, when we cover the head of your numbers, we have that CSOs and some guidance for the year.
John Harrison: We certainly expect to have a better story next year, which we'll cover on the January call. We'll cover the interview numbers, the updates, CSOs, and some guidance for the year.
Michael Rose: Did I answer what you were looking for there, Michael, or do you want to ask them? No, that's good. I appreciate all the color.
Speaker Change: Did I answer what you were looking for for Michael Achary, you want to ask a question?
Michael Rose: I'll step back. Thanks for taking my questions. Thank you, Michael. Appreciate the questions.
Michael Rose: Now let's go to appreciate all the color, all stuff back next year taking my questions.
Michael Rose: Thank you, Michael, appreciate the question.
Catherine Mealor: And your next question comes from the line of Catherine Mealor with KBW. Your line is open. Thanks. Good evening. Thank you. I wanted to go back to the margin and appreciate the guidance for fourth quarter and glad to see that we can still see them in the higher next quarter.
Speaker Change: And your next question comes from the line of Kathryn Mueller with KBW. Your line is open.
Kathryn Mueller: Thank you very much.
Kathryn Mueller: Thank you.
Kathryn Mueller: I'm going to go back to the margin and appreciate the guidance for fourth quarter and glad to see that we can still deepen them through higher next quarter. We just think what you get to talk us through how you're thinking about the margin.
Mike Ackery: We just think, what would you 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. How do you think about it? It feels like you're kind of generally asked that sort of maybe liability something in the near term. Is there a scenario we can still see the margin increasing through next year? Or is this increased really just a result of some of the things you can do on your CD book? And it's more likely that we'll see some compression as we move into 2025.
Kathryn Mueller: Trucks for Lee as the move into next year. Without just getting an exact guidance.
Kathryn Mueller: You're as you go.
Kathryn Mueller: How do you think about it feels like you're kind of generally at the sense of maybe liability something 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 on your CD book? And it's more likely that we'll see some then compression as we move into 2025. Thanks.
Mike Ackery: Thanks. Hey Catherine, it's Mike, and I think the way to think about it is the first kind of talk about the fourth quarter and what we're expecting. And look, some of those things I think will certainly carry forward into 25. So just as we've experienced the last couple of quarters, you know, our name continues to be driven by really our fixed asset repricing and then repricing our CD portfolio. So those things, you know, help drive the name expansion in the third quarter. They'll again help drive, you know, the modest name expansion that we've kind of guided to for the fourth quarter.
Kathryn Mueller: Hey, Kathryn, it's Mike and
Mike Akary: I think the way to think about it is to first kind of talk about the full of quarter and what we're expecting.
Mike Akary: and look, some of those things I think will certainly carry forward into 25. So, just as we've experienced the last couple of quarters, our NIMM continues to be driven by really our fixed asset repricing and then repricing our CD portfolio. So, those things help drive the NIMM expansion in the third quarter. They'll again help drive the modest NIMM expansion that we've guided to for the fourth quarter, and then as we head into 2025, again, as John mentioned, we'll talk in much more detail about guidance for 25 in January , but that theme I think continues into 25 around having a lot of...
Mike Ackery: And then, as we head into 2025, you know, again, as John mentioned, we'll talk in much more detail about guidance for 25 in January. But that theme I think continues into 25 around, you know, having a lot of opportunities to reprice our bond book just for 25. 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. And you can probably add to that another 300 or 400 million, where our fair value hedges on specific bonds become effective.
Mike Akary: and a lot of opportunities to reprise our bond book just for 25. And these numbers I think will change or evolve a little bit. But, you know, we have the better part of $700 million of principle cash flow coming back to us from the bond portfolio next year.
Mike Ackery: So, you know, that'll be a real, I think, headwind toward, I'm sorry, tailwind tool helping with, you know, name 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 25, you know, there's going to be some significant turnover in our CD book, so call it close to $10 billion of CD repricing again at an advantage of, we think, at least 100 basis points.
Mike Akary: Helping with, you know, an expansion into next year. And then on our CD book, you know, in the, the prepared comments, everybody 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.
Mike Akary: at an advantage of close to 100 basis points in an into 25.
