Prepared remarks
Good day, ladies and gentlemen and welcome to Hancock Whitney Corporation's Third Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, this call may be recorded. And I would now like to introduce your host for today's conference, Kathryn Mistich, Investor Relations Manager. You may begin.
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.
Thank you all for joining us this afternoon. We are pleased to report our third quarter results, again reflecting improved profitability and efficiency. We achieved a ROA of 1.32% and reported another quarter of NIM expansion, fee income growth and lower operating expenses. Strong earnings facilitated continued growth in capital ratios, now among top quartile peers. Net interest income was up this quarter, due to higher yields on loans and securities and a flat cost of funds. Fee income continues to outperform and expenses remain well controlled and in fact were down quarter-over-quarter. In recent years, we made and continue to make strategic investments in fee income lines of business and are very pleased with continued impressive returns. Turning to the balance sheet. Loans were down $450 million, over $250 million of which is related to our purposeful decrease in SNC exposure. We also saw higher pay-offs due to refinance and sales transactions within the CRE multifamily and CRE industrial portfolio across the footprint.
The balance of overall loan reduction this quarter was largely the completion and liquidation of large industrial projects in the Lake Charles, Louisiana market. The balance sheet doesn't reflect the full story though, as we enjoyed very solid production and new credits during the quarter. We're also very pleased to have attained peer levels of SNC exposure, a year ahead of the original schedule. This particular line item will generally cease to be a purposeful headwind to growth. We are actively recruiting bankers to support growing the balance sheet next year now that we have reached all our goals in earnings efficiency and capital. Deposits were down in the quarter, but the DDA outflow remains moderated and our DDA mix was consistent at around 36%. There was some normal seasonal runoff in public funds deposits, and we experienced growth in interest bearing transaction accounts and in time deposits despite a reduction in promotional rates during the quarter.
Mike will add more detail in his comments later. Our credit quality metrics continue to normalize with a decrease in non-accrual loans, but an increase in criticized loans fully reflecting the results of the recent SNC exam, which was impactful to criticized migration. We expect to compare well versus peers in criticized loans and expect to be in the top quartile for non-accrual loans. Net charge-offs were up quarter-over-quarter, but we continue to see no significant weakening in any specific portfolio sectors or geography. We continue to enjoy a solid reserve of 1.46%, up slightly from the prior quarter. We maintained our posture of returning capital to investors by repurchasing over 300,000 shares of common stock in the quarter. Even after returning capital, we had strong growth in all of our capital metrics due to solid profitability, ending the quarter with a TCE of 9.56% and a common equity Tier 1 ratio of 13.79%.
We made modest changes to our guidance for the fourth quarter. As a reminder, we will give full guidance for 2025 on next quarter's call. October 9th marked the 125th anniversary of our bank charter. We attained this milestone because of our shareholders and clients trust and the efforts of our current and past associates, who live by the core values our founders set forth those many years ago. We have focused on achieving strong profitability, granular revenue sourcing, admirable earnings efficiency, solid capital and ACL reserves, a de-risked loan portfolio and top quartile capital ratios. As we reflect on our past and celebrate our future, we look forward to another 125 years of strength and stability. Lastly, I would like to acknowledge the incredible efforts of our team during the recent hurricanes impacting our footprint. As we again were the last to close and the first to open locations in storm impacted areas.
I'm exceptionally proud to serve with colleagues, who are intensely focused on a commitment to serve our communities in their time of greatest need. As we speak, our teams are delivering meals, ice and fuel in hard hit areas to assure we do our very best to serve. Our thoughts and our prayers are with those impacted by these storms and we are committed to being a steadfast partner in the recovery process. For over a century, our bank has been here to help people rebuild and recover and this time is no different. With that, I'll invite Mike to add additional comments.
