Published: 2022-08-04 17:19:30 ET

 

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark one)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2022

OR

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 001-36872

HANCOCK WHITNEY CORPORATION

(Exact name of registrant as specified in its charter)

 

Mississippi		64-0693170
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

Hancock Whitney Plaza, 2510 14th Street, Gulfport, Mississippi		39501
(Address of principal executive offices)		(Zip Code)

(228) 868-4000

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class	Trading symbol(s)	Name of each exchange on which registered
Common stock, par value $3.33 per share	HWC	Nasdaq
6.25% Subordinated Notes	HWCPZ	Nasdaq

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:

 

Large accelerated filer	☒		Accelerated filer	☐
Non-accelerated filer	☐		Smaller reporting company	☐
Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

85,715,927 common shares were outstanding at July 31, 2022.

 

 

 

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Hancock Whitney Corporation

Index

 

Part I. Financial Information		Page Number
ITEM 1.	Financial Statements	5
	Consolidated Balance Sheets (unaudited) – June 30, 2022 and December 31, 2021	5
	Consolidated Statements of Income (unaudited) – Three and Six Months Ended June 30, 2022 and 2021	6
	Consolidated Statements of Comprehensive Income (unaudited) – Three and Six Months Ended June 30, 2022 and 2021	7
	Consolidated Statements of Changes in Stockholders’ Equity (unaudited) – Three and Six Months Ended June 30, 2022 and 2021	8
	Consolidated Statements of Cash Flows (unaudited) – Six Months Ended June 30, 2022 and 2021	9
	Notes to Consolidated Financial Statements (unaudited) – June 30, 2022 and 2021	10
ITEM 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	39
ITEM 3.	Quantitative and Qualitative Disclosures about Market Risk	65
ITEM 4.	Controls and Procedures	67
Part II. Other Information
ITEM 1.	Legal Proceedings	68
ITEM 1A.	Risk Factors	68
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	68
ITEM 3.	Default on Senior Securities	N/A
ITEM 4.	Mine Safety Disclosures	N/A
ITEM 5.	Other Information	N/A
ITEM 6.	Exhibits	69
Signatures		70

 

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Hancock Whitney Corporation

Glossary of Defined Terms

Entities:

Hancock Whitney Corporation – a financial holding company registered with the Securities and Exchange Commission

Hancock Whitney Bank – a wholly-owned subsidiary of Hancock Whitney Corporation through which Hancock Whitney Corporation conducts its banking operations

Company – Hancock Whitney Corporation and its consolidated subsidiaries

Parent – Hancock Whitney Corporation, exclusive of its subsidiaries

Bank – Hancock Whitney Bank

Other Terms:

 

ACL – allowance for credit losses

AFS – available for sale securities

AMERIBOR - Index created by the American Financial Exchange as a potential replacement for LIBOR; calculated daily as the volume-weighted average interest rate of the overnight unsecured loans on American Financial Exchange

AOCI – accumulated other comprehensive income or loss

ALCO – Asset Liability Management Committee

ALLL – allowance for loan and lease losses

ARRC – Alternative Reference Rates Committee

ASC – Accounting Standards Codification

ASU – Accounting Standards Update

ATM – automated teller machine

Basel III – Basel Committee's 2010 Regulatory Capital Framework (Third Accord)

Beta – amount by which deposit or loan costs change in response to movement in short-term interest rates

BOLI – bank-owned life insurance

bp(s) – basis point(s)

C&I – commercial and industrial loans

CARES Act – Coronavirus Aid, Relief, and Economic Security Act

CD – certificate of deposit

CDE – Community Development Entity

CECL – Current Expected Credit Losses, the term commonly used to refer to the methodology of estimating credit losses required by ASC 326, “Financial Instruments – Credit Losses.” ASC 326 was adopted by the Company on January 1, 2020, superseding the methodology prescribed by ASC 310.

CEO – Chief Executive Officer

CFPB– Consumer Financial Protection Bureau

CFO – Chief Financial Officer

CME – Chicago Mercantile Exchange

CMO – collateralized mortgage obligation

Core Loans – loans excluding Paycheck Protection Program (PPP) loans

Coronavirus – the novel coronavirus declared a pandemic during the first quarter of 2020, resulting in prolonged market disruptions

COVID-19 – disease caused by the novel coronavirus

CRE – commercial real estate

DEI – Diversity, equity and inclusion

DIF – Deposit Insurance Fund

Excess Liquidity – deposits held at the Federal Reserve above $200 million, plus excess investments in the securities portfolio above normal cash flows

FASB – Financial Accounting Standards Board

FDIC – Federal Deposit Insurance Corporation

FDICIA – Federal Deposit Insurance Corporation Improvement Act of 1991

Federal Reserve Board – The 7-member Board of Governors that oversees the Federal Reserve System, establishes

monetary policy (interest rates, credit, etc.), and monitors the economic health of the country. Its members are appointed

by the President subject to Senate confirmation, and serve 14-year terms.

Federal Reserve System – The 12 Federal Reserve Banks, with each one serving member banks in its own district. This system, supervised by the Federal Reserve Board, has broad regulatory powers over the money supply and the

credit structure. They implement the policies of the Federal Reserve Board and also conduct economic research.

FFIEC – Federal Financial Institutions Examination Council

FHA – Federal Housing Administration

FHLB – Federal Home Loan Bank

GAAP – Generally Accepted Accounting Principles in the United States of America

HTM – held to maturity securities

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IRS – Internal Revenue Service

LIBOR – London Interbank Offered Rate

LIHTC – Low Income Housing Tax Credit

LTIP – long-term incentive plan

MBS – mortgage-backed securities

MD&A – management’s discussion and analysis of financial condition and results of operations

MDBCF – Mississippi Department of Banking and Consumer Finance

NAICS – North American Industry Classification System

NII – net interest income

n/m – not meaningful

NSF – Non-sufficient funds

OCI – other comprehensive income or loss

ORE – other real estate defined as foreclosed and surplus real estate

PCD – purchased credit deteriorated loans, as defined by ASC 326

PPNR – Pre-provision net revenue

PPP – Paycheck Protection Program, a loan program administered by the Small Business Administration designed to provide a direct incentive for small businesses to keep workers on payroll during interruptions caused by the COVID-19 pandemic

Reference rate reform – refers to the global transition away from LIBOR and other interbank offered rates toward new reference rates that are more reliable and robust

Repos – securities sold under agreements to repurchase

SBA – Small Business Administration

SBIC – Small Business Investment Company

SEC – U.S. Securities and Exchange Commission

Securities Act – Securities Act of 1933, as amended

Short-term Investments – the sum of Interest-bearing bank deposits and Federal funds sold

SOFR – secured overnight financing rate

te – taxable equivalent adjustment, or the term used to indicate that a financial measure is presented on a fully taxable equivalent basis

TDR – troubled debt restructuring

TSR – total shareholder return

U.S. Treasury – The United States Department of the Treasury

VERIP – Voluntary Early Retirement Incentive Program

 

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Part I. Financial Information

Item 1. Financial Statements

Hancock Whitney Corporation and Subsidiaries

Consolidated Balance Sheets

(Unaudited)

 

		June 30,				December 31,
(in thousands, except per share data)		2022				2021
ASSETS
Cash and due from banks		$	698,274			$	401,201
Interest-bearing bank deposits			785,738				3,830,177
Federal funds sold			85,458				458
Securities available for sale, at fair value (amortized cost of $6,358,434 and $6,984,530)			5,779,381				6,986,698
Securities held to maturity (fair value of $2,615,798 and $1,631,482)			2,752,012				1,565,751
Loans held for sale (includes $21,496 and $41,022 measured at fair value)			44,253				93,069
Loans			21,846,068				21,134,282
Less: allowance for loan losses			(308,175	)			(342,065	)
Loans, net			21,537,893				20,792,217
Property and equipment, net of accumulated depreciation of $290,880 and $280,065			352,011				350,309
Right of use assets, net of accumulated amortization of $40,312 and $34,425			98,664				102,239
Prepaid expenses			50,095				38,793
Other real estate and foreclosed assets, net			3,467				7,533
Accrued interest receivable			101,172				96,938
Goodwill			855,453				855,453
Other intangible assets, net			62,892				70,226
Life insurance contracts			725,664				664,535
Funded pension assets, net			230,627				227,870
Deferred tax asset, net			107,013				—
Other assets			367,458				447,738
Total assets		$	34,637,525			$	36,531,205
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits
Noninterest-bearing		$	14,676,342			$	14,392,808
Interest-bearing			15,190,090				16,073,089
Total deposits			29,866,432				30,465,897
Short-term borrowings			630,011				1,665,061
Long-term debt			240,091				244,220
Accrued interest payable			2,005				3,103
Lease liabilities			118,572				122,079
Deferred tax liability, net			—				19,434
Other liabilities			430,691				341,059
Total liabilities			31,287,802				32,860,853
Stockholders' equity:
Common stock			309,513				309,513
Capital surplus			1,710,898				1,755,701
Retained earnings			1,856,489				1,659,073
Accumulated other comprehensive loss, net			(527,177	)			(53,935	)
Total stockholders' equity			3,349,723				3,670,352
Total liabilities and stockholders' equity		$	34,637,525			$	36,531,205
Preferred shares authorized (par value of $20.00 per share)			50,000				50,000
Preferred shares issued and outstanding			—				—
Common shares authorized (par value of $3.33 per share)			350,000				350,000
Common shares issued			92,947				92,947
Common shares outstanding			85,714				86,749

 

See notes to unaudited consolidated financial statements.

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Hancock Whitney Corporation and Subsidiaries

Consolidated Statements of Income

(Unaudited)

 

		Three Months Ended								Six Months Ended
		June 30,								June 30,
(in thousands, except per share data)		2022				2021				2022				2021
Interest income:
Loans, including fees		$	207,163			$	209,066			$	399,913			$	422,779
Loans held for sale			443				648				1,134				1,319
Securities-taxable			39,015				33,148				76,179				64,351
Securities-tax exempt			4,718				4,762				9,373				9,545
Short-term investments			3,525				676				5,051				1,091
Total interest income			254,864				248,300				491,650				499,085
Interest expense:
Deposits			5,051				7,064				8,829				16,291
Short-term borrowings			959				1,555				2,378				3,088
Long-term debt			3,122				5,038				6,248				10,476
Total interest expense			9,132				13,657				17,455				29,855
Net interest income			245,732				234,643				474,195				469,230
Provision for credit losses			(9,761	)			(17,229	)			(32,288	)			(22,140	)
Net interest income after provision for credit losses			255,493				251,872				506,483				491,370
Noninterest income:
Service charges on deposit accounts			20,495				19,381				42,169				38,527
Trust fees			17,309				16,307				32,588				31,310
Bank card and ATM fees			21,870				20,483				42,266				38,603
Investment and annuity fees and insurance commissions			8,001				7,331				15,428				14,789
Secondary mortgage market operations			2,990				12,556				6,736				24,266
Securities transactions, net			—				333				(87	)			333
Other income			14,988				17,881				29,985				33,533
Total noninterest income			85,653				94,272				169,085				181,361
Noninterest expense:
Compensation expense			94,155				100,587				180,148				196,433
Employee benefits			21,015				42,067				42,418				65,836
Personnel expense			115,170				142,654				222,566				262,269
Net occupancy expense			12,225				12,955				23,905				25,865
Equipment expense			4,703				4,392				9,570				9,173
Data processing expense			26,169				23,885				50,408				46,832
Professional services expense			8,423				13,473				16,216				24,724
Amortization of intangible assets			3,586				4,245				7,334				8,664
Deposit insurance and regulatory fees			3,503				2,967				7,243				6,362
Other real estate and foreclosed assets income, net			(88	)			(86	)			(1,852	)			(80	)
Other expense			13,406				32,285				31,646				46,033
Total noninterest expense			187,097				236,770				367,036				429,842
Income before income taxes			154,049				109,374				308,532				242,889
Income taxes expense			32,614				20,656				63,619				46,999
Net income		$	121,435			$	88,718			$	244,913			$	195,890
Earnings per common share-basic		$	1.39			$	1.00			$	2.79			$	2.21
Earnings per common share-diluted		$	1.38			$	1.00			$	2.78			$	2.20
Dividends paid per share		$	0.27			$	0.27			$	0.54			$	0.54
Weighted average shares outstanding-basic			86,067				86,814				86,362				86,783
Weighted average shares outstanding-diluted			86,354				86,990				86,654				86,932

 

See notes to unaudited consolidated financial statements.

 

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Hancock Whitney Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income

(Unaudited)

 

		Three Months Ended								Six Months Ended
		June 30,								June 30,
(in thousands)		2022				2021				2022				2021
Net income		$	121,435			$	88,718			$	244,913			$	195,890
Other comprehensive income (loss) before income taxes:
Net change in unrealized gain or loss on securities available for sale and cash flow hedges			(203,551	)			50,135				(594,455	)			(95,355	)
Reclassification of income realized and included in earnings			(5,570	)			(3,198	)			(9,408	)			(2,912	)
Valuation adjustments to pension plan attributable to the Voluntary Early Retirement Program and curtailment			—				59,606				—				59,606
Other valuation adjustments to employee benefit plans			(7,987	)			(10,651	)			(7,987	)			(10,651	)
Amortization of unrealized net gain (loss) on securities transferred to held to maturity			266				(45	)			527				(101	)
Other comprehensive income (loss) before income taxes			(216,842	)			95,847				(611,323	)			(49,413	)
Income tax expense (benefit)			(48,941	)			21,542				(138,081	)			(12,206	)
Other comprehensive income (loss) net of income taxes			(167,901	)			74,305				(473,242	)			(37,207	)
Comprehensive income (loss)		$	(46,466	)		$	163,023			$	(228,329	)		$	158,683

 

See notes to unaudited consolidated financial statements.

 

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Hancock Whitney Corporation and Subsidiaries

Consolidated Statements of Changes in Stockholders’ Equity

(Unaudited)

Three Months Ended June 30, 2022 and 2021																		Accumulated
		Common Stock																Other
(in thousands, except parenthetical share data)		Shares Issued				Amount				Capital Surplus				Retained Earnings				Comprehensive Income (Loss)				Total
Balance, March 31, 2022			92,947			$	309,513			$	1,742,021			$	1,758,693			$	(359,276	)		$	3,450,951
Net income			—				—				—				121,435				—				121,435
Other comprehensive loss			—				—				—				—				(167,901	)			(167,901	)
Comprehensive loss			—				—				—				121,435				(167,901	)			(46,466	)
Cash dividends declared ($0.27 per common share)			—				—				—				(23,672	)			—				(23,672	)
Common stock activity, long-term incentive plans			—				—				5,957				33				—				5,990
Issuance of stock from dividend reinvestment and stock purchase plans			—				—				919				—				—				919
Repurchase of common stock (804,368 shares)			—				—				(37,999	)			—				—				(37,999	)
Balance, June 30, 2022			92,947			$	309,513			$	1,710,898			$	1,856,489			$	(527,177	)		$	3,349,723
Balance, March 31, 2021			92,947			$	309,513			$	1,764,145			$	1,374,688			$	(31,443	)		$	3,416,903
Net income			—				—				—				88,718				—				88,718
Other comprehensive income			—				—				—				—				74,305				74,305
Comprehensive income			—				—				—				88,718				74,305				163,023
Cash dividends declared ($0.27 per common share)			—				—				—				(24,023	)			—				(24,023	)
Common stock activity, long-term incentive plans			—				—				5,870				170				—				6,040
Issuance of stock from dividend reinvestment and stock purchase plans			—				—				958				—				—				958
Balance, June 30, 2021			92,947			$	309,513			$	1,770,973			$	1,439,553			$	42,862			$	3,562,901
Six Months Ended June 30, 2022 and 2021																		Accumulated
		Common Stock																Other
(in thousands, except parenthetical share data)		Shares Issued				Amount				Capital Surplus				Retained Earnings				Comprehensive Income (Loss)				Total
Balance, December 31, 2021			92,947			$	309,513			$	1,755,701			$	1,659,073			$	(53,935	)		$	3,670,352
Net income			—				—				—				244,913				—				244,913
Other comprehensive loss			—				—				—				—				(473,242	)			(473,242	)
Comprehensive loss			—				—				—				244,913				(473,242	)			(228,329	)
Dividends declared ($0.54 per common share)			—				—				—				(47,581	)			—				(47,581	)
Common stock activity, long-term incentive plans			—				—				9,886				84				—				9,970
Issuance of stock from dividend reinvestment and stock purchase plans			—				—				1,800				—				—				1,800
Repurchase of common stock (1,154,368 shares)			—				—				(56,489	)			—				—				(56,489	)
Balance, June 30, 2022			92,947			$	309,513			$	1,710,898			$	1,856,489			$	(527,177	)		$	3,349,723
Balance, December 31, 2020			92,947			$	309,513			$	1,757,937			$	1,291,506			$	80,069			$	3,439,025
Net income			—				—				—				195,890				—				195,890
Other comprehensive loss			—				—				—				—				(37,207	)			(37,207	)
Comprehensive income			—				—				—				195,890				(37,207	)			158,683
Cash dividends declared ($0.54 per common share)			—				—				—				(48,044	)			—				(48,044	)
Common stock activity, long-term incentive plans			—				—				11,074				201				—				11,275
Issuance of stock from dividend reinvestment and stock purchase plans			—				—				1,962				—				—				1,962
Balance, June 30, 2021			92,947			$	309,513			$	1,770,973			$	1,439,553			$	42,862			$	3,562,901

 

See notes to unaudited consolidated financial statements.