Mike Akary: You know, there's going to be some significant turnover in our CD book, so call it close to 10 billion dollars of CD, CD's, for you pricing, again, and an advantage of, we think at least a hundred basis points, so all those things combined, you know, give us a pretty good tailwind as we go through 25, 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,
Mike Ackery: So all those things combined, you know, give us a pretty good tailwind as we go through 25.
Mike Ackery: 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 in expansion and NII expansion, you know, in a down rate environment really needs to be balance sheet growth. And certainly, John, and as I 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 has a modestly asset sensitive company being able to continue NIM expansion in a down rate environment.
Catherine Mealor: Okay, great.
Mike Akary: 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-y growth. And certainly John , and as I already 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 has a modestly asset-sensitive company being able to continue NIM expansion in a down rate environment.
Catherine Mealor: And then, is it really, is it all fires and organic growth as a partner a 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 the credit risk. And so, in an environment where we still feel pretty good about credit and we're really working at revenue growth, do you think you can hit your target just organically, or does M&A become a bigger piece of your story? Well, when we think about our plans and the way we put together our business plan for next year and for 26, we really think about it first and foremost from an organic perspective.
Speaker Change: Okay, great. And then is it really, is it all hires an organic growth as a pummer a way to get there or does M&A become more of an interest to you? I think one thing that John has done many times, he's more worried about revenue growth than the 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 target just organically or does M&A become a bigger piece of your story?
Speaker Change: Well, when we think about our plans and the way we put together our business plan for next year and for 26, 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 of those kinds of opportunities present themselves in the next year or two. You know, that's something that we certainly would take a look at, but it's not anything we're planning for per se. If that's helpful. Thank you.
Mike Ackery: 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 entities present themselves in the next year or two. You know, that's something that we certainly would take a look at, but it's not anything we're planning for, per se, if that's helpful. It is.
Catherine Mealor: Great. Thanks for the color.
Speaker Change: and it's great. Thanks for the color.
Catherine Mealor: Thanks for the question.
Brett Rabatin: And your next question comes from a line of Brett Robotin with Optic Group. Your line is open. Hey, good afternoon, everyone. Wanted to start with the income and just with the guidance in the fourth quarter and the, you know, the ability income usually being higher in 4Q.
Speaker Change: Thanks for your questions.
Speaker Change: and your next question comes from the line of Brett Rebeton with Hoptic Group. Your line is open.
Brett Rebeton: Hey, good afternoon, everyone. Wanted to start with the income, and just with the guidance in the fourth quarter and the, you know, the ability 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, Bully, 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 67% for the full year.
Mike Ackery: I'm curious if you could give some more color on the other bucket in 3Q, specifically, you know, how much derivative income SBIC, Bully, and SVA, you know, might have been unusual in 3Q and then just maybe how much that might come down in 4Q to reconcile that 67% for the full year.
Mike Ackery: Sure, Brett, this is Mike. I'll get started. Certainly, John can add some color. So, if we look at the third quarter again, an absolutely excellent quarter across the board really for the income growth. So, it's certainly something, you know, we're very pleased to be able to report. And again, really, I think we can show the success of the investments that we've made the past couple of years, not the 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.
Mike Akary: Sure, Brett. This is Mike. I'll get started. Certainly John can add some collar. 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 and our fee income businesses. So, again, if we look at the third quarter, slide 17 in the deck, kind of out.
Mike Akary: are 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 of a quarter, and the vast majority of that increase really came from what we referred to as our specialty, the income lines.
Mike Ackery: And, you know, certainly the other income does stick out this quarter. It was up 5.6 million quarter of a quarter. And the vast majority of that increase really came from what we referred to as our specialty 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. Bowley showed a nice increase of about a half million. And then derivatives were up almost 2 million. So, that's the better part of the 5 million that was showing us 5.6 million growth quarter of a quarter.
Mike Akary: 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. Bowley showed a nice increase of about a half million and then derivatives were up almost $2 million, so that's the better part of the five million.
Mike Ackery: So, as we think about the fourth quarter, you know, certainly we would expect to see continued growth and wealth management. So, our trust fees, as well as our new income, to some extent. And certainly, you know, when you look at quarter of a 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. So, when we think about the income in the fourth quarter, we would expect to see somewhat of a modest drop between the third and fourth quarter.