Thanks, John, and good afternoon, everyone. Third quarter’s net income was $116 million or $1.33 per share, so up $1 million and $0.02 per share from last quarter. PPNR growth was again strong this quarter and was up $10.1 million or 10% to $167 million. Our return on average assets is a peer-leading 1.92%. Our NIM expanded 2 basis points to 3.39, driving modest growth in NII. As already mentioned, our fee income businesses had an outstanding quarter and expenses were again very well controlled. As mentioned, the company's NIM expanded 2 basis points from last quarter to 3.39%. This expansion was driven by higher loan and security yields, a flat cost of funds and a favorable mix of borrowed funds as shown on Slide 14 of the investor deck. Our cost of deposits was up 2 basis points to 2.02 this quarter, mostly due to inflows of high balance money market deposits from the equity markets in August.
That in turn drove a mid-quarter bump in our cost of deposits to 2.04%. We finished the quarter at an even 2%, which provides a nice glide path to a more significant reduction in the fourth quarter. Also as expected, we saw $2.6 billion of ceding maturities this quarter, which repriced from 5.04% to 4.62%, driving down the rate on time deposits by about 5 basis points. The pace of DDA outflows continued to slow this quarter with a drop of only $142 million and a stable DDA mix of 36%. We believe the DDA mix could stay at least at this level through year end. With the rate cuts in September and the 225 basis point rate cuts, we anticipate in the fourth quarter we expect our cost of deposits will be down significantly in the coming quarter. Our loan yield was up 3 basis points to 6.27%, reflecting fixed rate loan repricing and new loan originations, partially offset by lower rates on variable rate loans.
Given the two additional rate cuts we expect in the fourth quarter, we do expect loan yields will be down next quarter. Bond yields for the company were up 6 basis points to 2.66% due to our continued reinvestment of cash flows back into our bond portfolio. In the third quarter, $220 million of bonds came off the balance sheet at a yield of 2.69% and were reinvested at 4.74%. Next quarter, we expect about $200 million of cash flows coming off at about 3.10% and will be reinvested at over 4.5%. All this to say that we believe that through the net effect of lower deposit rates, higher bond yields, partially offset by lower loan yields, we do expect to achieve modest NIM expansion in the fourth quarter again, despite two additional rate cuts and limited balance sheet growth. As mentioned, the fee income was again strong this quarter, up 8% from last quarter. We benefited from higher investment and annuity fees, service charges on deposit accounts and specialty income.
We now expect non-interest income for 2024 will be up between 6% and 7% from 2023's adjusted non-interest income level. Expenses were down 1% this quarter, as we continue to focus on controlling costs throughout the company. Our guidance has been updated and we expect to grow expenses between 1% and 2% year-over-year, inclusive of our plans to hire additional revenue-generating staff in the coming quarters. Our PPNR guide is to be flat to down slightly from 2023's adjusted levels, reflecting our updated expectations on rate cuts, fee income and expense guidance. Lastly, a couple of quick comments on capital. Our capital ratios remain remarkably strong, even after returning capital through continued share repurchases and the recent increase in our common dividend. All things equal, we expect the share repurchases will continue at a similar pace in the fourth quarter. As always, the changes in the growth dynamics of our balance sheet and share valuation could impact that view. I will now turn the call back to John.
Thanks Mike. Let's open the call for questions.
Questions and answers
Your first question comes from the line of Michael Rose with Raymond James. Your line is open.
Maybe we could start with Chris. We saw the uptick in criticized commercial loans this quarter and it's been over the past couple of quarters an upward progression. I see you built the reserve a little bit. Can you just talk us through kind of what's driving the increase? And then, as we think about the prospects for lower rates, what's the driving factor to maybe bring some of those loans current? And then just separately, does this have anything to do with maybe accelerating some of the disposition of your SNCs?
No problem, Michael. Thank you for your question. First, I want to emphasize that we are generally satisfied with our asset quality performance, particularly compared to our peers and considering where we are in the economic cycle. In previous calls, we noted the possibility of some migration, especially in our commercial loan portfolio regarding criticized loans. It's important to clarify that most of the migration isn't related to our investment in commercial real estate, but primarily in our commercial and industrial sector. We are actively analyzing and assessing the reasons behind this migration. While it may seem straightforward, we're not identifying specific sectors as the main drivers; rather, the migration appears to be geographically spread, particularly in Louisiana, Alabama, and Texas, but only about 60% of the migration came from that region. The remaining 40% is dispersed across other areas.
