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Hancock Whitney Corporation (NASDAQ:HWC)
Q3 2020 Earnings Call
Oct 20, 2020, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to Hancock Whitney Corporation's Third Quarter 2020 Earnings Conference Call. [Operator Instructions] Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions]

I would now like to introduce your host for today's conference, Trisha Carlson, Investor Relations Manager. You may begin.

Trisha Voltz Carlson -- Executive Vice President and Investor Relations Manager

Thank you, and good afternoon. During today's call, we may make forward-looking statements. We would like to remind everyone to carefully review the safe harbor language that was published with the earnings release and presentation and in the company's most recent 10-K and 10-Q, including the risks and uncertainties identified therein. You should keep in mind that any forward-looking statements made by Hancock Whitney speak only as of the date on which they were made.

As everyone understands, the current economic environment is rapidly evolving and changing. Hancock Whitney's ability to accurately project results or predict the effects of future plans or strategies or predict market or economic developments is inherently limited. We believe that the expectations reflected or implied by any forward-looking statements are based on reasonable assumptions, but are not guarantees of performance or results and our actual results and performance could differ materially from those set forth in our forward-looking statements. Hancock Whitney undertakes no obligation to update or revise any forward-looking statements and you are cautioned not to place undue reliance on such forward-looking statements.

In addition, some of the remarks this afternoon 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 M. Hairston -- President and Chief Executive Officer

Thanks, Chris, and good afternoon everyone. We're very pleased to report results today to reflect the execution of the de-risking strategy we implemented in the first half of 2020. Earlier this year we absorbed the impact of building a strong pandemic related reserve, issued additional subordinated debt and downsize future risk by divesting approximately $500 million in energy credits. With those actions taken we returned to profitability this quarter, we expect to return to profitability and de-risking strategy should lead to improve returns for our shareholders.

Net income of $79 million or $0.90 per share reflects performance in line with our third quarter expectations for operating in today's pandemic environment, pre-provision net revenue was up 7% linked quarter and our provision for credit losses return to a more normalized level. NIM was flat quarter-to-quarter, fees improved across all business lines and we kept expenses under control. Today, our reserve for loan losses is a solid 2.16% or excluding PPP loans 2.4%. We believe at this point we are adequately reserved for potential losses in our loan portfolio, including the impacts COVID-19 can have on our clients.

Loans declined almost $400 million, with approximately half the reductions from refinancing mortgage balances and home equity loans into the secondary market, and we continue to draw down of the indirect portfolio. Our expectation for the near-term as the clients will continue to stay on the sideline until the election has been decided and until a widely distributed vaccine is available and accepted as reliable. So while our expectations for loan growth or a bit tempered in the short-term, core deposits on the other hand remained resilient despite a continued narrowing of rates. The reliability and continued growth of core deposits, a lot of continued drawdown of wholesale and time deposit funding, which in turn help to support our NIM.

Despite the ongoing challenges for businesses operating the pandemic environment, several credit metrics showed signs of improvement this quarter. We reported significantly lower level of provision expense, a lower level of net charge-offs and a 7% decrease in non-performing loans, deferrals remained on manageable level with less than $300 million in active deferrals and falling, compared to a $3.6 billion number at the peak in May.

As expected criticized loans exhibited pressure of $64 million or 18% this quarter, a little less than 60% of the increase is related to the hospitality sector directly impacted by COVID-19. We expect more credits will move to criticized over time due to COVID, but there we have adequately reserved, thanks to our posture in the first half of the year. Today, we can confidently report that our balance sheet reflects less risk with a strong reserve, resilient core deposits and solid capital measures. We began rebuilding the capital spent in the first half of the year with the tangible common equity ratio of 20 basis points to 7.53% or 8.12% excluding PPP loans. I expect TCE will approximate 8% by the year-end 2020. We will continue to consult the examiners from the quarterly dividend and our intent remains to continue paying dividends at current levels with Board components.

Before I turn the call over to Mike, I want to mention the impact from this year's Hurricane season. Three storms at our markets this year, with two storms taking virtually the same path over Southwest, Louisiana and one storm hitting the beach towns of Gulf Shores and Orange Beach in Alabama and the Pensacola MSA in Florida. We know it has been a difficult summer for many of our clients and colleagues in these markets. And specifically want to thank the hundreds of our team members, who volunteered to operate locations, while fellow banker secure their homes, and most locations reopened under generator power the day after the storm winds [Phonetic]. Our volunteers cooked over 55,000 meals for citizens and businesses in the impacted areas, once again for getting typically 24 hours after storm winds subsided. We will continue to support our clients, communities and our colleagues in these areas, despite three Hurricanes in six weeks, we expect no material provision expense related to these three storms.

