Earnings Call Transcript - HWC Q3 2023

Operator, Operator

Good day, ladies and gentlemen, and welcome to Hancock Whitney Corporation's Third Quarter 2023 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. Please go ahead.

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

Thanks everyone for joining us this afternoon. Third quarter's results reflect continued growth in capital ratios, fully funding loan growth with core deposit growth, a slowing remix of DDAs, and early but welcome signs of NIM stabilization due to higher loan yields and lower growth in deposit costs. As anticipated, loan growth again moderated this quarter. Total loans were up $194 million, driven mostly by project draws in both multifamily real estate and mortgage. As noted on slide seven, the net growth in both CRE and mortgage relates primarily to migration of in-process construction projects as they are completed. Demand has continued to slow as higher rates and insurance costs have changed client behavior. Today we are seeing both commercial and consumers either choose to forgo large purchases or use existing funds in lieu of borrowing. Our own internal appetite also continues to moderate as we remain focused on full-service relationships, disciplined pricing, and selective appetite in some sectors. Our path to loan growth will be determined by our ability to fund growth with core deposits and lending within our risk appetite. The credit quality of our loan portfolio remains solid and we continue to be well reserved. Criticized, commercial and non-accrual loans remain at low levels, and in fact, criticized ratios are again at a historical low. Despite the one large idiosyncratic charge-off disclosed during the quarter, we have seen no significant or systemic weakening in any sector of the portfolio. That said, we are mindful of the impact of higher for longer rates, inflationary cost and the regulatory environment, thus are proactive in monitoring for any developing risk. Core client deposits grew this quarter and we continue to maintain our diversified deposit base. Total deposits were up $277 million, with the remix continuing from DDA to time deposits and other interest-bearing deposit products. The DDA remix did, however, show signs of slowing this quarter, and we ended the quarter with 38% of our deposits in DDAs at the top end of the range contemplated in the mid-quarter update. Promotional CD and interest-bearing money market pricing contributed to the remix this quarter. Our clients do remain rate sensitive and we don't expect that will significantly moderate until rates stabilize or start to decline. When looking at our balance sheet our guidance for both loans and deposits is unchanged and we see the trends from Q3 continuing through year end. A quick note on capital, our TCE was down this quarter to 7.34%, due to impacts of higher long-term rates on AOCI. However, we are pleased to report that our Tier 1 ratio ended the quarter above 10% and our CET1 ratio was above 12%. As a reminder, we have no preferred stock shares in our capital stack. As we reflect on the year so far and look into the fourth quarter, we believe our strong deposit base will continue to help support our funding needs. We maintain a robust ACL and continue to build capital, which we believe will help us manage successfully through this cycle. October marks Founders Month, and we look forward to continuing our legacy of commitment and service to the people and communities we operate in, as we have for over 124 years. Before turning the call over to Mike, I would also like to take a moment to honor the life of George Schloegel, who joined the organization in the mailroom as a high school student, ultimately rising to Chairman and Chief Executive Officer during his long 52-year career. George passed away unexpectedly and peacefully on October the 6th, only weeks after giving interviews to various trade organizations on the history and future of banking. George was a young and particularly vigorous 83 in his passing, and we will dearly miss our longtime friend and colleague. With that, I'll invite Mike to add additional comments.