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Hancock Whitney Corporation and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)

 

		Six Months Ended
		June 30,
(in thousands)		2022				2021
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	244,913			$	195,890
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			14,814				14,352
Provision for credit losses			(32,288	)			(22,140	)
Gain on other real estate and foreclosed assets			(3,276	)			(627	)
Loss (gain) on sale of securities			87				(333	)
Deferred tax expense			11,634				2,158
Increase in cash surrender value of life insurance contracts			(920	)			(15,353	)
Impairment of or loss on disposal of assets			539				15,274
Loss on extinguishment of debt			—				4,165
Net decrease in loans held for sale			43,329				45,414
Net amortization of securities premium/discount			21,311				26,211
Amortization of intangible assets			7,334				8,664
Stock-based compensation expense			11,379				11,646
Net change in derivative collateral liability			96,591				44,441
Decrease in interest payable and other liabilities			(19,009	)			(6,229	)
Decrease in other assets			108,679				45,301
Other, net			(18,286	)			(1,271	)
Net cash provided by operating activities			486,831				367,563
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale of available for sale securities			73,219				198,681
Proceeds from maturities of securities available for sale			295,121				593,760
Purchases of securities available for sale			(383,398	)			(2,235,723	)
Proceeds from maturities of securities held to maturity			77,794				77,197
Purchases of securities held to maturity			(708,439	)			(59,362	)
Proceeds received upon termination of fair value hedge instruments			49,167				—
Net (increase) decrease in short-term investments			2,959,439				(869,999	)
Net redemptions of Federal Home Loan Bank stock			37,423				—
Proceeds from sales of loans and leases			26,619				12,312
Net (increase) decrease in loans			(808,525	)			670,795
Purchase of life insurance contracts			(65,000	)			(75,000	)
Proceeds from the surrender of life insurance contracts			—				44,045
Purchases of property and equipment			(18,212	)			(7,636	)
Proceeds from sales of other real estate			9,378				5,504
Other, net			4,277				6,549
Net cash provided by (used in) investing activities			1,548,863				(1,638,877	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits			(599,465	)			1,575,231
Net decrease in short-term borrowings			(1,035,050	)			(151,005	)
Proceeds from the issuance of long-term debt			—				22,388
Repayments of long-term debt			(480	)			(153,287	)
Dividends paid			(47,365	)			(48,044	)
Payroll tax remitted on net share settlement of equity awards			(1,799	)			(1,082	)
Proceeds from exercise of stock options			227				439
Proceeds from dividend reinvestment and stock purchase plans			1,800				1,962
Repurchase of common stock			(56,489	)			—
Net cash provided by (used in) financing activities			(1,738,621	)			1,246,602
NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS			297,073				(24,712	)
CASH AND DUE FROM BANKS, BEGINNING			401,201				526,306
CASH AND DUE FROM BANKS, ENDING		$	698,274			$	501,594
SUPPLEMENTAL INFORMATION FOR NON-CASH
INVESTING AND FINANCING ACTIVITIES
Assets acquired in settlement of loans		$	118			$	2,578

 

See notes to unaudited consolidated financial statements.

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HANCOCK WHITNEY CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

FORWARD-LOOKING STATEMENTS

 

The objective of this discussion and analysis is to provide material information relevant to the assessment of the financial condition and results of operations of Hancock Whitney Corporation and subsidiaries during the six months ended June 30, 2022 and selected comparable prior periods, including an evaluation of the amounts and certainty of cash flows from operations and outside sources. This discussion and analysis is intended to highlight and supplement financial and operating data and information presented elsewhere in this report, including the consolidated financial statements and related notes. The discussion contains forward-looking statements within the meaning and protections of section 27A of the Securities Act of 1933, as amended, and section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are subject to risks and uncertainties. Should one or more of these risks or uncertainties materialize, our actual results may differ from those expressed or implied by the forward-looking statements. Important factors that could cause actual results to differ materially from the forward-looking statements we make in this Quarterly Report on Form 10-Q and in other reports or documents that we file from time to time with the SEC include, but are not limited to, the following:

 

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Also, any statement that does not describe historical or current facts is a forward-looking statement. These statements often include the words “believes,” “expects,” “anticipates,” “estimates,” “intends,” “plans,” “forecast,” “goals,” “targets,” “initiatives,” “focus,” “potentially,” “probably,” “projects,” “outlook,” or similar expressions or future conditional verbs such as “may,” “will,” “should,” “would,” and “could.” Forward-looking statements are based upon the current beliefs and expectations of management and on information currently available to management. Our statements speak as of the date hereof, and we do not assume any obligation to update these statements or to update the reasons why actual results could differ from those contained in such statements in light of new information or future events.

Forward-looking statements are subject to significant risks and uncertainties. Investors are cautioned against placing undue reliance on such statements. Actual results may differ materially from those set forth in the forward looking statements. Additional factors that could cause actual results to differ materially from those described in the forward-looking statements can be found in Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021 and in other periodic reports that we file with the SEC.

You are cautioned not to place undue reliance on these forward-looking statements. We do not intend, and undertake no obligation, to update or revise any forward-looking statements, whether as a result of differences in actual results, changes in assumptions or changes in other factors affecting such statements, except as required by law.

OVERVIEW

Non-GAAP Financial Measures

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations include non-GAAP measures used to describe our performance. These non-GAAP financial measures have inherent limitations as analytical tools and should not be considered on a standalone basis or as a substitute for analyses of financial condition and results as reported under GAAP. Non-GAAP financial measures are not standardized and therefore, it may not be possible to compare these measures with other companies that present measures having the same or similar names. These disclosures should not be considered an alternative to GAAP.

A reconciliation of those measures to GAAP measures are provided in the Consolidated Financial Results table later in this item. The following is a summary of these non-GAAP measures and an explanation as to why they are deemed useful.

Consistent with the provisions of subpart 229.1400 of the Securities and Exchange Commission’s Regulation S-K, “Disclosures by Bank and Savings and Loan Registrants,” we present net interest income, net interest margin and efficiency ratios on a fully taxable equivalent (“te”) basis. The te basis adjusts for the tax-favored status of net interest income from certain loans and investments using a statutory federal tax rate of 21% to increase tax-exempt interest income to a taxable equivalent basis. We believe this measure to be the preferred industry measurement of net interest income, and that it enhances comparability of net interest income arising from taxable and tax-exempt sources.

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We present certain additional non-GAAP financial measures to assist the reader with a better understanding of the Company’s performance period over period, as well as to provide investors with assistance in understanding the success management has experienced in executing its strategic initiatives. These non-GAAP measures may reference the concept “operating.” We use the term “operating” to describe a financial measure that excludes income or expense considered to be nonoperating in nature. Items identified as nonoperating are those that, when excluded from a reported financial measure, provide management or the reader with a measure that may be more indicative of forward-looking trends in our business.

We define Operating Pre-Provision Net Revenue as total revenue (te) less noninterest expense, excluding nonoperating items. Management believes that operating pre-provision net revenue is a useful financial measure because it enables investors and others to assess the Company’s ability to generate capital to cover credit losses through a credit cycle.

 

Current Economic Environment

Economic conditions in the second quarter of 2022 continued to be influenced by rising inflation that reached a near-record level in June. The effects of labor market shortages and resulting wage pressures and prolonged supply chain disruption that stemmed from COVID-19 pandemic response have been magnified by the disruption in global commodity supply as a result of Russia’s military action in Ukraine. Despite growth in consumer spending, Real Gross Domestic Product (GDP) declined at a rate of 0.9% on an annualized basis, indicating economic contraction for the second consecutive quarter. However, employment indicators remain strong, with the unemployment rate holding steady at 3.6% in each of the four months ended June 30, 2022. The Federal Reserve continued in its efforts to combat inflation, issuing 50-basis point and 75-basis point rate increases in May and June 2022, respectively, the latter of which was the largest rate hike since 1994. In late July, the Federal Reserve issued an additional 75-basis point increase.

Our markets again displayed modest signs of expansion in economic activity. According to the Federal Reserve’s Beige Book, retail sales were solid and leisure travel and tourism levels remained robust in the geographic areas we serve. We experienced strong loan demand across most of our portfolio, which, along with an uptick in credit line utilization, led to a more than 3% linked-quarter growth rate in core loans (excluding PPP). Our credit quality indicators continued to improve and remain at historically low levels. Our net interest margin expanded with rising interest rates and with the redeployment of a large portion of excess liquidity that has been present in our balance sheet for the better part of two years. The utilization of excess liquidity resulted from investment in the loan and bond portfolios, funding of customer deposit outflows due in part to both typical seasonality and increased spending amid the inflationary environment, and the repayment of certain short-term borrowings called by the FHLB in response to the rise in interest rates.

 

Economic Outlook

We utilize economic forecasts produced by Moody’s Analytics (Moody’s) that provide various scenarios to assist in the development of our economic outlook. This outlook discussion utilizes the June 2022 Moody’s forecast, the most current available at June 30, 2022. The forecasts are anchored on a baseline forecast scenario, which Moody’s defines as the “most likely outcome” of where the economy is headed based on current conditions. Several upside and downside scenarios are produced that are derived from the baseline scenario.

While maintaining a fundamentally positive outlook, the June 2022 baseline scenario was slightly less optimistic in certain areas than the March 2022 baseline. Key assumptions within the June 2022 baseline forecast include the following: (1) Russian military action will go no further than Ukraine and, as such, disruption to the U.S. economy will be limited and temporary; (2) the return to full-employment, defined as an unemployment rate of 3.5%, labor force participation of approximately 62.5% and a prime age employment to population ratio above 80%, is expected to be achieved this summer; (3) forecasted GDP growth of 2.7% in 2022 and 2.6% in 2023; (4) the Federal Funds rate will reach a target rate of 2.25% to 2.50% by the end of 2022; and (5) each future surge in COVID-19 infections having a diminishing threat to economic conditions.

The alternative Moody’s forecast scenarios have varying depictions of economic performance as compared to the baseline. Management determined that assumptions provided for in the downside slower near-term growth (S-2) to be more likely than the baseline scenario; as such, the S-2 scenario was given a 75% probability weighting in our allowance for credit losses calculation at June 30, 2022. The S-2 scenario assumes that the conflict between Russia and Ukraine spans longer than anticipated in the baseline scenario and results in longer and larger interruption of global commodity supply; in turn, supply chain issues worsen, increasing shortages of affected goods and further boosting inflation. The Federal Reserve would react to these heightened pressures by raising interest rates more than anticipated in the baseline scenario, generating greater corrections in equity markets and declines in spending. As such, the S-2 scenario also incorporates a mild two quarter recession in the second half of 2022. Further, the S-2 scenario assumes that unemployment rate peaks at 6.5% in mid-2023, with the return to full employment not occurring until the third quarter of 2024

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and that the number of COVID-19 cases, hospitalizations and deaths will rise again, slowing growth in spending on air travel, retail and hotels.

Despite economic volatility and uncertainty, including the possibility of a recession in the near-term, the credit loss outlook on our portfolio as a whole has not changed significantly. Positive economic indicators of growth in our footprint, continued improvements in our asset quality metrics and minimal credit losses in recent periods allowed for a modest release of credit loss reserves during the period. However, based on the current and forecasted economic environment, we do not anticipate additional reserve releases, and expect zero or low provisions for the remainder of 2022.

The effects of inflation and the Federal Reserve's actions to counter those effects in the form of further interest rate increases and quantitative tightening are likely to reduce economic growth in the near term. While uncertainty over the economic environment remains, we expect continued interest rate increases will contribute favorably to our net interest margin and income, and, despite expected modest slowing of core loan growth in the near term, we do not expect a significant impact to our full-year loan growth guidance.

Forward-looking information based on management’s expectation of near-term performance is provided in the sections that follow. Given the economic volatility experienced over the past two and a half years, the remaining economic effects of the pandemic and the risks and uncertainties surrounding geopolitical unrest, it is not possible to accurately predict the extent, severity or duration that these conditions may have upon our results of operation. We continuously seek to monitor and anticipate developments as they relate to our business.

 

 

Highlights of the Second Quarter 2022

We reported net income for the second quarter of 2022 of $121.4 million, or $1.38 per diluted common share, compared to $123.5 million, or $1.40 per diluted common share in the first quarter of 2022 and $88.7 million, or $1.00 per diluted common share, in the second quarter of 2021. There were no nonoperating items in the second and first quarters of 2022. There was $42.2 million, or $0.37 per share after-tax, of net nonoperating expense items in the second quarter of 2021, attributable to efficiency initiatives, loss on the redemption of subordinated notes and a gain on the sale of Mastercard Class B common stock.

Second quarter 2022 results compared to first quarter 2022:

 

We reported another quarter of strong results in the second quarter of 2022, with early achievement of our efficiency ratio target of 55% and expansion in our net interest margin to over 3%. We reported strong core loan growth of $706.2 million, or 13% linked-quarter annualized, and reflected a $12 million increase in pre-provision net revenue. Our asset quality metrics remained at historically low levels, our capital levels are sound, and we continue strategic expense management while investing for revenue growth.

During the quarter, we added seven new bankers across our footprint, with additions in Dallas, Houston, Baton Rouge, New Orleans, Nashville, Gulfport, and Tampa. These hires are in addition to fifteen in 2021, and ten in the first quarter of 2022, with additional hires planned during the remainder of 2022. Our strategy is to fund these revenue enhancing costs through continued expense focus. We believe this approach, along with interest rate increases, will contribute to continued improvements in efficiency and overall performance.

 

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Consolidated Financial Results

 

The following table contains the consolidated financial results for the periods indicated.

