Earnings Call Transcript - HWC Q3 2024

Operator, Operator

Good day, ladies and gentlemen, and welcome to Hancock Whitney Corporation's Third Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. As a reminder, this call may be recorded. And I would now like to 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 all for joining us this afternoon. We are pleased to report our third quarter results, again reflecting improved profitability and efficiency. We achieved a ROA of 1.32% and reported another quarter of NIM expansion, fee income growth, and lower operating expenses. Strong earnings facilitated continued growth in capital ratios, now among top quartile peers. Net interest income was up this quarter, due to higher yields on loans and securities and a flat cost of funds. Fee income continues to outperform and expenses remain well controlled and in fact were down quarter-over-quarter. In recent years, we made and continue to make strategic investments in fee income lines of business and are very pleased with continued impressive returns. Turning to the balance sheet, loans were down $450 million, over $250 million of which is related to our purposeful decrease in SNC exposure. We also saw higher pay-offs due to refinance and sales transactions within the CRE multifamily and CRE industrial portfolio across the footprint. The balance of overall loan reduction this quarter was largely the completion and liquidation of large industrial projects in the Lake Charles, Louisiana market. The balance sheet doesn't reflect the full story though, as we enjoyed very solid production and new credits during the quarter. We're also very pleased to have attained peer levels of SNC exposure, a year ahead of the original schedule. This particular line item will generally cease to be a purposeful headwind to growth. We are actively recruiting bankers to support growing the balance sheet next year now that we have reached all our goals in earnings efficiency and capital. Deposits were down in the quarter, but the DDA outflow remains moderated and our DDA mix was consistent at around 36%. There was some normal seasonal runoff in public funds deposits, and we experienced growth in interest-bearing transaction accounts and time deposits despite a reduction in promotional rates during the quarter. Mike will add more detail in his comments later. Our credit quality metrics continue to normalize with a decrease in non-accrual loans, but an increase in criticized loans, fully reflecting the results of the recent SNC exam, which was impactful to criticized migration. We expect to compare well versus peers in criticized loans and expect to be in the top quartile for non-accrual loans. Net charge-offs were up quarter-over-quarter, but we continue to see no significant weakening in any specific portfolio sectors or geography. We continue to enjoy a solid reserve of 1.46%, up slightly from the prior quarter. We maintained our posture of returning capital to investors by repurchasing over 300,000 shares of common stock in the quarter. Even after returning capital, we had strong growth in all of our capital metrics due to solid profitability, ending the quarter with a TCE of 9.56% and a common equity Tier 1 ratio of 13.79%. We made modest changes to our guidance for the fourth quarter. As a reminder, we will give full guidance for 2025 on next quarter's call. October 9th marked the 125th anniversary of our bank charter. We attained this milestone because of our shareholders' and clients' trust and the efforts of our current and past associates, who live by the core values our founders set forth those many years ago. We have focused on achieving strong profitability, granular revenue sourcing, admirable earnings efficiency, solid capital and ACL reserves, a de-risked loan portfolio, and top quartile capital ratios. As we reflect on our past and celebrate our future, we look forward to another 125 years of strength and stability. Lastly, I would like to acknowledge the incredible efforts of our team during the recent hurricanes impacting our footprint. As we again were the last to close and the first to open locations in storm-impacted areas. I'm exceptionally proud to serve with colleagues who are intensely focused on a commitment to serve our communities in their time of greatest need. As we speak, our teams are delivering meals, ice, and fuel in hard-hit areas to assure we do our very best to serve. Our thoughts and our prayers are with those impacted by these storms, and we are committed to being a steadfast partner in the recovery process. For over a century, our bank has been here to help people rebuild and recover, and this time is no different. With that, I'll invite Mike to add additional comments.