Mike Achary, CFO

Thanks, John. Good afternoon, everyone. Third quarter's net income was $98 million, or $1.12 per share, that was down $20 million, or $0.23 per share from last quarter and was primarily related to the previously disclosed charge-off of $29.7 million. PPNR for the quarter was $153 million, down just $5 million from last quarter's level of $158 million. In part due to a significant slowdown in our NIM compression, the rate of decline in our NII also slowed, while a modest increase in fees were nearly offset by a similar increase in expenses. As mentioned, our NIM compression did slow this quarter to 3 basis points from 25 basis points last quarter and was better than our previous guide of 5 basis points to 8 basis points of compression. The quarter's improved NIM performance was driven by a leveling off of deposit cost, a slowing DDA remix, less reliance on wholesale borrowings, and better loan yields. Our cost of deposits increased 34 basis points in the third quarter, compared to an increase of 49 basis points in the second quarter. Slide 13 provides additional monthly trend detail for the cost of deposits, reflecting the slowdown in each month of the quarter. We expect deposit costs could be up around 18 basis points or so in the fourth quarter and would bring the second-half of the year's increase to around 52 basis points, compared to 90 basis points in the first-half of 2023. Our total deposit beta for the third quarter increased to 127% or about 33% cycle to-date. We expect the cumulative level will approach 35% by year-end. How much higher the deposit beta goes from there will, of course, depend on the direction of deposit rates next year. On the asset side of the balance sheet, our loan yield improved to 6.01% this quarter. That was up 20 basis points linked quarter. The coupon rate on new loans increased to 8.03% and was up 63 basis points from last quarter. The previous quarter's increase was 52 basis points, so momentum is building with our new loan rates. As we've mentioned throughout the quarter, increasing our loan yields has been a focus point for the company and will continue to be so going forward. As we look forward to the fourth quarter, we do expect an additional 3 basis points to 5 basis points of NIM compression. We're assuming that the Fed will not raise rates in the fourth quarter and therefore stays at 5.5% through year-end. We expect ongoing headwinds from the continued DDA remix, albeit at a slower pace, as well as the impact of CD maturities in the fourth quarter. We do, however, continue to see positive tailwinds from continued stabilization and deposit cost and higher loan yields. Net charge-offs were $38.3 million this quarter, or 0.64% of average loans, of which 50 basis points was related to the idiosyncratic charge-off mentioned earlier. Reserves were down slightly during the quarter, but still ended the quarter with a robust ACL to loans of 140 basis points. This quarter was our third consecutive quarter of fee income growth from the fourth quarter of 2022. Our service charges on deposit income improved, and we benefited from a strong quarter of income from our specialty lines of business. Our guide for fee income is unchanged this quarter and we expect a slight decline in the fourth quarter. Expenses for the company were relatively stable this quarter. We remain confident in our annual guide for 2023 and currently expect expenses in the fourth quarter to be down from the third quarter's level. And finally, all aspects of our forward guidance are summarized on slide 20 of our earnings deck. I will now turn the call back to John.

John Hairston, President and CEO

Thank you, Mike, and let's open the call for questions.

Operator, Operator

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

Michael Rose, Analyst

Hey good afternoon, everyone. Thanks for taking my questions. Just wanted to start on the reserve release this quarter. I certainly understand the credit, I appreciate you guys disclosing that beforehand. But just given we are seeing some slowing across the economic landscape and people seem to be getting more cautious, just can you describe the factors that drove that reserve release? Understand that, you know, criticized classified came down, you know, non-performers came down. That's all great, but why not just, you know, kind of build reserves here? I just wanted to kind of pick your brain as to, you know, the rationale? Thanks.

Mike Achary, CFO

Yes, I'll start, Michael. This is Mike and then certainly Chris or John can add some commentary as well. You know, no real reason other than we felt the reserve where we ended the quarter at 140 basis points was certainly robust enough for our view of credit and our view of the economy and all the factors that go into determining the reserve going forward. So, we did release $9.8 million, but $5.8 million of that overall release was related to the one credit. So, I guess the net release was really just $4 million. So that would have been another basis point or 2 related to the OCL to total loans. So that basically was our thinking, and also, you know, the levels of our commercial criticized and NPLs in our view of those asset quality metrics going forward also played into it. But again, I think the bottom line is, you know, the 140 ACL to loans, we feel is certainly robust enough. So, Chris or John, if you all want to add anything?

John Hairston, President and CEO

No, I think that covered it.

Michael Rose, Analyst

Alright, yes. Appreciate it. I appreciate the net amount there. Maybe just as my follow-up, just wanted to talk about the margin. And specifically, you talked previously about potentially restructuring the securities portfolio. It looks like the FDIC charge will hit in the fourth quarter. I think you had previously discussed maybe not wanting to do it. And that if you were going to do a restructuring, not in the same quarter, as that charge was going to hit? But just wondering if you got any updated thoughts there? And then just what gives you kind of confidence that given that the margin is already down 3 bps that you can kind of maintain around these levels in the fourth quarter?