 

	Three Months Ended																				Six Months Ended
(in thousands, except per share data)	June 30, 2022				March 31, 2022				December 31, 2021				September 30, 2021				June 30, 2021				June 30, 2022				June 30, 2021
Income Statement Data:
Interest income	$		254,864		$		236,786		$		238,756		$		244,417		$		248,300		$		491,650		$		499,085
Interest income (te) (a)			257,449				239,331				241,391				247,185				251,154				496,780				504,861
Interest expense			9,132				8,323				9,460				9,708				13,657				17,455				29,855
Net interest income (te)			248,317				231,008				231,931				237,477				237,497				479,325				475,006
Provision for credit losses			(9,761	)			(22,527	)			(28,399	)			(26,955	)			(17,229	)			(32,288	)			(22,140	)
Noninterest income			85,653				83,432				89,612				93,361				94,272				169,085				181,361
Noninterest expense			187,097				179,939				182,462				194,703				236,770				367,036				429,842
Income before income taxes			154,049				154,483				164,845				160,322				109,374				308,532				242,889
Income tax expense			32,614				31,005				27,102				30,740				20,656				63,619				46,999
Net income	$		121,435		$		123,478		$		137,743		$		129,582		$		88,718		$		244,913		$		195,890
For informational purposes - included above, pre-tax
Nonoperating item included in noninterest income:
Gain on hurricane-related insurance settlement	$		—		$		—		$		3,600		$		—		$		—		$		—		$		—
Gain on sale of Hancock Horizon Funds			—				—				—				4,576				—				—				—
Gain on sale of Mastercard Class B common stock			—				—				—				—				2,800				—				2,800
Nonoperating items included in noninterest expense:
Efficiency initiatives			—				—				(649	)			(1,867	)			40,812				—				40,812
Hurricane related expenses			—				—				(680	)			5,092				—				—				—
Loss on redemption of subordinated notes			—				—				—				—				4,165				—				4,165
Balance Sheet Data:
Period end balance sheet data
Loans	$		21,846,068		$		21,323,341		$		21,134,282		$		20,886,015		$		21,148,530		$		21,846,068		$		21,148,530
Earning assets			31,292,910				32,997,323				33,610,435				32,348,036				32,075,450				31,292,910				32,075,450
Total assets			34,637,525				36,317,291				36,531,205				35,318,308				35,098,709				34,637,525				35,098,709
Noninterest-bearing deposits			14,676,342				14,976,670				14,392,808				13,653,376				13,406,385				14,676,342				13,406,385
Total deposits			29,866,432				30,499,709				30,465,897				29,208,157				29,273,107				29,866,432				29,273,107
Stockholders' equity			3,349,723				3,450,951				3,670,352				3,629,766				3,562,901				3,349,723				3,562,901
Average balance sheet data
Loans	$		21,657,527		$		21,122,038		$		20,770,130		$		20,941,173		$		21,388,814		$		21,391,262		$		21,566,071
Earning assets			32,780,813				33,201,926				32,913,659				32,097,381				32,195,515				32,990,206				31,608,834
Total assets			35,380,247				36,003,803				35,829,027				35,207,960				35,165,684				35,690,303				34,624,947
Noninterest-bearing deposits			14,655,800				14,363,324				14,126,335				13,535,961				13,237,796				14,510,370				12,808,401
Total deposits			29,979,940				30,029,793				29,750,665				29,237,306				29,228,809				30,004,728				28,686,797
Stockholders' equity			3,383,789				3,607,061				3,642,003				3,606,087				3,488,592				3,494,809				3,465,159
Common Shares Data:
Earnings per share - basic	$		1.39		$		1.40		$		1.56		$		1.46		$		1.00		$		2.79		$		2.21
Earnings per share - diluted			1.38				1.40				1.55				1.46				1.00				2.78				2.20
Cash dividends per common share			0.27				0.27				0.27				0.27				0.27				0.54				0.54
Book value per share (period end)			39.08				39.91				42.31				41.81				41.03				39.08				41.03
Tangible book value per share (period end)			28.37				29.25				31.64				31.10				30.27				28.37				30.27
Weighted average number of shares - diluted			86,354				86,936				87,132				87,006				86,990				86,654				86,932
Period end number of shares			85,714				86,460				86,749				86,823				86,847				85,714				86,847

 

 

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	Three Months Ended																				Six Months Ended
($ in thousands)	June 30, 2022				March 31, 2022				December 31, 2021				September 30, 2021				June 30, 2021				June 30, 2022				June 30, 2021
Performance and other data:
Return on average assets			1.38	%			1.39	%			1.53	%			1.46	%			1.01	%			1.38	%			1.14	%
Return on average common equity			14.39	%			13.88	%			15.00	%			14.26	%			10.20	%			14.13	%			11.40	%
Return on average tangible common equity			19.77	%			18.66	%			20.13	%			19.22	%			13.94	%			19.20	%			15.63	%
Tangible common equity (b)			7.21	%			7.15	%			7.71	%			7.85	%			7.70	%			7.21	%			7.70	%
Tangible common equity Tier 1 (CET1) ratio			11.08	%			11.12	%			11.09	%			11.17	%			10.98	%			11.06	%			10.98	%
Net interest margin (te)			3.04	%			2.81	%			2.80	%			2.94	%			2.96	%			2.92	%			3.02	%
Noninterest income as a percentage of total revenue (te)			25.65	%			26.53	%			27.87	%			28.22	%			28.41	%			26.08	%			27.63	%
Efficiency ratio (c )			54.95	%			56.03	%			56.57	%			57.44	%			57.01	%			55.47	%			57.56	%
Allowance for credit loss as a percentage of total loans			1.55	%			1.63	%			1.76	%			1.92	%			2.03	%			1.55	%			2.03	%
Annualized net charge-offs to average loans			(0.01	)%			0.01	%			0.01	%			0.03	%			0.20	%			(0.00	)%			0.27	%
Nonperforming assets as a percentage of loans, ORE and foreclosed assets			0.20	%			0.24	%			0.32	%			0.34	%			0.46	%			0.20	%			0.46	%
FTE headcount			3,594				3,543				3,486				3,429				3,626				3,594				3,626
Reconciliation of operating revenue and operating pre-provision net revenue (non-GAAP measure) (te) (d)
Net interest income	$		245,732		$		228,463		$		229,296		$		234,709		$		234,643		$		474,195		$		469,230
Noninterest income			85,653				83,432				89,612				93,361				94,272				169,085				181,361
Total revenue			331,385				311,895				318,908				328,070				328,915				643,280				650,591
Taxable equivalent adjustment			2,585				2,545				2,635				2,768				2,854				5,130				5,776
Nonoperating revenue			—				—				(3,600	)			(4,576	)			(2,800	)			—				(2,800	)
Total revenue (te)	$		333,970		$		314,440		$		317,943		$		326,262		$		328,969		$		648,410		$		653,567
Noninterest expense			(187,097	)			(179,939	)			(182,462	)			(194,703	)			(236,770	)			(367,036	)			(429,842	)
Nonoperating expense			—				—				(1,329	)			3,225				44,977				—				44,977
Operating pre-provision net revenue (te)	$		146,873		$		134,501		$		134,152		$		134,784		$		137,176		$		281,374		$		268,702

 

 

 

RESULTS OF OPERATIONS

Net Interest Income

Net interest income (te) for the second quarter of 2022 was $248.3 million, up $17.3 million, or 7%, compared to the first quarter of 2022 and up $10.8 million, or 5%, from the second quarter of 2021.

The increase in net interest income (te) compared to the first quarter of 2022 is largely attributable to the impact of the recent Federal Reserve rate increases with variable rate assets repricing, new loans and securities added at higher yields, and a lag in increasing deposit rate offerings. The increase also reflects a favorable change in our average earning asset mix, including a $535 million increase in loans, $292 million increase in securities and a $1.2 billion decrease in our lower-yielding short term investments. Net interest income further benefitted from an additional accrual day during the second quarter ($1.8 million), and lower premium amortization on the securities portfolio ($1.3 million). These improvements were partially offset by lower levels of the accretion of PPP loan fees ($2.5 million), nonaccrual interest recoveries ($0.8 million), and purchase accounting discount accretion ($0.3 million), as well as a 1 bp increase in the cost of funds.

The net interest margin for the second quarter of 2022 was 3.04%, up 23 bps from 2.81% in the first quarter of 2022. The widening of net interest margin from the prior quarter was largely due to the Federal Reserve interest rate increases in March, May and June, coupled with a favorable shift in the earning asset mix, including average core loan growth of $735 million, securities portfolio growth of $292 million and a $1.2 billion reduction in lower yielding short-term investments. These improvements were partially offset by a 1 bp increase in the cost of funds and a 2 bp decline due to the impact of PPP loan forgiveness, resulting from a $200 million decrease in average PPP loans during the second quarter.

The $10.8 million increase in net interest income (te) compared to the second quarter of 2021 is attributable to a $6.3 million increase in interest income (te) and a $4.5 million reduction in interest expense. The increase in interest income is primarily due to higher earnings on securities and short-term investments, partially offset by $2.2 million of lower interest income on loans, driven by lower PPP income, mainly resulting from loan forgiveness, which was largely offset by core loan growth and higher yields on new and

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repricing commercial loans. The increase in interest income includes a reduction in premium amortization ($2.8 million) on securities, and is net of a reduction in nonaccrual interest recoveries ($2.4 million) and a decline in purchase accounting discount accretion ($0.4 million). The decline in interest expense was driven by both a $667 million decrease in average interest-bearing deposit accounts, primarily in higher-cost time and public funds deposits, and lower rates paid on most accounts, as well as a decline in interest on long-term debt due to the redemption of $150 million of subordinated debt at 5.95% in June of 2021.

The net interest margin was up 8 bps compared to the second quarter of 2021 as a result of a more favorable rate environment and a more favorable mix of average earning assets as lower yielding short term investments were used to fund core loan growth and deployed into higher yielding securities, as well as to pay off certain short term borrowings at the Federal Home Loan Bank. Compared to the second quarter of 2021, the yield on earning assets was up 2 bps, while the cost of funds decreased 6 bps to 0.11%. The reduction in cost of funds reflects the previously mentioned shift in mix to lower-cost deposit products, the strategic reduction of promotional deposit rates, and lowering borrowing costs with the redemption of subordinated notes, and the repayment of certain Federal Home Loan Bank borrowings.

Net interest income (te) for the six months ended June 30, 2022 was $479.3 million, up $4.3 million, or 1%, from the first six months of 2021. The increase is due largely to lower interest expense of $12.4 million with lower cost of funds, driven by an improved mix of deposits and a decline in higher-cost borrowings. Interest income (te) declined $8.1 million largely due to lower PPP fees, partially offset by increases from an improving interest rate environment for new and repricing earning assets. The increase in interest income also includes a decrease in premium amortization on the securities portfolio ($4.6 million), and was reduced by lower nonaccrual interest recoveries ($6.6 million) and lower purchase accounting discount accretion ($2.4 million). The net interest margin for the six months ended June 30, 2022 was 2.92%, down 10 bps compared to the same period in 2021. The decline is reflective of a decline in yield on average earning assets of 18 bps, primarily driven by loan mix, partially offset by a favorable 8 bp reduction in the cost of funds.

We are seeing further widening of our net interest margin, with our July 2022 monthly net interest margin at 3.42%, compared 3.24% for June 2022. We anticipate that the net interest margin will widen during the remainder of 2022, as additional Federal Reserve interest rate increases are expected, and through a continued shift in earning asset mix and controlled deposit cost.

 

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The following tables detail the components of our net interest income (te) and net interest margin.

 

		Three Months Ended
		June 30, 2022												March 31, 2022												June 30, 2021
(dollars in millions)		Volume				Interest (d)				Rate				Volume				Interest (d)				Rate				Volume				Interest (d)				Rate
Average earning assets
Commercial & real estate loans (te) (a)		$	17,562.0			$	165.9				3.79	%		$	17,119.3			$	150.3				3.56	%		$	17,233.1			$	149.3				3.47	%
Residential mortgage loans			2,534.6				21.1				3.33	%			2,441.3				21.0				3.44	%			2,443.0				23.9				3.92	%
Consumer loans			1,560.9				19.6				5.03	%			1,561.4				18.4				4.77	%			1,712.7				21.0				4.92	%
Loan fees & late charges			—				1.9				0.00	%			—				4.4				0.00	%			—				16.5				0.00	%
Total loans (te) (b)			21,657.5				208.5				3.86	%			21,122.0				194.1				3.72	%			21,388.8				210.7				3.95	%
Loans held for sale			48.1				0.4				3.69	%			64.3				0.7				4.36	%			89.6				0.6				2.90	%
US Treasury and government agency securities			387.6				1.7				1.79	%			397.8				1.6				1.64	%			291.0				1.2				1.67	%
Mortgage-backed securities and    collateralized mortgage obligations			7,658.2				36.3				1.90	%			7,352.5				34.5				1.88	%			6,961.4				31.0				1.78	%
Municipals (te)			912.4				6.8				2.96	%			916.5				6.7				2.93	%			930.1				6.8				2.94	%
Other securities			21.2				0.2				3.34	%			21.0				0.2				3.31	%			12.3				0.1				3.64	%
Total securities (te) (c)			8,979.4				45.0				2.00	%			8,687.8				43.0				1.98	%			8,194.8				39.1				1.91	%
Total short-term investments			2,095.8				3.5				0.67	%			3,327.8				1.5				0.19	%			2,522.3				0.7				0.11	%
Total earning assets (te)		$	32,780.8			$	257.4				3.15	%		$	33,201.9			$	239.3				2.91	%		$	32,195.5			$	251.1				3.13	%
Average interest-bearing liabilities
Interest-bearing transaction and savings deposits		$	11,412.9			$	1.3				0.05	%		$	11,423.4			$	1.1				0.04	%		$	11,315.8			$	2.7				0.10	%
Time deposits			1,005.2				0.4				0.15	%			1,088.5				0.6				0.24	%			1,466.5				1.7				0.47	%
Public funds			2,906.0				3.3				0.46	%			3,154.6				2.1				0.26	%			3,208.7				2.6				0.33	%
Total interest-bearing deposits			15,324.1				5.0				0.13	%			15,666.5				3.8				0.10	%			15,991.0				7.0				0.18	%
Repurchase agreements			523.0				0.1				0.08	%			587.5				0.1				0.06	%			556.1				0.2				0.15	%
Other short-term borrowings			701.2				0.9				0.49	%			1,102.4				1.3				0.49	%			1,104.9				1.4				0.49	%
Long-term debt			240.3				3.1				5.20	%			241.8				3.1				5.17	%			371.9				5.0				5.42	%
Total borrowings			1,464.5				4.1				1.12	%			1,931.7				4.5				0.95	%			2,032.9				6.6				1.30	%
Total interest-bearing liabilities			16,788.6				9.1				0.22	%			17,598.2				8.3				0.19	%			18,023.9				13.6				0.30	%
Net interest-free funding sources			15,992.2												15,603.7												14,171.6
Total cost of funds		$	32,780.8			$	9.1				0.11	%		$	33,201.9			$	8.3				0.10	%		$	32,195.5			$	13.6				0.17	%
Net interest spread (te)						$	248.3				2.93	%						$	231.0				2.72	%						$	237.5				2.82	%
Net interest margin		$	32,780.8			$	248.3				3.04	%		$	33,201.9			$	231.0				2.81	%		$	32,195.5			$	237.5				2.96	%

 

 

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		Six Months Ended
		June 30, 2022												June 30, 2021
(dollars in millions)		Volume				Interest (d)				Rate				Volume				Interest (d)				Rate
Average earning assets
Commercial & real estate loans (te) (a)		$	17,341.9			$	316.3				3.68	%		$	17,283.4			$	305.1				3.56	%
Residential mortgage loans			2,488.3				42.1				3.38	%			2,521.3				48.6				3.85	%
Consumer loans			1,561.1				37.9				4.90	%			1,761.4				42.4				4.85	%
Loan fees & late charges			—				6.3				0.00	%			—				29.9				0.00	%
Total loans (te) (b)			21,391.3				402.6				3.79	%			21,566.1				426.0				3.98	%
Loans held for sale			56.1				1.1				4.07	%			100.6				1.3				2.63	%
US Treasury and government agency securities			392.7				3.4				1.71	%			253.0				2.2				1.71	%
Mortgage-backed securities and    collateralized mortgage obligations			7,506.2				70.8				1.89	%			6,636.5				60.4				1.82	%
Municipals (te)			914.4				13.5				2.95	%			932.3				13.7				2.93	%
Other securities			21.1				0.3				3.32	%			11.9				0.2				3.85	%
Total securities (te) (c)			8,834.4				88.0				1.99	%			7,833.7				76.5				1.95	%
Total short-term investments			2,708.4				5.1				0.38	%			2,108.4				1.1				0.10	%
Total earning assets (te)		$	32,990.2			$	496.8				3.03	%		$	31,608.8			$	504.9				3.21	%
Average interest-bearing liabilities
Interest-bearing transaction and savings deposits		$	11,418.2			$	2.5				0.04	%		$	11,057.3			$	6.1				0.11	%
Time deposits			1,046.6				1.0				0.20	%			1,611.2				4.7				0.59	%
Public funds			3,029.6				5.4				0.36	%			3,209.9				5.5				0.34	%
Total interest-bearing deposits			15,494.4				8.9				0.11	%			15,878.4				16.3				0.21	%
Repurchase agreements			555.1				0.2				0.07	%			569.8				0.4				0.14	%
Other short-term borrowings			900.7				2.2				0.49	%			1,104.8				2.7				0.49	%
Long-term debt			241.0				6.2				5.18	%			384.2				10.5				5.45	%
Total borrowings			1,696.8				8.6				1.02	%			2,058.8				13.6				1.32	%
Total interest-bearing liabilities			17,191.2				17.5				0.20	%			17,937.2				29.9				0.33	%
Net interest-free funding sources			15,799.0												13,671.6
Total cost of funds		$	32,990.2			$	17.5				0.11	%		$	31,608.8			$	29.9				0.19	%
Net interest spread (te)						$	479.3				2.83	%						$	475.0				2.88	%
Net interest margin		$	32,990.2			$	479.3				2.92	%		$	31,608.8			$	475.0				3.02	%

 

 

 

Provision for Credit Losses

During the second quarter of 2022, we recorded a negative provision for credit losses of $9.8 million, compared to negative provisions for credit losses of $22.5 million in the first quarter of 2022 and $17.2 million in the second quarter of 2021. The second quarter of 2022 negative provision included net recoveries of $0.7 million and a reserve release of $9.1 million, while the first quarter of 2022 included net charge-offs of $0.3 million and a reserve release of $22.8 million. The second quarter of 2021 negative provision included net charge-offs of $10.5 million and a reserve release of $27.7 million. Continued improvement in overall credit performance for all periods reported has resulted in the gradual release of allowance built at the onset of the pandemic. The release of the allowance has been slowing with the changing economic environment and continued core loan growth.

