Earnings Call Transcript
HANCOCK WHITNEY CORP (HWC)
Earnings Call Transcript - HWC Q2 2024
Operator, Operator
Good day, ladies and gentlemen, and welcome to Hancock Whitney Corporation Second 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 to everyone for joining us this afternoon. We are very pleased with the results from the second quarter, which reflect solid earnings amidst our continued efforts to improve profitability, reposition our balance sheet for this macroeconomic and operating environment, and also growing capital. We hope our investors are pleased to see our first half of 2024 resulting in profitability, capital ratios, dividend and repurchase increases, earnings efficiency, and overall AQ ratios, all among the best in the mid-cap bank space. Net interest income was up this quarter, driven by lower deposit costs and improved earning asset yields in both loans and bonds. Fee income continues to grow and exceed expectations, and expenses remain well controlled. Net charge-offs were down, as was our provision for loan losses, but we still were able to grow reserves. Our balance sheet repositioning continued this quarter as loans contracted slightly, but mostly due to a purposeful decrease in SNC balances of $221 million. Our focus remains on more granular full-service relationships, and our team produced the volume necessary to nearly offset our more selective credit and mix appetite. As we expected, these more granular credits have contributed to NIM expansion and we will remain focused on loan pricing in the balance of the year. As promised, we have updated our guidance this quarter and we now expect loans to be flat to down slightly from 2023. This guidance reflects our goal of thoughtfully reducing large credit-only relationships, including SNCs, while originating more granular loans via relationship wins, all for the purpose of achieving higher loan yields and relationship revenue over time. As expected, our credit quality metrics continue to normalize, but the increase in criticized commercial and non-accrual loans was at a more modest pace this quarter, and we remain at or near 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 continue to enjoy a solid reserve of 1.43%, up slightly from the prior quarter. Our guidance with respect to the allowance and provision remains unchanged. Deposits were down in the quarter, but mostly due to a net reduction in broker CDs of $195 million. DDAs did continue to decline, but at a much more moderated pace than in recent quarters, and our DDA mix was actually consistent with the prior quarter at 36%. There was normal seasonal run-off in interest-bearing transactions in public fund accounts and we were pleased to experience growth in retail time deposits despite maturity concentrations and no significant changes in our promotional rates during the quarter. Our guidance was updated for deposits and we now expect deposits to be flat to slightly down compared to 2023. We continue to migrate away from broker deposits, which were nearly $600 million at the end of 2023. During the quarter, we were very pleased to return capital to investors with a 33% increase in our common stock dividend and we repurchased over 300,000 shares of common stock. Even after returning capital, we had strong growth in all of our capital metrics due to our solid profitability, ending the quarter with a TCE of 8.77% and a common equity Tier 1 ratio of 13% in the quarter. As I mentioned, we updated this quarter to reflect our expectations for the rest of the year. Our near-term expectation is to maintain this forward momentum of repositioning our balance sheet, improving NIM, controlling expenses and growing fee income. Our efforts to control expenses will allow us to reinvest in the company through hiring additional revenue-generating staff, which should help to inflect the balance sheet back to growth in 2025 and support profitability. Mike will cover the guidance in more detail in his commentary to come. As we look forward to celebrating our 125th year and beyond, we hope investors view HWC more as a journey accomplished with strong profitability, granular revenue sourcing, admirable earnings efficiency, solid capital and ACL reserves, a derisk loan portfolio, and now sporting a nearly 9% TCE and over 13% Tier 1 ratio. As we celebrate the beginning of our next quarter century, our efforts are on the windshield versus the rearview mirror as we work very hard to grow our balance sheet and value over the strategic planning period. With that, I'll invite Mike to add additional comments.
Mike Achary, CFO
Thanks, John, and good afternoon, everyone. Second quarter's reported net income was $115 million or $1.31 per share, up $0.07 per share and about $2.9 million higher than last quarter. PPNR at $156 million, or 1.79% of average assets, was up $3.5 million from the prior quarter. Our NIM expanded 5 basis points to 3.37% and pushed growth in NII. Fees were up nicely, and expenses were relatively flat and well controlled. As mentioned, we saw NIM expansion this quarter, with NIM of 3.37%, again up 5 basis points from last quarter. As shown on Slide 14 of the investor deck, our NIM performance was driven by higher loan and bond yields, as well as lower deposit costs. Those were partially offset by a less favorable borrowing mix. Our total cost of deposits was down 1 basis point this quarter to an even 2%. Obviously, it's significant that our total cost of deposits turned over in the second quarter after nearly two years of consecutive quarter-over-quarter increases. We saw $2.2 billion of maturing CDs reprice from around 5.01% to 4.78%, driving down the rate on our time deposit book by about 8 basis points. Also contributing to the lower cost of deposits was a 7-basis-point drop in the rate paid on public funds. Another driver here was continued stabilization in our DDA mix. The second quarter drop in DDAs was only $160 million, lowest level so far, but the mix actually increased slightly from 36.3% last quarter to 36.5% this quarter. We now believe the DDA mix could stay at or near this level through year-end. As mentioned, our loan yield was higher this quarter and was up 8 basis points to 6.24% due to our focus on more granular loans. Bond yields were also up about 4 basis points to 2.6% due to reinvesting cash flows back into our bond portfolio at higher rates. In the second quarter, we saw $166 million of principal cash flow come off the bond portfolio at 2.59% and then was reinvested at 5.23%. For the second half of 2024, we have about $411 million of cash flow coming off