Mike Achary, CFO

Thanks, John, and good afternoon, everyone. Third quarter’s net income was $116 million or $1.33 per share, so up $1 million and $0.02 per share from last quarter. PPNR growth was again strong this quarter and was up $10.1 million or 10% to $167 million. Express is a return on average assets that's a peer-leading 1.92%. Our NIM expanded 2 basis points to 3.39, driving modest growth in NII. As already mentioned, but our fee income businesses had an outstanding quarter and expenses were again very well controlled. As mentioned, the company's NIM expanded 2 basis points from last quarter to 3.39%. This expansion was driven by higher loan and security yields, a flat cost of funds, and a favorable mix of borrowed funds as shown on Slide 14 of the investor deck. Our cost of deposits was up 2 basis points to 2.02 this quarter, mostly due to inflows of high balance money market deposits from the equity markets in August. That in turn drove a mid-quarter bump in our cost of deposits to 2.04%. We finished the quarter at an even 2%, which provides a nice glide path to a more significant reduction in the fourth quarter. Also as expected, we saw $2.6 billion of ceding maturities this quarter, which repriced from 5.04% to 4.62%, driving down the rate on time deposits by about 5 basis points. The pace of DDA outflows continued to slow this quarter with a drop of only $142 million and a stable DDA mix of 36%. We believe the DDA mix could stay at least at this level through year-end. With the rate cuts in September and the 225 basis point rate cuts we anticipate in the fourth quarter, we expect our cost of deposits will be down significantly in the coming quarter. Our loan yield was up 3 basis points to 6.27%, reflecting fixed-rate loan repricing and new loan originations, partially offset by lower rates on variable-rate loans. Given the two additional rate cuts we expect in the fourth quarter, we do expect loan yields will be down next quarter. Bond yields for the company were up 6 basis points to 2.66% due to our continued reinvestment of cash flows back into our bond portfolio. In the third quarter, $220 million of bonds came off the balance sheet at a yield of 2.69% and were reinvested at 4.74%. Next quarter, we expect about $200 million of cash flows coming off at about 3.10% and will be reinvested at over 4.5%. All this to say that we believe that through the net effect of lower deposit rates, higher bond yields, partially offset by lower loan yields, we do expect to achieve modest NIM expansion in the fourth quarter again, despite two additional rate cuts and limited balance sheet growth. As mentioned, the fee income was again strong this quarter, up 8% from last quarter. We benefited from higher investment and annuity fees, service charges on deposit accounts, and specialty income. We now expect non-interest income for 2024 will be up between 6% and 7% from 2023's adjusted non-interest income level. Expenses were down 1% this quarter, as we continue to focus on controlling costs throughout the company. Our guidance has been updated, and we expect to grow expenses between 1% and 2% year-over-year, inclusive of our plans to hire additional revenue-generating staff in the coming quarters. Our PPNR guide is to be flat to down slightly from 2023's adjusted levels, reflecting our updated expectations on rate cuts, fee income, and expense guidance. Lastly, a couple of quick comments on capital. Our capital ratios remain remarkably strong, even after returning capital through continued share repurchases and the recent increase in our common dividend. All things equal, we expect the share repurchases will continue at a similar pace in the fourth quarter. As always, the changes in the growth dynamics of our balance sheet and share valuation could impact that view. I will now turn the call back to John.

John Hairston, President and CEO

Thanks, Mike. Let's open the call for questions.

Operator, Operator

Your first question comes from Michael Rose with Raymond James. Your line is open.

Michael Rose, Analyst

Maybe we could start with Chris. We saw the uptick in criticized commercial loans this quarter, and it's been over the past couple of quarters an upward progression. I see you built the reserve a little bit. Can you just talk us through kind of what's driving the increase? And then, as we think about the prospects for lower rates, 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 SNCs?