I will now turn the call over to Mike for additional comments.

Michael M. Achary -- Chief Financial Officer

Thanks. John. Good afternoon, everyone. So as John noted earnings for the third quarter totaled $79.4 million or $0.90 per share, obviously a vast improvement over the second quarter and a nice return to profitability for the company. As a reminder, the second quarter's loss of $117 million included a large provision of nearly $307 million, a $160 million of which was related to the energy loan sale and then an additional $147 million that was mainly COVID-19 related.

Our PPNR came in at $126.3 million, so up a healthy $7.8 million or 7% for last quarter. Consistent with our prior guidance, our provision returned to a more normalized level at $25 million. The provision covered our net charge-offs of $24 million, with the remainder of building reserves slightly. For the fourth quarter, we expect the provision to again cover our net charge-offs, so at this point, we do not expect to significantly build or release reserves.

Our balance sheet was stable at $33 billion, loans were down $388 million with deposits also down, but just under $292 million. The decrease in loans was reflected across all markets, as well as in mortgage, indirect and energy, there were no PPP loans forgiven in the quarter. We currently expect that PPP loans will remain relatively stable through the end of the year and then begin to significantly decline in first quarter of '21, as a forgiveness process ramps up.

The primary driver of the $292 million drop in EUP [Phonetic] deposits was related to our balance sheet strategy to reduce some of our excess liquidity. So while our EUP deposits were down $292 million, $392 million was related to a reduction and more costly brokered CDs. Our mix of deposits was favorable this quarter as well, with increases in DDA and other less costly deposit categories and then decreases in more expensive retail and brokerage CDs. As a result, we were able to reduce our cost of deposits 9 basis points from last quarter. We also moved about $600 million of cash held at the Fed to the securities portfolio picking up about 107 basis points of yield. This proactive approach, the balance sheet management led to a stable NIM for the quarter of 3.23%. Looking forward, we expect the NIM to continue to remain relatively stable in the fourth quarter.

Slide 24, is the greener slide in the deck. All areas within fee income improved linked quarter, while not at pre-pandemic levels, increased activity in service charges and card fees led to increases in fee income. Mortgage banking fees were up again and we're a significant contributor to the quarter's overall fee income growth, as was specialty income specifically BOLI. At this point, we do not expect similar levels of mortgage fees or specialty income in the fourth quarter. We maintained our focus on expense control and reported a lower level of expense this quarter with incentive pay and payroll taxes, both down.

During the third quarter, we also saw an overall decline in head count of 138. Initiatives we implemented during the quarter, such as the closure of our trust offices in New York and New Jersey and a focus on staffing that the higher vacancy and attrition levels. We also announced the consolidation of 12 branch locations in Mississippi and Louisiana in late October. As these expense reduction efforts continue, we expect expenses to be down in the fourth quarter as well.

As John noted, we began rebuilding capital this quarter. Our CET1 ratio was 10.29%, up 51 basis points from June and our total risk-based capital came in just under 13% at quarter end.

With that, I'll turn the call back over to John.

John M. Hairston -- President and Chief Executive Officer

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

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question comes from Michael Rose with Raymond James. Your line is now open.

Michael Rose -- Raymond James -- Analyst

Hey, good afternoon guys.

Christopher S. Ziluca -- Chief Credit Officer

Hey, Michael.

Michael Rose -- Raymond James -- Analyst

Wanted to -- hey, how are you? Wanted to start with the increase in criticized commercial loans. This quarter, I assume some of it is migration from some of the at-risk exposures, if we could get some color there, and then if you could give some color on some of the healthcare credits that were charged off this quarter that would be great. Thanks.

John M. Hairston -- President and Chief Executive Officer

Okay, sure, Chris you want to talk about that?

Christopher S. Ziluca -- Chief Credit Officer

Sure. Yes, I mean as I indicated in some prior discussions, we really didn't anticipate a lot of migration during the first couple of quarters. But as we kind of got our arms around some of the specific account level issues, we knew that there was going to be some migration starting to show in Q3. So you're right, a portion -- reasonable portion of the migration this quarter was our ability to better assess the facts and circumstances of some of the credits in the sector under focus, as well as more broadly and so we did see some migration due to COVID.

John M. Hairston -- President and Chief Executive Officer

Michael this is John, on the healthcare question, the healthcare charge was almost all one credit that was not specifically healthcare credit. There was a very large percentage of now all of its income from healthcare offices and while they were shut down, it was somewhat egregiously affected. So we opted also operation to the charge that credit down.

Michael Rose -- Raymond James -- Analyst

Somewhat of a real estate credit then.

John M. Hairston -- President and Chief Executive Officer

No, no services credit.