the bond portfolio at around 2.9% that should get reinvested in north of 5%. In reviewing our NIM guidance in the second half of 2024, we believe we can achieve modest NIM expansion for the next two quarters despite a flat rate environment and little-to-no balance sheet growth. Fee income in the second quarter was again strong and was up 2% quarter-over-quarter. We benefited from higher trust fees, as well as an increase in both bank card and ATM fees, as well as higher secondary mortgage income. Investment and annuity fees were down a bit quarter-over-quarter, but from record high levels. We now expect noninterest income for 2024 will be up between 4% and 5% from 2023's adjusted noninterest income level. Expenses for the company were up 1% this quarter, reflecting continued focus on controlling costs throughout the company. Our guidance has been updated, and we expect to grow expenses between 2% and 3%. This is inclusive of plans to hire additional bankers in the second half of 2024. The favorable change in guidance here is driven by overall lower levels of personnel expense growth despite adding additional revenue-generating staff and lower occupancy and equipment expense growth. Our PPNR guide is for PPNR levels to be down about 1% to 2% from 2023's adjusted levels. That implies modest growth in PPNR in the second half of 2024 compared to the first half. While our overall guidance now assumes zero rate cuts in 2024, we do not believe there's a significant difference between a zero rate cut scenario and one where the Fed cuts rates, say, twice this year. Lastly, a quick comment on capital. As John mentioned, our capital ratios remain remarkably strong, even after returning capital through the dividend increase and share repurchases. All things equal, we expect the share repurchases could continue at a similar pace for the rest of this calendar year. Certainly, changes in the growth dynamics of our balance sheet and share valuation could impact that view.
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 with KBW. Please go ahead.
Catherine Mealor, Analyst
Thanks. Good afternoon.
John Hairston, President and CEO
Good afternoon, Catherine.
Catherine Mealor, Analyst
Maybe my first question just on the margin. As you think about the pace of loan yield increases in the back half of the year, is the change that we saw this quarter a good pace to think about what we'll see over the next couple of quarters just assuming a flat rate environment, or do you expect some kind of a lesser increase in loan yields as we get to the back half of the year?
Mike Achary, CFO
Hey, Catherine, this is Mike. I'll start off and John can certainly add color. But in terms of the NIM expansion that we're expecting in the second half of the year, we kind of describe it as modest, and I think that means potentially a couple of basis points in each the third and fourth quarter. And certainly one of the drivers that will push our NIM a little bit higher in the second half is higher loan yields. Certainly, that comes from a continued repricing of our fixed-rate loan portfolio as we've talked about before, but then also I think from some incremental improvements in our variable loans going forward as well. We had a little bit of a favorable mix change this past quarter that was very helpful. And assuming that kind of continues, yeah, I would expect to see a couple of basis points improvement in our loan yield, again, in each of the next couple of quarters.
Catherine Mealor, Analyst
Okay, great. And then, I was surprised to see the expense guidance come down, so improved, because I know you've been talking a lot about hiring in the back half of the year. I know you mentioned that there's some offsets in personnel and occupancy that's perhaps paying for that. But if you could just kind of walk us through some of the things that you're doing to create those savings? And then, is it also fair to assume that maybe the growth rate picks up more in 2025 as maybe we get kind of the full impact of hires in the back half of the year?
Mike Achary, CFO
Yeah, Catherine, this is Mike again. I'll get started. And to kind of answer your last question first, yeah, I think as we look at '25, you'll certainly see the annualized impact in '25 of the hires that we make, let's say, in the second half of this year, as well as any new hiring we continue to make in '25. So, I do think that we'll have, all things equal, a little bit higher level of expense growth in '25 compared to '24. Now, related to '24, one of the things I think our company is known for, and this is kind of embedded in our culture, is good cost controls and really being mindful of how we spend money. And I think that what we're doing here is really something that just kind of embodies that. So, our pledge is that we will continue to find ways by controlling costs in the current cost base to be able to pay for new initiatives, including new hires going forward. Lots of things going on that kind of make that happen. We've talked about strategic procurement really being institutionalized in our company. And I think as each quarter goes by, we continue to get benefits from those programs. But then, we also have done some things here and there with looking at outsourcing that I think has been incrementally useful and that's something that certainly could pick up as we go forward. So, those are the things that I would use as examples. But again, the pledge is to really kind of pay for those new hires by creating room inside of our existing expense base. So, John, anything you want to add to that?
John Hairston, President and CEO
No. That's good.
Catherine Mealor, Analyst
Okay. That's great. Thank you.
John Hairston, President and CEO
You bet. Thank you, Catherine.
Michael Rose, Analyst
Hey, good afternoon, everyone. Thanks for taking my questions. Just wanted to start on the SNC reduction. I know that's been one of the things you guys have been working on. Can you just remind us what the target is by the end of the year, over the next couple of years? Where you'd ideally like to get to? And I assume that a lot of these loans or at least the ones that you're going to let run-off or move away from you are lower yielding and you're replacing them with smaller higher-yielding loans. So, if you can just discuss kind of the interplay on how that should play out in the loan yield? Because it would seem to me that that would be a positive benefit as we move forward. You could actually see sustained higher loan yields versus many of your peers given that dynamic even if rates begin to come down. Thanks.
