Earnings Call
Hancock Whitney Corp (HWC)
Earnings Call Transcript - HWC Q1 2024
Operator, Operator
Good day, ladies and gentlemen. Welcome to Hancock Whitney Corporation's First Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. As a reminder, this call may be recorded. I would now like to introduce your host for today's conference, Kathryn Mistich, Investor Relations Manager. You may begin.
Kathryn Mistich, Investor Relations Manager
Thank you and good afternoon. During today's call, we may make forward-looking statements. We would like to remind everyone to carefully review the safe harbor language that was published with the earnings release and presentation and in the company's most recent 10-K and 10-Q, including the risks and uncertainties identified therein. You should keep in mind that any forward-looking statements made by Hancock Whitney speak only as of the date on which they were made. As everyone understands, the current economic environment is rapidly evolving and changing. Hancock Whitney's ability to accurately project results or predict the effects of future plans or strategies, or predict market or economic developments is inherently limited. We believe that the expectations reflected or implied by any forward-looking statements are based on reasonable assumptions, but are not guarantees of performance or results, and our actual results and performance could differ materially from those set forth in our forward-looking statements. Hancock Whitney undertakes no obligation to update or revise any forward-looking statements, and you are cautioned not to place undue reliance on such forward-looking statements. Some of the remarks contain non-GAAP financial measures. You can find reconciliations to the most comparable GAAP measures in our earnings release and financial tables. The presentation slides included in our 8-K are also posted with the conference call webcast link on the Investor Relations website. We will reference some of these slides in today's call. Participating in today's call are John Hairston, President and CEO; Mike Achary, CFO; and Chris Ziluca, Chief Credit Officer. I will now turn the call over to John Hairston.
John Hairston, President and CEO
Thank you, Kathryn, and thanks everyone for joining us today. We are pleased to report a solid start to 2024, which marks our 125th anniversary of helping people achieve their dreams under a charter our founders established in 1899. The first quarter results reflect our efforts to continue to grow capital and to reposition our balance sheet, all while maintaining solid profitability and earnings. Fee income and expenses were both flat this quarter, demonstrating our ability to take advantage of fee income opportunities and at the same time control expenses. Net interest income was down slightly this quarter, driven by lower average earning assets due to the impact of a portfolio restructure. The decrease was partially offset by a more attractive mix of earning assets, stabilization in deposit costs, and lower short-term borrowings. We ended the quarter with no wholesale borrowings except the remaining brokered CDs. Our continued focus on repositioning our balance sheet and prudent pricing efforts has led to NIM expansion. We are delighted with these results and believe we are well-positioned to take advantage of future rate decreases should they happen this year. Loan growth was modest this quarter and in line with what we expected for the first half of the year. We continued our focus on more granular full relationship loans and are deemphasizing large loan-only relationships. The team was successful at producing the loan volumes necessary to overcome our more select credit appetite and achieve overall growth with mortgage driving the growth this quarter. Loan pricing remains a top priority and we believe focusing on more granular credit deals will drive improved pricing on new loans. As expected, our credit quality metrics continued to normalize during the quarter and net charge-offs were modest. Despite the uptick in criticized commercial and non-accrual loans, we remain in the top quartile of our peers. Our loan portfolio is diverse and we still see no significant weakening in any specific portfolio sectors or geography. We remain proactive in monitoring portfolio risk and are mindful of potential macroeconomic environments. We continue to maintain a solid reserve of 1.42%, up slightly from the prior quarter. We are pleased with our deposit growth during the quarter of $86 million, which included the maturity of $195 million in brokered deposits. Excluding the impact of brokered deposits, client deposits were up $281 million this quarter. We saw growth in money markets and in CDs due to promotional pricing we offered on both of these account types. The DDA remix continued, but overall pace continues to slow. We ended the quarter with 36% of our deposits in DDAs. We are also proud to report continued improvement in all of our capital ratios. Our TCE grew to 8.62% and our common equity Tier 1 ratio ended the quarter at 12.67%. Our capital metrics continue to be supported by our solid earnings. We remain well capitalized, inclusive of all AOCI and unrealized losses. A quick note on guidance. We did not make any updates to our guidance this quarter, which Mike will further address in his commentary next. As we look forward to celebrating our 125th year and beyond, we believe we continue to position ourselves to effectively navigate any operating environment. With that, I'll invite Mike to add additional color.