Chris Ziluca, Chief Credit Officer

No problem, Michael. I appreciate the question. First of all, I want to emphasize that we remain pleased with our asset quality performance, especially compared to our peers and considering where we are in the cycle. In previous calls, we mentioned expecting some migration, particularly in the commercial loan book regarding criticized loans. I want to highlight that most of this migration hasn’t affected our investment commercial real estate book; it has primarily been in our commercial and industrial (C&I) book. We continue to analyze and assess the reasons for this migration. While it seems straightforward, we don’t see specific sectors driving it; rather, it is geographically widespread this quarter, mainly in our Louisiana, Alabama, and Texas markets, but even then, that only accounts for 60%. The remaining 40% is distributed across other jurisdictions. Looking at the industries, 70% of the migration this quarter involved manufacturing, retail and wholesale trade, transportation companies—those under pressure as I noted last quarter—and even professional and information services. Some of this, as John mentioned in his opening comments, resulted from our SNC exam, but only 60% can be traced back to that process, indicating a more diversified issue. We have sharpened our watch process, implemented one or two years ago, to include more proactive discussions around potential problems. We analyzed the recent migration over the past few quarters and found no immediate material issues with those credits at this time. It reflects where we currently are in the cycle, a slight decrease in demand following the post-pandemic buildup and elevated operating costs. You asked about rates and potential benefits; those changes occurred late in the quarter, meaning customers facing higher borrowing costs won’t see immediate benefits in their current metrics. If interest rates ease further, we believe there could be some positive effects, but the challenges our customers face extend beyond just interest rates—they also include softening demand and increased operational costs. Nevertheless, we still feel confident in our portfolio compared to our historical performance and our standing relative to peers.

Michael Rose, Analyst

As a follow-up, how should we view loan growth moving forward? I understand you have reduced the SNC portfolio to near your target range, and while the guidance remains unchanged, it suggests a possibility of slight growth but perhaps some stability in the fourth quarter. Assuming the fourth quarter marks the conclusion of the SNC runoff, and considering that you had some projects that paid down outside of the SNC this quarter and are planning to hire new staff, how should we approach loan growth from this point? I know it’s early for 2025, but how should we assess loan growth going forward? Does this also take into account the forward curve regarding your outlook for increased growth if rates decrease?

John Hairston, President and CEO

Michael, this is John. I'll start with your question about the SNC parts. The loan growth numbers for the quarter by sector are detailed on Page 8. To give you some more insight, as mentioned in my prepared comments, about $250 million of the overall reduction was from the SNC portfolio, which was anticipated. We've been working on this for several quarters, and I'm pleased that we can now say we've balanced our exposure relative to our peers. We can begin to move past the self-inflicted growth challenges we've faced. There might be a small amount of runoff in the fourth quarter related to the timing of deal management, but overall, I believe the self-induced headwind for the SNC is over. Regarding growth, while I don’t expect that segment to grow significantly, I do anticipate it will remain relatively stable as a percentage of overall loans as we look ahead to more growth in total credits. You also asked about project paydowns. You may recall that there was significant media attention around large LNG projects in the Lake Charles area of Louisiana, which have positively impacted that market. The projects we partly financed are now complete, and the contractors have been paid, resulting in paydowns of their operating lines. The decrease in line utilization shown on Page 8 reflects mostly these paydowns. The only unexpected factor affecting overall loan growth this quarter was the greater pressure on the CRE book due to higher-than-anticipated payoffs from strong activity in the private equity market and from bridge lenders. There's always some fluctuation, but we saw a higher level of paydowns than expected. As we see improvements in the construction and development sector, the decrease in C&D on Page 8 is more about the timing of paydowns and the time it takes for borrowers to use their equity before they begin borrowing on the lines we've already approved. We expect to see this pick up into 2025. In summary, demand remains somewhat subdued, but we are noticing some signs of progress. Our commercial banking pipelines are starting to grow. It’s still too early to predict when sentiment will improve, but I think it might happen after the election and with further signs of declining rates from the Federal Reserve, which could encourage projects to proceed. The pipeline is definitely building. In our specific business purpose lending areas, such as the business banking and SBA groups, performance has been strong. We've achieved another record quarter for SBA volumes and fee income, as highlighted on Page 17. Overall, we feel positive about our loan numbers. With some of the challenges behind us and new bankers coming on board as we enter 2025, we anticipate a better story next year, which we will discuss more in January when we review the end-of-year numbers and provide updated guidance. Did I address your question adequately, Michael, or do you have more inquiries?

Michael Rose, Analyst

No, that's good. I appreciate all the color. I'll step back.