Michael Rose -- Raymond James -- Analyst

Service. Okay, got it. And then maybe just a follow-up for Mike, if you can give us the dollar amounts that you would expect would come out of the run rate for fees and expenses for some of the elevated items this quarter that would be appreciated. Just from a run rate perspective? Thanks.

Michael M. Achary -- Chief Financial Officer

Michael, I'm not sure I heard the last part of the question.

Michael Rose -- Raymond James -- Analyst

Just what comes out of the run rate for the elevated expenses this quarter and then, you know, relate -- what will come out for the severance cost and stuff like that for the closing of the offices? Thanks.

Michael M. Achary -- Chief Financial Officer

Yes, so for the third quarter in terms of any one-time costs, they really did offset one another. So the severance that we had, as well as some of the costs related to the closure of some of the facilities we called out was really offset by the reduction in incentive comp and a few other items that were really, kind of, left over from the MSL acquisition. So all of those items actually did offset one another, such that the run rate for the third quarter going forward, really was there is a number that we reported.

Now in the fourth quarter we do expect to continue to execute on the same kinds of our cost initiatives -- cost-saving initiatives that we did in the third quarter. So we do expect, all things equal for expenses to be down in the third quarter probably at least $2 million or so.

Michael Rose -- Raymond James -- Analyst

You mean in the fourth quarter, correct?

Michael M. Achary -- Chief Financial Officer

Fourth quarter, I'm sorry 4Q over 3Q.

Michael Rose -- Raymond James -- Analyst

Thank you. Okay, OK. And then what BOLI amount this quarter?

Michael M. Achary -- Chief Financial Officer

It was right at about $3 million and again a lot of that was mortality gains that we don't expect to repeat in the fourth quarter.

Michael Rose -- Raymond James -- Analyst

Perfect. Thanks for taking my call -- my questions.

Michael M. Achary -- Chief Financial Officer

You bet, Michael. Good to hear from you.

Operator

Thank you. Our next question comes from Brett Rabatin with Hovde Group. Your line is now open.

Brett Rabatin -- Hovde Group -- Analyst

Hi, good afternoon, everyone.

John M. Hairston -- President and Chief Executive Officer

Hi, Brett.

Brett Rabatin -- Hovde Group -- Analyst

Wanted to ask about the growth outlook and I know that things are a bit uncertain and you've obviously been through a challenging year in terms of the energy book and maybe the focus has been more on making sure credit is good. And I guess I'm just trying to figure out what the path for growth might be from here? And what loan categories you want to grow? And what kind of the loan pipeline looks at this point?

John M. Hairston -- President and Chief Executive Officer

Okay. This is John. I'll start and Chris or Mike may want to add color. But [Indecipherable] let's talk first about the decline from the second quarter to third quarter. It is unusually somewhat evenly split between consumer purpose credit and business credit usually it's not quite that even when we see growth or decline. But the mortgage refinancing activity continue to outperform in 3Q and in fact we had record applications after we thought surely it would subside a bit from the record second and first quarter, but it didn't actually went up. And so the impact of that refinance activity to some degree took out balances that were already in our mortgage portfolio, as well as home equity lines that were over on the consumer side, so about half of the overall reduction that you see categories and the investor deck actually source that -- at the mortgage refinance and the continued wind down of the indirect portfolio.

And looking at business credits, it was really somewhat across the board and with very few deferrals left and that fell pretty precipitously through the third quarter, the amortization rate has essentially been outpacing production, which is roughly for third quarter 50% of what it would have been the previous year's third quarter. So a significantly lower level of production. I'd say the causes of that are about 80% demand at about 20% a tightened credit risk appetite, while there is still a little bit of uncertainty. So when you look at growth categories in the future, I think they would be -- those things that would be somewhat obvious, the sectors that are under focus, while there may be a little more demand there, it's It's not something that we're excited about growing not right now. And that despite the fact the hospitality book through most of our footprint has actually been somewhat resurgent as we went through the third quarter and is performing better than perhaps we would have expected a quarter ago, which was better than a quarter before that. But at this point, we just don't think that the crystal ball is clear enough to step on the gas too far and the hospitality hospitals rated sector.

So I think there's life in particular sectors of commercial real estate in certain markets. There is life in the consumer book that is related to real estate secured credit as valuations begin to respond to tightness in the market. And then in various categories of C&I outside those sectors is under focus. So I don't want to give the -- I view that we're not interested in production, we're keenly interested in production, but at this point in time, we're focused on making sure it's sturdy from a credit risk perspective and end markets that we feel like are going to resurge a little bit faster than some of the ones where we may have a larger concentration today. Anything to add of that Chris or John?