Mike Achary, CFO
Thanks, John. Good afternoon, everyone. First quarter's reported net income was $109 million or $1.24 per share. We did accrue an additional net charge of $3.8 million, or $0.04 per share for the FDIC special assessment this quarter. Excluding this item, net income would have been $112 million, or $1.28 per share. Adjusted PPNR was $153 million, down about $3 million from the prior quarter, but in line with expectations. Our NIM did expand 5 basis points this quarter, but NII was down mostly due to a smaller average earning asset base. Fees and expenses were in line and flat with last quarter. As mentioned, we saw NIM expansion this quarter with NIM of 3.32%, up 5 basis points from the prior quarter. As shown on Slide 15 of the investor deck, our NIM performance was driven by higher securities yields following our bond portfolio restructuring last quarter, a slower rate of deposit cost increases in NIB remix, improved funding mix, and then finally higher loan yields. NII was down primarily due to lower average earning assets following the bond portfolio restructuring, but the decline was partially offset by improved earning asset mix and lower levels of wholesale funding. In fact, we ended the quarter with zero FHLB advances. After the brokered CD maturity of $195 million this quarter, we only have $395 million remaining. Those mature in May. Our intent as of now would be to not renew the May brokered CD maturities. Deposit costs were up 8 basis points to 2.01% from 1.93% in the fourth quarter. The month of March actually came in a bit lower at 2%, an indicator that we have reached a peak this quarter and deposit costs may begin to turn over. The moderation in deposit cost was driven by slower DDA deposit remix, higher growth and lower cost interest bearing transaction accounts and the brokered CD maturity. Our total deposit beta remains at 37% cycle to date. The most significant driver of deposit costs going forward will be repricing activity on CDs. On the earning asset side, our securities yield was up 9 basis points to 2.56%, primarily due to the full quarter's realization of the bond portfolio restructuring transaction. The yield in the month of March was 2.58% and we expect to see further yield improvement with portfolio reinvestments this year. We expect just under $600 million in principal cash flow from the bond portfolio over the next three quarters. Those cash flows will come off at around 2.9%, could get reinvested at yields of around 200 basis points higher. Our loan yield improved to 6.16% this quarter, up 5 basis points linked quarter. The rate of yield growth on loans has slowed as much of the impact of 2023's rate hikes were fully priced in during the fourth quarter. However, we remain focused on maximizing loan pricing. As we think about our NIM in 2024, our guidance remains unchanged and includes three rate cuts at 25 basis points each in June, September, and December this year. We continue to expect modest NIM expansion across the next three quarters. Headwinds include some level of continuing deposit remix, which has slowed, but we do expect that any rate cuts will be a tailwind as we are able to reprice CD maturities lower in the second half of the year. Fee income was flat this quarter as we benefited from strong activity in investment and annuity income. Expenses excluding the special FDIC assessment were up less than 1% this quarter, reflecting our focus on controlling costs throughout the company. As noted, we have not changed our forward guidance this quarter, which is summarized on Slide 22 of the investor deck. However, we have included a disclosure around what we believe the impact on PPNR will be if there are no rate cuts this year. Lastly, a quick comment on capital. As John mentioned, our capital ratios remain remarkably strong and continue to grow. In our efforts to manage capital in the best interest of our company and our shareholders, we may pivot to looking at our common dividend and the potential resumption of buybacks under our current authority at some point later this year. I will now turn the call back to John.
John Hairston, President and CEO
Thanks, Mike. Let's open the call for questions.
Operator, Operator
Thank you. We will now begin the question-and-answer session. Your first question comes from Catherine Mealor from KBW. Please go ahead.
Catherine Mealor, Analyst
Thanks, good afternoon.
John Hairston, President and CEO
Hi, Catherine.
Catherine Mealor, Analyst
I wanted to start on credit. Just want to see if you could give us some more color on the increase in non-performers and criticized assets that you show in the slide deck.
Chris Ziluca, Chief Credit Officer
Thank you, Catherine. It's Chris Ziluca. I want to highlight that we are currently experiencing historically low levels of criticized and non-accrual loans. Additionally, our modified loans remain low, around 16 basis points. However, as mentioned in the slide deck on Page 12, we did see an increase in the net movement of criticized loans during the quarter. We analyzed various categories and geographies but did not identify any persistent common factors. From my perspective, many companies have been benefiting from a historically high level of liquidity, which is now declining. Given the current economic conditions and rising interest rates, operating costs have increased for some, presenting challenges. This seems to be the main theme related to the movement toward criticized loans, but I do not perceive anything significant within those movements. In fact, I believe they will likely resolve themselves over time. The non-accruals this quarter were largely influenced by a single commercial credit, which we have appropriately charged down, and we feel confident about its potential for ongoing success after the charge down.
Catherine Mealor, Analyst
Okay, great. And would you say that non-performer that moved most of the charge-offs this quarter were related to that one credit?
Chris Ziluca, Chief Credit Officer
Yes, they were.
Catherine Mealor, Analyst
Okay. It looks like there's about a $66 million increase. Are there any larger credits in that amount, or is it mostly smaller ones? I'm just curious if there are any significant credits involved.
Chris Ziluca, Chief Credit Officer
It seems to be a combination of factors. There are some medium-sized credits involved, but many of the larger credits also fall into a temporary situation where they have faced some revenue challenges that need to be addressed by adjusting their operating expenses.
Catherine Mealor, Analyst
Okay. Okay, great. And you talked a lot the past couple of quarters about just your desire to lower your reliance on kind of non-relationship credits and move towards a more granular loan portfolio. As we think about your shared national credit portfolio that's, I think, about 11% of loans, is there a level to where you think that could move to over time? And I'm just trying to kind of frame the size of a headwind that is to you getting the growth ticket to turn back on once we get to maybe a little more stabilization in the industry.