Mike Akary: That was showing this spot, 0.6 million growth, quarter of a quarter. So as we think about the fourth quarter, you know, certainly we would expect to see continued growth and wealth management. So our trust fees as well as our newity income to some extent. And certainly, you know, when you look at quarter of a 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. So when we think about the income in the fourth quarter, we would expect to see somewhat of a modest draw between the third and fourth quarter.
Mike Ackery: So, as we think about the fourth quarter, we would expect to see continued growth and wealth management.
Mike Ackery: So John, anything you want to say? You need a question on the page, and we can clarify it for you, Brett.
Speaker Change: Mr. John, anything you want to do?
John Hairston: and we clarify for you, Brett.
Brett Rabatin: No, that's helpful, guys. And then just wanted to talk about capital for a second, and I know with the ballot for the fourth quarter in a flatish balance sheet, and then maybe in 25, 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, even despite the shared buyback.
Brett Rebeton: No, that's helpful, guys. And then just wanted to talk about capital for a second. And, you know, I know with the elephant for the fourth quarter, in a flatish balance sheet, and then maybe in 25, 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, even despite the shared buyback. Any thoughts on just capital accumulation and maybe what's right?
Mike Ackery: Any thoughts on just capital accumulation and maybe what the right, it might be for capital as you do it as core versus excess. You want to try and figure out how to invest? Sure, Brett. So when we think about capital, obviously, as we've talked about in many venues, really going back four years to, 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 come into your one nearly 14%.
Speaker Change: Now, for Mike V for Capitol, as you do, it is core versus excess you want to try and figure out how to invest.
Speaker Change: 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 come into your one nearly 14%. So those are attractive levels.
Mike Ackery: So those are 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've resumed buybacks and really have guided to, you know, looking at both of those things as we move into 25, with really the top priority for deploying capital, really to be support organic balance. It grows. 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.
Speaker Change: and we view those capital levels.
Speaker Change: has 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.
Mike Ackery: So, 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, 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.
Speaker Change: and really have guided to, you know, looking at both of those things as we move into 25.
Speaker Change: with really the top priority for deploying capital really to be support organic balance growth. So that's something that we're looking forward to be able to support next year and again we've talked a lot about.
Mike Ackery: I think that's important.
Brett Rabatin: Okay, that's really helpful. Thanks for all the color.
Speaker Change: 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, 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. I think that's important.
Brett Rabatin: Yes, sir. Thank you for asking the question.
Speaker Change: Okay, that's really helpful, thanks for all the color. Yes sir, thank you for asking the question.
Benjamin Gerlinger: And your next question comes from the line of Ben Gerlinger with City. Your line is open. Hey, good afternoon, guys. I know we've kind of beaten the dead horse here in the credit, but it's kind of the responses thus far. I mean, I think it was 60% of the increase was Nick related. Obviously, it was rounding our ballpark. Our previous one phrase it.
Speaker Change: And your next question comes from the line of Ben Garlinger with City, your line is open.
Speaker Change: Hey, we got three of you guys, hey man.
Speaker Change: Oh, I know we've kind of beaten dead horse here in the credit, but it's a kind of a responses thus far.
Speaker Change: I mean, I think it was 60% of the increase was Nick related. Obviously, that's rounding our ballpark career. Don't spray it. What do you think about just kind of going forward? It's now back out roughly 75 million.
Chris Ziluca: When you think about just kind of going forward, that would back up roughly 75 million of the roughly 130 million linked quarter. 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. is economically dependent and somebody just can't tell six or nine, twelve months from now.
Speaker Change: of the roughly 130 million linked quarter per size.
Speaker Change: Give me thoughts and kind of what we should expect going forward, especially with lower rates. I know that some of this is...
Speaker Change: is economically dependent and that you just can't tell six or nine, twelve months from now, but when you think about lower rates and kind of the cleaning up of the balance sheet, you feel like you've appropriately addressed a lot of the credit or presumably could be, so we could potentially be overmarked or is it still kind of more fluid than that?