Mike Achary, CFO

Yes, regarding the NIM guidance, we anticipate a potential compression of 3 to 5 basis points in the fourth quarter. When evaluating this compression, we consider both positive and negative factors. On the positive side, deposit costs seem to be stabilizing, which we began to notice during the third quarter. We project our cost of deposits may rise by about 18 basis points in the fourth quarter compared to 34 basis points in the third quarter, indicating some stability. Additionally, we see positive momentum in higher loan yields, with new coupon rates exceeding 8% for the first time in a while. Over the past two quarters, we recorded increases of 63 basis points from the second quarter to the third and 52 basis points from the first to the second quarter, suggesting growing momentum in loan rates. Our fixed-rate loan portfolio is also expected to continue repricing upward, which we have seen trend positively, up approximately 1,000 basis points over the last few quarters. On the downside, while the DDA remix showed a slowdown this quarter at 38% compared to 40% previously, it remains a drag on our NIM. The greater concern for fourth-quarter compression stems from CD maturities. We have around $1.4 billion in CDs maturing in the fourth quarter, repricing from about 4.34% to around 4.92%. Most of these maturities, nearly $1 billion, will occur in October, which will impact most of the fourth quarter. As for bond portfolio restructuring, it's still under consideration for either this quarter or potentially the first quarter. We acknowledge the possibility of a special FDIC assessment in the fourth quarter, which previously appeared to be occurring in the third quarter but has now shifted. Thus, we continue to explore our options regarding restructuring.

Michael Rose, Analyst

Thanks for taking my questions. It seems like you were anticipating that question, Mike. So I appreciate all the color. Thank you.

Mike Achary, CFO

Thanks, Michael. This isn’t my first call.

Operator, Operator

Your next question comes from the line of Brett Rabatin with Hovde Group. Your line is open.

Brett Rabatin, Analyst

Good afternoon, everyone. Thank you for the questions. I want to start with the noninterest-bearing demand deposit accounts. It's still gradually declining, and I'm curious about how this affects your guidance. Do you have any updates on where you expect those balances to settle, or any visibility into operating accounts that might have reached their lowest point? I would appreciate any insights or updates regarding your thoughts on demand deposit accounts.

Mike Achary, CFO

Yes, Brett, I'll start and John can certainly or might want to add some additional color. But again, as I mentioned a little bit earlier, we're expecting that DDA remix, so that non-interest-bearing percent to probably end the year somewhere around 36% or so. When we conclude the fourth quarter and talk about guidance for next year, I think we'll have a little bit more clarity around where we think that trajectory will take us as we go through ‘24. So more on that obviously next quarter. But we're encouraged by what we're seeing and what kind of transpired this quarter. So if you look at the percentage declines quarter-over-quarter, second quarter compared to first, we were down about 5.5%, and then it slowed to about 4.5% or so in the third quarter. And if you look at the makeup of our DDA base, really about two-thirds, a little bit less than two-thirds of that is commercial customers. And we saw an even more significant slowing in those balances. So about 7% in the previous quarter, and then that slowed to a little bit under 4% in the fourth quarter. So it absolutely is happening, I think, across our customer base, but obviously more so on the commercial side. So John, anything you want to add to that?

John Hairston, President and CEO

No, that was a good answer. And Brett, this is John. The only thing I would add is we still anticipate a trajectory that indicates we will reach the pre-pandemic average account balances sometime around the second or third quarter of next year. It's difficult to pinpoint exactly when that ends, but at least we'll be at a marker that was relatively stable for several years before the pandemic started. When Mike mentioned that the end of the year looks like we should be close to 36%, that's actually slightly better than the lower end of the range we provided just a few months ago. So the updated target for the end of the year is perhaps a bit more appealing than where we were recently. This reflects the reduction in the mix change we've experienced so far. As for where it settles, it's really hard to predict precisely, but if we assume that we reach the target when we achieve the pre-pandemic average balances, that would imply a continued slowing—maybe not every quarter—but a slowdown that leads us to a target in the second and third quarters of next year. I hope that helps.

Brett Rabatin, Analyst

Okay, that's helpful. I wanted to ask about the slide on loan repricing. On slide 24, you mentioned the four to 12-month bucket, which has a different composition than the three months or less, especially without more consumer involvement. As we try to model your loan portfolio increases over the next year regarding the existing book, will the weighted average rate for that four to 12-month bucket be somewhat lower than the 805, considering the consumer benefits in the three months or less segment?

Mike Achary, CFO

Yes, I believe that's accurate. The majority of our variable rate loans fall within the three months or less category, which is of course influenced by the movement of rates. I think you're correct in your assessment.

Brett Rabatin, Analyst

So would a number closer to seven or closer to eight, do you think would be the right number for that four to 12-month bucket as it reprices?