Operator, Operator

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

Catherine Mealor, Analyst

We return to the margin, and I appreciate the guidance for the fourth quarter. It's reassuring to see the net interest margin projected to be higher next quarter. Could you elaborate on how you're viewing the margin structurally as we approach next year without providing specific guidance? It seems that you are somewhat cautious about liabilities in the near term. Is there a possibility that we could see the margin increase throughout next year, or is this rise mainly due to factors related to your CD book, suggesting that NIM compression is more likely as we head into 2025?

Mike Achary, CFO

Catherine, it's Mike. I want to share our expectations for the fourth quarter and beyond. Many of the themes we've been seeing will continue into 2025. Our net interest margin (NIM) has been largely influenced by the repricing of fixed assets and our certificate of deposit (CD) portfolio. These factors have contributed to NIM growth in the third quarter and are expected to support moderate NIM growth in the fourth quarter as well. Looking ahead to 2025, we will provide more detailed guidance in January, but we expect significant opportunities to reprice our bond portfolio. Next year, we anticipate receiving around $700 million in principal cash flow from our bond portfolio, plus an additional $300 to $400 million from our fair value hedges on some bonds, which should positively impact NIM growth. As for our CD portfolio, while we've talked about the repricing of $2.6 billion in the fourth quarter, we expect over $3 billion to reprice at about 100 basis points advantage. Additionally, in 2025, we will see substantial turnover with nearly $10 billion of CDs repricing at a similar advantage. All of this will give us a solid boost as we move through 2025. It's worth noting that to maintain NIM and net interest income (NII) growth in a declining rate environment, we need to focus on expanding our balance sheet. John has mentioned our plans for loan book growth for next year, and if we succeed, we believe we have a good chance to continue NIM expansion as a moderately asset-sensitive company in that environment.

Catherine Mealor, Analyst

And then is it all higher than organic growth as a prime way to get there? Or does M&A become more of interest to you? I think one thing that John has said many times be more worried about revenue growth than credit risk. And so in an environment where we still feel pretty good about credit, and we're really looking at revenue growth. Do you think you can hit your target just organically? Or does M&A become a bigger piece of your story?

Mike Achary, CFO

Well, when we think about our plans and the way we put together our business plan for next year and for 2026, we really think about it first and foremost from an organic perspective. So the plan that we put together is built on organic balance sheet growth. So we don't plan for M&A. Certainly, if those kinds of opportunities present themselves in the next year or two, 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.

Operator, Operator

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

Brett Rabatin, Analyst

I wanted to start with the fee income. And just with the guidance in the fourth quarter and the annuity income usually being higher in 4Q. I'm curious if you could give us some more color on the other bucket in 3Q, specifically how much derivative income, SBIC, BOLI, and SBA might have been unusual in 3Q? And then just maybe how much that might come down in 4Q to reconcile that 6% to 7% for the full year?

Mike Achary, CFO

Sure, Brett. This is Mike. I'll get started, and certainly, John can add some color. So if we look at the third quarter, again, an absolutely excellent quarter across the board really for fee income growth. So it's certainly something we're very pleased to be able to report. And again, really, I think shows the success of the investments that we've made in the past couple of years in our fee income businesses. So again, if we look at the third quarter, Slide 17 in the deck highlights through that waterfall graph the various components. And certainly, the other income does stick out. This quarter, it was up $5.6 million quarter-over-quarter. And the vast majority of that increase really came from what we referred to as our specialty fee income lines. So talking about things like SBA fees being up about $1.6 million, our SBIC income or venture capital income was up about $700,000. BOLI showed a nice increase of about $0.5 million, and then derivatives were up almost $2 million. So that's the better part of the $5 million that was showing this $5.6 million growth quarter-over-quarter. So as we think about the fourth quarter, certainly, we would expect to see continued growth in wealth management, so our trust fees as well as our annuity income to some extent. And certainly, when you look at quarter-over-quarter, considering the fourth quarter, we really can't necessarily count on some of these specialty lines to again show the level of increase that we showed in the third quarter. So when we think about fee income in the fourth quarter, we would expect to see somewhat of a modest drop between the third and fourth quarter. So John, anything you want to add to that.