John Hairston, President and CEO
Yes, Michael, this is John. I'll begin, and then Mike and Chris can provide additional insights if they wish. You've addressed the question well. The aim is to redeploy assets, assuming demand exists, into higher-yielding opportunities and also into some self-sustaining liquidity alongside fee opportunities that arise from smaller full-service relationships. Regarding our performance for the remainder of the year, we made significant strides in the second quarter. Typically, there’s a lot of maturity activity in Q2 annually, so this performance was somewhat exceptional. I was particularly pleased with the effort and commitment demonstrated by our core bankers across multiple business lines, managing to replace nearly all of it in just one quarter. Looking ahead to the second half of the year, we expect results to be more modest, estimating around $100 million in additional reductions of outstanding SNC balances based on our current knowledge. As for 2025, without delving too deeply into guidance for that year, I would anticipate a runoff similar to what we expect for the entirety of 2024. This would bring us to roughly 9% of SNC outstanding balances as a percentage of total loans, aligning with those who publish peer norms. From that point onward, we'll adjust as necessary. Our primary goal is to eliminate any perceptions that could negatively impact valuation. We are focused on enhancing valuation for investors now that profitability is in a solid position, with no specific concerns regarding any part of the SNC book; it's merely about managing perceptions effectively. Honestly, we excel in many other areas and should not rely on SNCs for loan growth as we may have in the past couple of years when liquidity was abundant. Is there anything else on this topic you would like to discuss?
Michael Rose, Analyst
I was just going to ask if 9% is the target you aim for. I believe you mentioned that's about where your peers are. Could we see that percentage decrease over time in the intermediate to long term?
John Hairston, President and CEO
Well, not to focus too much on it, but generally we would like to be in the range of what our peers are both published and unpublished. At this point in time, that's around 9%. If that were to go lower, then we'd go lower. If it goes higher, we'll probably stay about where we are, because we think we can generate other types of activity to cover.
Michael Rose, Analyst
Okay. Understood. Perfect. And then maybe just as my follow-up, certainly understand the near-term color on share repurchases, but you guys do have pretty robust capital at this point. I know a lot of people are talking about M&A across the industry. If you can just kind of frame up what you guys would potentially be looking for? Because it sounds like now you guys are on your front foot after doing a lot of work over the past couple of years to get where you are and to get the profitability efficiency where it is. What's the next step for Hancock? Does M&A play a part in that? And what would you look for ideally? Thanks.
Mike Achary, CFO
Yeah, Michael, I'll get started. And thanks for the question. And yeah, there's certainly been a lot of fantastic work over the past couple of years in terms of derisking the loan portfolio, building reserves, building capital, and then pretty dramatically improving profitability both from an ROA and then an efficiency ratio standpoint. So, the last couple of quarters have been about thinking about ways to proactively manage capital. And so, we had the increase in the common dividend this past quarter and then again the resumption of buybacks. And I think I said in the opening comments that kind of going forward, we would expect to, all things equal, kind of continue the buybacks more or less at the current levels. And the things that could change that view would be a change in the dynamics related to the growth of our balance sheet and then certainly the dynamics related to our valuation either higher or lower. So, certainly, the stock has enjoyed a pretty nice couple of days as many other banks have as well. And that doesn't change, I think, the way we think about the buybacks. I think we'll still look at engaging in buybacks at more or less the same levels. And having said that, that's something that gets evaluated really kind of on a weekly basis as we go through the quarter. A little bit longer-term in terms of the M&A question. M&A is obviously something that we have not been focused on the last couple of years. It's really been on the things that I mentioned a couple of minutes ago and that doesn't change today. Although we certainly pay very close attention to the things that are going on in the market. We listen to the conversations, we talk to people, we get to know people, all the things that I think you would expect the company of our size and magnitude to do. In terms of actually participating in M&A, I mean, that's probably something a little bit further down the road. I think we'd like a little bit better valuation. And certainly, I think everyone in the industry would like a little bit better clarity in terms of the regulatory oversight and what the approval process actually is. Maybe there'll be some clarity later this year related to that, we'll see. But when the time comes, we certainly won't shy away from considering growing our company strategically through M&A, whether that's transactions that would add scale to the balance sheet and give us an opportunity to take out costs, or other transactions that give us an opportunity to be a little bit more strategic and introduce new markets. So, that's kind of how we think about that.
Michael Rose, Analyst
Great. Thanks for taking my questions.
John Hairston, President and CEO
Okay. Thanks, Michael.
Operator, Operator
Your next question comes from the line of Casey Haire with Jefferies. Please go ahead.
Casey Haire, Analyst
Thanks, good afternoon, everyone. I wanted to follow up on Mike's question regarding mergers and acquisitions. Would you say that there are a lot of discussions happening right now? Additionally, is there a specific asset level that would be ideal for you in pursuing M&A given the $35 billion context?
Mike Achary, CFO
Sure, Casey. So, the way I would answer that question is, certainly a lot of visits from investment bankers with books and ideas. So that's probably picked up. Fair to say that that's picked up in the last couple of quarters. But in terms of our involvement, I mean, again, as I mentioned, we're doing the things that you would think a company like ourselves would do and that is just getting to know people and paying attention to the things that are going on kind of around us. In terms of sizing any kind of opportunities, I think that's really premature and really kind of don't want to go there right now in terms of indicating any kind of size. What I did kind of comment on was transactions that would add scale to the balance sheet and then other transactions that would give us an opportunity to expand strategically, but there's nothing in mind specifically related to either of those options right now. I think that if and when we engage in M&A, it's probably a little bit further down the road, let's say.
