Q2 2024 Hancock Whitney Corp Earnings Call

Participants

Kathryn Mistich; Vice President, Investor Relations Manager; Hancock Whitney Corp

John Hairston; President, Chief Executive Officer, Director; Hancock Whitney Corp

Michael Achary; Chief Financial Officer; Hancock Whitney Corp

Christopher Ziluca; Executive Vice President, Chief Credit Officer; Hancock Whitney Corp

Catherine Mealor; Analyst; Keefe, Bruyette & Woods

Michael Rose; Analyst; Raymond James Financial, Inc.

Casey Haire; Analyst; Jefferies

Brandon King; Analyst; Truist Securities

Ben Gerlinger; Analyst; Citi

Brett Rabatin; Analyst; Hovde Group

Stephen Scouten; Analyst; Piper Sandler

Gary Tenner; Analyst; D.A. Davidson

Matt Olney; Analyst; Stephens

Christopher Marinac; Analyst; Janney Montgomery Scott

Presentation

Operator

Good day, ladies and gentlemen, and welcome to Hancock Whitney Corporation's second quarter 2024 earnings conference call. (Operator Instructions) As a reminder, this call may be recorded. I would now like to introduce your host for today's conference, Catherine Mr. Rich Investor Relations Manager. You may begin.

Kathryn Mistich

Thank you, and good afternoon. During today's call, we may make forward-looking statements. We would like to remind everyone to carefully review the Safe Harbor language that was published with the earnings release and presentation and in the company's most recent 10-K and 10-Q, including the risks and uncertainties identified therein.
You should keep in mind that any forward-looking statements made by Hancock Whitney speak only as of the date on which they were made. As everyone understands, the current economic environment is rapidly evolving and changing.
Hancock Whitney's ability to accurately project results or predict the effects of future plans or strategies or predict market or economic developments is inherently limited. 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

Thank you, Kathryn, and thanks to everyone for joining us this afternoon. We're 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 snick 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 [SNC's], 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 nonaccrual 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 runoff in interest-bearing transaction 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 will be flat to slightly down compared to 2023. We continue to migrate away from brokered 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 of ACL reserves, a de-risk loan portfolio, and now supporting 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.

Michael Achary

Thanks, John, 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%, push 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 points 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 points 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 loan. 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 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 bankcard 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 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, 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 adjusted level. 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 the zero rate cut scenario and one where the Fed cuts rate 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 equally, 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 put impact that view.
I will now turn the call back to John.

John Hairston

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

Question and Answer Session

Operator

(Operator Instructions) Catherine Mealor, KBW.

Catherine Mealor

Thanks. Good afternoon.

John Hairston

Good afternoon, Catherine.

Catherine Mealor

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?

Michael Achary

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 basis points in each of 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 yields again in each of the next couple of quarters.

Catherine Mealor

Okay, great. And then I just was surprised to see the expense guidance come down so improve because I know you've been talking a lot about hiring in the back half of the year. And I know you mentioned that there are 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?

Michael Achary

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 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 pledges 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

No, good.

Catherine Mealor

Okay. That's great. Thank you.

John Hairston

Thank you Catherine.

Operator

Michael Rose, Raymond James.

Michael Rose

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 lower yielding, 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 it is that would be a positive benefit as we move forward, you could actually see a sustained higher loan yields versus many of your peers, given that dynamic, even if rates begin to come down? Thanks.