Mike Achary, CFO

Well, the way we look at it on a quarterly basis, if you go back to this quarter, the new loan rate was just north of 8%, and then we have that broken out in the previous slide between fixed and variable. So what we have here on ‘24 is just a little bit longer look of how we view the loan portfolio and how it could reprice over the next couple of years, obviously.

John Hairston, President and CEO

John mentioned that they are experiencing better-than-expected performance from their bankers, who are successfully explaining the relationship between renewal rates, new loan rates, and the volume of compensating balances. They are willing to accept a slight decrease in loan yield to secure substantial compensating deposits and operational accounts, particularly in the business sector and especially with middle-market accounts. Both scenarios positively contribute to net interest margin and profitability. John believes that the maturity of the banker core has been impressive, which may have mitigated the anticipated compression in net interest margin this quarter compared to previous expectations.

Brett Rabatin, Analyst

Okay, great. Appreciate the color.

Operator, Operator

Your next question comes from the line of Casey Haire of Jefferies. Your line is open.

Casey Haire, Analyst

Thanks. Good afternoon, everyone. Regarding expenses, last quarter you discussed the efficiency ratio of about 55%, which places you at a different debt level. We are currently at 56%, and we are anticipating some additional pressure on net interest margin. I would like to hear any updated thoughts on how you plan to address operating leverage in terms of expenses.

Mike Achary, CFO

Well, sure. As we go into 2024, I think that will become something that we look at has intently if not more intently, going forward. But in terms of the fourth quarter, and our expense increase for the second half of the year. Obviously, there's no change in our guidance. We're looking at coming in at about an 8% increase year-over-year. And certainly, as we look into 2024, we would think that, that level would come down meaningfully in terms of expense increases year-over-year. So that 8% is not where we want to be. The 56%-plus efficiency ratio is not where we want to be. So those are certainly things that we think about and we'll address going forward.

Casey Haire, Analyst

Okay. Very good. Circling back to the bond book repositioning, I realize many are discussing this, and I'm curious about how much you can do from an external perspective. You have a strong CET1 ratio, but your TCE, impacted by unrealized losses, is below the desired 8% threshold. I'm wondering if there's enough opportunity to restructure the bond book to improve that CET1 ratio and raise the TCE above 8%, with a reasonable earn back.

Mike Achary, CFO

Yes, I think so, Casey. We have been considering that transaction, and it remains a possibility. We will continue to examine it closely in the fourth quarter and possibly into the first quarter. Once we are ready to move forward with such a transaction, we will inform everyone. For now, it is too early to discuss specific details. I understand that you would like us to be more explicit about our thoughts, but we need to be careful not to share too much information that could violate regulations. So, we will leave it at this: it is still being considered, and we will proceed from there.

Casey Haire, Analyst

Okay. Very good. Yes. I'm just curious. Circling back on credit quality, one of the slides mentioned the focus has shifted from traditional office to medical office. I'm wondering if there is some concern about what you're observing in the medical office sector, which I believed to be a strong asset class. Could you provide some insight into what's driving that?

Chris Ziluca, Chief Credit Officer

Yes, this is Chris Ziluca. It seems there may have been a misunderstanding regarding our wording. For many years, we have been cautious about general purpose office spaces and have typically focused more on medical office as an asset class. As you mentioned, medical office, particularly based on the type of medical work conducted in the office, is significantly stronger than general purpose office. Overall, however, we remain cautious about that asset class. We did notice a slight decline in our overall office exposure, not a large decrease, but around 4% quarter-over-quarter as we adjust our focus away from that segment in commercial real estate.

Casey Haire, Analyst

Got it. Thank you.

Mike Achary, CFO

You bet. Thank you, Casey.

Operator, Operator

Your next question comes from the line of Stephen Scouten with Piper Sandler. Your line is open.

Stephen Scouten, Analyst

Yes, thanks everyone. Appreciate it. I guess one more question kind of around capital usage. I mean, you guys kind of outlined your capital priorities in your slide deck, and I would kind of view the potential for this securities restructuring somewhere within that. I'm not really sure, I guess, maybe below organic growth above dividends is kind of what I'm hearing. But can you talk about how you think about the math versus a buyback at this point? I mean, it seems like with your stock at 115 intangible or something like that, it might be more attractive at these levels. So just kind of curious how you're thinking about the various pieces of the capital, especially relative to the buyback?