Chris Ziluca: But when you think about lower rates and kind of the cleaning up over the balance sheet, you feel like you've appropriately addressed a lot of the credit or presumably could be, so we could potentially be overmarked or is it still kind of more fluid than that. Yeah, it's definitely a crystal ball type question. And we address credit kind of on a daily, monthly, quarter basis, and we make sure that we have our portfolio and our individual relationships and loans classified correctly. If we kind of look forward, as I mentioned in one of my earlier comments, interest rates definitely have had and do have an impact on the performance of our customers, some more than others. In general, they're probably, if they're kind of a bar or a net bar, or they're definitely going to be impacted and benefit from lower interest rates.
Speaker Change: Yeah, it's definitely a crystal ball type question. You know, we address credit, you know, kind of on a daily monthly court 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.
Speaker Change: As I mentioned in one of my earlier comments, interest rates definitely have had and do have an impact on the performance of our customers, some more than others in general. They're probably, if they're a kind of a borrower, a net borrower, they're definitely going to be impacted and benefit from lower interest rates. On the commercial side, many of our customers either hedge or they 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.
Chris Ziluca: On the commercial side, many of our customers either hedge or they 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. And obviously, the build up and 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 CNI side of things. And so 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 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.
Speaker Change: And obviously the build up and interest rates that we saw over the past year or two was much more dramatic than I think we're going to see and 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 on the CNI side of things. And so 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 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 and we're seeing some customers manage.
Chris Ziluca: And we're seeing that, and we're seeing some customers managing their inventory levels down because of just slowness in demand, especially for heavy equipment and things like vehicles and more durable goods. And then others are going to have to manage their expenses through just payroll, and many are taking that step as well.
Speaker Change: Inventory Levels Down, because of just a slowness in demand, especially for heavy equipment and things like vehicles and more durable goods. And then others are going to have to manage their expenses through just payroll and many are taking that step as well.
Chris Ziluca: So my view sitting where I am right now is I think we have our credit book appropriately marked or classified. And it just remains to be seen what happens as either rates help or any sort of twist in the economic cycle manifest itself in a particular sector. But, as I indicated, I mean, we're pretty spread out from industry-specific issues.
Speaker Change: So, you know, my view sitting where I am right now is, you know, I think we have our credit book appropriately marked or classified, you know, and it just remains to be seen, you know, what happens, you know, as either range help or any sort of kind of twist in the economic cycle manifest itself in a particular sector. 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 seen.
Chris Ziluca: 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 space.
John Harrison: 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 a variable rate money coming down are certainly tailwinds to improve in the bottom line for clients. But, as you know, we have to risk rate based on current and prior, you know, relatively reasonably previous financials. And so the outlook for how well things may get, unfortunately, can't be inclusive in the rate.
Speaker Change: and some things in that space. Ben, this is John Hairston, just to add a little color and maybe this is...
John Hairston: More in line with what you're looking for, but clearly inflation reducing the cost of workforce.
John Hairston: Coming a little bit more reasonable or certainly not going up as fast as it was and the cost of a variable rate money coming down are certainly tailwinds to improve in the bottom line for clients but as you know, we have to risk rate based on current and prior, you know, relatively reasonably previous financials and so the outlook for how well things may get unfortunately can't be inclusive in the rate. We have comments we're giving you a rearview look on ratings and a forward view on confidence of things working out pretty well, hopefully that's helpful.
Benjamin Gerlinger: So it's a little bit of a rear view. Comments were given your rear view look on ratings and a forward view on confidence of things working out pretty well. Hope with that. That's all. Yeah, I thought it was just helpful.
Benjamin Gerlinger: I mean, I got a few emails, the criticize of jump, spooks and people, but I think that it's this Nick review and then, like you said, credit is a little backward looking in this respect, especially when it's kind of rate focused, probably a story of some of the fears.
Speaker Change: Yeah, I thought that this helpful. I mean, we've got a few emails, the criticize and jumps, books and people, but I think it's a snick review and then it's got to be said.
Speaker Change: Criter to the little back room looking at this response, especially as kind of rape, broken, supposedly to sway some of the years. Kind of a little more than anyone's there to question if something modified, it's learned to continue to go up. Not a huge amount, maybe any color that would be helpful.
Chris Ziluca: Kind of a little more than we want to sort of question, is some modified slides continue to go up, not a huge amount, any color that would be helpful?