John Hairston, President and CEO

Any of the questions on the fees and we can clarify for you, Brett?

Brett Rabatin, Analyst

No, that's helpful, guys. And then just wanted to talk about capital for a second. And I know with the outlook for the fourth quarter in a flattish balance sheet and then maybe in '25, 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 share buyback. Any thoughts on just capital accumulation and maybe what the right might be for capital as you view it as core versus excess you want to try and figure out how to invest?

Mike Achary, CFO

Sure, Brett. So when we think about capital, obviously, as we've talked about in many venues, really going back four years or so, that really has been one of our strategic focus points to build capital to top quartile levels. And I think, certainly, we've been able to accomplish that over this time period. So from the numerical perspective, TCE is certainly knocking on the door of 10% and common Tier 1 nearly 14%. So those are attractive levels. And we view those capital levels as things that really just give us a lot of optionality around how we think about managing capital going forward. So in the past couple of quarters, we've increased the common and we resumed buybacks and really have guided to looking at both of those things as we move into ’25, with really the top priority for deploying capital to be to support organic balance sheet growth. So that's something that we're looking forward to being able to support next year. And again, we've talked a lot about the different things that we're putting in place to ensure that we're able to grow the balance sheet, specifically loans next year. So certainly, if that growth for whatever reason isn't as attractive as what we're planning for, we could certainly look at increasing the buybacks or the common dividend or things of that nature. So again, the levels of capital that we have, I think, first and foremost, give us a lot of optionality with respect to how we think about managing the balance sheet, and I think that's important.

Operator, Operator

And your next question comes from the line of Ben Gerlinger with Citi.

Ben Gerlinger, Analyst

I know we're kind of beating a dead horse here on the credit, but from kind of the responses thus far, I mean, I think it was 60% of the increase was SNC-related. Obviously, that's rounding or ballpark or you want to phrase it. When you think about just kind of going forward that would back out roughly $75 million of the roughly $130 million linked quarter criticized. Do you have any thoughts on kind of what we should expect going forward, especially with lower rates? I know that some of this is economically dependent and someone who just can't tell 6 or 9, 12 months from now. But when you think about lower rates and kind of the cleaning up of the balance sheet, do you feel like you've appropriately addressed a lot of the credit or presumably could be so it could potentially be over-marked? Or is it still kind of more flower than that?

Chris Ziluca, Chief Credit Officer

Yes, it's a question that requires some foresight. We assess credit regularly—daily, monthly, and quarterly—to ensure our portfolio and our individual relationships and loans are correctly categorized. Looking ahead, as I mentioned earlier, interest rates have certainly affected our customers' performance, with varying impacts. Generally, consumers who are net borrowers will be affected positively by lower interest rates. On the commercial side, many customers either hedge or enter fixed-rate agreements, while some have floating rates, which will benefit from rate reductions. Those with fixed rates will need to adjust over time. The increase in interest rates over the last couple of years was more significant than the decreases we might see, so the benefits for our customers in commercial and industrial areas may take longer to materialize. They will need to adapt to general demand for their products and services, and any signs of persistent slowness will require them to adjust their expenses. We are currently observing some customers reducing their inventory levels due to a decline in demand, particularly for heavy equipment and durable goods like vehicles. Others are managing expenses through payroll adjustments, and many are taking that step too. From my perspective, our credit portfolio is classified appropriately. It remains to be seen how either decreases in rates or shifts in the economic cycle will affect specific sectors. However, I believe the issues we face are mostly situational rather than tied to specific geographies or industries, with the exception of transportation, where we do see some activity, although we are not heavily exposed in that area.

John Hairston, President and CEO

Ben, this is John. Just to add a little color and maybe this is more in line with what you're looking for. But clearly, inflation reducing the cost of workforce is becoming a little bit more reasonable or certainly not going up as fast as it was and the cost of variable rate money coming down are certainly tailwinds to improve the bottom line for clients. But as you know, we have to risk rate based on current and relatively reasonably previous financials. And so the outlook for how well things may get, unfortunately, can't be inclusive in the rate. So it's a little bit of a rear view, the comments we're giving you a rearview look on ratings and a forward view in confidence of things working out pretty well. Hopefully, that's helpful.