John Hairston, President and CEO
Okay, Catherine, this is John. I'll answer that. Thanks for your question. It's good to hear from you. Regarding our comparison to peers, not everyone reports their figures. When we assess our standing, we've sometimes noted that we are perceived as being somewhat heavy in that area, which is always concerning when it's viewed negatively. Our reliance on syndications was never due to a lack of production capacity; rather, it stemmed from having excess liquidity after the PPP credits. We aimed to achieve better returns than the zero from the Fed overnight, leading us to develop more liquidity because we had more available to deploy. That situation is now diminishing. Over the next couple of years, we expect it to align more closely with what we see in reported peer levels, which is a couple of hundred basis points relative to loans. In dollar terms, that's about $250 million per year for a couple of years, framing it that way. This isn't a size we worry about in terms of our capacity to replace it through production. We can adjust our levels as we engage in new relationships or renew existing ones, depending on what makes sense. It's a manageable situation, though it does present a challenge. However, if we can shift credit-only funds into full relationship funds, we ultimately benefit from increased overall revenue.
Catherine Mealor, Analyst
It does.
John Hairston, President and CEO
Does that answer your question? Was that specific enough of what you were looking for?
Catherine Mealor, Analyst
It does, yes. The $250 million was exactly what I was looking for. Thank you.
John Hairston, President and CEO
You bet. Thank you.
Operator, Operator
Your next question comes from the line of Michael Rose from Raymond James. Please go ahead.
Michael Rose, Analyst
Hey, good afternoon, everyone. Thanks for taking my questions. Just wanted to follow up on the SNC commentary. It looks like it kind of accounted for kind of all this quarter's loan growth. I think the balances were about $2.6 billion last quarter. And you've talked about or reiterated again kind of acceleration in the back half of the year on loan growth. But I think there's growing signs that the economy is slowing. Just what gives you confidence that you will see that acceleration? Is it something in the pipeline? Is it what you're hearing from your customers? And what could be the puts and the takes to that output? And then what should we think or contemplate SNC growth as part of that guidance? Thanks.
John Hairston, President and CEO
Sure, Michael. To clarify, the net growth we report quarter-over-quarter includes a significant amount of credit that is moving into the category but is not new. This is primarily a technical classification. For instance, if the outstanding balances rise above the threshold that categorizes them as SNC, or if a couple of banks add a bank that pushes them into SNC, we have to classify them as such. So, the majority of the increase you see is not from new money; it's mainly due to a change in classification to the SNC category. Does that make sense?
Michael Rose, Analyst
Yep, totally get it.
John Hairston, President and CEO
So at this point in time, we are in the posture of, on a net basis, quarter-over-quarter, decreasing the large credit-only reliance. They're not that big, but it's higher than we'd like it to be. And frankly, we need the liquidity to put in other things that we think are better and more valuable to investors over the course of time. Did I answer your question, Michael?
Michael Rose, Analyst
Yeah. And then just the puts and the takes to kind of the back half acceleration in growth, just given some of the macro headwinds.
John Hairston, President and CEO
Sure. Overall, when discussing the factors at play, I could provide more detail than you might want, but I'll summarize. Currently, there are several positive factors influencing us. One notable aspect for the first quarter, which we haven't highlighted much recently, is that we experienced a slight improvement in line utilization, as shown on Page 8. It's been five quarters since we last saw an increase in line utilization. While one data point doesn't establish a trend, it would be premature to claim this is a sustainable trend. We anticipated that as average deposits per account return to pre-pandemic levels, around 2019 levels, we would logically see line utilization gradually rise, and that’s exactly what is occurring. Whether this trend continues remains to be seen, but we expected utilization to improve as deposit account sizes normalize, which is happening now. This is a positive development that doesn't incur additional costs for us. Additionally, in the current rate environment, we are observing unexpected minimal paydowns. There are very few operational company divestitures in our portfolio, and we haven't seen much activity in paying off loans due to business sales, certainly not to the extent we observed in 2022 and the first half of 2023. As we move into the latter part of the year, two factors could drive an increase across most of our lending categories. One would be if the rate environment starts to improve, which might encourage those who have been hesitant to take action. The second factor is that even if rates do not decrease, I anticipate that enough business owners will feel motivated to act rather than risk missing out on better deals in the future. I believe it would be a more favorable environment for growth if rates decline. However, even if they remain the same, the key question will be how much we’re willing to compromise on rates to foster business growth. It’s a bit early for us to determine that now, as we continue to focus on securing favorable rates considering the current deposit costs.
Michael Rose, Analyst
That's valuable insight, John. One question for Mike before I step away. Thank you for the information on PPNR excluding rate cuts. It seems consensus is already in that range, suggesting you would perform better with rate cuts. Is that the correct interpretation? Can you provide any clarity on what PPNR might look like, as you mentioned, moving down 1% to 2%? Just broadly, what are the factors influencing that outlook if there are no cuts? There would certainly be other elements that change if cuts don't happen. For instance, would there be any offsets in fee income or similar areas?