For the six months ended June 30, 2022, we recorded a negative provision for credit losses of $32.3 million, compared to a negative provision of $22.1 million for the six months ended June 30, 2021. Included in the negative provision for the six months ended June 30, 2022 was a reserve release of $31.9 million and net recoveries of $0.4 million, compared to a reserve release of $50.9 million and net charge-offs of $28.8 million, or 0.27% of average total loans on an annualized basis for the same period last year. The year-to-date reserve releases for both periods are also due to continued improvement overall credit performance allowing for the gradual reduction of allowance for credit loss.

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Net recoveries in the second quarter of 2022 were $0.7 million, or (0.01%) of average total loans on an annualized basis, compared to net charge-offs $0.3 million, or 0.01% in the first quarter of 2022, and $10.5 million, or 0.20% in the second quarter of 2021. The second quarter of 2022 included net recoveries of $1.6 million for commercial and $0.4 million for mortgage, partially offset by $1.4 million of consumer net charge-offs. The first quarter of 2022 included net recoveries $0.8 million for commercial, and minimal mortgage recoveries, partially offset by $1.2 million of consumer net charge-offs. Net charge-offs in the second quarter of 2021 included $9.2 million of commercial net charge-offs, $0.1 million of mortgage net recoveries and $1.4 million of consumer net charge-offs. For the first six months of 2022, the net recovery of $0.4 million is largely the result of net recoveries in commercial totaling $2.4 million, with mortgage net recoveries of $0.5 million and consumer net charge-offs of $2.5 million. The net charge-off for the six months ended June 30, 2021 totaled $28.8 million, including $14.5 million of energy related charge-offs and $11.0 million of other commercial charges and $3.5 million of consumer net charge-offs, partially offset by net recoveries of $0.2 million in the residential mortgage portfolio.

Future assumptions in economic forecasts and our asset quality metrics will drive our outlook for the level of forecasted reserves. However, we do not expect additional reserve releases in the current economic environment and expect to see zero or low provisions for the remainder of 2022.

The discussion labeled "Allowance for Credit Losses and Asset Quality" appears later in this Item and provides additional information on these changes and on general credit quality.

Noninterest Income

Noninterest income totaled $85.7 million for the second quarter of 2022, up $2.2 million, or 3%, from the first quarter of 2022, and down $8.6 million, or 9%, from the second quarter of 2021. There were no nonoperating items included in noninterest income in the first two quarters of 2022. There was $2.8 million of nonoperating noninterest income in the second quarter of 2021 attributable to a gain on the sale of Mastercard Class B common stock. Excluding this item, operating noninterest income decreased $5.8 million, or 6%, from the same quarter last year. The increase in operating noninterest income from the prior quarter was largely attributable to an increase in trust fees, bankcard and ATM fees, income from bank owned life insurance, partially offset by a decline in net service charges on deposit accounts and secondary mortgage market operations income. The decline in operating noninterest income from the second quarter of 2021 is largely due to a decline in secondary mortgage market operations income and income from derivatives, partially offset by improvements in bank card and ATM fees, service charges on deposit accounts, and trust fees.

The components of noninterest income are presented in the following table for the indicated periods.

 

		Three Months Ended												Six Months Ended
		June 30,				March 31,				June 30,				June 30,				June 30,
(in thousands)		2022				2022				2021				2022				2021
Service charges on deposit accounts		$	20,495			$	21,674			$	19,381			$	42,169			$	38,527
Trust fees			17,309				15,279				16,307				32,588				31,310
Bank card and ATM fees			21,870				20,396				20,483				42,266				38,603
Investment and annuity fees and insurance commissions			8,001				7,427				7,331				15,428				14,789
Secondary mortgage market operations			2,990				3,746				12,556				6,736				24,266
Income from bank-owned life insurance			4,273				3,545				3,347				7,818				10,628
Credit related fees			2,543				2,669				2,971				5,212				5,815
Income from customer and other derivatives			2,728				2,349				3,750				5,077				8,785
Securities transactions, net			—				(87	)			333				(87	)			333
Gain on Sale of Mastercard Class B common stock			—				—				2,800				—				2,800
Other miscellaneous			5,444				6,434				5,013				11,878				5,505
Total noninterest income		$	85,653			$	83,432			$	94,272			$	169,085			$	181,361

Service charges on deposit accounts are composed of overdraft and nonsufficient funds fees, business and corporate account analysis fees, overdraft protection fees and other customer transaction-related charges. Service charges on deposits totaled $20.5 million for the second quarter of 2022, down $1.2 million, or 5%, from the first quarter of 2022, and up $1.1 million, or 6%, from the second quarter of 2021. The decrease from the first quarter of 2022 is primarily attributable to a lower net level of consumer overdraft fees, partially offset by an increase in business account service charges and overdraft fees. The increase from the second quarter of 2021 was largely due to an increase in business service fees which include activity-related service charges and higher overdraft fees, partially offset by lower consumer-related service charges. As noted in prior filings, we have announced plans to eliminate consumer (retail) non-sufficient funds fees and certain overdraft fees by the end of 2022, which are currently reflected in this revenue line item. We expect

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these fees to decrease, on average, by approximately $2 million to $3 million per quarter in 2023, with an annual estimated impact of approximately $10 million to $11 million. We believe these changes are in line with the evolving retail banking industry, as traditional banks adjust products to meet consumer needs and provide them with the tools needed to help manage their overall finances. We expect to see improving account acquisition rates in 2023 with this change and as we launch additional retail products and features.

Trust fee income represents revenue generated from a full range of trust services, including asset management and custody services provided to individuals, businesses and institutions. Trust fees increased $2.0 million, or 13%, from the prior quarter and increased $1.0 million, or 6%, compared to the same quarter a year ago. The increase compared to the prior quarter is primarily due to increased money market revenue on corporate and institutional accounts with the reduction of fee waivers and seasonal tax preparation fees. The increase from the same quarter last year was largely due to higher money market revenue and the impact of a new fee structure introduced during the second quarter of 2021. These increases were partially offset by a decline in Hancock Horizon mutual funds income as the funds were sold in the third quarter of 2021.

Bank card and ATM fees include interchange and other income from credit and debit card transactions, fees earned from processing card transactions for merchants, and fees earned from ATM transactions. Bank card and ATM fees totaled $21.9 million for the second quarter of 2022, up $1.5 million, or 7%, from the first quarter of 2022 and up $1.4 million, or 7%, from the same quarter last year. The increase from the prior quarter and the same quarter last year was largely attributable to increases in both transaction volume and amounts, with commercial credit card fees and merchant fees driving the increase from the prior quarter and commercial credit card fees driving the increase from the same quarter last year.

Investment and annuity fees and insurance commissions, which includes both fees earned from sales of annuity and insurance products, as well as managed account fees, increased $0.6 million, or 8%, compared to the first quarter of 2022 and increased $0.7 million, or 9%, compared to the same quarter a year ago, primarily as a result of current market conditions. The increase from the prior quarter was largely due to increased annuity fees driven by current market conditions. The increase from the same quarter a year ago was primarily due to higher annuity fees and investment fees, partially offset by lower insurance and corporate underwriting fees

Income from secondary mortgage market operations is comprised of income produced from the origination and sales of residential mortgage loans in the secondary market. We offer a full range of mortgage products to our customers and typically sell longer-term fixed rate loans while retaining the majority of adjustable rate loans, as well as loans generated through programs to support customer relationships. Income from secondary mortgage market operations was $3.0 million in the second quarter of 2022, down $0.8 million, or 20%, from the first quarter of 2022 and down $9.6 million, or 76%, from the second quarter of 2021. The decrease from the prior quarter and the same quarter last year was due largely to both a lower level of refinancing activity and a lower percentage of originated loans sold in the secondary market, as we are retaining a higher volume of loans in our portfolio. The level of mortgage applications during the second quarter of 2022 was down approximately 11% when compared to the first quarter of 2022 and down 27% when compared to the second quarter of 2021. The percentage of mortgage loans sold in the secondary market to total originations (as opposed to those held in our portfolio), declined to 21% in the second quarter of 2022 from 27% in the first quarter of 2022 and 45% in the same quarter last year. Secondary mortgage market operations income will vary based on application volume and pull through rates. We expect this lower level of income from secondary mortgage market operations to continue as the demand for mortgage loans and refinancing slows in the rising interest rate environment.

Income from bank-owned life insurance (BOLI) is typically generated through insurance benefit proceeds as well as the growth of the cash surrender value of insurance contracts held. Income from bank-owned life insurance was $4.3 million for the second quarter of 2022, up $0.7 million, or 21%, from the first quarter of 2022, and up $0.9 million, or 28%, from the second quarter of 2021. The increase from both the prior quarter and same quarter last year is attributable to both a higher level of income from the purchase of policies in March of 2022 and higher benefit proceeds.

Credit-related fees include fees assessed on letters of credit and unused portions of loan commitments. Credit related fees were $2.5 million for the second quarter of 2022, down $0.1 million, or 5%, from the first quarter of 2022 and down $0.4 million, or 14%, from the second quarter of 2021. The decrease from both the prior quarter and the same quarter last year is primarily attributable to a decrease in both letter of credit fees and unused commitment fees, with commitment fees impacted by increased credit line utilization during the period.

Income from customer and other derivatives is largely from our customer interest rate derivative program and totaled $2.7 million for the second quarter of 2022 compared to $2.3 million in the first quarter of 2022 and $3.8 million for the second quarter of 2021. The decrease from the same quarter last year is largely attributable to the demand during the second quarter of 2021 for interest rate swap arrangements due to the long-term interest rate environment at the time. Derivative income can be volatile and is dependent upon the composition of the portfolio, volume and mix of sales activity and market value adjustments due to market interest rate movement.

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Other miscellaneous income is comprised of various items, including income from small business investment companies (SBIC), FHLB stock dividends, and syndication fees. Other miscellaneous income (excluding nonoperating items) totaled $5.4 million, down $1.0 million compared to the first quarter of 2022 and up $0.4 million compared to the second quarter of 2021. The decrease compared to the prior period was largely driven by a lower level of SBIC income. The increase compared to the prior year reflects increased gains on sales of assets, partially offset by lower SBIC income and syndication fees.

Noninterest income for the first six months of 2022 was $169.1 million, down $12.3 million or 7% from the same period last year. There were no nonoperating income items in the first six months of 2022 compared to $2.8 million of in the first six months of 2021, related to a gain on the sale of Mastercard Class B stock, as noted above. Excluding the nonoperating item, operating noninterest income was down $9.5 million, or 5% compared to the first six months of 2021. The decline in fee income is largely related to a $17.5 million, or 72% decrease in secondary mortgage market operations income, the result of both a decrease in demand for refinancing and a higher rate of retention of residential mortgage loans. Derivative income was down $3.7 million, or 42%, primarily attributable to the customer derivative program, as recent interest rate increases have lessened the demand for variable rate loans and, in turn, the demand for associated derivative instruments. BOLI income was down $2.8 million, or 26%, as 2021 included $4.4 million of income received in connection with the purchase of policies in the first quarter of 2021. These decreases were partially offset with increases in SBIC income which was up $4.4 million, as 2021 included a $4.7 million pandemic related write-down, service charges which were up $3.6 million, or 9%, bank card and ATM fees which were up $3.7 million, or 9%, and trust fees, which were up $1.3 million, or $4%.

Management continues to forecast full-year 2022 noninterest income, excluding nonoperating items, will decline 1% to 3%, from the 2021 level of $353.4 million, with the current expectation being closer to 3% due largely to the decline in secondary mortgage market operations income.

 

Noninterest Expense

Noninterest expense for the second quarter of 2022 was $187.1 million, up $7.2 million, or 4%, from the first quarter of 2022, and down $49.7 million, or 21%, from the second quarter of 2021. There were no nonoperating noninterest expense items in the first two quarters of 2022 and $45.0 million in the second quarter of 2021, which related to initiatives put into place to improve overall efficiency and operating performance. These expenses included $20.2 million of salaries and benefits related to a Voluntary Early Retirement Plan (VERIP), $15.5 million of loss on the impairment of facilities and equipment related to financial center closures, $5.1 million of severance expense related to a reduction in force, and $4.2 million in costs related to the redemption of $150 million of subordinated debt. Excluding the nonoperating items, operating noninterest expense was down $4.7 million, or 2% from the same quarter last year. The increase in operating expense from the prior quarter was largely driven by higher personnel expense, data processing expense and lower gains on other real estate. Compared to the same quarter last year, the decrease in operating noninterest income was due to personnel expense, professional services expense with lower consulting and legal fees, partially offset by an increase in data processing expense as a result of higher level of card activity, and an increase in business development costs. A more detailed discussion of the variances follows.

 

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The components of noninterest expense for the periods indicated are presented in the following tables.

 

		Three Months Ended												Six Months Ended
		June 30,				March 31,				June 30,				June 30,				June 30,
(in thousands)		2022				2022				2021				2022				2021
Compensation expense		$	94,155			$	85,993			$	100,587			$	180,148			$	196,433
Employee benefits			21,015				21,403				42,067				42,418				65,836
Personnel expense			115,170				107,396				142,654				222,566				262,269
Net occupancy expense			12,225				11,680				12,955				23,905				25,865
Equipment expense			4,703				4,867				4,392				9,570				9,173
Data processing expense			26,169				24,239				23,885				50,408				46,832
Professional services expense			8,423				7,793				13,473				16,216				24,724
Amortization of intangible assets			3,586				3,748				4,245				7,334				8,664
Deposit insurance and regulatory fees			3,503				3,740				2,967				7,243				6,362
Other real estate and foreclosed asset expense			(88	)			(1,764	)			(86	)			(1,852	)			(80	)
Corporate value, franchise and other non-income taxes			4,558				4,248				3,422				8,806				7,886
Advertising			3,512				3,166				2,276				6,678				4,762
Telecommunications and postage			2,971				2,925				3,163				5,896				6,481
Entertainment and contributions			2,440				2,961				1,486				5,401				2,934
Tax credit investment amortization			1,004				1,004				1,113				2,008				2,225
Printing and supplies			918				1,003				941				1,921				1,919
Travel expense			1,123				660				667				1,783				1,024
Other retirement expense			(7,781	)			(6,772	)			(6,806	)			(14,553	)			(13,351	)
Loss on extinguishment of debt			—				—				4,165				—				4,165
Loss on facilities and equipment from consolidation			—				—				15,462				—				15,462
Other miscellaneous			4,661				9,045				6,396				13,706				12,526
Total noninterest expense		$	187,097			$	179,939			$	236,770			$	367,036			$	429,842

 

Nonoperating Expenses (included above)

		Three Months Ended												Six Months Ended
		June 30,				March 31,				June 30,				June 30,
(in thousands)		2022				2022				2021				2022				2021
Nonoperating expense
Compensation expense		$	—			$	—			$	5,161			$	—			$	5,161
Employee benefits			—				—				20,189				—				20,189
Personnel expense			—				—				25,350				—				25,350
Loss on extinguishment of debt			—				—				4,165				—				4,165
Loss on facilities and equipment from consolidation			—				—				15,462				—				15,462
Total nonoperating expenses		$	—			$	—			$	44,977			$	—			$	44,977

Personnel expense consists of salaries, incentive compensation, long-term incentives, payroll taxes, and other employee benefits such as 401(k), pension, and medical, life and disability. Personnel expense totaled $115.2 million for the second quarter of 2022, up $7.8 million, or 7%, compared to the prior quarter and down $2.1 million, or 2%, compared to the same quarter last year, excluding the prior year nonoperating items noted above. The increase from the prior quarter was largely due to increased incentives with higher production ($3.5 million), annual merit raises ($2.2 million), increased headcount, including new banker hires, combined with generally higher wages ($1.1 million), and one additional work day ($1.0 million). The decrease from the same quarter last year was largely due to the efficiency measures implemented during 2021, including the VERIP and the closure of 26 financial centers, partially offset by annual merit raises.