Ben Gerlinger, Analyst

Yes, it is helpful. I mean, we've got a few e-mails that the criticized jump spooks on people, but I think the SNC review and then like you said, credit is a little backward-looking in this respect, especially if it kind of rate focus probably as some of the peers. Kind of a little more nuanced question. It's not modifying lens continue to go up. Not that do you know, any color there would be helpful.

Chris Ziluca, Chief Credit Officer

Sure. Yes, this is Chris again. Just by its nature, if you imagine a special assets department, we tend to 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 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.

Operator, Operator

And your next question comes from the line of Gary Tenner with D.A. Davidson.

Gary Tenner, Analyst

I wanted to ask about kind of the overall guide on PPNR as it is now versus where it was last quarter. If you kind of look at the midpoints of what you provided for fees and expenses in the last quarter on PPNR with the changes now. It certainly would appear that NII for the full year is coming in lower than what you would have thought a quarter ago despite the fact that you still are guiding to additional modest NIM expansion and the loan growth that hasn't really changed. So is it a function of maybe just the balance sheet not growing at all really kind of back half of the year? Or what's the primary item there just as kind of then we're thinking about rolling forward into 2025?

Mike Achary, CFO

When we discuss PPNR, it's important to note that our guidance is annual, but we can easily estimate what we're anticipating for the fourth quarter. You're correct about the balance sheet size, which has not grown and has actually decreased somewhat in the second half of the year. This is contributing to the stabilization we expect in NII for the fourth quarter. Additionally, we mentioned fees, where we had nearly $5 million in specialty items that won't be consistent on a quarter-over-quarter basis. Some of these may recur in the fourth quarter, but it's difficult to predict exactly how much. On the expense side, while we had an excellent quarter by reducing expenses compared to the previous quarter, we are likely to see a slight increase in the fourth quarter. Putting all of this together, even though we had a strong quarter for PPNR growth in the third quarter, it is likely to decrease a bit in the fourth quarter.

Gary Tenner, Analyst

The question was mainly about the net interest income, which you addressed, and the details regarding expenses were also useful. Now for my second question regarding your comments about recruiting efforts. Can you provide some context on the targets you have in mind for staffing and the type of talent you are considering as you plan for next year?

John Hairston, President and CEO

Yes, this is John. Thank you, Gary, for the redirect. Regarding hiring, we aren't ready to discuss numbers yet; we plan to do that in January. Our expectation is to be recruiting right now. While we have made some hires, we want to complete our recruiting efforts over the next four to five months before reporting on our progress and expectations for 2025 guidance. It would be premature to address it now. We have a significant number of offers out, but as you know, the acceptance rate won't be 100%. So for now, I'll refrain from discussing specific numbers. However, I can say that our recruiting efforts have been well received. We provide a unique environment with a strong partnership between the line credit and treasury functions, which helps in setting rates and creating attractive packages for new clients and those looking to expand. The effort has been positively received, and we look forward to discussing it more as we move into 2025. In terms of talent acquisition, we welcome good candidates with experience in any of our markets, but our recruiting has been concentrated in areas with higher organic growth rates, such as Texas and Florida. We're primarily looking to recruit bankers and a few less middle-market relationships, focusing on commercial business banking and SBA, along with wealth advisers, given the success of our wealth management program. We believe there are opportunities to quickly add wealth advisers. It generally takes about 12 months for new bankers to start contributing to profitability, and between 18 and 24 months for them to become significantly profitable and closer to our target operating model. We've maintained this practice for about 10 years, and it has proven to be predictive within four to five months in terms of whether those recruits will be successful. I think recruiting will be an important topic to discuss in January.

Operator, Operator

And your next question comes from the line of Matt Olney with Stephens.