Mike Achary, CFO
Yeah. Thank you, Michael. Appreciate the question. And we did add that disclosure this quarter around what we view PPNR to do with zero rate cuts versus the three that really is embedded in the original guidance. And the difference isn't big, it amounts to about $7 million or so of NII for the last three quarters of the year. So again, it's not a real big difference. And most of that difference would be weighted really toward the second half of the year. And to be honest with you, a lot of it really is in the fourth quarter. So the way we think about our NIM going forward, really in the second quarter, I think we expect pretty modest to a handful of basis points expansion. And then, if we do get the rate cuts, we have a tailwind that helps us with the CD repricing in the back half of the year. And so from there, you'll see a little bit in the way of modest NIM expansion. If we don't get the rate cuts, then again, after a handful of basis points in the second quarter, we're likely to be flat through the rest of the year. So that really is what drives that difference in guidance. The other things, though, that are certainly helpful as we kind of go through the year that aren't really impacted by whether there'll be a difference in rate cuts or not, is really the repricing of the bond portfolio as well as the repricing that continues to occur in our fixed rate loan portfolio. So we gave some information about the bond portfolio. We have about $600 million or so of bonds that will reprice from around 2.90% weighted average to probably right around 5%. Now, if we don't get the rate cuts and the treasury yields increase, then that reinvestment rate will likely be a little bit better. On the fixed rate loan side, we continue to enjoy the benefits of repricing that portfolio. So for the balance of the year, we're probably talking about $550 million or so in fixed rate loans that are going to reprice from, call it, 4.75% or so to probably about 7.5%. So it's pretty important and a pretty good tailwind to have that repricing of both the bond portfolio as well as the fixed rate loan portfolio. And then the CDs, the benefit there really comes from the potential for rate cuts. And again, if those rate cuts don't happen, we'll have that difference that I mentioned. So hopefully, that's helpful.
Michael Rose, Analyst
Yeah, very helpful, Mike. Thanks, guys, for taking my questions. Appreciate it.
Mike Achary, CFO
Thank you, Mike.
Operator, Operator
Your next question comes from the line of Casey Haire from Jefferies. Please go ahead.
Casey Haire, Analyst
Great, thanks. Good afternoon, everyone. Mike, I wanted to follow up on the CD repricing. You mentioned that it is a significant factor affecting the net interest margin. Last quarter, I recall you indicated that $900 million is set to mature this quarter at a certain rate. What is the expectation regarding its rollover? We've been hearing that CD prices have decreased somewhat.
Mike Achary, CFO
Yeah, they've definitely come in. And our best promo rate is 5%, four, five months. And so that continues to be, probably our best-selling CDs. We also have a nine month at 4.75% and then 11 months at 4.25%. But as far as the CD maturities, those numbers are constantly moving around depending on the reinvestment of the renewal rates going forward. So what the numbers look like now is for the second quarter, we actually have about $2 billion of CDs maturing. Those are coming off at 4.88%. Third quarter, that goes down to about $1.3 billion, coming off at 5.11%. And in the fourth quarter, about $900 million coming off at about 4.69%. So the way we're looking at the renewals of those CDs, the second quarter, there'll be some benefit, but it'll be pretty minor for the most part. So for the third and fourth quarter, those benefits do become a little bit more significant, especially in an environment where we do have one or more rate cuts during that time period.
Casey Haire, Analyst
Okay. Very good. So in other words, it's still a bit of a challenge, but clearly decreasing. Eventually, you'll be close to market levels.
Mike Achary, CFO
Yeah, I think so. I think that's right.
Casey Haire, Analyst
Okay. What are your thoughts on capital? I'm curious about the timing for the latter half of the year. Your capital ratios look strong and are in line with your guidance. With the election year, what makes the second half of the year significant for initiating the buyback?
Mike Achary, CFO
Yeah. I don't know that it's necessarily the back half of the year. So I think that's something that will be considered as we even go through the next quarter or so. So obviously, on the dividend and any change there, that's a Board decision. And related to the buybacks, I think it's a pretty good option that we would probably resume buybacks at some level, at some point in the next quarter or so. So I don't think that's necessarily constrained or going to be delayed to the back half of the year. And some of those things could start to occur as early as this quarter.
Casey Haire, Analyst
All right, great. Okay. And then just last one for me. On the fee guide, still you held that flat. If I run rate the first quarter result here, you're kind of right at the high end of the range. You guys did pretty well in other. Just wondering, is that just conservative or do you expect a little bit of a pullback?
Mike Achary, CFO
No, I think it's conservative. So we didn't change the guidance on fees or expenses. But I would suggest, especially on fees, that there's probably a bias toward the upper end of that range and even on expenses, a little bit of a bias toward the bottom end of the range without changing the range itself, if that makes sense.
Casey Haire, Analyst
Yes. All right, great. Thanks, guys.
John Hairston, President and CEO
Yeah. Casey, this is John. I'll just add one other point that just may be interesting, if not helpful. And that is, the components of the first quarter fee income included a couple of categories that are the best we've ever had. SBA continues to set records pretty much every quarter. And at the pace that that fee income bucket is improving, that pushes some of the guide high. And then secondly, our wealth management area now makes up a full third of our fee income. I mean, it was probably less than 10% just seven or eight years ago, and now it's almost a third. That includes record sales and annuities this quarter after record sales of annuities last quarter. So, you kind of hate to increase the guidance above the top end of the range on record performance after record performance, two quarters in a row, particularly given the interest rate environment could curtail some of that, and you get the benefit on the net interest income side, right? So we probably are being a little conservative by leaving the guide alone, but we'd like to see more about what the rate environment looks like before we evaluate changing them. Hopefully, that's helpful.
Operator, Operator
Your next question comes from the line of Stephen Scouten from Piper Sandler. Please go ahead.
Stephen Scouten, Analyst
Hey, guys, thanks for the time here. I guess I'm curious about the movements in non-interest-bearing deposits. You guys talked about the pace of decline there is slowing. I guess I'm curious, how you're thinking about the ultimate level of projected non-interest-bearing deposits as a percentage of deposits today versus maybe previous quarter or prior?