Mike Achary, CFO

Yes. Yes, Stephen. So again, on slide 18, as you mentioned, we have kind of the priorities. And we're careful in terms of how we think about those. And really haven't changed or adjusted those priorities. So I think they really do kind of speak for themselves. And you asked about buybacks. And certainly, buybacks is something we think about and consider. But I don't know that in this environment, it's something that we're going to rise to the level of actually executing on buybacks right now. I'm not sure that the environment in terms of how examiners look at that in the context of bank failures back in March. And in the context of wanting to continue to kind of build capital going forward, really fit right now. So certainly, aside from those things, buybacks are an attractive way to deploy capital. We've done that in the past. And I dare say, at some point in the future, we'll reenter that method of deploying capital. So back to the bond restructuring, I mean, that is and could be an attractive way of deploying some capital. Again, not going to go into too much in the way of details of that, but that's out there under consideration as we kind of mentioned.

Stephen Scouten, Analyst

Yes. I guess my question is more like as you evaluate those, I mean is there an earn back calculation? Is that what you're thinking about? Or it sounds like maybe more of the bond restructuring or other things to be more palatable to regulators versus share repurchase? I'm just trying to understand the dynamics of what creates that priority set.

Mike Achary, CFO

Well, in terms of a bond restructuring, the way we would think about that is having to earn back or pay back somewhere in the ‘24, a little bit less than 30-month range. We think that makes sense and pull those kinds of transactions to the point of serious execution.

Stephen Scouten, Analyst

Got it. Got it. That's helpful. And then if we could talk about the SNC exposure briefly, I think, what is it, $2.8 billion, I think you noted at $930 million. Can you give us any more detail there in terms of what percentage of those loans you guys might be the lead on or if there's a geographic focus primarily within that book? And kind of, obviously, we saw just one kind of go bad and that doesn't mean there's some greater issue, but that becomes the fear, I think, for some. So just wondering if you can give us any color that might provide comfort, if you will.

Chris Ziluca, Chief Credit Officer

Yes. This is Chris Ziluca. Yes, I mean geographically, obviously, we're more focused on the markets that we generally operate in. So kind of Texas to Florida. But we also do have a health care specialty group that does participate in some transactions that would have more of a national focus. So there's a little bit of a mix there. There really isn't any sort of geographic or industry focus. We took a deeper look into that, kind of anticipating this call and some discussions on it since we highlighted it here on the page, on page eight, but we feel pretty good overall about the SNC book. And I certainly can understand the question, given what happened recently. But as I think we've all indicated, it is a bit idiosyncratic. And I think the final chapter of that book hasn't been written yet anyway. So we'll learn more over time. But we have in the buildup of liquidity during the kind of pandemic period there. We deployed some of that excess capacity in that area. And as we kind of look forward, since many of those relationships don't necessarily have full-service opportunities, we'll look to dial that back over time.

Stephen Scouten, Analyst

Okay. That's extremely helpful. And is the reserve against those loans, I mean, kind of in line with the $128 million loan loss reserve overall? Or is it maybe I guess, the commercial reserves like $130 million as well. So is it kind of fair to assume it's in that range of commercial loans?

Chris Ziluca, Chief Credit Officer

Yes. I mean, we don't necessarily segment the portfolio that way when we're deriving our reserve estimates. So they're generally sprinkled in with our C&I based on their asset quality.

John Hairston, President and CEO

And Steve, this is John. To provide some additional clarity, as interest rates increased last year, we recognized that in the latter half of this year, the demand for various types of financial engagements, not just SNC but also syndications and overall growth, would likely decline due to the rising cost of funds. Our priority is to maintain liquidity to support core growth and clients who have a greater share of our resources. The reduction that Chris referred to earlier was going to occur regardless of the specific negative news related to one credit. We anticipate that our commercial loan levels will peak at around 15%. After that, we expect a decrease both in percentage and total exposure as we restructure those credits with smaller amounts or possibly fewer credits, alongside the amortization, and reinvest the liquidity gains into options that offer more consistent long-term value. It’s important to clarify that the charge-off in question did not influence our strategy regarding syndications; this is strictly related to our balance sheet.

Stephen Scouten, Analyst

Got it. That’s really helpful point of clarification. Thanks so much for the color guys.

Mike Achary, CFO

You bet. Thank you.