Casey Haire, Analyst
Is there a certain level of capital that would lead you to consider being more aggressive with buybacks? Looking at Slide 19, a year ago you were 140 basis points lower. If we maintain that momentum, we could exceed a certain valuation soon. I'm trying to understand what would influence changes in the buyback strategy given the impressive capital build.
Mike Achary, CFO
Yeah, look, it's a great problem to have and we don't shy away at all from our ability to grow capital. We're proud of it and we think it's something that certainly is a hallmark of our franchise and our ability to grow our company. So, the guidance that I gave really was for the next couple of quarters in terms of continuing the buybacks at kind of the current levels, but look, that's something we'll evaluate as we go through the next couple of quarters and certainly don't want to commit to anything right now that would be premature.
John Hairston, President and CEO
This is John. I'll add to that. Obviously, the best purpose of using capital is to capitalize a faster-growing balance sheet than we have right now. The macro hasn't been friendly to provide that. And so, the reason we began talking a couple of quarters ago about trotting more offensive players on the field was because we expected that macro environment was going to be the case. So, at this moment in time, our focus is really more deploying our revenue generators in the field, supporting them with maybe a bigger marketing spend, adding players and potentially offices and markets that we believe the leadership is already in place and ready to move and start adding accounts on a net basis at a faster clip. So, that's really, I guess, where I'd say our heart and minds are. All the other options that you mentioned before in the questions are all fair, but they're really maybe call them Part B or C behind inflecting the balance sheet to more northward growth if that makes sense. So, we pay attention to capital levels. Certainly, view all those options as possibilities discussed and dutifully with our Board members and the priorities are exactly we put in the deck. I hope that's helpful.
Casey Haire, Analyst
It is. Thanks, guys.
John Hairston, President and CEO
You bet, Casey. Thank you.
Brandon King, Analyst
Hey, good evening.
John Hairston, President and CEO
Good evening.
Brandon King, Analyst
So, in the prepared remarks, you mentioned keeping the DDA mix particularly stable through year-end. So, could you just talk about what gives you confidence in that projection if there's any sensitivity to Fed funds?
Mike Achary, CFO
Yeah. Thanks, Brandon. I'll get started with that one and certainly John can add some color. But really what gives us confidence is I think what we've been able to accomplish thus far this year and that's this notion of stabilization of that mix. So, in our deck, those are rounded numbers and the mix both for last quarter and this quarter, we advertised at 36%. But actually, those numbers round to 36%. We actually had a little bit of an increase quarter-over-quarter in terms of that mix. So, the guidance that we're giving for the end of the year is kind of this notion of 35% to 36%, and we're as confident as we can be that we'll be able to hit those marks at 12/31 of '24. So, I think to answer your question, the thing that gives us confidence is the stability that we've actually witnessed, as well as talking to customers and really kind of ascertaining that the worst of that remix is certainly behind us, I think.
Brandon King, Analyst
Okay. And any sensitivity to the rate outlook, does that play any factor?
Mike Achary, CFO
No, I don't think so. I mean, our outlook right now has been conservatively reduced to the zero rate hikes. Maybe we'll get to what we'll see at this point. We're not betting on that. And should we get a couple of rate cuts later this year, then that I think would help add to that stability, but with zero, I don't think our outlook changes.
Brandon King, Analyst
Okay. And then, just wanted to touch on the increase in commercial criticized. I recognize it's normalizing. Could you just characterize what you're seeing? And then, also, if you're actually seeing any credits move out of that criticized bucket?
Chris Ziluca, Chief Credit Officer
Hi, Brandon, it's Chris Ziluca. Thanks for your question. What I would say is, is that we're seeing a point where we're seeing a lot less in the way of downgrade activity, which is I think what you're seeing in the way of kind of the slower inflow this quarter from prior quarters. Not to say that I can anticipate that that's going to continue to slow down, but I do believe that our downgrade activity has diminished quite a bit. We did see some upgrades in the quarter, not that many as you can imagine. When you downgrade a credit into special mention or substandard, it has to season and perform for several quarters. And we were operating at such a low level that the inflows that we've seen over the past two or three quarters need to season and resolve themselves before we can justify upgrading them or seeing them refinance away from us. And then finally, what I'll say is that we're really not seeing any sort of connectivity between any of the activity in our criticized loan portfolio. There really isn't any single geography or sector. And I know that's easy to say, but it really is true. I spent a lot of time trying to figure out if there's anything specific in there that would draw my attention to the broader portfolio that those come from, and I don't really see anything specifically.
Brandon King, Analyst
All right. Thanks for taking my questions.
John Hairston, President and CEO
You bet.
Ben Gerlinger, Analyst
Hi. Good afternoon.
John Hairston, President and CEO
Hi, Ben.
Ben Gerlinger, Analyst
I noticed on your website that you have a five-month CD offering at 5%. If I remember correctly, this is slightly lower than the promotions you had earlier this year. I'm curious about the cost of deposits; while the mix is part of the equation, you've seen a decrease in costs compared to the previous quarter, which is a positive sign. If the mix of noninterest-bearing deposits remains relatively stable, is the majority of the yield affecting the margin, or do you believe there is potential to improve the right side of the balance sheet?