Looking at the industries involved, 70% of the migration this quarter was from manufacturing, retail and wholesale trade, and transportation, which I mentioned last quarter, along with other banks acknowledging the sector is facing some challenges. There were also impacts from our recent SNC exam, but only 60% of the migration was connected to that process, indicating some diversification. We are continually monitoring this situation; we enhanced our watch process over the past couple of years to encourage early discussions on potential issues. We reviewed the recent migration's composition and found no significant immediate concerns with those credits. We believe this trend reflects where we are in the cycle, with decreased demand following the post-pandemic period and rising operating costs. Regarding interest rates, any benefits from recent rate changes will not be seen by customers with higher borrowing costs yet since they occurred late in the quarter.
If interest rates do continue to ease, we believe there will be some positive effects, but our customers are also facing other challenges, including softer demand and elevated operating costs. Overall, we remain confident in our portfolio and our standing relative to historical performance and our peers.
How should we view loan growth moving forward? I understand that you have reduced the SNC portfolio to near your target range. The unchanged guidance suggests some potential growth, but also possibly flat performance in the fourth quarter. Considering that the fourth quarter may be the end of the SNC runoff, and given that you've seen some projects paid down outside of the SNC this quarter, along with plans to hire new staff, how should we approach loan growth from this point? While I recognize it's early to discuss 2025, could you share your thoughts on loan growth moving forward and whether this outlook reflects the anticipated impact of a decreasing interest rate environment?
Sure, this is John. I'll take that question. You referred to the SNC parts, so I'll start there. Page 8 outlines the loan growth numbers for the quarter by sector. To provide some clarity, as I mentioned in my prepared comments, approximately $250 million of the overall reduction was in the SNC portfolio, which we had planned for. It’s something we've been working on for several quarters, and I'm pleased that we can now consider ourselves even compared to our peers regarding exposure. We can start to mitigate the self-imposed headwind for growth at this stage. There might be a slight decrease in the fourth quarter, but that will mainly depend on the timing of our deal flow. I believe we can consider the self-induced headwind from the SNC pretty much finished. Regarding growth, I wouldn’t expect that portfolio to grow significantly, but I anticipate it will remain stable as a percentage of total loans as we approach a more growth-focused year for overall credit numbers.
The second matter you brought up was the project paydowns. You might remember that there was considerable press about the large LNG projects in the Lake Charles area of Louisiana, which were very advantageous for that market and the state as a whole. The projects we partially financed have concluded, and those contractors have received their payments, leading them to pay down their operating lines. The downward dip you see on Page 8 regarding line utilization is mainly due to those paydowns. So that was the second element affecting our loan growth. The only unforeseen aspect in terms of overall loan growth was the added pressure we encountered in the CRE sector concerning payoffs. It’s a sector with significant turnover, and this quarter, particularly from the previous quarter, we observed aggressive activity from private equity and bridge lenders regarding pricing and terms. Consequently, the paydowns in this area happened more than we expected.
As our pipeline in C&D has started to improve, we are looking at more new projects. The decrease in overall C&D that you see on Page 8 is primarily due to the timing between those paydowns and the period it takes for borrowers to utilize their equity before beginning to leverage the lines we’ve approved. We anticipate seeing those developments take shape as we move into 2025. Overall, while demand remains somewhat cautious, there are definitely signs of improvement. Our commercial banking pipelines are starting to build. It’s too early to predict when people might start feeling more optimistic, but I believe that once the election is concluded and we see some downward movement from the Federal Reserve regarding rates, the projects waiting on the sidelines will begin to move forward. Our pipeline is growing. In more specific sectors of our business purpose lending, we’re experiencing significant success.
The business banking group and the SBA group have performed exceptionally well quarter-over-quarter, achieving another record quarter in SBA volumes and fee income. This is highlighted on Page 17 in the fee markets. We feel quite positive about our loan figures, and with several headwinds now behind us and the new bankers coming on board as we approach 2025, we’re expecting a much better narrative next year, which we will discuss in January along with the year-end numbers, updated CSOs, and guidance for the upcoming year. Did that address what you were looking for, Michael, or do you have another question?