Occupancy and equipment expenses are primarily composed of lease expenses, depreciation, maintenance and repairs, rent, taxes, and other equipment expenses. Occupancy and equipment expenses totaled $16.9 million in the second quarter of 2022, up $0.4 million, or 2%, from the first quarter of 2022 and down $0.4 million, or 2%, from the second quarter of 2021. The linked-quarter increase was

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largely related to higher facilities expense partially offset by a decrease in maintenance and depreciation expense. The decrease from the same quarter last year is primarily attributable to the closure of 26 financial centers during 2021 as a result of efficiency initiatives.

Data processing expense includes expenses related to third party technology processing and servicing costs, technology project costs and fees associated with bank card and ATM transactions. Data processing expense was $26.2 million for the second quarter of 2022, up $1.9 million, or 8%, compared to the first quarter of 2022, and up $2.3 million, or 10%, compared to the second quarter of 2021. The increase from both the first quarter of 2022 and the second quarter of 2021 is largely due to implementation of technology enhancement projects and higher processing expense related to the increase in bank card activity.

Professional services expense for the second quarter of 2022 totaled $8.4 million, up $0.6 million, or 8%, compared to the previous quarter and down $5.1 million, or 37%, from the second quarter of 2021. The increase from the first quarter of 2022 is primarily due to higher legal fees and accounting and auditing services. The decrease from the same quarter last year is largely attributable to lower consulting expense primarily related to PPP support, as well as a reduction in legal fees.

Deposit insurance and regulatory fees totaled $3.5 million, down $0.2 million, or 6%, from the first quarter of 2022 and up $0.5 million, or 18%, from the second quarter of 2021. The modest decline from the prior quarter was in FDIC insurance costs and reflects a relatively stable risk-based assessment. The increase from the prior year is due largely to the impact of declining levels of low-risk PPP loans and lower levels of excess liquidity to our risk-based FDIC insurance cost. We expect our FDIC insurance cost to continue to increase as we continue to redeploy excess liquidity.

Other real estate and foreclosed asset expense reflected net gains of $0.1 million in the second quarter of 2022 compared to net gains of $1.8 million for the first quarter of 2022, and $0.1 million in the second quarter of 2021. The net gains in the first quarter of 2022 were from sales of properties. Other real estate gain or losses may occur periodically and are dependent on the volume of properties for sale and current market conditions.

Corporate value, franchise and other non-income tax expense for the second quarter of 2022 totaled $4.6 million, up $0.3 million, or 7%, over the prior quarter and up $1.1 million, or 33%, compared to the same quarter last year. The increase from the first quarter of 2022 reflects an increase in franchise tax due to a higher equity base. The increase from the same quarter last year is largely due to the bank share tax benefit realized during 2021 from the net loss recorded in 2020.

Business development-related expenses (including advertising, travel, entertainment and contributions) totaled $7.1 million for the second quarter of 2022, up $0.3 million, or 4%, from the first quarter of 2022, and up $2.6 million, or 60%, from the second quarter of 2021. The linked-quarter increase was largely due to an increase in advertising and travel, partially offset by a decrease in entertainment and contributions. The increase over last year was largely due to advertising, entertainment and contributions, and travel expenses as we continue to invest in high growth markets.

All other expenses, excluding amortization of intangibles and nonoperating items, totaled $1.8 million for the second quarter of 2022, a decrease of $5.4 million, or 75%, from the first quarter of 2022, and $3.0 million, or 63%, from the second quarter of 2021. The decline from both periods is largely due to lower levels of miscellaneous losses in the current period and pension-related other retirement expense, partially offset by an increase in noncredit losses and other miscellaneous smaller items.

Noninterest expense totaled $367.0 million for the first six months of 2022, down $62.8 million, or 15%, from the first six months of 2021. Excluding the nonoperating expenses mentioned above, operating expense was down $17.8 million, or 5%, from the same period last year. The decline from last year was largely due to a $14.4 million, or 6%, decrease in personnel expense from VERIP and reduction in force completed in 2021, partially offset by new banker hires and merit increases in 2022. Further, professional services expense declined $8.5 million, or 34%, largely due to the lower PPP consulting costs in 2022, other real estate expense declined $1.8 million in 2022, and net occupancy and equipment was down $1.6 million, or 4%. These declines were partially offset by increases in data processing expense which was up $3.6 million, or 8%, and business development-related expense which was up $5.1 million, or 59%.

We continue to expect our 2022 operating noninterest expense will be down approximately 1% to 3% from the 2021 level of $760.1 million, with our current expectation closer to 1% due to projected higher levels of incentive pay. We believe our ongoing expense initiatives, including strategic procurement, combined with the full-year impact of initiatives completed through 2021, will support the strategy of using cost control measures to fund revenue enhancements, such as additional investments in technology and additional bankers, and reduce the overall impact of wage inflation.

 

 

 

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Income Taxes

The effective income tax rate for the second quarter of 2022 was approximately 21.2% compared to 20.1% in the first quarter of 2022 and 18.9% in the second quarter of 2021. The second quarter of 2022 effective income tax rate is higher than both the prior quarter and the second quarter of 2021 due primarily to higher forecasted annual pre-tax earnings, largely as a result of rising interest rates.

Many factors impact the effective income tax rate including, but not limited to, the level of pre-tax income and relative impact of net tax benefits related to tax credit investments, tax-exempt interest income, bank-owned life insurance, and nondeductible expenses. Based on the current forecast, management expects the effective income tax rate for 2022 to be in the 19%-21% range, absent any changes in tax law.

Our effective tax rate has historically varied from the federal statutory rate primarily because of tax-exempt income and tax credits. Interest income on bonds issued by or loans to state and municipal governments and authorities, and earnings from the bank-owned life insurance program are the major components of tax-exempt income. The main source of tax credits has been investments in tax-advantaged securities and tax credit projects. These investments are made primarily in the markets we serve and are directed at tax credits issued under the Federal and State New Market Tax Credit (“NMTC”) programs, Low-Income Housing Tax Credit (“LIHTC”) programs, as well as pre-2018 Qualified Zone Academy Bonds (“QZAB”) and Qualified School Construction Bonds (“QSCB”). These investments generate tax credits, which reduce current and future taxes and are recognized when earned as a benefit in the provision for income taxes.

We have invested in NMTC projects through investments in our own Community Development Entities (“CDE”), as well as other unrelated CDEs. Federal tax credits from NMTC investments are recognized over a seven-year period, while recognition of the benefits from state tax credits varies from three to five years. We have also invested in affordable housing projects that generate federal LIHTC tax credits that are recognized over a ten-year period, beginning in the year the rental activity begins. The amortization of the LIHTC investment cost is recognized as a component of income tax expense in proportion to the tax credits recognized over the ten-year credit period.

Based on tax credit investments that have been made to date in 2022, we expect to realize benefits from federal and state tax credits over the next three years totaling $10.0 million, $10.1 million and $7.3 million in 2023, 2024, and 2025, respectively. We intend to continue making investments in tax credit projects. However, our ability to access new credits will depend upon, among other factors, federal and state tax policies and the level of competition for such credits.

 

LIQUIDITY AND CAPITAL RESOURCES

Liquidity

Liquidity management ensures that funds are available to meet the cash flow requirements of our depositors and borrowers, while also meeting the operating, capital and strategic cash flow needs of the Company, the Bank and other subsidiaries. As part of the overall asset and liability management process, liquidity management strategies and measurements have been developed to manage and monitor liquidity risk. The Company has access to sufficient liquidity for cash requirements, both on balance sheet and with $19.9 billion in net available sources of funds at June 30, 2022, summarized as follows:

 

		June 30, 2022
(in thousands)		Total Available				Amount Used				Net Availability
Internal Sources
Free Securities, cash and other		$	5,251,131			$	—			$	5,251,131
External Sources
Federal Home Loan Bank			5,624,144				300,413				5,323,731
Federal Reserve Bank			3,421,912				—				3,421,912
Brokered deposits			4,479,965				9,190				4,470,775
Other			1,394,000				—				1,394,000
Total Liquidity		$	20,171,152			$	309,603			$	19,861,549

 

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The asset portion of the balance sheet provides liquidity primarily through loan principal repayments, maturities and repayments of investment securities and occasional sales of various assets. Short-term investments such as federal funds sold, securities purchased under agreements to resell and interest-bearing deposits with the Federal Reserve Bank or with other commercial banks are additional sources of liquidity to meet cash flow requirements. Free securities represent unpledged securities that can be sold or used as collateral for borrowings, and include unpledged securities assigned to short-term dealer repurchase agreements or to the Federal Reserve Bank discount window. Management has established an internal target for the ratio of free securities to total securities of 20% or greater. As shown in the table below, our ratio of free securities to total securities was 52.61% at June 30, 2022, compared to 50.63% at March 31, 2022 and 65.33% at June 30, 2021. Securities and FHLB letters of credit are pledged as collateral related to public funds and repurchase agreements.

 

			June 30,				March 31,				December 31,				September 30,				June 30,
Liquidity Metrics			2022				2022				2021				2021				2021
Free securities / total securities				52.61	%			50.63	%			53.95	%			56.73	%			65.33	%
Core deposits / total deposits				99.00	%			98.94	%			98.66	%			98.27	%			98.07	%
Wholesale funds / core deposits				2.97	%			6.21	%			64.50	%			7.19	%			6.41	%
Quarter-to-date average loans /quarter-to-date average deposits				72.24	%			70.34	%			69.81	%			71.62	%			73.18	%

The liability portion of the balance sheet provides liquidity mainly through the ability to use cash sourced from various customers’ interest-bearing and noninterest-bearing deposit accounts. At June 30, 2022, deposits totaled $29.9 billion, a decrease of $633.3 million, or 2%, from March 31, 2022 and an increase of $593.3 million, or 2%, from June 30, 2021. The linked-quarter decrease is primarily attributable to seasonal tax outflows in public funds, increased spending amid the inflationary environment, and increased competition for deposits as interest rates increase. The year-over-year increase is largely attributable to higher balances in consumer and business accounts, due in part to stimulus and hurricane-related insurance proceeds. Core deposits consist of total deposits excluding certificates of deposit of $250,000 or more and brokered deposits. Core deposits totaled $29.6 billion at June 30, 2022, down $610.0 million, or 2%, compared to March 31, 2022, and up $860.3 million, or 3%, from June 30, 2021. The ratio of core deposits to total deposits was 99.00% at June 30, 2022, compared to 98.94% at March 31, 2022 and 98.07% at June 30, 2021. Brokered deposits totaled $9.2 million as of June 30, 2022, a decrease of $5.0 million compared to March 31, 2022 and a decrease of $65.0 million compared to June 30, 2021. The Company has had only limited brokered deposit activity during the periods discussed in this Item, due to excess levels of liquidity. The use of brokered deposits as a funding source is subject to certain policies regarding the amount, term and interest rate.

Purchases of federal funds, securities sold under agreements to repurchase and other short-term borrowings from customers provide additional sources of liquidity to meet short-term funding requirements. Besides funding from customer sources, the Bank has a line of credit with the FHLB that is secured by blanket pledges of certain mortgage loans. At June 30, 2022, the Bank had borrowings of approximately $200 million and had approximately $5.3 billion available under this line. During the second quarter of 2022, $900 million in FHLB advances were called and paid out of excess liquidity. The unused borrowing capacity at the Federal Reserve’s discount window is approximately $3.4 billion. There were no outstanding borrowings with the Federal Reserve at any date during any period covered by this report.

Wholesale funds, which are comprised of short-term borrowings, long-term debt and brokered deposits were 2.97% of core deposits at June 30, 2022, compared to 6.21% at March 31, 2022 and 6.41% at June 30, 2021. At June 30, 2022, wholesale funds totaled $879.3 million, a decrease of $995.7 million, or 53%, from March 31, 2022 and a decrease of $959.4 million, or 52%, from June 30, 2021. The decrease for both time periods was primarily due to $900 million FHLB advances being called during the second quarter of 2022. The Company has established an internal target for wholesale funds to be less than 25% of core deposits.

Another measure used to monitor our liquidity position is the loan-to-deposit ratio (average loans outstanding for the reporting period divided by average deposits outstanding). The loan-to-deposit ratio measures the amount of funds the Company lends for each dollar of deposits on hand. Our average loan-to-deposit ratio for the second quarter of 2022 was 72.24%, compared to 70.34% for the first quarter of 2022 and 73.18% for the second quarter of 2021. Management has an established target range for the loan-to-deposit ratio of 87% to 89%, but will operate outside that range under certain circumstances, such as those caused by the continuing impact of the pandemic. Average loans outstanding for the second quarter of 2022, the first quarter of 2022, and the second quarter in 2021, included approximately $0.2 billion, $0.4 billion, and $2.0 billion, respectively, of low-risk SBA guaranteed PPP loans that are primarily repaid through the forgiveness process, which is expected to be substantially complete by end of the second quarter of 2022.

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Cash generated from operations is another important source of funds to meet liquidity needs. The Consolidated Statements of Cash Flows included in Part I Item 1 of this document present operating cash flows and summarize all significant sources and uses of funds during the six months ended June 30, 2022 and 2021.

Dividends received from the Bank have been the primary source of funds available to the Parent for the payment of dividends to our stockholders and for servicing its debt. The liquidity management process takes into account the various regulatory provisions that can limit the amount of dividends the Bank can distribute to the Parent. The Parent targets cash and other liquid assets to provide liquidity in an amount sufficient to fund approximately four quarters of ongoing cash or liquid asset needs, consisting primarily of common stockholder dividends, debt service requirements, and any expected early extinguishment of debt. The Parent may operate below the target level on a temporary basis if a return to the target can be achieved in the near-term, generally not to exceed four quarters. The Parent had cash and liquid assets of $72.4 million at June 30, 2022.

During the second quarter of 2022, we repurchased 804,368 shares of our common stock at an average cost of $47.24 per share, inclusive of commissions, under a Board authorization to repurchase up to 4,338,000 shares of the company’s common stock, set to expire December 31, 2022. To-date, the Company has repurchased 1,604,244 shares under this plan at a total cost of $78.3 million.

On June 15, 2021, the Parent utilized excess liquidity to redeem all of its issued and outstanding 5.95% subordinated notes due with an aggregate principal amount of $150 million.

 

 

Capital Resources

Stockholders’ equity totaled $3.3 billion at June 30, 2022, down $101.2 million from March 31, 2022 and down $213.2 million from June 30, 2021. The decrease from March 31, 2022 is primarily attributable to a $167.9 million decrease in accumulated other comprehensive income, largely due to fair value adjustments on securities available for sale and cash flow hedges, declaration of $23.7 million of dividends, and the repurchase of $38.0 million of common stock. These factors were partially offset by $121.4 million in net income and $6.9 million of long-term incentive plan and dividend reinvestment activity. The decrease from June 30, 2021 is attributable to a decline of $570.0 million of accumulated other comprehensive income, largely attributable to fair value adjustments on the available for sale securities portfolio, and, to a lesser degree, cash flow hedges, the declaration of $95.5 million of dividends and the repurchase of $78.3 million of common stock, partially offset by increases from $512.2 million of net income and $18.4 million of long term incentive plan and dividend reinvestment activity.