Operator, Operator

Your next question comes from the line of Brandon King with Truist Securities. Your line is open.

Brandon King, Analyst

Hey, good evening.

Chris Ziluca, Chief Credit Officer

Good evening.

Brandon King, Analyst

Yes. So I appreciate the guidance on the CD renewal rates, but I just wanted to get a sense of how those renewal rates have trended over the last couple of months? Have we seen some stabilization in where the renewal rates have been? And are you anticipating any potential increases going forward?

Mike Achary, CFO

Yes, Brandon, this is Mike. As I've mentioned, in terms of overall deposit rates, we've seen significant stabilization over the past four to five months leading up to the third quarter. Specifically regarding the CD maturities, in the third quarter, we had nearly $1.4 billion maturing at a rate of 3.95%, which repriced at approximately 4.75%. This resulted in an 80 basis point difference in the fourth quarter, which we anticipate will reduce to about 58 basis points as we compare the maturing rates to our expected renewal rates. Looking ahead to the first quarter of next year, we expect that difference to decrease further to around 23 basis points. The stabilization of deposit rates is becoming evident in how our CDs are repricing, not only in the most recent quarter but as we look forward to the next couple of quarters.

Brandon King, Analyst

Okay. Very helpful. And then on credit quality, I noticed that accruing loans 90 days pass through and modified loans still accruing, there was a noticeable increase in those two items. Just wanted to get some more details around what's going on there.

Chris Ziluca, Chief Credit Officer

Yes. I mean, just at a high level, a lot of those are loans that we're working through maturities. And so they end up kind of crossing over in that process of processing a maturity or arranging the maturity to be extended in its normal course.

Brandon King, Analyst

Okay. So the anticipation of those will end up paying off or?

Chris Ziluca, Chief Credit Officer

Or just being rewritten and then getting back to payment status. And maturity oftentimes drives it falling into a "past due" bucket that may not otherwise really be past due.

Brandon King, Analyst

Okay. And what about the modifier, is that the same situation for the modified loans as well?

Chris Ziluca, Chief Credit Officer

Yes. Yes.

John Hairston, President and CEO

To be clear, Brandon, it's a little picky just of the way we obviously report things, but a loan could be past due without necessarily having a payment past due, right? Just because it's past maturity. So they sometimes will cross over the end of quarter, and that's the reason for that. So there's not really a linkage between, call it, reserve appetite and that amount of past dues unless the payment itself is light. Does that make sense?

Brandon King, Analyst

Yes.

John Hairston, President and CEO

No real concern there.

Brandon King, Analyst

Okay. So we should be expecting that to kind of trend lower going forward is that...

John Hairston, President and CEO

It goes up and down based on timing. And I don't know if it's still this way, Chris can correct me if I'm wrong, but there's a fair amount of seasonality in some of the book on the middle market side. So there's larger numbers of renewals that occur in different parts of the year. And typically, in the second and third quarter is when we seem to have a little bigger bucket of those that all renew. And unfortunately, they're all kind of stacking in the quarter. So if everything doesn't come together perfectly, they will sometimes drag over the first day of the quarter and therefore, get reported that way. Chris is that still accurate?

Chris Ziluca, Chief Credit Officer

Yes.

Brandon King, Analyst

Thank you very much for taking my questions.

Mike Achary, CFO

You bet. Thanks for asking.

Operator, Operator

Your next question comes from the line of Catherine Mealor with KBW. Your line is open.

Catherine Mealor, Analyst

One follow-up just to the deposit cost discussion. Can you remind us seasonality around your public fund balances and any impact that might have on your NIM guidance for next quarter?

Mike Achary, CFO

Yes, I'd be glad to, Catherine. So we have a pretty robust public fund business. Those deposits average around $3 billion or so as you look through the year. Typically, those deposit inflows will begin to ramp up a bit in the fourth quarter. So they can range from about $150 million to about $175 million in the fourth quarter. And as we get into the new year, they begin to kind of trail off as the municipalities begin to kind of allocate and spend those dollars. So every one of those relationships are contractual, and the vast majority are tied to primarily spreads to short treasury bills. So there is a bit of an impact in the fourth quarter in terms of the deposit inflows, but then also related to deposit rates. And the dynamic around our public fund book was built into the guidance we gave for the fourth quarter in terms of deposit costs and potential NIM compression.