Christopher S. Ziluca -- Chief Credit Officer

The only thing I would add, John is that certainly the areas that we're not interested in growing continue to be the ones that we kind of called out in the past. So indirect mortgage as you just mentioned, and then certainly energy.

Brett Rabatin -- Hovde Group -- Analyst

Would it be fair to assume that you're expecting originations to more than offset payoffs from here?

John M. Hairston -- President and Chief Executive Officer

It's a little hard to tell. This is John again 4Q seasonally can be daunting in terms of production offsets. In this particular fourth quarter with the election uncertainty has created what appears to be more consternation and one would have expected. A lot of that is because people don't know how to model taxes next year, so while it may be priced into the market from an investor point of view, it's still a degree of uncertainty, those people considering, retooling and expanding. The only exception to that is I think just because money is so cheap, we are seeing a fair amount of increase. In real estate related expansions, but they're not big enough at this point in time to offset production -- offset pay downs.

Now that being said, there is a fairly significant debate internally over where the trough actually happens. I don't want to get too much into it, because we haven't really reached a consensus, I don't think we will until after the election. But certainly the pace of paydowns versus production is slowing and I think perhaps the peak of that offset might have been in 3Q. But it's way too early to call out when the inflection point, really occurs.

Brett Rabatin -- Hovde Group -- Analyst

Okay, great, thanks for the color.

John M. Hairston -- President and Chief Executive Officer

Of course. Thank you.

Operator

Thank you. Our next question comes Kevin Fitzsimmons, D.A. Davidson. Your line is now open.

Kevin Fitzsimmons -- D.A. Davidson -- Analyst

Hey, good evening, everybody.

John M. Hairston -- President and Chief Executive Officer

Hi, Kevin.

Kevin Fitzsimmons -- D.A. Davidson -- Analyst

I guess, if we can look a little further out on the margin and I know that's tough to do the so many moving parts, but beyond fourth quarter as we look into next year. And let's for now put PPP to the side, but I would think -- if you think you start growing the loan portfolio over time. Some of the excess liquidity continues to fall off. Do you envision being able to keep the margin stable over the next several quarters? Or is that just to tall in order here, if we're in a lower for longer rate environment? Thanks.

Michael M. Achary -- Chief Financial Officer

Yes, Kevin. This is Mike. So certainly the guidance that we've given kind of go forward really just goes to the fourth quarter and we feel pretty, pretty certain around our ability to maintain the NIM somewhere around where it is right now, so through '23. Going into '21 at this point, the visibility and the clarity is pretty murky for the reasons you just mentioned, as well as our whole bunch of other things out there, including when meaningful loan growth might resume, things like full opening all of our regional economies certainly that's very dependent upon a vaccine that's available and effective, as well as the rate environment. And certainly, if we assume the rate environment stays where it is right now growing the margin in that environment, certainly is going to be a challenge. But really is too soon, I think for us to step out there with guidance right now beyond the fourth quarter. So we'll talk a little bit more about '21 guidance after our fourth quarter release.

Kevin Fitzsimmons -- D.A. Davidson -- Analyst

Okay. Thanks, Mike. And you had mentioned before about PPP forgiveness process ramping up and how we should look at the loans staying roughly stable in fourth quarter, but then falling off relatively quickly in first quarter. So is it fair to assume the bulk of the remaining origination fee will -- we should expect to flow through to the margin, mostly in first quarter of '21?

Michael M. Achary -- Chief Financial Officer

Yes, that's certainly under the scenario we've outlined related to the forgiveness process and how that plays out. If it does play out that way and certainly will have some fee recognition, a little bit on the outsized basis in the first quarter of next year. Now, to the extent that we do have any forgiveness in the fourth quarter, then there'll be some fees that will be pulled forward to the fourth quarter from the first quarter of next year. But as of right now, we're moving that -- assuming that to be a material amount.

And Kevin, as it's helpful, there were no PPP loans repaid in 3Q and thus far as of this morning in fourth quarter, only about $1 million have been paid down from SBA, but there is $105 million that have already been submitted and we're waiting for resolution. So it's definitely picking up, how quickly all those get resolved and repaid is kind of tough to forecast, but it does appear that SBA is beginning to expedite that process. So beginning of the set clarity as to what that -- is at the beginning. And that could play throughout so who knows.

Kevin Fitzsimmons -- D.A. Davidson -- Analyst

Let me just ask one quick question on the statement on the dividend, I just want to be clear, is this -- are you guys just really kind of including that in there? Or does it signal and -- because on one hand just -- I thought you said pretty clearly intend to pay it. I think last quarter on this call, it came across that it might be at risk. And then you guys came out pretty definitively and said, you intend to pay it now capitals increasing, you are back to profitability. So, is that more just a -- out of an abundance of caution, you're always having that conversation and consultation with regulators on how we should look at that?