The tangible common equity (TCE) ratio was 7.21% at June 30, 2022, compared to 7.15% at March 31, 2022 and 7.70% at June 30, 2021. The increase from the prior quarter is largely attributable to both earnings and tangible asset contraction, partially offset by higher other comprehensive loss due mostly to fair value adjustments to the available for sale securities portfolio, as well as to dividends and common stock repurchases. The decline from June 30, 2021 was primarily due to higher other comprehensive loss, dividends, and common stock repurchases, partially offset by earnings, tangible asset contraction and long-term incentive plan and dividend reinvestment activity.

The regulatory capital ratios of the Company and the Bank at June 30, 2022 remained well in excess of current regulatory minimum requirements, including capital conservation buffers, by at least $486 million. The Company and the Bank have been categorized as “well-capitalized” in the most recent notices received from our regulators. Refer to the Supervision and Regulation section in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 for further discussion of our capital requirements.

The following table shows the regulatory capital ratios for the Company and the Bank as calculated under current rules for the indicated periods. The capital ratios reflect the election to use the CECL five-year transition rule that allowed for the option to delay for two years the estimated impact of CECL on regulatory capital (0% in 2020 and 2021), followed by a three-year transition (25% in 2022, 50% in 2023, 75% in 2024, and 100% thereafter). The two-year delay includes the full impact of January 1, 2020 cumulative effect impact plus an estimated impact of CECL calculated quarterly as 25% of the current ACL over the January 1, 2020 balance (modified transition amount). The modified transition amount was recalculated each quarter in 2020 and 2021, with the December 31,

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2021 impact of $24.9 million plus day one impact of $44.1 million (net of tax) carrying through the remaining three years of the transition, as adjusted by the applicable transition percentage.

 

		Well-				June 30,				March 31,				December 31,				September 30,				June 30,
		Capitalized				2022				2022				2021				2021				2021
Total capital (to risk weighted assets)
Hancock Whitney Corporation			10.00	%			12.70	%			12.82	%			12.84	%			13.06	%			12.94	%
Hancock Whitney Bank			10.00	%			12.28	%			12.33	%			12.33	%			12.51	%			12.45	%
Tier 1 common equity capital (to risk weighted assets)
Hancock Whitney Corporation			6.50	%			11.08	%			11.12	%			11.09	%			11.17	%			10.98	%
Hancock Whitney Bank			6.50	%			11.28	%			11.27	%			11.24	%			11.30	%			11.20	%
Tier 1 capital (to risk weighted assets)
Hancock Whitney Corporation			8.00	%			11.08	%			11.12	%			11.09	%			11.17	%			10.98	%
Hancock Whitney Bank			8.00	%			11.28	%			11.27	%			11.24	%			11.30	%			11.20	%
Tier 1 leverage capital
Hancock Whitney Corporation			5.00	%			8.68	%			8.38	%			8.25	%			8.15	%			7.83	%
Hancock Whitney Bank			5.00	%			8.83	%			8.49	%			8.36	%			8.25	%			7.98	%

Our regulatory ratios reflect the impact of PPP loans, which are guaranteed by the SBA and, when meeting certain criteria, are subject to forgiveness to the debtor by the SBA. These loans carry a 0% risk-weighting in the tier 1 and total capital regulatory ratios due to the full guarantee by the SBA. However, these loans are reflected in average assets used to compute tier 1 leverage. PPP loans totaled $151 million, $335 million and $1.4 billion as of June 30, 2022, March 31, 2022, and June 30, 2021, respectively.

On April 22, 2021, our board of directors authorized the repurchase of up to 4,338,000 shares of the Company’s common stock (approximately 5% of the shares of common stock outstanding as of March 31, 2021). The authorization is currently set to expire on December 31, 2022. The shares may be repurchased in the open market, by block purchase, through accelerated share repurchase plans, in privately negotiated transactions or otherwise, in one or more transactions, from time to time, depending upon market conditions and other factors, and in accordance with applicable regulations of the Securities and Exchange Commission. The repurchase authorization may be terminated or amended by the Board at any time prior to the expiration date. During the second quarter of 2022, 804,368 shares were repurchased under this program at an average cost of $47.24 per share, inclusive of commissions. To date, 1,604,244 shares with an average cost of $48.80 have been repurchased under this program.

On April 28, 2022, our board of directors declared a regular second quarter cash dividend of $0.27 per share, consistent with the prior quarter. The Company has paid uninterrupted dividends to its shareholders since 1967.

 

BALANCE SHEET ANALYSIS

Short-Term Investments

Short-term assets are held to ensure funds are available to meet the cash flow needs of both borrowers and depositors. Short-term investments, including interest-bearing bank deposits and federal funds sold, were $0.9 billion at June 30, 2022, down $2.3 billion from March 31, 2022 and down $1.3 billion from June 30, 2021. Average short-term investments of $2.1 billion for the second quarter of 2022 were down $1.2 billion compared to the first quarter of 2022, and down $0.4 billion compared to the second quarter of 2021. Typically, these balances will change on a daily basis depending upon movement in customer loan and deposit accounts. The decline in short-term investments is the result the repayment of certain FHLB borrowings, growth in our core loan portfolio, growth in our securities portfolio as well as a reduction in deposits.

Securities

The purpose of the securities portfolio is to increase profitability, mitigate interest rate risk, provide liquidity and comply with regulatory pledging requirements. Our securities portfolio includes securities categorized as available for sale and held to maturity.

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Available for sale securities are carried at fair value and may be sold prior to maturity. Unrealized gains or losses on available for sale securities, net of deferred taxes, are recorded as accumulated other comprehensive income in stockholders' equity.

Investment in securities totaled $8.5 billion at June 30, 2022, up $50.3 million, or less than 1%, from March 31, 2022, and down $101.7 million, or 1%, from June 30, 2021. The increase from March 31, 2022 was from net purchases of $242.4 million, partially offset by a negative market valuation adjustment on available for sale securities of $192.1 million. The decrease from June 30, 2021 reflects a negative valuation adjustment on securities available for sale of $689.3 million, partially offset by net purchases of $587.6 million. The net purchases from the prior quarter and the same quarter last year reflect investment of a portion of excess cash from federal funds into higher-yielding securities.

At June 30, 2022, securities available for sale totaled $5.8 billion and securities held to maturity totaled $2.8 billion. As a result of excess liquidity, and to provide some protection from the impact of future interest rate changes upon accumulated other comprehensive income, we reclassified securities available for sale with an aggregate fair value of $561.8 million to the securities held to maturity portfolio during the first quarter of 2022.

Our securities portfolio consists mainly of residential and commercial mortgage-backed securities and collateralized mortgage obligations that are issued or guaranteed by U.S. government agencies. We invest only in high quality investment grade securities with a targeted portfolio effective duration generally between two and five and a half years. At June 30, 2022, the average expected maturity of the portfolio was 5.91 years with an effective duration of 4.93 years and a nominal weighted-average yield of 2.08%. Under an immediate, parallel rate shock of 100 bps and 200 bps, the effective durations would be 4.91 and 4.84 years, respectively. At March 31, 2022, the average expected maturity of the portfolio was 5.86 years with an effective duration of 4.47 years and a nominal weighted-average yield of 1.93%. The average maturity of the portfolio at June 30, 2021 was 5.91 years, with an effective duration of 4.58 years and a nominal weighted-average yield of 1.89%. The changes in expected maturity, effective duration, and nominal weighted-average yield compared to both March 31, 2022 and June 30, 2021 was the result of reinvestment of maturities and paydowns and growth from the investment of excess liquidity. At June 30, 2022, approximately $1.4 billion of our available for sale securities are hedged with $1.3 billion in fair value hedges in order to provide protection and flexibility to reposition and/or reprice the portfolio in a rising interest rate environment, effectively reducing the duration (market price risk) on the hedged securities. Our strategy in the near term will be to invest in the securities portfolio as rates rise and monitor our hedge positions to adjust interest rate sensitivity.

At the end of each reporting period, we evaluate the securities portfolio for credit loss. Based on our assessments, expected credit loss was negligible for all periods in 2022 and 2021, and therefore no allowance for credit loss was recorded.

Loans

Total loans at June 30, 2022 were $21.8 billion, up $522.7 million, or 2%, from March 31, 2022, and up $697.5 million, or 3%, from March 31, 2021. The linked-quarter increase was primarily attributable to growth of $706.2 million in core loans (excluding PPP), partially offset by a decrease of $183.5 million in PPP loans. Increased line utilization as well as new loans contributed to core growth in all markets across our footprint linked quarter, with healthcare, commercial and industrial, commercial real estate and mortgage as the main drivers, while the indirect consumer lending portfolio continues to run-off. The increase compared to June 30, 2021 is due to core loan growth of $2.0 billion, partially offset by a $1.3 billion decrease in PPP loans.

The following table shows the composition of our loan portfolio at each date indicated:

 

		June 30,				March 31,				December 31,				September 30,				June 30,
(in thousands)		2022				2022				2021				2021				2021
Total loans:
Commercial non-real estate		$	9,645,092			$	9,584,480			$	9,612,460			$	9,416,990			$	9,532,710
Commercial real estate - owner occupied			2,964,474				2,868,233				2,821,246				2,812,926				2,809,868
Total commercial and industrial			12,609,566				12,452,713				12,433,706				12,229,916				12,342,578
Commercial real estate - income producing			3,641,243				3,563,299				3,464,626				3,467,939				3,419,028
Construction and land development			1,408,727				1,286,655				1,228,670				1,213,991				1,295,036
Residential mortgages			2,615,807				2,462,900				2,423,890				2,351,053				2,412,459
Consumer			1,570,725				1,557,774				1,583,390				1,623,116				1,679,429
Total loans		$	21,846,068			$	21,323,341			$	21,134,282			$	20,886,015			$	21,148,530

 

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Commercial and industrial (“C&I”) loans, including both non-real estate and owner occupied real estate secured loans, totaled approximately $12.6 billion, or 58% of the total loan portfolio, at June 30, 2022, an increase of $156.9 million, or 1%, from March 31, 2022, and an increase of $267.0 million, or 2%, from June 30, 2021. The linked-quarter increase is primarily attributable to growth of $340.4 million, or 3%, in core loans, partially offset by a $183.5 million reduction in PPP loans, due to repayment primarily through the SBA’s forgiveness program. Our linked-quarter core loan growth was diverse across our footprint and industries. The year-over-year increase is attributable to core loan growth of $1.5 billion, partially offset by a $1.3 billion net reduction in PPP loans. PPP loans included in C&I portfolio totaled $151.3 million at June 30, 2022, $334.8 million at March 31, 2022 and $1.4 billion at June 30, 2021.

The Bank lends mainly to middle market and smaller commercial entities, although it participates in larger shared credit loan facilities. Shared national credits funded at June 30, 2022 totaled approximately $2.4 billion, or 11% of total loans, an increase of $257 million from March 31, 2022 and $792 million from June 30, 2021. At June 30, 2022, approximately $518 million of our shared national credits were with healthcare-related customers, with the remaining portfolio in commercial real estate and other diverse industries.

 

Our loan portfolio is well diversified by product, client, and geography throughout our footprint. Nevertheless, we may be exposed to certain concentrations of credit risk which exist in relation to different borrowers or groups of borrowers, specific types of collateral, industries, loan products, or regions. The following table provides detail of the more significant industry concentrations for our commercial and industrial loan portfolio, which is based on NAICS codes for all industries, with the exceptions of energy, which is based on the borrower’s source of revenue (i.e. a manufacturer whose income is derived from energy-related business is reported as energy), and PPP loans, as those are expected to be 100% SBA guaranteed and therefore have limited credit risk.

 

		June 30,								March 31,								December 31,								September 30,								June 30,
		2022								2022								2021								2021								2021
						Pct of								Pct of								Pct of								Pct of								Pct of
( $ in thousands )		Balance				Total				Balance				Total				Balance				Total				Balance				Total				Balance				Total
Commercial & industrial loans:
Real estate and rental and leasing		$	1,457,730				12	%		$	1,363,548				11	%		$	1,311,241				11	%		$	1,298,560				11	%		$	1,250,737				10	%
Health care and social assistance			1,283,176				10	%			1,182,345				10	%			1,284,578				10	%			1,219,769				10	%			1,086,845				9	%
Retail trade			1,128,931				9	%			1,104,686				9	%			1,086,204				9	%			1,069,225				9	%			1,051,317				9	%
Manufacturing			1,038,052				8	%			984,699				8	%			919,830				7	%			928,041				8	%			946,266				8	%
Construction			1,026,278				8	%			1,027,469				8	%			923,040				7	%			861,075				7	%			753,049				6	%
Wholesale trade			991,718				8	%			856,534				7	%			823,295				7	%			808,252				7	%			751,689				6	%
Finance and insurance			913,300				7	%			911,910				7	%			896,105				7	%			796,980				7	%			772,464				6	%
Transportation and warehousing			831,602				7	%			771,865				6	%			780,934				6	%			785,367				6	%			769,145				6	%
Accommodation, food services and entertainment			664,282				5	%			644,919				5	%			595,698				5	%			604,550				5	%			605,728				5	%
Professional, scientific, and technical services			642,337				5	%			662,559				5	%			621,739				5	%			521,965				4	%			503,425				4	%
Public administration			570,032				5	%			588,755				5	%			596,301				5	%			625,979				5	%			638,921				5	%
Other services (except public administration)			399,936				3	%			401,243				3	%			424,090				4	%			421,884				3	%			420,321				4	%
Information			307,717				2	%			286,132				2	%			280,019				2	%			245,933				2	%			188,183				2	%
Educational services			279,322				2	%			274,848				2	%			255,127				2	%			251,383				2	%			260,366				2	%
Energy			246,961				2	%			249,235				2	%			266,235				2	%			264,791				2	%			274,641				2	%
Other			676,877				5	%			807,138				7	%			838,211				7	%			590,832				4	%			651,958				5	%
Total commercial & industrial loans			12,458,251				99	%			12,117,885				97	%			11,902,647				96	%			11,294,586				92	%			10,925,055				89	%
PPP loans			151,315				1	%			334,828				3	%			531,059				4	%			935,330				8	%			1,417,523				11	%
Total commercial & industrial loans		$	12,609,566				100	%		$	12,452,713				100	%		$	12,433,706				100	%		$	12,229,916				100	%		$	12,342,578				100	%

Commercial real estate – income producing loans totaled approximately $3.6 billion at June 30, 2022, an increase of $78 million, or 2%, from March 31, 2022 and $222 million, or 6%, from June 30, 2021. Construction and land development loans, totaling approximately $1.4 billion at June 30, 2022, increased $122 million, or 9%, from March 31, 2022 and increased $114 million, or 9%, from June 30, 2021. The following table details the end-of-period aggregated commercial real estate – income producing and

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construction loan balances by property type. Loans reflected in 1-4 family residential construction include both loans to construction builders as well as single family borrowers.