Matt Olney, Analyst

Mike, it sounds like you feel good about deposit pricing so far. It's obviously early in the cycle, but just would love to hear any updated thoughts you have on deposit betas throughout the cycle in this kind of down cycle maybe as compared to the past betas that you disclosed in your presentation.

Mike Achary, CFO

We feel confident in our ability to manage deposit costs going forward. Prior to the Fed's move, we took proactive steps to reduce our promotional rates, particularly on CDs. Our top promotional CD rate is currently a three-month at 4.5%, which we’ve decreased by 50 basis points. We also offer a five-month at 4.15% and both 8- and 11-month CDs at 4%. These rates are appealing, all exceeding the 4% mark. We'll monitor their trajectory from here. For the fourth quarter, our guidance anticipates a 225 basis point rate cut, so we'll adjust deposit pricing as we progress through the quarter. Regarding our deposit betas for this cycle, while this isn’t formal guidance, expectations suggest our total deposit beta will be around 37% to 38%. Our interest-bearing deposit betas are expected to be between 57% and 58%, and for loans, around 49% to 50%. These are our targets as we navigate this cycle. It will be interesting to see how things unfold post-election and into next year.

Matt Olney, Analyst

And then, going back to the credit discussion. Really a great commentary on the criticized loans and the deterioration there. Did I miss the details behind the commercial loan charge-off in the third quarter? I'm just looking for any kind of color behind that.

Chris Ziluca, Chief Credit Officer

No, you didn't miss the question. Yes, so charge-offs were a little bit higher this past quarter. We had a couple of C&I credits that we've been kind of working through, and made the decision that now is the best time to kind of charge them down given where they are. We're still working through those issues with those customers but wanted to make sure that it was kind of in the right spot moving forward. So we took some partial charges to kind of address that. The rest were pretty run-rate oriented in nature, much smaller. So not much to talk about there.

Operator, Operator

And your next question comes from the line of Christopher Marinac with Jamie Montgomery Scott.

Christopher Marinac, Analyst

I wanted to ask about risk-adjusted returns, particularly on risk-adjusted yields in the commercial book as rates fall. I mean, as you look out a couple of quarters, would you imagine it gets easier to get your longer-term risk-adjusted yields, or does it get hardest?

Chris Ziluca, Chief Credit Officer

I'll attempt that even though I'm much more credit risk-focused than that. But yes, I mean, I think what you see is oftentimes during kind of periods of turmoil that risk and returns 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 as we start to see a broader demand across C&I and CRE, I think you'll see a little bit more rationalization on risk-adjusted returns. We continue to be focused on that. I mean it's one of our key mandates here, which is making sure that we get paid for the risk. If the risk is perceived to be lower from a credit quality standpoint, then we'll accept a little bit better or lower rate on a transaction. But we won't sacrifice rate for credit quality.

Christopher Marinac, Analyst

And then just for either you or Mike, what do you say in terms of fraud from sort of small business-related deposits? And is that showing up at all in some of the sundry expense lines?

John Hairston, President and CEO

Chris, this is John. Did you say fraud?

Christopher Marinac, Analyst

Yes, fraud.

John Hairston, President and CEO

Fraud has been a challenge for both consumers and small businesses over the past few years. During the pandemic, many were distracted, and this allowed bad actors to make significant progress. However, this year, our fraud losses have been lower compared to last year and the year before. This is not due to a decrease in intensity, but rather because we invested heavily in tools and personnel to detect issues before they lead to losses. Fraud remains a pervasive problem for the industry and the economy. We must continue investing in measures to protect our clients. A significant part of our ongoing expenses is dedicated to educating our clients on implementing internal controls, which banks have utilized for years but that businesses need to adopt themselves.

Mike Achary, CFO

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 fraud expense is really down a bit.

Operator, Operator

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.

John Hairston, President and CEO

Okay. Thanks, Abby. Thanks for moderating the call. Thanks, everyone, for your interest. I know a busy release today. We look forward to seeing you on the road soon.

Operator, Operator

Ladies and gentlemen, this concludes today's call, and we thank you for your participation. You may now disconnect.