Chris Ziluca: 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.
Chris Ziluca: Gotcha, that's helpful.
Speaker Change: Sure, yeah, this is Chris again. You know, just 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...
Chris Ziluca: I'll stop that.
Chris Ziluca: Appreciate this, Thomas. Thanks, Ben.
Speaker Change: have to classify those loans as modifications, even though it's part of the strategy that we work through with those customers.
Speaker Change: Gatch. That's helpful. I'll set that for free. It's time to send this.
Gary Tenner: And your next question comes from the line of Gary Tenner with DA Davidson. Your line is open. Thanks, good afternoon.
Speaker Change: Thanks for your time.
Speaker Change: And your next question comes from the line of Gary Tenner with DA Davidson, your line is open.
Mike Ackery: Hey, I wanted to ask about kind of the overall guide on PPRR as it is now versus where it was last quarter. If you kind of look at the midpoints of what you've provided for fees and expenses and the last quarter on PPRR with the changes now, you know, it certainly, you know, would appear that NII for full years coming in lower than what you would have thought of quarter ago. This might be the fact that you still are guiding to, you know, additional monosystem expansion, and the longer it hasn't really changed.
Gary Tenner: Thanks, good afternoon. Hey, I wanted to ask about kind of the overall guide on TPRR as it is now versus where it was last quarter. If you kind of look at the midpoints of what you've provided for fees and expenses and the last quarter on TPRR with the changes now, it certainly would appear that NII for fully res coming in lower than what you would have thought a quarter ago, despite the fact that you still are guiding to additional monosystem expansion and the longer it hasn't really changed. So is it a function of maybe just the balance sheet not growing?
Mike Ackery: So is it a function of maybe just the balance sheet not growing at all really kind of back after the year or what's the primary item there just says kind of them were thinking about rolling forward into 2025? Yeah, hey, Gary. This is Mike. Great question. So when we think about PPRR, 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 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 leveraged a little bit in the second half of the year.
Gary Tenner: At all, really kind of back after the year, or what's the primary item there, just as kind of the number of things about rolling forward into 2025.
Speaker Change: Yeah, heck, 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 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 leveraged a little bit in the second half of the year. So I think that's driving. [inaudible]
Mike Ackery: 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 of a quarter basis. I do think we'll have some of that repeating the fourth quarter, but it really is hard to pinpoint exactly what that might be.
Speaker Change: 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 of a quarter basis. I do think we'll have some of that repeating the fourth quarter but it really is hard to pinpoint exactly what that might be.
Mike Ackery: On the expense side, I do think while we had an absolutely tremendous quarter in terms of actually reducing expenses quarter of a 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 PVNR growth in the third quarter, that's likely to come down a little bit in the full of quarter. No, I mean it was really focused on the NII piece, but you answered that, and the nuance on the expenses is helpful as well.
Speaker Change: On the expense side, I do think while we had an absolutely tremendous quarter in terms of actually reducing expenses quarter of a 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 PVNR growth in the third quarter, that's likely to come down a little bit in the fourth quarter, I think.
Speaker Change: Got it. No, not at all. I mean, it was, the question was really focused on the NIO piece, but you answered that and the nuance on the expenses itself 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 on what kind of talent that could be as you're looking out into next year.
Gary Tenner: And then just a second question as it relates to the comments, John, about 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 on what kind of talent that could be as you're looking out into the next year.
John Harrison: Yes, 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, although we have made some buyers. 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 25 is part of the 25 guys. So it'd be a little premature to do it now. We got a fair number offers out, but as you know, full through age, not going to be 100%.
Speaker Change: Yes, this is John. Thanks Gary for the Reader Act in terms of hiring.
John Hairston: 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 all that we have, nice and iris.
John Hairston: 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 25 is part of the 25 guidance and so it would be a little premature to.
John Hairston: We have a fair number of offers out, but as you know, the full-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 package 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 has been pretty warmly received and we look forward to talking about it as we get into 25 in terms of where I think you asked where.
John Harrison: 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 package together that are attractive to new clients when they first come in the door. And for those clients, you're looking to expand. So the effort's been pretty warmly received, and we look forward to talking about it as we get into 25 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 area of our footprint that have a natural higher organic growth rate.