John Hairston

Yeah. Michael, this is John. I'll start and then Mike, Kris can add color if they like. I mean, you answered the question, the goal would be able to redeploy presuming demand is there into higher yield and also opportunities for some self providing liquidity as well as fee opportunities that you get with a smaller full-service relationships.
In terms of sizing the rest of the year. We did make a lot of progress in second quarter and typically there's a lot of maturity action in Q2 each year. So it was a bit outsized we were and frankly, I was very pleased to see the hustle and diligence of the core of bankers across several lines of business to replace almost all of it in one quarter.
The second half of the year is going to be a bit more modest, Michael, we would suspect somewhere in the neighborhood about $100 million in additional SNC outstanding balance reductions in the second half of the year, based on what we know now and then in 2025, not to get too much into '25 guidance but to answer your question, probably about the same amount of runoff in 2025 as in the whole of 2024.
And that would take us to somewhere the neighborhood, all things being equal of around a 9% total amount of SNC outstanding balances as a percent of total loans, which is right on top of those people that published appear normal. And then from there, it will go wherever the right answer is.
So once again, the desire there is really to remove any optics of that would create a hangover in valuation. We're sort of in the business of doing whatever we can to improve valuation for investors. Now that profitability is at a pretty good place, and not really any concern over any particular part of the SNC book, it's just a manager of a matter of managing OpEx down.
And frankly, we're really good at a lot of other things that shouldn't have to depend on SNC's for loan growth as much as maybe the last couple of years when we were awash with liquidity. Any redirect on that topic, Mike you'd like?

Michael Rose

I was just going to ask just the 9%., is that kind of where you want to be? As I think you just said that's around where peers are or could we see that drift lower over time in the kind of the intermediate to longer term?

John Hairston

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. And at that point -- at this point in time, that's around 9%. So if that were to go lower than would 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

Okay. Understood. Perfect. And then maybe just as my follow-up, certainly understand the nearer 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? What would you look for ideally? Thanks.

Michael Achary

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 an efficiency ratio standpoint.
So 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 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 in 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 a 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 some of the regulatory oversight and what the approval process actually is.
Maybe there will 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 were done, 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

Great. Thanks for taking my questions.

John Hairston

Thanks, Michael.

Operator

Casey Haire, Jefferies.

Casey Haire

Yeah, thanks. Good afternoon, everyone. I want to follow up on Mike's question on M&A. So I guess would you say it's like a fairly active. Is there a lot of discussion going on right now?
And then as a follow up to that, is there an asset level that would be ideal for you guys in pursuing M&A coming from $35 billion?

Michael Achary

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'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, would 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, if and when we engage in M&A, it's probably a little bit further down the road would say.

Casey Haire

Okay. I guess is there a level of capital that is, that would change your stance on maybe getting a little bit more aggressive on buybacks. I mean, looking at slide 19, a year ago, you guys were 140 bps lower, right?
So fast forward a year, if we continue that cadence, we could be north of approaching [15]. So I'm just trying to get a sense like the capital builds pretty impressive and just trying to get a sense of what would change that buyback cadence?

Michael Achary

Yes. 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, a 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

This is John, I'll add to that. Obviously, the 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 attracting more offense of 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 into sales supporting them with maybe a bigger marketing spend, adding players and potentially offices in markets that we believe the leaderships 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 hearts and minds are. All the other options that you mentioned before in the questions are all fair, but they're really maybe column Part B or C behind inflecting the balance sheet to more northward growth if that makes sense.

Michael Achary

So we pay attention to capital levels. Certainly, view all those options as possibilities discussed in dutifully with our Board members and the priorities are exactly we've put in the deck. Hope that's helpful.

Casey Haire

It is, thanks, guys.

Michael Achary

Okay, thank you.

Operator

Brandon King, Truist Securities.

Brandon King

Hey, good Evening. So in the prepared remarks, you mentioned keeping the DDA mix particularly stable to year end. So could you just talk about what gives you confidence in that projection if there's any sensitivity to fed funds?

Michael Achary

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 around the 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, you know, at [1,231] 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

Okay. And any sensitivity to the rate outlook at that (inaudible) factors?

Michael Achary

No, I don't think so. I mean our outlook right now has been conservatively reduced to the zero rate hikes. You know, maybe we'll get to, 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 we would help add to that stability, but with zero, I don't think our outlook changes.

Brandon King

Okay. And then just wanted to touch on the increase in commercial criticized, I recognize it's normalizing, but could you just characterize what you're seeing? And then also if you're actually seeing any credits move out of the criticized bucket?

Christopher Ziluca

Hi, Brendan. It's Chris Zilluca. Yes, thanks for your question. What I would say is that, you know, 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've 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 does come from, and I don't really see anything specifically.