John M. Hairston -- President and Chief Executive Officer

Yes, absolutely, absolutely, Kevin. So it goes without saying that our number one capital priority at this point in time, is there any support for the common dividend. And that was the case for last quarter and that will be the case really on a go-forward basis, because the losses that we had in the first half of the year we go through a consultation process with the Federal Reserve and that will continue at least for another couple of quarters. But as we said in the earlier comments and we'll reiterate it right now, we are very confident in our ability to continue the common dividend at the current levels.

Kevin Fitzsimmons -- D.A. Davidson -- Analyst

Great. Thanks, Mike. Appreciate it.

Michael M. Achary -- Chief Financial Officer

You bet.

Operator

Thank you. Our next question comes from Catherine Mealor with KBW. Your line is now open.

Catherine Mealor -- Keefe Bruyette & Woods -- Analyst

Thanks. Good evening.

John M. Hairston -- President and Chief Executive Officer

Good evening, Catherine.

Catherine Mealor -- Keefe Bruyette & Woods -- Analyst

One follow-up on the margin, I'm just thinking about loan yield. So if I back out accretable yield and PPP, I'm getting a loan yield of around $388 million. So how should we think about where new and renewed loan yields upon the loan growth as well [Phonetic], as you, kind of, thinking where the portfolio is churning where that? Are we close to the bottom on new loan yields or how much, kind of, more downside do you think we have from that $388 million?

John M. Hairston -- President and Chief Executive Officer

Not sure how much downside we have, but certainly your math is correct and kind of backing down to about $388 million yield or so and that also happens to be the yield that in the third quarter we put new loans on the books. So our production levels were about $900 million or so. And those loans came on at about $387 million or so. So there should be good support to maintain that loan yield more or less going forward. Now of course our NIM for the quarter was flat at $323 million, but if we back out our purchase accounting accretion, the core NIM was actually up the basis point. So obviously that's something that's variable.

Catherine Mealor -- Keefe Bruyette & Woods -- Analyst

Got it. Thanks, that's helpful. And then your tax rate is 19%. How do you think about what your tax rate would look like if the corporate tax rate went up to 28%?

John M. Hairston -- President and Chief Executive Officer

Well, that's something we're still working through, Catherine. So you're correct again, I mean the third quarter effective rate came in at 19%. We do expect that rate to be a bit lower in the fourth quarter as we're, kind of, focusing on different tax strategies in terms of evaluating and implementing them, but we're not ready right now to come out with what the fourth quarter effective tax rate might be. And as we move into next year, if it does go up to 28%, we do have a deferred tax liability at the end of the third quarter that stands at about $47 million. So certainly under that scenario that will have to be evaluated. But no guidance on that just yet.

Catherine Mealor -- Keefe Bruyette & Woods -- Analyst

Okay, great. Thank you.

Michael M. Achary -- Chief Financial Officer

Okay.

Operator

Thank you. Our next question comes from Brad Milsaps with Piper Sandler. Your line is now open.

Brad Milsaps -- Piper Sandler -- Analyst

Hey, good evening guys.

John M. Hairston -- President and Chief Executive Officer

Hey, Brad.

Brad Milsaps -- Piper Sandler -- Analyst

Mike appreciate all the details around the branch consolidation and some of the headcount reduction. Just kind of curious in the, kind of, bigger picture, is this sort of the tip of the iceberg, kind of, on what you guys could potentially having the works in terms of maybe additional branch consolidation. I know you're not going to give me guidance for next year yet, but just trying to thinking about how you're looking at. So where the expense structure from a bigger picture standpoint of this. Is this were the beginning of something larger or is this kind of the end of a plan that you guys have been working on for a while?

John M. Hairston -- President and Chief Executive Officer

No, absolutely not the end. So we continue to focus on these kinds of things for it. And what you saw us do in the third quarter, I think that you'll see us do similar kinds of things in the fourth quarter, but there is nothing, obviously, we're ready to announce right now. And then on a kind of a go-forward basis, we continue to evaluate other options and that could be in the full arm of some larger efficiency kind of exercise. But again, those are things we're evaluating right now and certainly not in a position to announce.

Brad Milsaps -- Piper Sandler -- Analyst

Okay. And then wanted to follow-up on some of your comments around it. The bond [Indecipherable] it looks like a lot of that occurred maybe late in the quarter, if I'm looking at the average is correct. Can you give me a sense of kind of where the average yields were of the bonds that you were putting on, kind of, relative to the current yield of the book?