Mike Achary, CFO
Yeah. This is Mike. So, in terms of our promotional CDs, you're right, our best rate or highest rate out there is the 5% for either a three- or five-month maturity. We also have an eight-month and an 11-month at 4.25%. So, we have reduced that latter rate by 50 basis points, but the 5% has been there for a couple of months now. Now, if you go back to the end of last year, we were at 5.40% for an eight-month duration. So, as we've talked about before, we've kind of brought in the duration and been able to kind of reduce the promotional rate. So going forward, certainly our ability to reprice maturing CDs in the second half of the year is certainly a driver of our ability to continue increasing our NIM, but the other things that contribute to that is our ability to reprice our bond book. We kind of talked about that. We have the better part of $411 million of bonds maturing or cash flow coming back to us in the second half of the year at a little bit under 3% and we'll redeploy that money obviously at 5% or better, but then also repricing our fixed rate loans as we've kind of talked about in the past. So, the things that will drive our NIM expansion in the second half of the year are really the same things that have been driving our expansion certainly in the second quarter and, to a large degree, the first quarter as well. So hopefully that helped answer your question.
Ben Gerlinger, Analyst
Yeah, absolutely. That's helpful. So, mainly left-hand side, but a little bit of stability on the right-hand side of the balance sheet also helps.
John Hairston, President and CEO
Yeah, absolutely.
Ben Gerlinger, Analyst
So, when you think about the capital, I know we've kind of beat this horse to death a little bit here, but above 13, I know you've talked about potential growth in certain areas via revenue producers and then you also said lenders. All those terms are often interchangeable. And previously, I remember you guys talked about Texas as an area, an avenue for lending growth. I was curious, if hires today would probably help 2025, all else equal, but can we see a ramping pace of hires this year that would help next year, or is this kind of more just 10,000-foot view continue to hire across the board and not really trying to set up a better year? Just trying to get a sense of hires and what you kind of mean by that by revenue production?
John Hairston, President and CEO
So, this is John. I'll start. And if I meander around the answer, you feel welcome to redirect me a bit. In terms of hiring, the target types of bankers we're looking for are seasoned individuals and what we refer to as the commercial banking and the business banking space. That's going to be generally speaking, call it, $30 million, $40 million annual revenues and down, which tend to almost self-fund in the overall relationship. And we've demonstrated a good bit of skill and success in developing fee services from that same type of client over time. So, the bankers we would add would be generally in that space. We would also add wealth advisors given the really impressive success I think we've had the last couple of years. That may be directed to both small businesses and retail across our financial centers and across the footprint. So, it's a bit of a mixed bag, Ben, in terms of geography because where we have market share, we'll have a better success of wealth advisors because there's a book to play takeaway ball from other individuals who may have the asset management fee income while we have the core banking, we really want it all. So, we may see more wealth advisors in the markets where we already have a pretty big slice of the pie. We may see more bankers in those growth markets where it's a bigger pie and we have a small slice. In terms of office adds, that would be in those bookend markets as well. So, you're correct that the impact of adding bankers is more of a '25 balance sheet line item. And the expectation would be that we begin seeing the print of a new banker make itself known within 12 months. And under a flywheel concept, we begin to see substantial profitability between 18 and 24 months depending on the segment they're operating in, the market they're in and their experience level. So, it's really all about '25 and '26. We're talking about adding bankers. The wealth advisors, on the other hand, tend to make a difference pretty quickly if they're familiar with those markets. Did I answer where you were headed there? Did you need to maybe ask a more detail question?
Ben Gerlinger, Analyst
No. That was great. I'm going to sneak one more in. If you guys think about the share repurchase, I know you've covered it a bit, is it valuation-driven or is it opportunity relative to growth? And if you think valuation, is it relative to peer or your historical past? Just kind of thinking about the drivers of pressing the buy button here.
Mike Achary, CFO
I believe that the current capital levels we have, along with our capacity to grow that capital, play a significant role. Additionally, it's a question of valuation. We assess price to tangible book value and our price-to-earnings ratio, comparing our valuation to the mid-cap peer group. There is definitely potential for our valuation to increase, and one way to demonstrate our confidence in the company is through share repurchases. There's also an opportunistic element to consider. So, it's a combination of all the factors I've mentioned that influences our decision.
John Hairston, President and CEO
Ben, this is John. The only thing I'll add to Mike's great comments were, we tend to look at the combination of dividends and repurchases as return of capital to investors. And when we compare ourselves to mid-cap peers, some are lighter or heavier in dividends, some are lighter and heavier in repurchases, but we generally want to be at the capital levels we're at right now and the balance sheet not growing quite as quickly as we'd like it to, assure that we're competing, I think, for investor interest at a similar level of returning capital. So, it may be more of an art than a science, but all of those things Mike mentioned what I had, are kind of the way we look at it right now.
Ben Gerlinger, Analyst
Got it. That's helpful color. Appreciate the time, guys.
John Hairston, President and CEO
You bet. Thanks for the questions.