No, that's good. I appreciate all the color. I'll step back.
And your next question comes from the line of Catherine Mealor with KBW.
We revisit the margin, and I appreciate the fourth quarter guidance. It’s encouraging to see that we anticipate a higher net interest margin next quarter. Could you discuss your structural thoughts on the margin as we approach next year without providing exact guidance? It seems like you might be somewhat liability sensitive in the near term. Is there a possibility for the margin to keep increasing throughout next year, or is this rise mainly driven by changes in your CD book, suggesting a higher chance of NIM compression as we enter 2025?
Catherine, it's Mike. To frame our expectations for the fourth quarter, some recurring themes will likely extend into 2025. As we've noted over recent quarters, our net interest margin continues to be positively influenced by the repricing of our fixed assets and CD portfolio. These factors have contributed to NIM growth in the third quarter and will support a modest NIM increase that we're anticipating for the fourth quarter. As we look toward 2025, we'll provide more detailed guidance in January, but I believe opportunities to reprice our bond portfolio will continue to persist. We expect to receive approximately $700 million in principal cash flow from our bond holdings next year, and we anticipate an additional $300 million to $400 million from fair value hedges on specific bonds becoming effective. This should create a beneficial environment for NIM expansion moving forward. Regarding our CD portfolio, during the third quarter, we discussed the repricing of $2.6 billion, and for the fourth quarter, we have over $3 billion repricing at an advantage of nearly 100 basis points.
In 2025, we expect a significant turnover in our CD book, about $10 billion, also repricing at a favorable rate of at least 100 basis points. Together, these elements provide a strong advantage for us as we enter 2025, contributing positively to our short-term liability sensitivity. However, as we've mentioned consistently throughout the second half of the year, continued NIM and net interest income growth in a declining rate environment will heavily depend on balance sheet growth. John has already touched on our plans for expanding the loan portfolio next year. If we can achieve this, we believe we have a solid opportunity as a moderately asset-sensitive organization to maintain NIM growth even in a declining rate context.
And then is it all higher than organic growth as a prime way to get there? Or does M&A become more of an interest to you? I think one thing that John has said many times be more worried about revenue growth than credit risk. And so in an environment where we still feel pretty good about credit, and we're really looking at revenue growth. Do you think you can hit your target just organically? Or does M&A become a bigger piece of your story?
Well, when we think about our plans and the way we put together our business plan for next year and for 2016, we really think about it, first and foremost, from an organic perspective. So the plan that we put together is built on organic balance sheet growth. So we don't plan for M&A. Certainly of those kinds of opportunities present themselves in the next year or two. That's something that we certainly would take a look at. But it's not anything we're planning for, per se, if that's helpful.
And your next question comes from the line of Brett Rabatin with Hovde Group.
I wanted to start with the fee income. And just with the guidance in the fourth quarter and the annuity income usually being higher in 4Q. I'm curious if you could give us some more color on the other bucket in 3Q, specifically how much derivative income, SBIC, BOLI and SBA might have been unusual in 3Q? And then just maybe how much that might come down in 4Q to reconcile that 6% to 7% for the full year?
Sure, Brett. This is Mike. I'll get started, and certainly, John can add some color. So if we look at the third quarter, again, an absolutely excellent quarter across the board really for fee income growth. So it's certainly something we're very pleased to be able to report. And again, really, I think shows the success of the investments that we've made in the past couple of years in our fee income businesses. So again, if we look at the third quarter, Slide 17 in the deck kind of outlines through that waterfall graph, the various components. And certainly, the other income does stick out. This quarter, it was up $5.6 million quarter-over-quarter. And the vast majority of that increase really came from what we referred to as our specialty fee income lines. So talking about things like SBA fees being up about $1.6 million, our SBIC income or venture capital income was up about $700,000. BOLI showed a nice increase of about $0.5 million and then derivatives were up almost $2 million.