John M. Hairston -- President and Chief Executive Officer

Sure will be glad to. So the bond portfolio finished the quarter at right at about $6.8 billion. So it was up just a little bit under $700 million quarter-over-quarter. We like to keep the bond portfolio somewhere between 20% to 25% of average earning assets. So it's kind of right smack in the middle of that range, if you will. The yield was down 16 basis points, of course nine of that was related to higher premium amortization in the quarter and then the other seven was basically lower reinvestment yields. So the total amount of money that we reinvested back into the bond portfolio was just north of about $1. About $400 million of that was really just reinvested cash flows from prepayments and those were up pretty significantly as you can imagine third quarter, compared to the second.

And then the other $600 million that I called out earlier was really that we're really moved from the Fed earning 10 basis points to the bond portfolio, we picked up about the 107 basis points, I mentioned earlier. So the kinds of things that we invested back into in the bond portfolio really is characteristic of the portfolio itself. Probably by two-thirds of that money are reinvested back in mortgage-backed securities. The yield there was about 119 basis points and then there was another quarter or so that we reinvested in commercial mortgage backed, the yield there was about 105 basis points.

Brad Milsaps -- Piper Sandler -- Analyst

Great, thank you guys. I appreciate it.

Michael M. Achary -- Chief Financial Officer

Sure.

Operator

Thank you. Our next question comes from Ebrahim Poonawala with Bank of America Securities. Your line is now open.

Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst

Good afternoon, guys.

John M. Hairston -- President and Chief Executive Officer

Hi, Ebrahim.

Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst

I just had a couple of follow-up questions; one, on expenses, did I hear you correctly, Mike, that you expect the decline that you expect in the fourth quarter is about $2 million sequentially in terms of the expansion run rate?

Michael M. Achary -- Chief Financial Officer

Yes, that's correct, Ebrahim.

Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst

And should it not be more than that given all the actions you've taken or was some of that already baked into third quarter numbers, which is why we don't see a greater impact from the expense savings or the branch we have headcount reduction?

Michael M. Achary -- Chief Financial Officer

Yes, there is certainly some of that. But a lot of it is timing. And for example, the 12 branches that we announced the consolidation of those won't be closed until really until the middle of the fourth quarter, so you won't see a full impact -- full quarter's impact of that really to get to the first quarter of '21. And really the same goes for some of the attrition levels that we were able to achieve, as well as the vacancy rates. So I think most of that you'll see kind of a full quarter and a full-year's impact in '21. So again once we close the fourth quarter -- on the fourth quarter call, I would expect that we'll give a little bit more granular guidance around expenses, as well as other items.

Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst

Got it. Plus I would assume that some pickup on the expense savings if mortgage banking is slower in the fourth quarter in 1Q. So you should get some benefit there as well?

Michael M. Achary -- Chief Financial Officer

Right. That's correct.

Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst

And I guess just moving to margin to your -- I guess your response to Catherine's questions around the core loan yield. So when we look at sort of the balance sheet and the pressure from the lower interest rate backdrop. Is it fair to say that it's essentially tied to the investment securities book given that loan yields are close to bottom and funding cost probably have a little bit more room lower, but beyond all of this, the incremental pressure point is essentially the securities book?

Michael M. Achary -- Chief Financial Officer

Yes, I think so, but if we look at the fourth quarter and again our ability to keep our NIM flat quarter-over-quarter, kind of, the tailwinds that we think about the things that we'll be able to continue to execute on, that will offset things like the lower yield in the bond portfolio. Deposit cost for one, I mean we've had, and I think a pretty good run this year being able to proactively reduce our deposit costs, we've got it down 9 basis points third quarter or the second quarter, the previous quarter was down 30. So at the level we're at now, certainly we're beginning to run out of runway at 20 basis points, but we do believe that there is additional room to reduce the cost of our deposits, and I think you'll see that in the fourth quarter. You kind of called out a forecast of 17 basis points by December and that's the number that we're kind of hanging our hand on, but certainly there is some ability or capability to outperform that number a little bit. So that continues to be one of the lynchpins if you will, of how we're able to keep our NIM basically stable at $323 million.

In terms of shedding liquidity, the vast majority of that, I think is really kind of played out to some extent, but there's still some opportunity to run off some liquidity, which is certainly going to be helpful to the NIM. And then, we have great support from our PPP loans, I think as I mentioned earlier, if there is any PPP loans forgiveness that happens in the fourth quarter, that will be helpful for the NIM, because that will certainly pull forward some fees from first quarter of '21. So those are the things we're thinking about and kind of how we think about our ability to keep the NIM stable in the fourth quarter.

Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst

Got it. That was helpful. And we have another bank this morning talk about 80% of PPP loans sitting in deposits. What would that number be for you? And should we expect a good amount of deposit runoff when PPP loans are forgiven?