Brandon King

All right, thanks for taking my questions.

Operator

Ben Gerlinger, Citi.

Ben Gerlinger

Hi, good afternoon. So, I am on the website, hopefully you guys (inaudible) see the 5% even. If I recall correctly, it's a little bit lower than the promos that you've had earlier this year.
I was kind of curious when you look at the cost of deposits, obviously, mix is going to be a little bit a part of it, but when you look at the cost of deposits are down linked quarter, which is a positive in the mid [mix] space. Noninterest rate stays roughly the same on mix. It is most of the work yield driving the margin or do they get the right hand side of the balance sheet that changed as well?

Michael Achary

Ben, this is Mike. So in terms of our promotional CDs, you're right, our best rate or highest rate out there is that 5% for either three, four or five month maturity. We also have an 8 month and an 11 month at four and a quarter. So we have reduced that ladder 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 544, an eight month duration. So as we've talked about before, we've kind of brought into duration and been able to kind of reduce the promotional rates. 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've kind of talked about that. We have better part of $411 million of bonds maturing our cash flow coming back to us in the second half of the year at a little bit under 3%, 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 helps answer your question.

Ben Gerlinger

Yes, absolutely it is helpful. So mainly left hand side, a little bit stability on the right-hand side of the balance sheet also helps. 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 talked about potential growth in certain areas via revenue producers and also some lenders from those terms are often interchangeable.
And previously, I remember you guys talked about Texas as an area avenue for lending growth. I Was curious 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 this kind of more than 10,000 foot view continue to hire across the board and not really set up a better year? Just trying to get a sense of hire than what you kind of mean by that by revenue production?

John Hairston

So this is John. I'll start. And if I meander around the the answer, you feel welcome to redirect me a bit. In terms of hire and 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, $40 million in annual revenues and down which tend to almost self fund in the overall relationship.
And we've demonstrated a good bit of scale 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 business 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 advisers 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 advisers 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 book in markets as well. So you're correct that the impact of adding bankers is is more of a '25 balance sheet line item and the expectation would be that we began seeing the print of a new banker make itself known within 12 months and under a flywheel concept.
We began 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 detailed question.

Ben Gerlinger

No, that was great. I'm going to sneak one more in. If you guys think about the share purchase, I know you guys have covered it a bit. Is it valuation driven or is that opportunity relative to growth? And if you think valuations, is it relative to peer or your historical past? Just kind of thinking about the drivers of pressing the buy button here?

Michael Achary

Yes, I think it's a function, Ben, of certainly the levels of capital that we enjoy right now, as well as our ability to grow that capital, but it's also a valuation question. We look at price to tangible book value and certainly our P/E ratio.
We compare our valuation to, let's say, the mid-cap peer group. And certainly there's room for our valuation to improve and one way that we can kind of tangibly show the market that we believe in our company is to repurchase shares. There's also certainly an opportunistic aspect to this as you would expect. So I think it's in part all of those things I just mentioned that you kind of pointed out.

John Hairston

Ben, it's John. The only thing I'll add to Mike's great comments were, we tend to look at the combination of divies and repurchases as a return of capital to investors, and when we compare ourselves to mid-cap peers some are lighter or heavier in divvy, some are lighter and heavier in repurchase.
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. Sure that we are competing, I think, for investor interest at a similar level of return of 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

Got it. That's helpful color. Appreciate the time, guys.

John Hairston

You bet. Thanks for the questions.

Operator

Brett Rabatin, Hovde Group.