John Harrison: 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 weld advisors given the success of well management offering. We still have places where we think we can add weld advisors and get a creative pretty quickly. So it takes about 12 months for new bankers to begin and kind of on a flywheel basis profitability in between 18 and 24 months for them to become materially profitable and closer to the target operating model.
Speaker Change: We're glad to accept good talent, particularly if it's experience really in any of our markets but our recruiting efforts have been more focused in the areas where footprint that have a natural, higher, or gaining growth rate.
Speaker Change: and so that would be Texas and Florida and generally speaking we're pretty bankers in a little less than the middle market size relationships. What we call commercial business banking in SBA.
Speaker Change: and also weld advisors, given the success of a weld management offering, we still have places where we think we can add weld advisors and get it created pretty quickly. So it takes about 12 months for new bankers to begin and kind of on a flywheel basis, profitability in between 18 and 24 months for them to become materially profitable and closer to the target operating model. And we've had that place 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 recording episode is going to be so good to talk about when we get to January . If you want to get in clarifying questions on that or...
Gary Tenner: And we've had that place about 10 years, and it tends to be really good and predictive after just four or five months in terms of what it's going to work out well or not. So I think the recruiting efforts can be so good to talk about when we get to January. You want to get in clarifying questions on that, or?
Gary Tenner: No, that was great, John. Thanks, guys.
Speaker Change: No, that was great, John. Thanks, guys.
Matthew Olney: Thank you. And your next question comes from the line of Matt only with Stevens. Your line is open. 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. I pay a thought you have on deposit betas throughout the cycle in this kind of down cycle, maybe it's compared to the pass betas that you disclose in your presentation.
Speaker Change: and your next question come from the line of Matt Olney with Steven's, your line is open.
Matt Olney: Yeah, thanks for taking the question. Mike, it sounds like you feel good about the pause of pricing so far. It's obviously early in the cycle, but we'd love to hear any epic thoughts you have on the pause of baites throughout the cycle in this kind of down cycle. Maybe it's compared to the past bait as you disclose in your presentation.
Mike Ackery: Sure, Matt. And yeah, I think you're right. We do feel good about our ability to continue to control the positive cost going forward. So, you know, we were pretty proactive in reducing our promotional rates, especially on CDs, you know, coming into the Fed move. So our top promotional CD rate is a three month at four and a half percent, and we lowered that 50 basis points. And then eight and 11 months at four percent. So those rates, I think, are attractive. They're all at that kind of almost magical number above four percent now. So we'll see where that goes from here.
Speaker Change: Sure, Matt. And yeah, I think you're right. We do feel good about our ability to continue to control the positive cost going forward. So, you know, we were pretty proactive in reducing our promotional rates, especially on CDs, you know, coming into the Fed move. So our top promotional CD rate is a three month at four and a half percent and we lowered that 50 basis points. We also have a five month at four fifteen and then eight and eleven months at four percent. So those rates I think are attractive. They're all at that kind of almost magical number of above four percent now. So we'll see where that goes from here.
Mike Ackery: Our guidance for the fourth quarter really includes two 25 basis point rate cuts. So it's obviously will address deposit pricing as we go the rest of the quarter.
Speaker Change: Our guidance for the four core really includes two 25 days as point break cuts so obviously we'll address the positive pricing as we go.
Mike Ackery: As far as our deposit betas are really our betas for this cycle, you can see at the bottom of 16 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 data, probably something between 37 and 38 percent. When we look at our interest bearing deposit data, it is 57 to 58, and then on the loan side, somewhere around 49 to 50 percent. So those are our expectations. That's what we're; those are the things we're striving for through this cycle.
Speaker Change: The rest of the quarter. As far as our deposit of 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 data. Probably something between 37 and 38%. When we look at our interest bearing deposit data, 57 to 58, and then on the alone 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
Matthew Olney: And, you know, it'll be interesting to see how the cycle progresses post election and through next year. Okay. Appreciate that, Mike.
Speaker Change: Progressive Post-Election and through next year.
Matt Olney: And then going back to the credit discussion. I heard all the great commentary on the 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.