Mike Achary, CFO
Yeah, Stephen, this is Mike. I'm happy to chat about that for a minute or two. So our DDA remix definitely is slowing. There's no doubt that that's occurring. And support for that I mean, obviously, you can see the numbers. But our percentage of deposits at a DDA moved from 37% last quarter to 36% this quarter. But the rate of decline was really less than half of the previous quarter. So in the fourth quarter, we were down about $600 million. This quarter, we were down only about $230 million or so. So on a percentage basis, that went from 5% to about 2%. So on last quarter's call, we had talked about looking at the end of the year and suggesting that maybe that DDA percentage would be somewhere around 33%. Obviously, with the way that the remix is slowing, we would look at that number as being probably something closer to 35% or so as of now. And one additional point that certainly was a significant item, we think is in the month of March, we really saw our first increase in DDA deposits on an average basis in really almost two years. So I think that's further evidence that that remix is absolutely slowing and could be turning over at some point.
Stephen Scouten, Analyst
Okay, that's really helpful. And I guess with that 35%, would that be kind of within the context of assuming three rate cuts? And do you think that would get maybe marginally worse if we were to get no cuts for whatever reason?
Mike Achary, CFO
I don't know that right now, whether we get three rate cuts or zero rate cuts is going to have a real big impact on that number. I think that we see some things in motion again around the slowing of that remix and those numbers beginning to move a little bit in the opposite direction, obviously, in an environment where there are no rate cuts, which is today.
Stephen Scouten, Analyst
Okay. And then going back to credit briefly, you guys have talked even in your, like, in your release, you talk about credit metrics normalizing. But I guess I'm just kind of curious what that looks like for you because you still only had 15 basis points of net charge-offs and some of these numbers are still historically low. So, what do you feel like that normalization level really looks like for you all?
Chris Ziluca, Chief Credit Officer
Yeah. Thanks for the questions. It's Chris Ziluca. It really is a good question. I think, I guess what I would say is that because we've been operating at such historically low levels for both us and also really compared to our peer set, that even normalization would probably be just getting towards maybe peer average. And I think we have a long way to go before we get there from my perspective. But I think we've been very successful and very lucky in many respects with all of the liquidity that's been pumped into the system to allow us to get to the level that we're at. And so, it wouldn't surprise me that we would continue to see some level of migration in. Now, reality is that the wildcard is how do peers perform also. And so if we're kind of performing in tandem with them, then maybe we don't get to peer average. So it really is just a matter of, we've had such a low level and we continue to try to strive for that, that any sort of movement would probably be considered kind of a normalization.
John Hairston, President and CEO
Stephen, this is John. I'll just add to that. Internally, we view this as needing to stay ahead of the other competitors rather than just surviving the challenges we face. We consider it successful to remain in the top quartile for low levels of criticized and non-performing loans. Anything below the peer median would be quite surprising and disappointing. So, if you think of it in those terms, our expectations fall between the first and second quartile, with the top quartile being our definition of success.
Stephen Scouten, Analyst
Got it. That's really helpful. And if I could squeeze in one more maybe, I was just curious what drove, if anything specific, the decline in new loan yields quarter-over-quarter? It's kind of been trending up at a fairly ratable pace. And looks like this quarter fell down to 7.91% versus 8.15%. So I'm wondering if that's like a mix issue, maybe more of these single closed mortgages that you mentioned or what kind of drove that decline?
John Hairston, President and CEO
Great question. This is John, I'll take a wing at it. I think the answer is about half mix, just differences in Q1. And Q1 does typically have a little bit different mix than the other quarters of the year. And then secondly, and this is, I think, going to be the same with our competitors as well, is right now with a rate environment that the news media is talking every day about, when will rates begin to go down, that's a pretty stark change from a year ago when they were talking about how far will they go up. So when we're negotiating terms or specifically rate terms with clients, it really is a tailwind to getting better pricing when there's a thought that rates are going to be flat or higher. In this environment, rates are expected to go down. So that's creating a little bit more pushback on rates upon renewal and new deals. And frankly, the competition is also just as interested in getting new business they can to at least hold the loan book flat. And so I think competition is higher. Awareness of what rate direction is happening in the market is a little higher, and I think both of those are driving that down a little bit. But our posture right now, to be clear, is we still want to get as good a rate as we can possibly get and we're giving up a little volume in order to get a higher rate. As we get later in the year, if rates do indeed stay flat, or the belief is that they'll still go down, that I think we may see some rate concession across the banks environment, particularly mid-sized bank environment to show growth. It's hard to really tell at this point in time, but if you go back through history, when people begin to expect a rate cut, it's harder and harder to get new deal rates at the level that you may want. And I think we saw a little bit of that in Q1. But again, about half of it or a little more was mixed.
Stephen Scouten, Analyst
Really helpful color. Thanks for the time you all.
John Hairston, President and CEO
You bet. Thank you for the question.
Operator, Operator
Your next question comes from the line of Ben Gerlinger from Citi. Please go ahead.
Ben Gerlinger, Analyst
Hey, good afternoon, everyone.
John Hairston, President and CEO
Hi, Ben.