Brett Rabatin

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 the past year, you had decent growth, particularly in the back half of '23. Do 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

Yes, I'll take a pass at that. This is John. The big wildcard, I say, big wildcard, I mean the rate environment matters when and the portfolio success matters when it comes to wealth related fee income. So it's hard to gauge what that really will be. But after four or five quarters in a row of record annuity and wealth income in general, we try not to get so overly exuberant that we forecast net quarter-over-quarter increases at what has been a record pace. So we have that moderated a little bit, not the fee income itself, but the growth of it.
Secondly, secondary mortgage fees, now that we're at about a 95% of the total deals actually going to the secondary market. That fee income category was up sharply in the first quarter and it was up again a little bit modest, but still up enough to make a difference in the second quarter. And depending on what happens with the rate environment, the back half of the year, that one may very well prove to be stronger.
Then we have estimated as part of that guide. We try to be relatively conservative in the guide and I think we're assuming a flat rate environment that would obviously have an impact on second year fee income. If rates go down, then our guide may prove to be a little short when it comes to the mortgage side. All things card continue to perform and deposit service charges have been stable and we expect to remain so for the rest of the year.
And the only category that we see continuing to set a record every quarter is SBA, which second quarter again proved to be a terrific quarter and I think third quarter is going to be even better. So it's really a mix of what I'll call stable fee income sources and those that continue to grow. But we don't want to try to get I guess so, I don't want to get irrationally exuberant about the first half of the year being so strong and presume those continued increases are at that pace. We need a little luck in the market to continue at that kind of a rate. Did I answer your question?

Brett Rabatin

That was perfect and very good color, John appreciated. The other question I wanted to ask was obviously you would have grown the loan book, absence of the reduction in the Shared National Credit portfolio. I wanted to hear, if you gave it, I missed it, but just any color on what you're seeing change with loan demands now here in the past quarter, if it's yes, I think going back to Gulf South, it sounded like things were softening a little bit from a demand perspective. So I was just curious for an update on demand and just you know what you were seeing customers think about for the back half?

John Hairston

Sure, Brett, this is John. I'll start again and the other guys can add color if they like. I wouldn't say the tone has changed dramatically since the last time we visited at Gulf South. What I can share is, it's really a mixed signal sort of a moment in time, where using second quarter as a basis, we've already talked about the SNC runoff and that wasn't demand.
That was just our screening appetite is obviously a bit more narrow to achieve the goal that we talked about in the first question of the day. But generally, our CRE book, as an example, we had the best production in CRE in the second quarter as we've had in the last six quarters.
In today's environment, when I say CRE aside for owner-occupied, that really means primarily multifamily with a little industrial and maybe a smaller section of retail in there, there's not in the office to speak of obviously at this moment in time. But we had a great CRE quarter and the team did magnificently, the outlook and the pipeline for CRE is also up for the second half of the year.
That said, we are seeing competitors who have been sidelined for fear who have much higher CRE concentrations than we have. We've enjoyed that advantage, you know, for a while and now we're seeing some players come off the sidelines that have been sidelined to become more competitive which puts pressure on the deal prices and we've got to make sure and be comfortable that we're getting the yields that need to be there for the business to make sense versus look at other types of lending.
So CRE had a good quarter. Equipment Finance had a very good quarter. Pipeline there still looks good. The offsets would be other than the SNC thing. Consumer and home equity line is still really light both in pipeline and in production is not bad, but we've got to do a fair number of new deals just to stand still, given the amortization levels every quarter and their higher for longer environment has not been kind to grow and consumer purpose balance sheet.
So those are sort of the mixes. There's not really a huge difference geographically. I think all of our footprint is doing well. And frankly, given the tepid demand, I'm real proud of our team for doing as much as they did in Q2 to offset the SNC runoff that already happened and hopefully in the back half of the year, the green shoots I mentioned earlier in some of those categories will sprout and maybe our guidance be proven to be a little conservative.
But right now, we're calling it flat towards the end of the year, maybe slightly down just depending on what the rate of payoffs are and sentiment improving as things develop politically and other types of things in the back half of the year.

Brett Rabatin

Okay, great. That was very helpful. Thanks so much, John.

John Hairston

Okay, (technical difficulty)

Operator

Stephen Scouten, Piper Sandler.

Stephen Scouten

Hey, thanks guys, good afternoon. I guess on 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, the overall credit maybe less in this environment? How do you think about that line utilization dynamic going forward?