Speaker Change: Okay, appreciate that, Mike, and then going back to the credit discussion. I don't know the great commentary on the criticize 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: Yeah, yeah, Matt, it's Chris Luka. No, you didn't. You didn't miss the question. Yeah. So, you know, charge loss were a little bit higher on this past quarter. We had a couple of CNI credits that we've been kind of working through and made the decision that now was 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.
Chris Ziluca: So not much to talk about there. Okay.
Speaker Change: Yeah, yeah, Matt, it's Chris Luka. No, you didn't, you didn't miss the question. Yeah, so, you know, charge us were a little bit higher on this past quarter. We had a couple of C and I credits that we've been kind of working through and, and made the decision that now was 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 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.
Matthew Olney: Thank you. Thanks, Matt.
Speaker Change: Okay.
Speaker Change: Thank you. Let's watch, man.
Christopher Marinac: And your next question comes from the line of Christopher Maranac with Johnny Montgomery Scott. Your line is open. Hey, thanks. Good afternoon. I wanted to ask about risk-adjusted returns; they're particularly on risk-adjusted yields in the commercial book as rates fall. And as you look out a couple quarters, would you imagine it gets easier to get your longer term risk adjusted yields, or is it harder?
Speaker Change: And your next question comes from the line of Christopher Marnaque with Janney Montgomery Scott. Your line is open.
Christopher Marnaque: Thanks, Good afternoon. I want to ask about risk adjusted returns, basically on risk adjusted yields in the commercial book as rates fall and as you look out a couple quarters would you imagine it gets easier to get your longer term risk adjusted yields or risk it harder.
Chris Ziluca: Yeah, this is this Crystal. 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, 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.
Speaker Change: Yeah, this is Chris Aluga. I'll attempt that even though I'm much more credit risk focused than that. But yeah, I mean, I think what you see is oftentimes during periods of turmoil that risk and return don't always perfectly line up. And I think as time moves on, 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
Chris Ziluca: But, you know, as we start to see a broader demand across C and I and pre, 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, our, you know, 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.
Chris Ziluca: Great, Chris.
Chris Ziluca: Thank you for going through that. And then just for either you or Mike, what are you saying in terms of fraud from sort of small business related deposits, and is that showing up at all? It's something the Sunday expense lines?
Speaker Change: Great, Chris, thank you for going through that and just for either you or Mike, what are you saying in terms of fraud from a sort of small business related to politics and is that showing up at all? It's something that's under your expense lines.
Chris Ziluca: Chris, this is Johnny. Do you say fraud? Yes, fraud. I'll take that. Mike and Joplin, 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, again, it makes a 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; because we spent a bit of money building tools and people to try to detect these issues before they turned into a loss.
Speaker Change: Chris, did you say fraud? Yes, fraud.
Speaker Change: I'll take that, Michael Juffin, and of course, if you like.
Speaker Change: 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 again, it makes a pretty good headway. Actually the way this year is go and our fraud losses have been less this year than they were last year of the year before but it wasn't because there were less attempts because we spent a good bit of money building tools and people to try to detect these years. 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.
Chris Ziluca: 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.
Speaker Change: that we're having to add over time, is just an education of our clients in terms of how they put in internal controls. That bikes have been using for a long time, but that they need to implement in their own businesses. Chris, this is my 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, fraud expense is really down a bit.
Mike Ackery: Chris, this is my; 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, the fraud expense is really down a bit. Great, Mike. Thank you, John. Thank you as well.
Speaker Change: Great Mike, thank you and John, thank you as well.
Speaker Change: At thanks for the course.
Operator: Thanks for the questions.
Speaker Change: And 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. Okay, thanks Abby. Thanks for moderating the call. Thanks everyone for your interest. I know a busy release day. We look forward to seeing you on the red scene.
John Harrison: And that is all the time we have for questions today.
John Harrison: I would like to turn the conference back over to Mr. John Harrison for closing remarks. Okay, thanks, Abby. Thanks for moderating the call. Thanks everyone for your interest. I know a busy release date. We look forward to seeing you on the road soon.
Operator: Ladies and gentlemen, this concludes today's call, and we thank you for your participation. You may now disconnect.
Speaker Change: Ladies and gentlemen, this concludes today's call and we thank you for your participation. You may now disconnect.