Brett Rabatin, Analyst
Hey, good afternoon, everyone. Wanted to ask a question on the fee income guidance for the back half of the year. If I think about the high end of the guidance, that would basically be kind of flattish from the second quarter, but if you look at the trend of the past year, you had decent growth, particularly in the back half of '23. Can we go back to the fee income guide and just maybe is there anything that might be restraining fee income or any line items that might be softer in the back half?
John Hairston, President and CEO
Sure, I'll address that. The rate environment and portfolio performance are crucial for our wealth-related fee income. It's challenging to predict the exact outcome, particularly after experiencing four or five consecutive quarters of record annuity and overall wealth income. We're cautious about forecasting continuous quarter-over-quarter increases at such a remarkable rate, so we've slightly moderated our growth expectations rather than the fee income itself. Regarding secondary mortgage fees, with about 95% of total deals going to the secondary market, we've seen a significant rise in this category in the first quarter, followed by a modest but noticeable increase in the second quarter. Depending on the rate environment in the latter half of the year, this area may exceed our initial estimates. We aim to be conservative in our guidance, assuming a flat rate environment, which would influence secondary fee income. If rates decline, our projections for the mortgage sector might fall short. On the other hand, card services continue to perform well, and deposit service charges have remained stable, which we expect to continue for the rest of the year. The only category consistently setting records each quarter is SBA, and we anticipate that the third quarter will be even stronger. Overall, it's a combination of stable fee income sources and others that are growing, but we want to avoid being overly optimistic about the robust performance in the first half of the year. Continued market conditions will be necessary to maintain that level of growth. Did I address your question?
Brett Rabatin, Analyst
That was a great response, John, thank you. I wanted to ask about the loan book growth, which you would have seen if it weren't for the reduction in the Shared National Credit portfolio. I'm curious about any changes in loan demand you've noticed over the past quarter. It seems like, particularly in Gulf South, demand might be softening a bit. Could you provide an update on demand and what customers are anticipating for the second half of the year?
John Hairston, President and CEO
Sure, Brett. This is John. I'll start over and others can add their insights if they want. I wouldn't say the tone has changed significantly since our last visit at Gulf South. What I can share is that we're currently experiencing mixed signals. Referring to the second quarter, we’ve already mentioned the SNC run-off, which wasn't a reflection of demand but rather our more selective screening approach aimed at achieving our earlier stated goals. Generally speaking, our commercial real estate (CRE) portfolio had its best production in the second quarter over the last six quarters. In today’s market, when I speak of CRE, aside from owner-occupied properties, I'm primarily referring to multifamily developments, with some industrial and a smaller portion of retail included, but not much in the office sector at this time. We had a strong CRE quarter, and the team performed exceptionally well. The outlook and pipeline for CRE also look positive for the second half of the year. That said, we are seeing competitors who have been hesitant due to their higher CRE concentrations beginning to re-engage, which may pressure deal prices. We need to ensure that we are comfortable with the yields necessary for our business to make sense, rather than pursuing other types of lending. CRE had a good quarter, and equipment finance performed very well as well, with a promising pipeline. The challenges we face mainly stem from the SNC issue, as consumer and home equity lines remain low in both pipeline and production. Although production isn't bad, we need to secure a considerable number of new deals just to maintain our position due to amortization levels each quarter. The prolonged high-rate environment has not been favorable for growth in the consumer-purpose portfolio. Overall, there's not a significant geographical difference; our entire footprint is performing well. Given the lackluster demand, I am proud of our team for achieving so much in Q2 to offset the previous SNC run-off. Hopefully, in the latter half of the year, the positive indicators I mentioned earlier in some of these categories will materialize, and our guidance might prove to be somewhat conservative. But at this moment, we're expecting flat performance towards the end of the year, maybe slightly down, depending on the rate of payoffs and whether sentiment improves as political and other developments unfold in the latter half of the year.
Brett Rabatin, Analyst
Okay. Great. That was very helpful. Thanks so much, John.
John Hairston, President and CEO
Okay. You bet, Brett. Thanks for good questions.
Stephen Scouten, Analyst
Hey. Thanks, guys. Good afternoon. I guess, on the criticism, one thing I thought was interesting was just a comment about line utilization ticking up a little bit. Do you think we could see a longer-term trend there? Accessibility to overall credit is maybe less in this environment? How do you think about that line utilization dynamic moving forward?
John Hairston, President and CEO
That's an excellent question. We discuss it internally quite often. You would expect that given the current situation on the consumer side, as obtaining cards has become significantly harder, we aren't heavily involved in card banking, so it's not a major focus for us. However, institutions with a larger card base have indeed observed tighter credit, but this hasn't resulted in increased utilization. We see that consumers' willingness to make significant purchases, typically financed with lines of credit such as home equity loans, is currently balanced with their ability to manage payments at their existing levels. Therefore, we're not witnessing a notable increase in consumer utilization. On the small business front, lines of credit have started to show some improvement likely due to expectations of a busier second half of 2024. Additionally, concerning commercial lines, especially construction and development, the impact on our C&D business from mortgages transitioning from C&D to mortgage has decreased significantly in the latter half of this year. As this impact wanes, we may see growth in this category. New deals in the C&D pipeline begin with zero utilization and gradually increase. As the number of deals in C&D rises, the reported line utilization decreases due to the nature of how reporting works. Once these deals mature and transition to permanent financing, utilization rises again until they are paid down, with the permanent financing often moving to different providers. In summary, we expect a slight increase in line utilization over time, but it won't fluctuate sharply based on any specific news.