John Hairston

That's a great question. We talk about it internally a good bit. You would think at this point in time on the consumer side as cards have gotten a lot harder to obtain. We're not really much of a card bank. So it's not a big play for us, but others who have a much bigger basis in cards, if certainly screen credit tighter really that hasn't led to utilization being heavier.
And the only way we can really look at that is that the appetite for consumers to purchase big things that they typically put on lines of credit, mostly home equity loans secured, home equity secured that their appetite for purchasing diminished enough to where they're really just kind of amortizing with the level that they're at right now.
So we're not seeing much on the consumer side in terms of utilization increase. Our small business lines of credit however have begin to improve a bit. And I think that's because they're getting ready for what they think is going to be a busier half of 2024.
And then finally, on the commercial lines and particularly the C&D lines, as the drag on our C&D business from mortgages migrating from C&D to the mortgage category greatly diminishes in the second half of this year. That drag on C&D may begin to allow the category to grow a little bit more. And when we get new deals to the C&D pipeline, remember they start out as zero utilization and their work their way forward.
So as the percentage of deals go up in C&D, the actual line utilization reported goes down. If you follow me the way the inverse reporting happens and then as they get more mature and ready to go into permanent than the utilization goes up until they pay down. Indeed the permanent are going somewhere else for longer-term financing.
So I think to answer your question is slight to up line utilization as what we anticipate over time. I don't think it will be sharply up or down, though, based on any particular piece of news.

Stephen Scouten

Okay. Makes sense. And then one other thing I found interesting, kind of the new fixed rate loan yield 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 fixed rate loans, as we presumably move towards rate cuts here in the back half of the year '25? Or is that just more a dynamic of demand and just kind of happenstance?

John Hairston

I think It's just mix of what we booked that quarter and the fact that fixed rate lending is a little bit more competitive because of the re-emergence of competitors who really didn't care too much about fixing the past few quarters and now they do.
So it's, and if the quality of the credits we're trying to book, Stephen, it is pretty competitive. It's not competitive at the low quality, but it's very competitive at the high-quality.

Stephen Scouten

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'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 you think you're kind of in that sweet spot from an asset size perspective that enders 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 what you think will drive your ability to bring those people on versus your other peers?

John Hairston

That's a great question. And when I talk to candidates and every now and then actually get the opportunity to do that, the selling points that deliver form as it's a company that's going to be here. We have achieved a great deal of heavy lifting to the point that the company is very stable, very profitable. We have capital to deploy to grow the balance sheet.
We've saved an awful lot of money to become more efficient from an earnings perspective, but we're not afraid to invest in high-quality people to add offices and invest more marketing dollars over time. And so, I think that's attractive.
Secondly, the parity we have between our credit team and our banker team is very good. It's a very constructive. While they don't always see eye to eye on every single credit, it's a very constructive and instructive environment to where they work together and we try very hard to make sure we're very clear what we are interested in adding or not adding at any given level of segment or geographic concentration.
And then thirdly, I think we're very honest with our team members about where the company is headed and what our activity and investment structure is going to look like in the near term. So it is somewhat predictable. So a lot of the tough lifting that we did to trim expenses to right size office level, all that sort of in the work environment has already been somewhat completed, and so the direction forward is a little bit more predictable for people who are interested and coming out of an organization that may have a lot more types of unexpected activity coming out.
So we're like, in my comment earlier that prepared area, I mentioned we're focused on the windshield versus the rearview mirror and part of that is directed at that type of posture.

Stephen Scouten

Yes. Okay. Those are great insights. Appreciate all the color, and thanks for the time.

John Hairston

Stephen, thanks for the question.

Operator

Gary Tenner, D.A. Davidson.

Gary Tenner

Thanks. Good afternoon, guys. Two questions. First, on the CD side, Mike, you update us the amount of CDs maturing third quarter, fourth quarter, along with the prevailing rates on this?