So, that's the better part of the $5 million that was showing this $5.6 million growth quarter-over-quarter. So as we think about the fourth quarter, certainly, we would expect to see continued growth in wealth management, so our trust fees as well as our annuity income to some extent. And certainly, when you look at quarter-over-quarter, considering the fourth quarter, really can't necessarily count on some of these specialty lines to again show the level of increase that we showed in the third quarter. So when we think about fee income in the fourth quarter, we would expect to see somewhat of a modest drop between the third and fourth quarter. So John, anything you want to add to that.
Any of the question on the fees and we can clarify for you, Brett?
No, that's helpful, guys. And then just wanted to talk about capital for a second. And I know with the outlook for the fourth quarter in a flattish balance sheet and then maybe in '25, the growth becomes more prevalent again at some point. But it feels like given your level of profitability, you could continue to have some capital accumulation even despite the share buyback. Any thoughts on just capital accumulation and maybe what the right might be for capital as you view it as core versus excess you want to try and figure out how to invest?
Sure, Brett. When we consider capital, it has been a strategic focus for about four years to build it up to top quartile levels. I believe we have successfully achieved that. From a numbers standpoint, our TCE is approaching 10% and our common Tier 1 is nearly 14%, which are strong figures. We see these capital levels as providing us with significant flexibility in managing capital going forward. In recent quarters, we have increased our common capital and resumed buybacks, and we are guiding towards these strategies as we look ahead to 2025, with a primary focus on supporting organic balance sheet growth. We are optimistic about this support for next year. We’ve discussed various measures we are implementing to ensure we can grow our balance sheet, particularly with loans. If that growth doesn't materialize as we anticipate, we can consider increasing buybacks or common dividends. Overall, the capital levels we currently hold give us considerable options for managing the balance sheet, which is crucial.
And your next question comes from the line of Ben Gerlinger with Citi.
I know we're kind of beating a dead horse here on the credit, but from kind of the responses thus far, I mean, I think it was 60% of the increase was SNC related. Obviously, that's rounding or ballpark or you want to phrase it. When you think about just kind of going forward that would back out roughly $75 million of the roughly $130 million linked quarter criticized. Do you have any thoughts on kind of what we should expect going forward, especially with lower rates? I know that some of this is economically dependent and someone who just can't tell 6 or 9, 12 months from now. But when you think about lower rates and kind of the cleaning up of the balance sheet. Do you feel like you've appropriately addressed a lot of the credit or presumably could be so it could potentially be over marked? Or is it still kind of more flower than that?
Yes, it’s a challenging question to answer. We evaluate credit on a daily, monthly, and quarterly basis to ensure our portfolio and individual loans are classified accurately. Looking ahead, as I mentioned earlier, interest rates have certainly impacted our customers' performance, with varying effects. Generally, consumers who are net borrowers will benefit from lower interest rates. On the commercial side, some of our customers use hedges or enter into fixed rate agreements, while others have variable rates that will benefit from lower rates. However, fixed rate loans will need to adjust over time. The rise in interest rates we've seen recently has been significant, and the benefits from falling rates will likely come more slowly for our commercial and industrial clients. They may need to adjust their expenses based on demand for their products and services, especially if there is an expectation of continued sluggishness.
We are already observing some customers reducing their inventory levels due to decreased demand for heavy equipment and durable goods, while others are managing expenses through payroll adjustments. From my perspective, our credit book is accurately marked and classified, but it will be important to see how changes in rates or shifts in the economic cycle affect specific sectors. Currently, the issues we're facing seem to be more situational rather than tied to specific geographies or industries, except for transportation, where we are observing some challenges, but we are not heavily invested in that area.
Ben, this is John. Just to add a little color and maybe this is more in line with what you're looking for. But clearly, inflation reducing the cost of workforce becoming a little bit more reasonable or certainly not going up as fast as it was and the cost of variable rate money coming down are certainly tailwinds to improve the bottom line for clients. But as you know, we have to risk rate based on current and relatively reasonably previous financials. And so the outlook for how well things may get unfortunately can't be inclusive in the rate. So it's a little bit of a rear view, the comments we're giving you a rearview look on ratings and a forward view and confidence of things working out pretty well. Hopefully, that's helpful.