Catherine Mealor, Analyst

Okay, perfect. I have another question about loan growth. Loan growth has slowed down for everyone in the latter half of this year. Can you provide some insight into the new loans you are originating, specifically the types of credit you are comfortable with, the types you are doing less of, and perhaps a preliminary outlook on how you envision loan growth looking as we transition into next year in a higher-for-longer scenario?

John Hairston, President and CEO

Okay. Thanks for the question. It's John. I'll let Chris speak to sector appetite and then I'll come back on just sentiment and what not. So Chris, on just sectors in focus or appetite for or not.

Chris Ziluca, Chief Credit Officer

Yes. I mean again, we're obviously very mindful of the sectors that are potentially most impacted by higher interest rates, the wage and employment challenges and then just higher operating costs. In some instances, the customers are able to pass them on and others may be more challenged to be able to do so. I mean, clearly, when we look at consumer discretionary, I think we're obviously a little bit more thoughtful about what we're looking at there, things like hospitality, and then even the asset classes that we sort of talked about earlier about office and retail, both retail as a C&I product and C&I as a CRE product is something that we continue to be a little bit more tighter on, I guess, in that regard. We have pretty robust discussions and a lot of the larger credits go through kind of a prescreen process, and so there's a lot of healthy debate before we look to either pursue an opportunity or maybe even renew an opportunity in those areas or in general.

John Hairston, President and CEO

Catherine, any question back on that before I give you some more? Or would you...

Catherine Mealor, Analyst

I have a follow-up question about the mortgage one-time closed product. I know it has contributed to your loan growth over the past year, and I'm wondering if you expect that to slow down as you look at the pipeline for next year or if you anticipate maintaining a level of growth in that area over the coming months.

John Hairston, President and CEO

Yes, I'll start there. Thank you for asking about it. The one-time close product originally falls under construction classification, as it is designated as in construction until the project is completed and the owner moves in. The balance sheet amount in this construction project is clearly at a later stage. We can expect some mortgage growth for perhaps another two quarters before we start to see a decline in the mortgage portfolio during the latter half of the year. The mortgage category will still show some net growth over time, and there are enough multifamily construction projects ongoing that will help offset the mortgage outflows. I anticipate that the construction in the C&D category will continue to grow slightly. As we move into next year, that too may become counteractive, but the drivers for these two elements are quite distinct. Regarding multifamily, we receive many inquiries about absorption rates and rental prices in different markets. The decline in absorption or pricing is mostly seen in one, two, and in some cases, three-star category projects. We maintain a strong position at around 95% occupancy in one and two-star buildings across our key markets, showing good absorption rates. If we were more focused on the one and two-star sector, we would possibly have more concerns. Our interest in multifamily projects remains strong; however, the current economic climate has made it challenging for many investors and developers to take on new projects due to high financing costs and property insurance. This isn't about our lack of interest, but rather the available opportunities have diminished. We're looking for equity in deals, construction cost commitments, and insurability from well-established developers, who are currently hesitant to engage until the market improves over the next year or two. On another note, our home equity line of credit products show the lowest utilization I can recall. Despite deposit account balances moving closer to pre-pandemic levels, we haven't seen a corresponding increase in utilization. People are making fewer large purchases compared to a year or even two to three years ago, and they often rely on equity lines for such purchases due to tax benefits. Currently, that spending has slowed down. At some point, this trend may reverse, likely when there’s an expectation that interest rates will stabilize or decline slightly. As long as the Federal Reserve can guide the economy to a safe landing—rather than a soft landing—I believe loan growth opportunities will begin to improve as market sentiment shifts. Was that information helpful, or would you like me to elaborate further?

Catherine Mealor, Analyst

It was. That was all really helpful. I like the safe landing commentary.

John Hairston, President and CEO

That's the target. I apologize first.

Catherine Mealor, Analyst

The soft landing phrase has been overused. That's really helpful. Thank you, John.

John Hairston, President and CEO

You bet.

Operator, Operator

Your next question comes from the line of Kevin Fitzsimmons with D.A. Davidson. Your line is open.