 

		June 30,								March 31,								December 31,								September 30,								June 30,
		2022								2022								2021								2021								2021
						Pct of								Pct of								Pct of								Pct of								Pct of
( $ in thousands )		Balance				Total				Balance				Total				Balance				Total				Balance				Total				Balance				Total
Commercial real estate - income producing and construction loans:
Healthcare related properties		$	879,474				18	%		$	815,090				17	%		$	766,338				16	%		$	677,137				15	%		$	676,587				14	%
Retail			780,454				16	%			793,126				17	%			777,594				17	%			756,619				16	%			781,143				16	%
Multifamily			776,723				15	%			695,090				14	%			647,300				14	%			696,924				15	%			688,900				15	%
Industrial			573,993				11	%			568,886				12	%			561,022				12	%			577,988				12	%			569,123				12	%
Office			569,055				11	%			554,005				11	%			501,771				11	%			487,510				10	%			501,885				11	%
1-4 family residential construction			548,286				11	%			516,580				11	%			469,690				10	%			441,925				9	%			426,745				9	%
Hotel/motel and restaurants			448,949				9	%			441,285				9	%			437,241				9	%			504,536				11	%			501,434				11	%
Other land loans			221,905				4	%			214,446				4	%			257,594				5	%			291,415				7	%			318,136				7	%
Other			251,131				5	%			251,446				5	%			274,746				6	%			247,876				5	%			250,111				5	%
Total commercial real estate - income producing and construction loans		$	5,049,970				100	%		$	4,849,954				100	%		$	4,693,296				100	%		$	4,681,930				100	%		$	4,714,064				100	%

Our residential mortgages loan portfolio totaled $2.6 billion at June 30, 2022, up $153 million, or 6%, from March 31, 2022 and $203 million, or 8%, from June 30, 2021. The increase in residential mortgage loans from the prior quarter was due to a lower level of originated loans sold in the secondary market, with the percentage of loans sold to total loans closed at 21% compared to 27% in the quarter ending March 31, 2022, partially offset by a 16% decline in production. The increase from the same quarter last year was also due to a lower level of originated loans sold in the secondary market, with the proportion of loans sold down from 45%, coupled with a slowdown in repayments, partially offset by a 56% decline in production. The consumer loan portfolio totaled $1.6 billion at June 30, 2022, up $13 million, or 1%, from March 31, 2022, and down $109 million, or 6%, from June 30, 2021. Changes in the consumer loan portfolio balance include the impact of our exit from the indirect automobile lending market, where the existing portfolio is in run-off, declining $29 million linked quarter and $149 million compared to June 30, 2021.

Management continues to expect core loan growth (excluding PPP loans) of 6% to 8% for the full year 2022. Our current forecast indicates we may be closer to 8%, with a potential slowdown in growth for third quarter and a rebound before the end of the year.

Allowance for Credit Losses and Asset Quality

The Company's allowance for credit losses was $339.5 million at June 30, 2022, compared to $348.6 million at March 31, 2022, and $429.2 million at June 30, 2021.

The $9.1 million linked-quarter decrease in the June 30, 2022 allowance for credit losses is primarily attributable to lower collectively evaluated reserves driven by the economic forecast and improving asset quality, and lower individually evaluated reserves (generally used for nonperforming and troubled debt restructured loans) due largely to customer payment activity. The slower near-term growth S-2 scenario (anchored on the baseline) was weighted most heavily at 75% and the baseline scenario was weighted 25% to incorporate reasonably possible alternative economic outcomes. Both economic scenarios utilized have varying degrees of severity and duration of inflationary pressures and volatility in commodities prices stemming from geopolitical unrest, with the S-2 scenario reflecting a mild recession in the second half of 2022.

The June 2022 baseline forecast assumes that the Russian military action will go no further than Ukraine and the impact on the U.S. economy will be limited and temporary. The return to full employment is expected by the summer of 2022 and gross domestic product is forecasted to grow for the remainder of 2022 and 2023, thereby avoiding a recession. To address inflation, the forecast assumes the Federal Reserve raises the federal funds rate to a target rate of 2.25% to 2.50% by the end of 2022. Future surges of COVID-19 infections are assumed to have a diminishing threat to economic conditions. The slower near-term growth S-2 forecast reflects a slower economic recovery than the baseline forecast, with the conflict between Russia and Ukraine persisting longer than in the baseline, resulting in further supply-chain disruption and volatility in commodities prices. Additionally, new cases, hospitalizations and deaths from COVID-19 begin to rise again, which results in a slower return to spending on air travel, retail and hotels than the baseline. The S-2 scenario also assumes two quarters of negative gross domestic product in 2022, resulting in a mild recession with a slower return to full employment than in the baseline forecast. Additional information on the Moody’s forecast is provided in the “Economic Outlook” section of this document.

The allowance release of $9.1 million in the second quarter of 2022 compared to the first quarter of 2022 and the release of $89.7 million for June 30, 2022 when compared to June 30, 2021 are across most portfolios and reflect the continued improvement in the economic conditions in our market and overall asset quality. Our allowance for credit loss coverage to total loans was 1.55% at June

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30, 2022, or 1.56% when excluding SBA guaranteed PPP loans, compared to 1.63% at March 31, 2022, or 1.66% excluding PPP loans, and 2.03% at June 30, 2021, or 2.17% excluding PPP loans. While our reserve coverage to total loans continued to decline with improved credit metrics, it remains elevated compared to normalized levels, reflecting the current economic uncertainty largely driven by inflationary pressures, quantitative tightening, global supply chain issues, and labor supply shortages in our markets.

The allowance for credit losses on the commercial portfolio decreased to $280.0 million, or 1.59% of that portfolio, at June 30, 2022 compared to the March 31, 2022 allowance of $291.5 million, or 1.68%. The decrease in the commercial allowance is primarily due to improved economic conditions in our footprint and improved asset quality metrics, with several quarters of little to no net charge-offs. Our residential mortgage allowance for credit loss increased modestly to $28.6 million, 1.09% of that portfolio at June 30, 2022, compared to $26.4 million, or 1.07%, at March 31, 2022, due to both growth in the portfolio and less favorable forecasted economic variables. Our allowance for credit losses on the consumer portfolio was $30.9 million, or 1.97%, at June 30, 2022, virtually unchanged from March 31, 2022.

Criticized commercial loans totaled $281.0 million at June 30, 2022, down 1% from $282.5 million at March 31, 2022, and down 15% from $329.6 million at June 30, 2021. The reduction in commercial criticized loans reflects payoffs, paydowns, upgrades, and charge-offs exceeding new downgrades. Criticized loans are defined as those having potential weaknesses that deserve management’s close attention (risk-rated as special mention, substandard and doubtful), including both accruing and nonaccruing loans. The Company routinely assesses the ratings of loans in its portfolio through an established and comprehensive portfolio management process. In addition, the Company often looks at portfolios of loans to determine if there are areas of risk not specifically identified in its loan by loan approach.

Net recoveries were $0.7 million, or (0.01%) of average total loans on an annualized basis in the second quarter of 2022, compared to net charge-offs of $0.3 million, or 0.01% of average total loans in the first quarter of 2022 and $10.5 million, or 0.20% in the second quarter of 2021. Our commercial portfolio had net recoveries of $1.6 million and $0.8 million in the second and first quarters of 2022, respectively, while the second quarter of 2021 had net charge-offs totaling $9.3 million. Our residential mortgage portfolio had net recoveries of $0.4 million in the second quarter of 2022, and minimal recoveries in both the first quarter of 2022 and the second quarter of 2021. Consumer net charge-offs were relatively consistent at $1.4 million in the second quarter of 2022, $1.2 million in the first quarter of 2022, and $1.4 million in the second quarter of 2021.

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The following table sets forth activity in the allowance for credit losses for the periods indicated:

 

		Three Months Ended												Six Months Ended
		June 30,				March 31,				June 30,				June 30,
(in thousands)		2022				2021				2021				2022				2021
Provision and Allowance for Credit Losses
Allowance for loan losses:
Allowance for loan losses at beginning of period		$	317,843			$	342,065			$	424,360			$	342,065			$	450,177
Loans charged-off:
Commercial non real estate			1,088				2,659				11,420				3,747				28,932
Commercial real estate - owner-occupied			857				—				1,335				857				1,682
Total commercial & industrial			1,945				2,659				12,755				4,604				30,614
Commercial real estate - income producing			1,062				4				37				1,066				231
Construction and land development			3				—				8				3				256
Total commercial			3,010				2,663				12,800				5,673				31,101
Residential mortgages			18				42				98				60				207
Consumer			2,947				2,680				2,924				5,627				6,618
Total charge-offs			5,975				5,385				15,822				11,360				37,926
Recoveries of loans previously charged-off:
Commercial non real estate			4,461				2,142				2,288				6,603				4,187
Commercial real estate - owner-occupied			102				389				250				491				287
Total commercial & industrial			4,563				2,531				2,538				7,094				4,474
Commercial real estate - income producing			—				878				—				878				—
Construction and land development			58				68				1,005				126				1,164
Total commercial			4,621				3,477				3,543				8,098				5,638
Residential mortgages			466				61				231				527				437
Consumer			1,574				1,528				1,550				3,102				3,099
Total recoveries			6,661				5,066				5,324				11,727				9,174
Total net charge-offs			(686	)			319				10,498				(367	)			28,752
Provision for loan losses			(10,354	)			(23,903	)			(14,194	)			(34,257	)			(21,757	)
Allowance for loan losses at end of period		$	308,175			$	317,843			$	399,668			$	308,175			$	399,668
Reserve for Unfunded Lending Commitments:
Reserve for unfunded lending commitments at beginning of period		$	30,710			$	29,334			$	32,559			$	29,334			$	29,907
Provision for losses on unfunded lending commitments			593				1,376				(3,035	)			1,969				(383	)
Reserve for unfunded lending commitments at end of period		$	31,303			$	30,710			$	29,524			$	31,303			$	29,524
Total Allowance for Credit Losses		$	339,478			$	348,553			$	429,192			$	339,478			$	429,192
Total Provision for Credit Losses		$	(9,761	)		$	(22,527	)		$	(17,229	)		$	(32,288	)		$	(22,140	)
Coverage Ratios:
Allowance for loan losses to period-end loans			1.41	%			1.49	%			1.89	%			1.41	%			1.89	%
Allowance for credit losses to period-end loans			1.55	%			1.63	%			2.03	%			1.55	%			2.03	%
Charge-offs ratios:
Gross charge-offs to average loans			0.11	%			0.10	%			0.30	%			0.11	%			0.35	%
Recoveries to average loans			0.12	%			0.10	%			0.10	%			0.11	%			0.09	%
Net charge-offs to average loans			(0.01	)%			0.01	%			0.20	%			(0.00	)%			0.27	%
Net Charge-offs to average loans by portfolio
Commercial non real estate			(0.14	)%			0.02	%			0.37	%			(0.06	)%			0.50	%
Commercial real estate - owner-occupied			0.10	%			(0.06	)%			0.16	%			0.03	%			0.10	%
Total commercial & industrial			(0.08	)%			0.00	%			0.32	%			(0.04	)%			0.41	%
Commercial real estate - income producing			0.12	%			(0.10	)%			0.00	%			0.01	%			0.01	%
Construction and land development			(0.02	)%			(0.02	)%			(0.35	)%			(0.02	)%			(0.17	)%
Total commercial			(0.04	)%			(0.02	)%			0.22	%			(0.03	)%			0.30	%
Residential mortgages			(0.07	)%			(0.00	)%			(0.02	)%			(0.04	)%			(0.02	)%
Consumer			0.35	%			0.30	%			0.32	%			0.33	%			0.40	%

 

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The following table sets forth nonperforming assets by type for the periods indicated, consisting of nonaccrual loans, troubled debt restructurings and foreclosed and surplus ORE and other foreclosed assets. Loans past due 90 days or more and still accruing are also disclosed.

 

		June 30,				March 31,				December 31,				September 30,				June 30,
(in thousands)		2022				2022				2021				2021				2021
Loans accounted for on a nonaccrual basis:
Commercial non-real estate		$	3,600			$	4,065			$	4,058			$	7,167			$	16,029
Commercial non-real estate - restructured			1,230				1,247				2,915				2,781				3,095
Total commercial non-real estate			4,830				5,312				6,973				9,948				19,124
Commercial real estate - owner occupied			2,165				2,514				3,104				4,922				6,276
Commercial real estate - owner-occupied - restructured			228				235				1,817				1,798				1,839
Total commercial real estate - owner-occupied			2,393				2,749				4,921				6,720				8,115
Commercial real estate - income producing			1,842				1,880				5,377				4,167				4,975
Commercial real estate - income producing - restructured			74				76				81				82				86
Total commercial real estate - income producing			1,916				1,956				5,458				4,249				5,061
Construction and land development			676				578				837				1,230				2,004
Construction and land development - restructured			4				6				7				8				8
Total construction and land development			680				584				844				1,238				2,012
Residential mortgage			18,649				20,709				23,483				23,423				30,995
Residential mortgage - restructured			1,713				2,036				1,956				2,541				1,780
Total residential mortgage			20,362				22,745				25,439				25,964				32,775
Consumer			7,885				9,093				11,888				12,238				16,464
Consumer - restructured			—				—				—				—				—
Total consumer			7,885				9,093				11,888				12,238				16,464
Total nonaccrual loans		$	38,066			$	42,439			$	55,523			$	60,357			$	83,551
Restructured loans - still accruing:
Commercial non-real estate		$	329			$	494			$	515			$	480			$	526
Commercial real estate - owner occupied			—				—				—				—				—
Commercial real estate - income producing			—				—				—				—				—
Construction and land development			116				117				118				119				120
Residential mortgage			1,142				1,363				2,169				1,407				2,103
Consumer			905				929				986				1,065				1,081
Total restructured loans - still accruing			2,492				2,903				3,788				3,071				3,830
Total nonperforming loans			40,558				45,342				59,311				63,428				87,381
ORE and foreclosed assets			3,467				6,345				7,533				8,423				10,201
Total nonperforming assets (a)		$	44,025			$	51,687			$	66,844			$	71,851			$	97,582
Loans 90 days past due still accruing		$	4,697			$	4,258			$	5,524			$	9,970			$	8,925
Total restructured loans		$	5,741			$	6,503			$	10,564			$	10,281			$	10,638
Ratios:
Nonaccrual loans to total loans			0.17	%			0.20	%			0.26	%			0.29	%			0.40	%
Nonperforming assets to loans plus ORE and foreclosed assets			0.20	%			0.24	%			0.32	%			0.34	%			0.46	%
Allowance for loan losses to nonaccrual loans and accruing loans 90 days past due			720.66	%			680.65	%			560.33	%			528.28	%			432.19	%
Allowance for loan losses to nonperforming loans and accruing loans 90 days past due			680.97	%			640.81	%			527.59	%			506.17	%			415.00	%
Loans 90 days past due still accruing to loans			0.02	%			0.02	%			0.03	%			0.05	%			0.04	%

 

Nonperforming assets totaled $44.0 million at June 30, 2022, down $7.7 million from March 31, 2022, and $53.6 million from June 30, 2021. Nonperforming loans decreased $4.8 million compared to March 31, 2022, and $46.8 million from June 30, 2021. The declines in nonperforming loans was largely attributable to payoffs and charge-offs outpacing downgrades. ORE and foreclosed assets were $3.5 million at June 30, 2022, down from $6.3 million at March 31, 2022, and $10.2 million at June 30, 2021. Nonperforming assets as a percentage of total loans, ORE and other foreclosed assets was 0.20% at June 30, 2022, down 4 bps from March 31, 2022, and 26 bps from June 30, 2021.

Future assumptions in economic forecasts and our asset quality metrics will drive our outlook for the level of future reserves. In light of the current economic environment, we currently do not foresee additional reserve releases in the near term, but rather could see zero to low provision for loan loss for the remainder of 2022.

 

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Deposits

Deposits provide the most significant source of funding for our interest earning assets. Generally, our ability to compete for market share depends on our deposit pricing and our wide range of products and services that are focused on customer needs. In order to meet our customers’ needs, we offer high-quality banking services with convenient delivery channels, including online and mobile banking. We provide specialized services to our commercial customers to promote commercial deposit growth. These services include treasury management, industry expertise and lockbox services. Since early 2020, deposit levels have also been influenced by pandemic driven factors, such as inflows from government stimulus payments, deposits related to funding PPP loans into business checking accounts and a slowdown in customer spending during the height of the pandemic.

Total deposits were $29.9 billion at June 30, 2022, down $633.3 million, or 2%, from March 31, 2022, including a $300.3 million decrease in noninterest-bearing deposits and a $332.9 million decrease in interest-bearing accounts. Total deposits increased $593.3 million, or 2%, from June 30, 2021, with strong growth of $1.3 billion in noninterest-bearing deposits and a $676.6 million decrease in interest-bearing deposits. The linked-quarter decrease in deposits reflects a seasonal decline in public fund deposits and other outflows from both commercial and consumer accounts. Average deposits for the second quarter of 2022 were $30.0 billion, down $49.9 million, or less than 1%, from the first quarter of 2022 and up $751.1 million, or 3%, from the second quarter of 2021.