Yes, it is helpful. I mean we've got a few e-mails the criticized jump spooks on people, but I think the SNC review and then like you said, credit is a little backward looking in this respect, especially if it kind of rate focus probably as some of the peers. Kind of a little more nuanced question. It's not modifying lens continue to go up. Not that do you know, any color there would be helpful.
Sure. Yes, this is Chris again. Just by its nature, if you imagine a special assets department, we tend to manage the portfolio kind of on a short duration basis as we work through individual issues. So as loans mature with customers that we're looking to either encouraged to refinance elsewhere or to allow them to get to a better place, we keep the duration of the maturity short. And so most of our modifications are term related because we roll them forward in 90 and 120 day increments. And over a period of time, you then have to classify those loans as modifications, even though it's part of the strategy that we work through with those customers.
And your next question comes from the line of Gary Tenner with D.A. Davidson.
I wanted to ask about kind of the overall guide on PPNR as it is now versus where it was last quarter. If you kind of look at the midpoints of what you provided for fees and expenses in the last quarter on PPNR with the changes now. It certainly would appear that NII for full year is coming in lower than what you would have thought a quarter ago despite the fact that you still are guiding to additional modest NIM expansion and the loan growth that hasn't really changed. So is it a function of maybe just the balance sheet not growing at all really kind of back half of the year? Or what's the primary item there just as kind of then we're thinking about rolling forward into 2025?
When we consider PPNR, the guidance we're providing is essentially annual. However, we can reasonably estimate what to expect for the fourth quarter. You're correct in noting the size of the balance sheet has not increased and has actually slightly decreased in the latter half of the year. This is certainly influencing the stabilization we're anticipating in NII for the fourth quarter. Additionally, we previously mentioned fees, where we recorded approximately $5 million in exceptional items that shouldn't be relied upon on a quarter-by-quarter basis. While some of this may recur in the fourth quarter, it's challenging to specify what that will be. On the expense front, although we experienced a remarkable reduction in expenses from the previous quarter, we are likely to see a slight increase in the fourth quarter. Therefore, when all of this is considered, despite a strong quarter for PPNR growth in the third quarter, I expect it to dip a bit in the fourth quarter.
The question focused on the net interest income, and your response regarding expenses was informative as well. Additionally, can you provide some context about the recruitment targets? How many new staff members are you considering adding, and what kind of talent are you seeking as you look ahead to next year?
Yes, this is John. Thank you, Gary, for the redirect. Regarding hiring, we are not ready to discuss specific numbers yet, but we plan to do so in January. We expect to focus on recruiting now, and while we have made some hires, we want to complete our recruiting efforts over the next four to five months before reporting our progress and expectations as part of the 2025 guidance. It would be premature to provide numbers at this moment. We have a good number of offers out, but as you know, the acceptance rate will not be 100%. I won’t focus on numbers right now, but I can say that our recruiting efforts have been well-received. We offer a unique environment where there is a strong partnership between the line credit and the treasury function, which helps in setting rates and creating attractive packages for new clients and those looking to expand. This effort has been positively received, and we look forward to discussing it in more detail as we approach 2025.
Concerning talent, we are eager to attract experienced individuals in any of our markets, but our recruiting has been primarily targeted in areas with higher organic growth potential, specifically Texas and Florida. Generally, we are looking for bankers in the commercial business banking space, as well as wealth advisers, given the success of our wealth management offering. We see opportunities to add wealth advisers and achieve quick gains. It typically takes about 12 months for new bankers to start contributing to profitability, with a timeframe of 18 to 24 months before they become significantly profitable and align with our target operating model. We have implemented this approach for about ten years, and after four to five months, we can predict whether it will be successful. Therefore, recruitment will be an important topic when we reconvene in January.
And your next question comes from the line of Matt Olney with Stephens.