Kevin Fitzsimmons, Analyst

Good afternoon, everyone. Most of my questions have been asked and answered. As a follow-up on the bond restructuring topic, I understand the sensitivity around not providing specifics. But maybe, Mike, you can help us understand the different factors that influence your decision on when or whether to move forward. I assume it's related to rates, your capital levels, and comfort with the curve. A few months ago, there was heightened sensitivity due to bank failures, which likely led to hesitance in selling securities to avoid misperceptions. However, that's behind us now. So, without going into specifics, I'm curious about how those factors play into your decision-making. Is it more of an internal debate about the right course of action, since there might be differing opinions? I'd like to hear your thoughts on this. Thank you.

Mike Achary, CFO

Sure, be glad to, Kevin. So I think as a company, we think and believe that from a philosophical point of view, it's the right thing to do in terms of potentially selling some bonds and reinvesting the proceeds. The consideration becomes this notion of whether you pay down debt, whether it's brokered CDs or home loan borrowings or you reinvest all the proceeds back into the bond portfolio or some combination of those two. So those are the things that we kind of think about and talk about certainly the charge that you might consider taking is something that's out there for discussion and analysis, the impact that, that has on our earnings, the impact that has on our capital really doesn't have much of an impact on TCE immediately because you're selling AFS bonds, but certainly on a regulatory ratio basis, it is something that can be impactful going forward. So those I think are the things we think about. I mean, certainly, if you look at the volume of bonds that you could sell for any given charge, that's less now than when it was before you had the significant increase in the treasury curve. So that's something that's a little bit of a part of the overall equation, just where those rates are going to go over the next couple of weeks, months, quarters, those kinds of things. So again, those are the things I think we think about and consider in terms of a transaction like that. And I'll wrap up those comments by just stating again that it's under consideration. And as we effect the transaction, we'll let everyone know certainly.

John Hairston, President and CEO

You bet.

Mike Achary, CFO

Thank you, Kevin.

Operator, Operator

Your next question comes from the line of Christopher Marinac with JMS. Your line is open.

Christopher Marinac, Analyst

Hey, thanks. Good afternoon. Had a question for Chris on credit quality and particularly from how you stress test C&I and CRE? And what's the difference between today's criticized level and sort of what they would be on the stress scenario? And how much of that would move the reserve level?

Chris Ziluca, Chief Credit Officer

Yes, that's a great question. We consistently analyze various aspects of stress testing. For commercial real estate, we assess the impact of interest rate adjustments on loans that need to be repriced in the current environment. We also examine net operating income and how it affects an individual's ability to service their debt. Additionally, for commercial and industrial loans, we focus on the probability of default among individual borrowers. This information guides our approach to reserving, though there isn't a direct connection to the reserves themselves. It's part of our evaluation process during our quarterly reserve assessments. Currently, I've been pleasantly surprised that the results from our stress tests haven't been as concerning as I initially expected. This gives me confidence that there is likely a bit more cushion in a typically stressed environment. Naturally, if we push for a more severe scenario, we would anticipate a higher number of theoretical defaults and losses, but we don't foresee that happening. We conduct these stress tests to understand the extremes, but we primarily concentrate on realistic stresses that help us refine our reserve levels and strategies.

Christopher Marinac, Analyst

Okay, great. That's helpful. And then Chris, just a follow-up on the SNC conversation and the disclosure in the slides. Are there other loans that would be kind of like club deals that are not the SNC definition, but are sort of non-organically originated by Hancock that you have above and beyond the 11%?

Chris Ziluca, Chief Credit Officer

Yes, there are likely more than a few accounts that fit that description. It's usual for us to bring in a partner when faced with an opportunity that's larger than we would typically pursue on our own, in order to support that relationship. These are what we refer to as club deals, and they often involve banks we frequently engage with, as opposed to the larger, broadly syndicated transactions that are typically led by major institutions.

Christopher Marinac, Analyst

Would those loans have a higher default rate across the cycle? Or is it kind of too early to comment on those?

Chris Ziluca, Chief Credit Officer

I mean, I don't view them any differently to be honest with you. And I don't see them as having any materially different default rate.

John Hairston, President and CEO

Okay. Great. Well, thank you for all the information this afternoon. It's been great.

Mike Achary, CFO

You bet. Thank you.

Operator, Operator

There are no further questions at this time. I will turn the call back to John for closing remarks.

John Hairston, President and CEO

Thank you, Sarah, for moderating today, and thanks, everyone, for your interest. We look forward to seeing you on the road soon. Have a great night.

Operator, Operator

This concludes today's conference call. Thank you for joining. You may now disconnect your lines. This concludes today's conference call. Thank you.