Ben Gerlinger, Analyst
I was curious about your guidance on the lower end for expenses. If we annualize this quarter, there's about a $20 million gap, which brings us to around 816 million to 836 million. I understand that expenses are likely closer to the lower end, but do you anticipate any ramp from here? Where should we expect that growth? Is it related to technology, staffing, or anything you can do to keep it below the low end of the range?
Mike Achary, CFO
Yeah. Ben, this is Mike. I think the way the trajectory of that will likely work as we kind of go through the year, recall that like many banks, we award raises on April 1st. So you will see a pretty healthy increase in expenses quarter-over-quarter related to those raises. So you'll have a full quarter's impact of that in the second quarter. And then from there, I would expect to see kind of modest increases as we go into the third and fourth quarter. And again, that should put us really at the bottom end of the range of 3% to 4%, and maybe a hair even below that 3%. So that's how we're kind of thinking about it.
John Hairston, President and CEO
Ben, this is John. I'll add just to it. Right now, we're having some really good and impressive success in some areas of the granular deployment balance sheet in loans, particularly in Texas and areas, and particularly Dallas. And so, there's a bit of a notion that as we get to the back of the year, depending on what the economic environment looks like, we may very well increase our deployment in adding new bankers and a small amount of new facility to continue that momentum, because it simply has been so good. And so there's a little bit of cushion built in that guidance as we sit down in the event that we do make those investments. And we want to be very transparent about it. Might not happen, given how the economy could change on us, but right now, we feel really, really good about the progress in the range or side of our loan balance sheet. And we believe, that there's some good talent out there in different places that may need a distribution disruption by the back half of the year that we'd like to avail ourselves of their assistance.
Mike Achary, CFO
And, Ben, if we take the route that John just kind of articulated, obviously we'll be transparent and modify the guidance accordingly.
John Hairston, President and CEO
That's not a signal. We're going to do it. It's a signal that that explains some of the reason for the range.
Ben Gerlinger, Analyst
Got you. Okay, that makes a lot of sense. If you just kind of look to your crystal ball here, it seems like growth is a little bit back half the year weighted. I mean, pricing looks to be pretty healthy. Mix shift on deposits is really kind of the only incremental headwind at this point because the cost of deposits are working pretty flat month-over-month when you gave that cadence for the first quarter. Just kind of curious, when you think about an exit of the year, and I get, you might not answer this directly, but is 3.40% achievable in the margin?
Mike Achary, CFO
Yeah, that's a great question. And as we kind of think about our NIM, and if you kind of go back to my earlier comments, under the scenario where there's a couple of rate cuts, that's certainly, I think, a possibility. If the zero rate cut scenario happens, then, the 3.40% NIM might be a little bit of a reach, is the way I would kind of think about that.
Ben Gerlinger, Analyst
Got you. That's helpful. I'll step back. Appreciate the time.
Mike Achary, CFO
Okay.
John Hairston, President and CEO
Thank you.
Operator, Operator
Your next question comes from the line of Brandon King from Truist Securities. Please go ahead.
Brandon King, Analyst
Thank you. Good afternoon.
John Hairston, President and CEO
Hi, Brandon.
Brandon King, Analyst
So just a question on the expectation for loan yields. The pace of increase slowed in the quarter to around 6 basis points. And I was wondering, just giving expectations for fixed-rate loan pricing going forward and the commentary around new loan yields, is that a good sort of run rate to expect maybe in the next couple of quarters and particularly, if kind of rates hold from here?
Mike Achary, CFO
Yeah, Brandon, this is Mike. And I do think it is, especially if there aren't any rate cuts from this point forward that we should see some stability on the variable side. But we should still see, as I mentioned earlier, some yield improvement on the fixed rate side as we continue to have those loans repriced as we go through the year.
Brandon King, Analyst
Okay. And as far as the fixed rate repricing, is that sort of ratable through the year or do you have sort of chunkier repricing impacts in certain quarters?
Mike Achary, CFO
Yes. The way we're currently viewing it, it appears to be fairly consistent across the remaining quarters of the year. In the last few quarters, it has shown remarkable consistency at around 12 basis points per quarter. It did decrease slightly in the first quarter to approximately 9 basis points, but it remains strong considering the size of that portfolio.
Brandon King, Analyst
Okay. And I recognize the headwind to CD repricing, but just how are you thinking about the total cost of deposits? Looks like you're on pace to potentially hold that stable in the second quarter. But if we are in kind of this stable rate environment, do you think you continue to keep that pretty stable in the back half of the year?
Mike Achary, CFO
Yeah, absolutely. So again, if you look at the first quarter, we came in at 2.01%, but the month of March came in at an even 2%. And again, as we think about the second quarter, we're looking at somewhere near that same 2% for the second quarter's total cost of deposits. And then from there, it really kind of depends on whether we get rate cuts or not. So in an environment where we do get rate cuts similar to the impact on the NIM, you'll see that cost of deposits continue to fall in the third and fourth quarter. If we don't get rate cuts, then it's going to probably be flattish to maybe down just a bit as we go through the rest of the year. So again, very similar to kind of the trajectory that we described earlier around the NIM.
Brandon King, Analyst
Okay, very helpful. That answers my questions.
Mike Achary, CFO
Okay.
John Hairston, President and CEO
Thank you.
Operator, Operator
Your next question comes from the line of Brett Rabatin from Hovde Group. Please go ahead.