Mike, it sounds like you feel good about deposit pricing so far. It's obviously early in the cycle, but just would love to hear any updated thoughts you have on deposit betas throughout the cycle in this kind of down cycle maybe as compared to the past betas that you disclosed in your presentation.
Sure, Matt. Yes, we feel optimistic about our ability to manage deposit costs moving forward. We took proactive steps to reduce our promotional rates, particularly for CDs, ahead of the Fed's decision. Our leading promotional CD rate is currently 4.5% for a three-month term, which we have decreased by 50 basis points. We also offer a five-month CD at 4.15%, and both eight- and eleven-month CDs at 4%. These rates are appealing as they exceed the 4% threshold. We'll monitor the situation as it evolves. For the fourth quarter, we're forecasting a 225 basis point rate cut, and we'll adjust deposit pricing accordingly as we progress. Regarding our deposit betas for this cycle, based on previous cycles, we anticipate a total deposit beta between 37% and 38%. For interest-bearing deposits, we expect a beta of 57% to 58%, and on the loan side, around 49% to 50%. Those are our targets for this cycle, and it will be interesting to see how things develop after the election and into next year.
And then, going back to the credit discussion. Really a great commentary on the criticized loans and the deterioration there. Did I miss the details behind the commercial loan charge-off in the third quarter? I'm just looking for any kind of color behind that.
No, you didn't miss the question. Yes. So charge-offs were a little bit higher this past quarter. We had a couple of C&I credits that we've been kind of working through and made the decision that now is the best time to kind of charge them down given where they are. We're still working through those issues with those customers, but wanted to make sure that it was kind of in the right spot moving forward. So we took some partial charges to kind of address that. The rest were pretty run rate oriented in nature, much smaller. So not much to talk about there.
And your next question comes from the line of Christopher Marinac with Jamie Montgomery Scott.
I wanted to ask about risk adjusted returns, particularly on risk adjusted yields in the commercial book as rates fall. I mean as you look out a couple of quarters, would you imagine it gets easier to get your longer-term risk-adjusted yields or does it get harder?
I'll attempt that even though I'm much more credit risk focused than that. But yes. I mean I think what you see is oftentimes during kind of periods of turmoil that risk and returns don't always perfectly lined up. And I think as time moves on, we're going to continue to see them get better aligned. I think right now, people are focused on certain sectors more than others, and so they can get a little crazy with the types of yields and the returns that they're willing to accept in those areas. But as we start to see a broader demand across C&I and CRE, I think you'll see a little bit more rationalization on risk-adjusted returns. We continue to be focused on that. I mean it's one of our key mandates here, which is making sure that we get paid for the risk. If the risk is perceived to be lower from a credit quality standpoint, then we'll accept a little bit better or lower rate on a transaction. But we won't sacrifice rate for credit quality.
And then just for either you or Mike, what do you say in terms of fraud from sort of small business-related deposits? And is that showing up at all in some of the sundry expense lines?
Chris, this is John. Did you say fraud?
Yes, fraud.
I'll take that, and Mike can jump in or Chris, if you like. Fraud, both for consumers and small businesses, has been a challenge for several years. During the pandemic, distractions allowed bad actors to make some significant progress. However, this year, our fraud losses have decreased compared to last year and the year before. This isn't due to a reduction in intensity; rather, we have invested significantly in tools and personnel to identify issues before they escalate into losses. Fraud remains a serious concern for the industry and the economy, and it’s vital that we continue to invest in protecting our clients. Much of the expense we are incurring over time is related to educating our clients on implementing internal controls that banks have used for a long time, which they need to adopt in their own businesses.
Chris, this is Mike. The only thing I would add to that is that there was nothing specific in the third quarter that rose to the level of being called out. In fact, I think our fraud overall fraud expense is really down a bit.
And that is all the time we have for questions today. I would like to turn the conference back over to Mr. John Hairston for closing remarks.
Okay. Thanks, Abby. Thanks for moderating the call. Thanks, everyone, for your interest. I know a busy release today. We look forward to seeing you on the road soon.
Ladies and gentlemen, this concludes today's call, and we thank you for your participation. You may now disconnect.