Michael M. Achary -- Chief Financial Officer

Well, certainly I think as the PPP loans are forgiven, we'll see money certainly move from the loan portfolio to other areas in terms of average earning assets. How much of that flows out of the deposit base, certainly you would think that, that some would maybe a material amount. But until that plays out it really gets hard to tell.

John M. Hairston -- President and Chief Executive Officer

Ebrahim, this is John. We tend to look at more, when spending picks up as opposed to win PPP forgiveness actually happens. And so far the book has been a lot stickier than we actually anticipated, which has been somewhat of an impediment to deposit service charges, right? Because [Indecipherable] decrease and recurring monthly charges and fees have been less, because the average balance, it's been higher. So there are puts and takes to when that flow actually begins to occur, but at this point in time, it's been quite resilient, which has in turn helped us to pay down some of the more expensive funding that Mike mentioned earlier.

Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst

Got it. Thanks for taking my questions.

John M. Hairston -- President and Chief Executive Officer

Yes, thank you so much.

Operator

Thank you. Our next question comes from Matt Olney with Stephens. Your line is now open.

Matt Olney -- Stephens -- Analyst

Hey, thanks guys. I want to circle back on credit. And John, you mentioned that criticized loans increased around 18% this quarter, and it sounds like you expect additional migration in the near-term. I'm curious what the expectations are from here? Are we talking another 18% and then, sort of, level off or I'm trying to figure out how far along you are in the evaluation of credits that could potentially be downgraded?

Christopher S. Ziluca -- Chief Credit Officer

Yes, so this is Chris Ziluca. Yes, I really, I mean, I think we're being cautious in many respects and how we're addressing it, because there's always unknown things that can kind of surface that depending on whether or not, you know, they've rolled back any sort of closures of businesses and things like that. But we've gone through our full portfolio and done a pretty thorough analysis of all the credits in our portfolio, and we feel pretty good about how we've risk weighted the loans thus far. So, although, as you can imagine given both the and the economic cycle we're in there will be some impact customers and then there will be somewhat uneven. We really don't see at this stage. And there's plenty of days in the quarter still any sort of significant migration downward. There will be some and then there will also be opportunities to upgrade some credits and of our credits have actually done pretty well during this cycle.

But as we work through the deferral process and the structured solutions that we put in place. We've used that opportunity in addition to our normal portfolio management process to really be certain about our risk rating. So to -- little bit of a roundabout answer, but the reality is, is that I think the bigger migration at this point, we saw in Q3 and although things can surface. I don't think we're going to see quite the level of migration at this juncture.

Matt Olney -- Stephens -- Analyst

Okay, that's helpful.

John M. Hairston -- President and Chief Executive Officer

Yes and Matt, this is John. Part of the reason for what Chris shared and it's obviously based on what we know today is that about 60% of that migration specifically was hospitality, and a lot of that migration was hotel, which is understandable given the situation that we're in. And if you look at over the footprint occupancy levels tend to be 50%, 60% or better projected for next year, which is obviously tremendously better than we saw in the middle parts of 2020. So that migration that happened this year, we'll probably be led by hotels and then as we get into next year gets likely to be things like attractions of the event management organizations, people that really are driven by festivals and convention and trade shows more narrowly. And so there'll be several bumps depending on what sector that it is, but I think I would agree with Chris.

Obviously as a company, who is looking to improve its image and asset quality give our energy experience in the last five years that review has been in depth and the expectation in candor and the way we deal with credits is very high. And so I think the 18% migration very accurately reflects what we actually have this quarter, there's no reaching deeper for a fact and we're pushing anything or kicking the can down the street. So I think it is exactly what we stated.

Matt Olney -- Stephens -- Analyst

Okay. All very fair points. And then going back to the healthcare credit was charged off this quarter. I think in the past you've divided healthcare into different segments, which segment was this from? And was this out of the Nashville office? Thanks.

John M. Hairston -- President and Chief Executive Officer

It was not. And obviously, I don't want to get too much into one credit that we'll incorporate, but I can tell you, it's not as a national group, it was original credit and it was an organization that while not in the healthcare business, derive their income from a multitude of offices that are in the healthcare business. And so with as much closure as we had across our footprint, a lot of physicians and dental offices were basically closed for the better probably four four, five months and so with that revenue curtailment, we felt the P&L was in position of where we were better off going ahead and taking the treatment, but they account now.

Matt Olney -- Stephens -- Analyst

Okay. That's OK.

John M. Hairston -- President and Chief Executive Officer

[Indecipherable] thank you.