Brett Rabatin, Analyst
Hey, good afternoon. Wanted to ask, we've seen a few office towers reprice or change hands at lower levels than where they were last transacted. And on Slide 10, you show that you've got 88% of the portfolio in office with $5 million or less of exposure and that the office buildings tend to be more mid-rise. I was curious how much of the office book would be bigger than $20 million or $25 million from a loan count perspective?
Chris Ziluca, Chief Credit Officer
Yeah, thanks for the question. Brett. This is Chris Ziluca. We only have 14 credits that are over $10 million, and none of them are over $25 million in exposure. So I think that pretty much answers the question around, are we participating in or doing larger office tower transactions.
Brett Rabatin, Analyst
That's helpful. I wanted to ask about the potential impact of a recession. While many people believe we might avoid a recession, I'm curious about how the core southern economies, particularly Louisiana and Mississippi, might perform compared to Texas and Florida if the economy weakens. What insights do you have regarding those markets and their potential reactions?
John Hairston, President and CEO
I’ll start by saying this is a bit of speculation. Typically, Mississippi and Louisiana aren't considered high growth markets, which means their valuations don't increase dramatically even when other areas might see spikes. The downside is that these markets grow more slowly than some of our other regions. However, they also tend to remain stable during recessions. For instance, during the last financial crisis, we experienced minimal losses in Mississippi, Louisiana, or Alabama. In fact, if it weren't for energy, our losses would have been significantly better than our peers. With energy now being a much smaller part of our portfolio, representing less than 1% of our loans, I expect these markets to perform well during a recession.
Brett Rabatin, Analyst
That's helpful. Regarding the SNC question, it seems that a significant portion of that portfolio is quite focused on the customer. How much of that portfolio do you have a primary deposit relationship with, or are you one of the leads on the credit?
Chris Ziluca, Chief Credit Officer
A significant part of it. Our main goal with syndications is to share credit with long-term partners when the total amount we hold becomes larger than we prefer to manage alone. We do lead some syndications, but our core portfolio remains quite diverse in terms of our credit-only holdings. Excluding specialties like commercial real estate, where syndications are typically short-term before moving to permanent markets, we have a healthcare team that is more active in syndications, though those balances and exposure have been decreasing as we have not needed to use our liquidity. I want to make it clear that our concerns about syndications are less about fear of credit and more about reallocating liquidity towards areas where we excel. Internally, we discuss our corporate strategic objectives, which we also share publicly. However, we do not disclose all our aspirations. One key goal is to establish ourselves as the top bank in the Southeast for privately owned businesses, which requires liquidity to competitively attract those organizations. We are starting to see positive outcomes in some markets I mentioned earlier. The shift away from syndication and non-core relationships is not a critique of syndications themselves; it’s about moving towards more core relationships because we excel at generating fees, which requires foundational relationships. This is the rationale behind our evolving strategy. Did that clarify things for you, or would you like me to go over it again?
Brett Rabatin, Analyst
Yeah, yeah. That's really helpful. Thanks so much, guys.
John Hairston, President and CEO
Okay. You bet.
Operator, Operator
Your next question comes from the line of Matt Olney from Stephens Incorporated. Please, go ahead.
Matt Olney, Analyst
Hey, thanks. Mike, you went through some of your promotional rates on time deposits earlier on the call, and I appreciate you disclosing that. Can you help us appreciate any changes that you've made to these promotional rates more recently? Are those rates you gave us from a few months ago, or were those after some recent changes you've made?
Mike Achary, CFO
No, those are the current rates, Matt. To give you some context, if you look back to the end of last year, our best CD rate was 5.4% for nine months. We actually shortened that in the first quarter to 5% for three months and then recently introduced a 5% rate at five months. We have lowered the overall rate and shortened the maturity period, then slightly lengthened it. These variations are related to market trends and customer preferences. We are also trying to coordinate these maturities to occur in an environment where rates might be lower. Even without rate cuts, we are observing a contraction in rates overall in the market. Rate cuts will certainly help in the second half of the year when these maturities happen, but even without them, it won't be the end of the world. We will still benefit from CD repricing, just not as much as we would with rate cuts.
Matt Olney, Analyst
It seems like you have adjusted your deposit or promotional pricing slightly and reduced the maturities. Are you considering further reductions in the promotional pricing before the Federal Reserve makes any cuts, or do you believe that the pricing is now at a comfortable level and would wait for the Fed to act before making any additional changes?
Mike Achary, CFO
Well, my opinion is there's a little bit of a line of demarcation it seems like at 5% for short CDs. But we'll pay close attention as we always do to the market and the things that are going on, both the headwinds and tailwinds. Personally, I could certainly see a scenario where we would probably want to breach that 5% at some point.
John Hairston, President and CEO
Matt, this is John. Just to add a little more color that may be helpful. Mike described before that we managed to cover more than 100% of the brokered CD departure in Q1 with client deposits at the rates that we mentioned. We have another slug, and a final slug of brokerage CDs coming up in May. And so part of maintaining the current posture is to try to eliminate as much of those as we can. We're not really ready to say that will definitely happen, but that's our desire because getting rid of that takes us to 100% core money, if that makes sense. And so it's a little early to try to get too aggressive on taking them down until we get past Q2. Hopefully, that's helpful.