Stephen Scouten, Analyst
Okay. Makes sense. And then, one other thing I found interesting, kind of these new fixed-rate loan yields that you guys disclosed on Slide 15 have obviously trended down the last couple of quarters. And it looks like maybe you've done a slightly higher percentage of fixed-rate loans as a percentage of overall production. So, I guess, I'm wondering is that intentional to some degree to try to book a little bit more in fixed-rate loans as we presumably move towards rate cuts here in the back half of the year or '25, or is that just more a dynamic of demand and just kind of happenstance?
John Hairston, President and CEO
I believe the change in our bookings for the quarter is due to the competitive landscape of fixed-rate lending, which has intensified as competitors who previously overlooked this segment are now engaging more actively. The quality of the credits we are targeting is quite competitive; while it may not be as competitive in the lower quality segment, there is significant competition at the higher quality level.
Stephen Scouten, Analyst
Makes sense. Okay. And then just last thing for me, as you think about the ability to bring in new hires, I mean, that's something we're hearing from a lot of banks these days in terms of that that's how they want to grow if they can. It seems like there would be a lot of demand for good people. What is it that you think kind of gives you the ability to bring those people on? And maybe do you think you're kind of in that sweet spot from an asset size perspective that lenders want to be a part of, or is it just your stability and ability to grow in this environment, or can you give any color to what you think will drive your ability to bring those people on versus your other peers?
John Hairston, President and CEO
That's a great question. When I speak with candidates, I highlight that our company is stable and profitable, which provides a strong foundation for growth. We have significant capital to invest and have made efforts to enhance our efficiency, allowing us to recruit talented individuals, expand our offices, and allocate more marketing funds over time. This attractiveness is complemented by the strong collaboration between our credit team and banking team, which fosters a constructive environment. Although they may not agree on every credit decision, they work together well, and we clearly communicate what we are looking to pursue or avoid in various market segments. Additionally, we are transparent with our team about the company's direction and investment strategy for the near future, making things relatively predictable. The necessary restructuring to cut costs and optimize office space has already been largely completed, leading to a clearer path forward for prospective employees, especially those coming from organizations facing more unpredictability. As I mentioned earlier, we focus on the future rather than dwelling on past challenges, reflecting our proactive approach.
Stephen Scouten, Analyst
Yeah. Okay. Those are great insights. Appreciate all the color, and thanks for the time.
John Hairston, President and CEO
You bet. Thanks for the question.
Gary Tenner, Analyst
Thanks. Good afternoon, guys. Two questions. First, on the CD side, Mike, can you update us the amount of CDs maturing in the third quarter, fourth quarter along with the prevailing rates on this?
Mike Achary, CFO
Sure. So, in the third quarter, we have about $2.3 billion of CDs maturing. Those are coming off at a little bit over 5%. And we think that those will reprice somewhere in the 4.65% or so range. So that's a favorable repricing dynamic of about 39 basis points. And in the fourth quarter, the level of maturing CDs dips a little bit, goes down to about $1.9 billion. Those are coming off at 4.83%. And again, we think those will go back on at somewhere around 4.70% to 4.75%. So, those are the dynamics in the second half of the year. And in the second quarter, we had $2.2 million maturing. Those came off at 5%, went back on at about 4.78%. So, certainly an opportunity for us to reprice those maturing CDs a bit lower going forward. The assumptions that I gave you around the rate that we think those CDs will go back on assume zero rate cuts in the second half of the year. Certainly, if we get a rate cut or two, that improves the dynamics related to those numbers being a little bit more favorable.
Gary Tenner, Analyst
I appreciate it. John, you've previously mentioned that the outlook for loan growth has shifted from being driven by lower rates to taking more proactive measures. Given the recent decline in your loan growth outlook for the full year, should we interpret that as a reflection of the timing or pace of hiring that has been achieved, or the hiring pipeline, or is it primarily related to overall demand?
John Hairston, President and CEO
It's really more a flip to all of our guidance being tied to a flat rate environment. Gary, if you remember, we had expected to have a few more rate cuts in the back half of the year than we now expect. And to make things very simple, we're trying to give all of our guidance, I mean, all of our guidance around fee income growth, expense load and everything else to a flat rate environment. To the extent that rates come down a bit, then that obviously gives us a little better shot in terms of growing the balance sheet more than we anticipate at the moment.
Gary Tenner, Analyst
Okay, great. I appreciate that, John. And actually, Mike, if I go back to the CD question one more time, why do you believe that the maturing CDs will reprice higher in the fourth quarter compared to your assumptions for third quarter repricing? What is the dynamic there?
Mike Achary, CFO
The dynamic of the maturing buckets, so it's just a little bit different mix in the fourth quarter in terms of where they're coming off and then the potential to reprice. So, it's a 5 or 6 basis point difference. So it's not significant, but the driver would be the mix of the maturing buckets.
Gary Tenner, Analyst
Okay. Thanks very much.
John Hairston, President and CEO
You bet.
Matt Olney, Analyst
Hey, guys. Thanks for all the good commentary this afternoon. Just want to go back to the funding strategy that we saw in the second quarter and the outlook in the back half of the year. Mike, I think you mentioned that the bank leaned heavier on the borrowings in the second quarter. Just any more color on kind of what drove that, and then, I guess, thoughts on the borrowings in the back half of the year?