Michael Achary

Sure, so in the third quarter, we have about $2.3 billion of CDs maturing. Those are coming off a little bit over 5%. And we think that those will reprice somewhere in the [465] or so range. So that's a favorable repricing dynamics 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 [483] and again, we think those will go back on at somewhere around [470 to 475]. So those are the dynamics in the second half of the year. And in the second quarter, we had $2.2 billion maturing those came off at 5%, went back on at about [478].
So certainly an opportunity for us to reprice that's 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 on 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

Great. I appreciate it. And then second question, John, you've mentioned in the past and I think on this call as well that the outlook for loan growth had kind of shifted from maybe being generated by lower rates to play more offense on the field as you've said before.
The decline or lowering of your loan growth outlook for the full year, I mean, should we read anything into that in terms of kind of the timing or pace of hiring that you've been able to accomplish or that your pipeline looks like it's going to of hires is going to support or are there other, is it more about just overall demand?

John Hairston

It's really more a flip to all of our guidance being tied to a flat rate environment. Gary, if you remember, we 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

Okay. Great. I appreciate that, John. And actually, Mike, if I go back to the CD question one more time, why with the repricing in the fourth quarter, why do you assume that those maturing CDs reprice higher, what's the, then your third quarter repricing? What's the dynamic there?

Michael Achary

The dynamic of the maturing bucket, 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

Okay. Thanks very much.

John Hairston

You bet.

Operator

Matt Olney, Stephens.

Matt Olney

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 back half of the year. Mike, I think you mentioned that the bank leaned heavier on the borrowings in 2Q. 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?

Michael Achary

I think the driver in the second quarter that resulted in a little bit heavier load of borrowings, really were 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 were 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 into a little bit lesser degree, interest bearing transaction.
And then also probably a little bit heavier outflow of public funds CDs. So we view most of those things as really kind of seasonal impacts that impacted the second quarter that should kind of rightsize themselves as we go through the balance of the year.

Matt Olney

Okay. Appreciate that. And 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?

Michael Achary

Not at this point. The view related to the bond portfolio is to keep it kind of flat at current levels. But certainly as we go through the balance of the year and loan growth is different than our expectations and maybe deposit growth is a little bit better.
We'll evaluate what to do with that those excess funds should we have them at that point. Certainly the level of rates at that time I think will play into that decision and what we can earn at the fed versus what we might earn by deploying into the bond book.

Matt Olney

Okay.

John Hairston

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 a contraction in Q3. That's about a $40 million a month, amortization level coming off today at [377]. 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 [377] 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

Okay. Thanks for the color.

John Hairston

You bet, thank you for the question.

Operator

Christopher Marinac, Janney Montgomery Scott.

Christopher Marinac

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 wanted to review the process as time passes?

Christopher Ziluca

Yes, 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 a long-term prospects of any sort of improvement will certainly encourage the customer to seek alternative financing, oftentimes with nonbank lenders, things like that.
Outside of that, you know, typically what we're doing is we're staying close to the customer, we're understanding their issues. You know, 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 a 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 on has been resolved or is no longer of a significant enough nature to keep it in that criticized loan category.

Christopher Marinac

Okay, great. That's helpful.

John Hairston

Chris, this is John. In case you were thinking more about timing there. Chris mentioned earlier, you'd like to see two or three quarters of seasoning once whatever the original offending problem was to call it the downgrade, you'd like to see it a couple of three quarters healed before you do the upgrades so once something gets in that category, it's going to linger there for a couple, three quarters, even if it's immediately rectified.
And to use a simple example, I know we're at the tail end of an hour-long call, so I'll make it brief, but if a client got stretched to better leverage during the pandemic, and credit and expense load that their revenue just couldn't keep up with and then we get into a higher rate environment, they might need time to trim their expense loads back down to the point that, if they had a covenant breach, they've cleared that up and a couple of three quarters later than we feel like we have the justification to present that problem is solved.
So they linger a bit, but obviously, we work hard to monitor them and assist where we can to get them to a better place, whether that's with us or maybe somewhere else. Hopefully that answered what you were looking for.

Christopher Marinac

No, that's great. I 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?

Christopher Ziluca

Yes. 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

Nothing to add. Thanks, Chris.

Christopher Marinac

Perfect. Thank you all. I appreciate the information

Operator

That concludes our question and answer session. And I will now turn the call over to John Hairston for closing remarks.

John Hairston

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

This concludes today's conference call. Thank you for your participation, and you may now disconnect.