Matt Olney, Analyst
Yes, that is helpful. Thanks for clarifying that. And then I guess, switching gears. Chris, on credit, I think you answered all my questions around the criticized loan bucket, and I think, you know that the charge-offs were mostly from a single credit. But I was surprised to see that the recoveries were quite a bit higher in the first quarter. I think it was around $14 million. It had been trending well below that in recent quarters. Just any color on the more sizable recovery you got this quarter.
Chris Ziluca, Chief Credit Officer
Yeah. I mean, we have a certain amount of flow recoveries, but we did have an opportunity this quarter to kind of relook at an existingly previously charged off account and kind of resolve that matter, maybe more permanently. And so that helped us to get probably what is going to be somewhat of an abnormal level of recovery, but certainly fortuitous for the quarter.
Matt Olney, Analyst
Okay. Thank you.
John Hairston, President and CEO
Thanks, Matt.
Operator, Operator
Your next question comes from the line of Christopher Marinac from Janney Montgomery Scott. Please go ahead.
Christopher Marinac, Analyst
Hey, thanks. Good afternoon. Chris, I wanted to ask you one more credit question. When we go back to the quarterly and annual disclosures, you've mentioned a pass watch category. Would that have gone down at the end of March, which therefore would compensate for the increase in the criticized?
Chris Ziluca, Chief Credit Officer
Not necessarily. I mean, we certainly have things that flow through the pass watch category, but some skip over that because of just the credit metrics that drive our risk rating models. So not necessarily all just from that category, although certainly a substantial portion in count wise came from that category.
Christopher Marinac, Analyst
Okay. And does the pass watch strive at all provision levels, or rather the reserve as you go forward?
Chris Ziluca, Chief Credit Officer
It has a component to it. Our models don't specifically connect to risk ratings at this point, but we consider migration in a lot of the qualitative aspects of our reserving methodology.
Christopher Marinac, Analyst
Okay, great. And my last question is about the PPNR guidance for this year. Looking ahead to 2024, do you anticipate that the numbers for 2025 and 2026 will be higher than this year, or do you foresee a situation where the PPNR might decline further next year?
Mike Achary, CFO
Chris, this is Mike, that's a great question. And involves at this point, I think, a lot of crystal ball kind of viewing. But at this point, I don't know that we're ready to really talk about guidance for '25. But I would suggest that if we think about '25 and we think about that being a year where potentially we're able to grow the balance sheet more than just below single digits. And that certainly, I think bodes well for our ability to expand PPNR into next year.
Christopher Marinac, Analyst
Got you. That's helpful. Thanks for speaking out loud on that, Mike. I appreciate it.
Mike Achary, CFO
You're welcome.
Operator, Operator
Your next question comes from the line of Gary Tenner from D.A. Davidson. Please go ahead.
Gary Tenner, Analyst
Thanks. Good afternoon. I wanted to ask a follow-up just on the loan growth guide. Sounds like the low single-digit holds in your mind with or without rates, even though I think a lot of folks think of a second half inflection for the group overall as being a little more reliant on rate cuts. Are your lenders kind of hearing pretty clearly from borrowers that, look, we're being patient on rates, but we feel good enough about our business opportunities that we're going to pull the trigger in the back half of the year even if we don't get some moderation in rates.
John Hairston, President and CEO
I think the first part of your answer is yes. We're hearing pretty clearly that the environment may improve for us in the latter half of the year. Some of this is due to organizations reassessing their debt service, which gives them more flexibility to spend if they're paying less on that debt. This encourages them to invest more in equipping, expanding facilities, and pursuing growth to increase their revenue. That seems to be the main driver. A 75 basis point change isn't significant enough to drastically improve financial conditions; rather, it indicates that we have managed to navigate to a stable economic point, allowing for a more optimistic outlook for the next few years. This may encourage individuals to take on a bit more risk regarding investments. However, at some point, spending becomes necessary. I believe that by the end of this year, if the economic climate shifts from higher interest rates for a prolonged period to an even longer duration, it will still prompt people to move forward with decisions because they need to manage their operating expenses to accommodate that increased level of debt service.
Gary Tenner, Analyst
Thanks. I appreciate the thoughts on that. And then kind of a quasi related follow up in terms of the PPNR guide with and without rates. Is that figure with no rate cuts purely the math on kind of the yield and rate impact of cuts, and no change in mix of the balance sheet in that scenario?
Mike Achary, CFO
Gary, this is Mike. It's a little bit of both. It's not just the pure math of what happens and what doesn't happen in terms of our rates and repricing. I mean, we're modifying the mix a bit to account for what we think is going to happen or not happen. But I would suggest, though, it's not a big, big impact or a big change, certainly in the size of the balance sheet for the second half of the year cuts versus no cuts. And that's why we didn't change our guidance both on the loan or deposit side at least not as of yet.
Gary Tenner, Analyst
Got it. Okay. I appreciate it.
Mike Achary, CFO
Okay.
Operator, Operator
That concludes our question and answer session. I will now turn the conference over to John Hairston for closing remarks.
John Hairston, President and CEO
Thank you, Krista, for managing the call. Thanks to everyone for your interest. Looks like a good year shaping up, and we're glad to share more with you when we see you on the road. We'll see you all very soon.
Operator, Operator
This concludes today's conference call. Thank you for your participation. And you may now disconnect.