Matt Olney -- Stephens -- Analyst

Just one more from me on Slide 15 you gave us a nice graph there of the deferrals and those are obviously coming down and highlights about $222 million of structured solutions. Do you still anticipate that amount to grow as we get toward the year-end? Or you think that $222 million will be relatively stable between now and year-end?

Christopher S. Ziluca -- Chief Credit Officer

Yes, I mean I'll respond to that. It's Chris Ziluca. Yes, I mean, for the most part, I think we've addressed the structural solutions necessary for a lot of our customers. I think we'll continue to look at that as customers that are still in the deferrals, we still have active deferrals there of $284 million. And if it structured solution is really the right answer for them, then we'll entertain it, but I don't really anticipate that number increasing substantially between now and the end of the year. It might go up, certainly as we try to put things in the right place and really do the right thing for the customer and for ourselves. But in reality, I think we spent the vast majority of our time in Q3 trying to put the building box in place for being able to deal with 2021.

John M. Hairston -- President and Chief Executive Officer

And that was part of the criticized update, as we [Speech Overlap] which are the structured solutions with the other criticized credit and which did not. So as we're all interlinked.

Matt Olney -- Stephens -- Analyst

Okay, great.

John M. Hairston -- President and Chief Executive Officer

Does that helped you, Matt?

Matt Olney -- Stephens -- Analyst

Yes, that'd be great, guys. Thanks, I appreciate it.

Michael M. Achary -- Chief Financial Officer

Yes, sir thank you for the questions.

Operator

Thank you. Our next question comes from Jennifer Demba with Truist Securities. Your line is now open.

Jennifer Demba -- Truist Securities -- Analyst

Thank you. Good evening.

Michael M. Achary -- Chief Financial Officer

Hi Jennifer.

Jennifer Demba -- Truist Securities -- Analyst

Just curious as to what kind of trends you're seeing -- you think you'll see in the fourth quarter in service charges and card income and mortgage fees. Are you going to continue to see more improvement in those core banking fees? Or and do you think seasonality is going to hurt the mortgage income line?

John M. Hairston -- President and Chief Executive Officer

So that's a terrific question and this is John. When we look at fee income, obviously third quarter was much better than second quarter and even as we take out the outperformance once again in secondary mortgage and in the other income categories, there were a number of -- BOLI we talked about, because it tends to be more lumpy. And so Mike wanted to call that one out. But we did have a categories, they were all up and the service charges were up 16%, car fees up 7%, annuities and investments up 10%. But when you compare that same run rate to the third quarter of last year.

Service charges are down 19% and so that would indicate that there is still a fair amount of upside in those fee income categories with the exception of secondary mortgage as that production begins to wine. So I would look for a little bit of improvement over time in those categories that I mentioned. Because I think there's still upside there, as average balances and accounts come down and as we have more foot traffic into the locations and meeting with various investment team members that generate both annuities and investment accounts. So we just need more traffic to get that particular number up. So I think as deposits migrate out or get spent, we'll see stronger service charge income as more people get into the seasonal season for shopping we'll see card fees go up and then investment annuities will go up when we can see more traffic, and that's been the toughest one to predict.

In terms of secondary, that's -- you asked that question last quarter and it was a great question there and I think I said every time we say, we think it will go down, it goes up again. So I'm almost hesitant to say that will go down other than the basis that the secondary mortgage income typically seasonally drops off as we get into the holiday season. So I think for that reason if no other reason alone, we should see it mediate down or moderate down a little bit more than it did last year same time. Did I answer your question?

Jennifer Demba -- Truist Securities -- Analyst

Yes. Thank you, John. Appreciate it.

John M. Hairston -- President and Chief Executive Officer

Okay. You bet. Thank you for the question.

Operator

Thank you. I'm not showing any further questions at this time. I would now like to turn the call back over to John Hairston for closing remarks.

John M. Hairston -- President and Chief Executive Officer

Okay. Thank you, Joel for running the call, and thanks to everyone for your interest. Be safe and we look forward to seeing you live sometime in the future. Take care.

Operator

[Operator Closing Remarks]

Duration: 47 minutes

Call participants:

Trisha Voltz Carlson -- Executive Vice President and Investor Relations Manager

John M. Hairston -- President and Chief Executive Officer

Michael M. Achary -- Chief Financial Officer

Christopher S. Ziluca -- Chief Credit Officer

Michael Rose -- Raymond James -- Analyst

Brett Rabatin -- Hovde Group -- Analyst

Kevin Fitzsimmons -- D.A. Davidson -- Analyst

Catherine Mealor -- Keefe Bruyette & Woods -- Analyst

Brad Milsaps -- Piper Sandler -- Analyst

Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst

Matt Olney -- Stephens -- Analyst

Jennifer Demba -- Truist Securities -- Analyst

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