Mike Achary, CFO
Well, I think the driver in the second quarter that resulted in a little bit heavy load of borrowings really related to the maturing brokered CDs. So, we offloaded half of what was on the books at that time at the end of the quarter. We're down to about $200 million. But then, I think, also one of the things that drove that little bit higher level of borrowings was probably a little bit heavier tax outflows that impacted DDAs and to a little bit lesser degree interest-bearing transaction, and then also probably a little bit heavier outflow of public fund CDs. So, we view most of those things is really kind of seasonal impacts that impacted the second quarter that should kind of right-size themselves as we go through the balance of the year.
Matt Olney, Analyst
Okay. Appreciate that. And then, in the absence of loan growth and potential loan balance contraction, any appetite to grow the securities portfolio in the back half of the year?
Mike Achary, CFO
Not at this point. The intention regarding the bond portfolio is to maintain it at current levels, but as we progress through the year, if loan growth differs from our expectations and deposit growth improves, we will assess what to do with any excess funds we may have at that time. The prevailing interest rates will also influence this decision, particularly regarding the potential earnings from the Federal Reserve compared to what we might achieve by investing in the bond portfolio.
John Hairston, President and CEO
Matt, this is John. The only thing I'll add to that is just one interesting dynamic is the mortgage portfolio, we expect to flip into contraction in Q3. That's about a $40 million a month amortization level coming off today at 3.77%. So, certainly, wherever that goes is beneficial not only to income but to NIM. And so, if we don't see any growth at all in loans, then you hate to just let it sit overnight at the Fed, but frankly the improvement over 3.77% isn't bad there either, right? So, that may play into what happens with the bond portfolio modestly, but right now the intent is to keep it the same.
Matt Olney, Analyst
Okay. Thanks for the color.
John Hairston, President and CEO
You bet. Thank you for the question.
Christopher Marinac, Analyst
Hey, thanks. Good evening. Just a quick credit question for Chris. Can you tell us a little bit about how criticized loans get upgraded? If you see any of that pending the next couple of quarters? And just kind of want to review the process as time passes.
Chris Ziluca, Chief Credit Officer
Yeah, it's a good question. Obviously, there are many different ways that we try to manage that segment of the portfolio. One is if we don't see long-term prospects of any sort of improvement, we'll certainly encourage the customer to seek alternate financing, oftentimes with non-bank lenders, things like that. Outside of that, typically what we're doing is we're staying close to the customer, we're understanding their issues. There is obviously a close relationship in many instances between the relationship manager and the client. And we kind of understand what their issues are. And as the company shows resolution of whatever issue it was that resulted in them going into a criticized category, we typically will either wait for the financials to support a change, if it's a financial issue, or if it's an event issue to ensure that the event has been resolved or is no longer of a significant enough nature to keep it in that criticized loan category.
Christopher Marinac, Analyst
Okay, great. That's helpful.
John Hairston, President and CEO
Chris, this is John. In case you're considering the timing, Chris mentioned earlier that you would like to see two or three quarters of improvement after the original issue that caused the downgrade. You would prefer to wait a couple of quarters to ensure the issue is resolved before considering an upgrade. Once a situation falls into that category, it tends to remain there for a couple of quarters, even if it is addressed quickly. For example, if a client became financially strained during the pandemic and accumulated expenses that outpaced their revenue, and then we enter a higher interest rate environment, they may need time to reduce their expenses. If they had a covenant breach, they would need to resolve that issue, and after a few quarters, we would feel justified in assuming that the problem has been addressed. These issues do persist for a while, but we make a concerted effort to monitor them and provide assistance to help clients improve their situations, whether with us or elsewhere. I hope that clarifies what you were looking for.
Christopher Marinac, Analyst
No, that's great. Thank you both for that. And just a quick follow-up. Just as you allocate reserves, do you see the need to put any more allocations towards commercial real estate or just related to some of the maturities that may be coming future quarters?
Chris Ziluca, Chief Credit Officer
Yeah. So, I'll take a quick run at it and then if Mike wants to enhance whatever I say, happy for him to do so. We do segment our portfolio based on both a little bit of geography and also on portfolio. And so, we do allocate more towards commercial real estate in this current environment. And it's expected that we would do so. When you get down to kind of sub-portfolios, we tend to not allocate down further than that, although there are certain influencing factors within those sub-portfolios that may influence us increasing or decreasing the reserve related to that sub-portfolio. So, we do, at this point in time, have a higher reserve level relative to our commercial real estate book than we did in the past, for instance. And that's obviously in recognition of kind of the current environment and the forward view. That said, I would say, we are fortunate that our commercial real estate portfolio is holding up nicely. And we don't really feel like there's a need to increase our reserve on commercial real estate for any known issues.
John Hairston, President and CEO
Nothing to add. Thanks, Chris.
Christopher Marinac, Analyst
Perfect. Thank you all. I appreciate the information.
Operator, Operator
That concludes our question-and-answer session. And I will now turn the call over to John Hairston for closing remarks.
John Hairston, President and CEO
Thank you, Krista, for moderating the call. And thanks, everyone, for your interest in the bank. Have a terrific evening after a really terrific trading day.
Operator, Operator
This concludes today's conference call. Thank you for your participation, and you may now disconnect.