The following table shows the composition of our deposits at each date indicated.

		June 30,				March 31,				December 31,				September 30,				June 30,
(in thousands)		2022				2022				2021				2021				2021
Noninterest-bearing deposits		$	14,676,342			$	14,976,670			$	14,392,808			$	13,653,366			$	13,406,385
Interest-bearing retail transaction and savings deposits			11,359,561				11,488,607				11,677,333				11,306,731				11,325,942
Interest-bearing public fund deposits:
Public fund transaction and savings deposits			2,832,720				2,962,811				3,216,651				2,938,943				3,090,247
Public fund time deposits			50,943				51,496				77,956				116,445				116,552
Total interest-bearing public fund deposits			2,883,663				3,014,307				3,294,607				3,055,388				3,206,799
Retail time deposits			937,676				1,010,935				1,091,959				1,183,482				1,319,857
Brokered time deposits			9,190				9,190				9,190				9,190				14,124
Total interest-bearing deposits			15,190,090				15,523,039				16,073,089				15,554,791				15,866,722
Total deposits		$	29,866,432			$	30,499,709			$	30,465,897			$	29,208,157			$	29,273,107

Noninterest-bearing demand deposits were $14.7 billion at June 30, 2022, down $300.3 million, or 2%, from March 31, 2020, and up $1.3 billion, or 9%, from June 30, 2021. The linked-quarter decrease reflects a decline in noninterest-bearing commercial, consumer and public funds deposits due in part to typical seasonality related to taxes, while the year-over-year changes are likely the result of pandemic and hurricane related cash inflows. Noninterest-bearing demand deposits comprised 49% of total deposits at June 30, 2022, unchanged from March 31, 2022, and up compared to 46% at June 30, 2021.

Interest-bearing transaction and savings accounts of $11.4 billion at June 30, 2022 were down $129.0 million, or 1%, from March 31, 2022 and up $33.6 million, or less than 1%, from June 30, 2021. Interest-bearing public fund deposits totaled $2.9 billion at June 30, 2022, down $130.6 million, or 4%, from March 31, 2022, and down $323.1 million, or 10%, from June 30, 2021. Time deposits other than public funds totaled $0.9 billion at June 30, 2022, down $73.3 million, or 7%, from March 31, 2022, and $382.2 million, or 29%, from June 30, 2021. The decrease in time deposits from both periods was due in part to maturing retail and jumbo certificates of deposit which were not renewed, likely due to prevailing rates that reflect management’s strategic approach to lowering the cost of funds, and more recently, a lag in increasing deposit rates with market changes.

Management continues to expect year-end deposits will remain flat to down slightly from the December 31, 2021 level of $30.5 billion, with seasonal growth forecasted in the fourth quarter.

 

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Short-Term Borrowings

At June 30, 2022, short-term borrowings totaled $630.0 million, down $990.3 million, or 61%, from March 31, 2022 and down $886.5 million, or 58%, from June 30, 2021. The decline from the prior quarter and the same quarter last year was due largely to the repayment of $900 million of FHLB advances during the second quarter of 2022, and the remainder of the change was related to customer repurchase agreements. Average short-term borrowings of $1.2 billion in the second quarter of 2022 were down $465.7 million, or 28%, compared to the prior quarter and down $436.8 million, or 26%, compared to the same quarter last year.

Short-term borrowings are a core portion of the Company’s funding strategy and can fluctuate depending on our funding needs and the sources utilized. Customer repurchase agreements and FHLB borrowings are the major sources of short-term borrowings. Customer repurchase agreements are offered mainly to commercial customers to assist them with their cash management strategies or to provide a temporary investment vehicle for their excess liquidity pending redeployment for corporate or investment purposes. While customer repurchase agreements provide a recurring source of funds to the Bank, amounts available will vary. FHLB borrowings are funds from the Federal Home Loan Bank that are collateralized by certain residential mortgage and commercial real estate loans included in the Bank’s loan portfolio, subject to specific criteria.

Included in short-term borrowings at June 30, 2022 are $200 million of FHLB advances consisting of one fixed rate note maturing in 2035, that is classified as short-term as the FHLB has the option to put (terminate) the advance prior to maturity. The advance was entered into in early 2020 with an interest rate of 0.52%. The note was called and repaid in July of 2022.

Long-Term Debt

Long-term debt totaled $240.0 million at June 30, 2022, virtually unchanged from the prior quarter and down $8.0 million, or 3% from the same quarter last year.

Long-term debt at June 30, 2022 includes subordinated notes payable with an aggregate principal amount of $172.5 million with a stated maturity of June 15, 2060, a fixed rate of 6.25% per annum that qualify as Tier 2 capital of certain regulatory capital ratios. Subject to prior approval by the Federal Reserve, the Company may redeem these notes in whole or in part on any of its quarterly interest payment dates after June 15, 2025.

 

 

OFF-BALANCE SHEET ARRANGEMENTS

Loan Commitments and Letters of Credit

In the normal course of business, the Bank enters into financial instruments, such as commitments to extend credit and letters of credit, to meet the financing needs of its customers. Such instruments are not reflected in the accompanying consolidated financial statements until they are funded, although they expose the Bank to varying degrees of credit risk and interest rate risk in much the same way as funded loans. Under regulatory capital guidelines, the Company and Bank must include unfunded commitments meeting certain criteria in risk-weighted capital calculations.

Commitments to extend credit include revolving commercial credit lines, non-revolving loan commitments issued mainly to finance the acquisition and development or construction of real property or equipment, and credit card and personal credit lines. The availability of funds under commercial credit lines and loan commitments generally depends on whether the borrower continues to meet credit standards established in the underlying contract and has not violated other contractual conditions. Loan commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee by the borrower. Credit card and personal credit lines are generally subject to cancellation if the borrower’s credit quality deteriorates. A number of commercial and personal credit lines are used only partially or, in some cases, not at all before they expire, and the total commitment amounts do not necessarily represent our future cash requirements.

A substantial majority of the letters of credit are standby agreements that obligate the Bank to fulfill a customer’s financial commitments to a third party if the customer is unable to perform. The Bank issues standby letters of credit primarily to provide credit enhancement to its customers’ other commercial or public financing arrangements and to help them demonstrate financial capacity to vendors of essential goods and services.

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The contract amounts of these instruments reflect our exposure to credit risk. The Bank undertakes the same credit evaluation in making loan commitments and assuming conditional obligations as it does for on-balance sheet instruments and may require collateral or other credit support. At June 30, 2022, the Company had a reserve for unfunded lending commitments totaling $31.3 million.

The following table shows the commitments to extend credit and letters of credit at June 30, 2022 according to expiration date.

 

						Expiration Date
						Less than				1-3				3-5				More than
(in thousands)		Total				1 year				years				years				5 years
Commitments to extend credit		$	9,822,217			$	4,178,316			$	2,404,219			$	2,423,402			$	816,280
Letters of credit			380,029				309,339				62,445				8,245				—
Total		$	10,202,246			$	4,487,655			$	2,466,664			$	2,431,647			$	816,280

 

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

There were no material changes or developments during the reporting period with respect to methodologies that the Company uses when applying what management believes are critical accounting policies and developing critical accounting estimates as disclosed in its Annual Report on Form 10-K for the year ended December 31, 2021.

The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America and with those generally practiced within the banking industry which require management to make estimates and assumptions about future events. Estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, and the resulting estimates form the basis for making judgments about the carrying values of certain assets and liabilities not readily apparent from other sources. Actual results could differ significantly from those estimates.

NEW ACCOUNTING PRONOUNCEMENTS

Refer to Note 14 to our consolidated financial statements included elsewhere in this report.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The Company’s net income is materially dependent upon net interest income. The Company’s primary market risk is interest rate risk which stems from uncertainty with respect to absolute and relative levels of future market interest rates that affect financial products and services. In order to manage the exposures to interest rate risk, management measures the sensitivity of net interest income and cash flows under various market interest rate scenarios, establishes interest rate risk management policies and implements asset/liability management strategies designed to produce a relatively stable net interest margin under varying interest rate environments.

The following table presents an analysis of our interest rate risk as measured by the estimated changes in net interest income resulting from an instantaneous and sustained parallel shift in rates at June 30, 2022. Shifts are measured in 100 basis point increments in a range from -500 to +500 basis points from base case, with -100 through +200 basis points presented in the table below. Our interest rate sensitivity modeling incorporates a number of assumptions including loan and deposit repricing characteristics, the rate of loan prepayments and other factors such as loan floors and the impact of off-balance sheet hedges. The base scenario assumes that the current interest rate environment is held constant over a 24-month forecast period and is the scenario to which all others are compared in order to measure the change in net interest income. Policy limits on the change in net interest income under a variety of interest rate scenarios are approved by the Board of Directors. All policy scenarios assume a static volume forecast where the balance sheet is held constant, although other scenarios are modeled.

 

		Estimated Increase
		(Decrease) in NII
Change in Interest Rates		Year 1				Year 2
(basis points)
-100			-6.34	%			-9.26	%
+100			5.61	%			8.36	%
+200			11.15	%			16.60	%

 

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The results indicate an increased level of asset sensitivity across most scenarios driven primarily by a large volume of variable rate loans indexed to short-term rates and a funding mix which has a higher composition of non-interest bearing and lower rate sensitive deposits. When deemed to be prudent, management has taken actions to mitigate exposure to interest rate risk with on- or off-balance sheet financial instruments and intends to do so in the future. Possible actions include, but are not limited to, changes in the pricing of loan and deposit products, modifying the composition of earning assets and interest-bearing liabilities, and adding to, modifying or terminating existing interest rate swap agreements or other financial instruments used for interest rate risk management purposes.

Even if interest rates change in the designated amounts, there can be no assurance that our assets and liabilities would perform as anticipated. Additionally, a change in the U.S. Treasury rates in the designated amounts accompanied by a change in the shape of the U.S. Treasury yield curve would cause significantly different changes to net interest income than indicated above. Strategic management of our balance sheet and earnings is fluid and would be adjusted to accommodate these movements. As with any method of measuring interest rate risk, certain shortcomings are inherent in the methods of analysis presented above. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Certain assets such as adjustable-rate loans have features which restrict changes in interest rates on a short-term basis and over the life of the asset. Also, the ability of many borrowers to service their debt may decrease in the event of an interest rate increase. We consider all of these factors in monitoring exposure to interest rate risk.

 

LIBOR Transition

In 2017, the United Kingdom’s Financial Conduct Authority announced that after 2021 it would no longer compel banks to submit the rates required to calculate the London Interbank Offered Rate (“LIBOR”). In November 2020, the administrator of LIBOR announced it will consult on its intention to extend the retirement date of certain offered rates whereby the publication of the one week and two month LIBOR offered rates will cease after December 31, 2021, but the publication of the remaining LIBOR offered rates will continue until June 30, 2023. Given consumer protection, litigation, and reputation risks, the bank regulatory agencies have indicated that entering into new contracts that use LIBOR as a reference rate after December 31, 2021, would create safety and soundness risks and that they will examine bank practices accordingly. Therefore, the agencies encouraged banks to cease entering into new contracts that use LIBOR as a reference rate as soon as practicable and in any event by December 31, 2021. The company discontinued the use of LIBOR for new contracts as of December 31, 2021, with limited exceptions as permitted by regulatory guidance or internal policies.

Regulators, industry groups and certain committees (e.g., the Alternative Reference Rates Committee ("ARRC") have, among other things, published recommended fallback language for LIBOR-linked financial instruments, identified recommended alternatives for certain LIBOR rates (e.g., AMERIBOR or the Secured Overnight Financing Rate ("SOFR") as the recommended alternative to U.S. Dollar LIBOR), and proposed implementations of the recommended alternatives in floating rate instruments.

We have a significant number of loans, derivative contracts, borrowings and other financial instruments with attributes that are either directly or indirectly dependent on LIBOR. The transition from LIBOR has resulted in and could continue to result in added costs and employee efforts and could present additional risk. Since proposed alternative rates are calculated differently, payments under contracts referencing new rates will differ from those referencing LIBOR. The transition will change our market risk profiles, requiring changes to risk and pricing models, valuation tools, product design and hedging strategies.

Management has established a LIBOR Transition Working Group (the “Group”) whose purpose is to direct the overall transition process for the Company. The Group is an internal, cross-functional team with representatives from business lines, support and control functions and legal counsel. Beginning in the third quarter of 2019, key provisions in our loan documents were modified to ensure new and renewed loans include appropriate pre-cessation trigger language and LIBOR fallback language for transition from LIBOR to the new benchmark when such transition occurs. All direct exposures resulting from existing financial contracts that mature after 2021 have been inventoried and are monitored on an ongoing basis. Remediation of these exposures is in process and will be consistent with industry timing. The Group has also inventoried indirect LIBOR exposures within the Company's systems, models and processes. The results of this assessment will drive development and prioritization of remediation plans, and the Group is continuing to monitor developments and taking steps to ensure readiness when the LIBOR benchmark rate is discontinued. Although we are currently unable to assess what the ultimate impact of the transition from LIBOR will be, failure to adequately manage the transition could have a material adverse effect on our business, financial condition and results of operations.

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The Bank has adopted several replacement benchmarks to use in place of LIBOR benchmark rates, with AMERIBOR along with Chicago Mercantile Exchange Inc. (“CME”) Term SOFR and FRB-NY SOFR as the primary rates. The replacement benchmarks rates adopted by the Bank have been affirmed to comply with the 19 principles set forth by the International Organization of Securities Commissions ("IOSCO") for Financial Benchmarks, and it further provides the Bank confidence these replacement benchmarks are based on transparent, market-based transactions. The Bank began using these replacement benchmarks towards the end of the third quarter of 2021.

At June 30, 2022, approximately 26% of our loan portfolio, excluding PPP loans, consisted of variable rate loans tied to LIBOR, along with related derivatives and other financial instruments.

 

Item 4. Controls and Procedures

In connection with the preparation of this Quarterly Report on Form 10-Q, an evaluation was carried out by the Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Disclosure controls and procedures are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of June 30, 2022, the Company’s disclosure controls and procedures were effective.

Our management, including the Chief Executive Officer and Chief Financial Officer, identified no change in our internal control over financial reporting that occurred during the three month period ended June 30, 2022, that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

The Company, including subsidiaries, is party to various legal proceedings arising in the ordinary course of business. We do not believe that loss contingencies, if any, arising from pending litigation and regulatory matters will have a material adverse effect on our consolidated financial position or liquidity.

Item 1A. Risk Factors

The Company disclosed risk factors in its Annual Report on Form 10-K for the year ended December 31, 2021. The risks described may not be the only risks facing us. Additional risks and uncertainties not currently known to us or that are currently considered to not be material also may materially adversely affect our business, financial condition, and/or operating results.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The Company has in place a Board approved stock buyback program whereby the Company is authorized to repurchase up to 4.3 million shares of its common stock through the program’s expiration date of December 31, 2022. The program allows the Company to repurchase its common shares in the open market, by block purchase, through accelerated share repurchase programs, in privately negotiated transactions, or otherwise, in one or more transactions. Following is a summary of repurchases during the three months ended June 30, 2022.

 

		Total number of shares or units purchased				Average price paid per share				Total number of shares purchased as part of a publicly announced plan or program				Maximum number of shares that may yet be purchased under such plans or programs
April 1, 2022 - April 30, 2022			106,866			$	48.16				106,866				3,393,258
May 1, 2022 - May 31, 2022			668,629			$	47.02				668,629				2,724,629
June 1, 2022 - June 30, 2022			28,873			$	48.92				28,873				2,695,756
			804,368			$	47.24				804,368

 

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Item 6. Exhibits

(a) Exhibits:

 

Exhibit Number		Description		Filed Herewith		Form		Exhibit		Filing Date
3.1		Second Amended and Restated Articles of Hancock Whitney Corporation				8-K		3.1		5/1/2020
3.2		Second Amended and Restated Bylaws of Hancock Whitney Corporation				8-K		3.2		5/1/2020
31.1		Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002		X
31.2		Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002		X
32.1		Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002		X
32.2		Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002		X
101.INS		Inline XBRL Instance Document		X
101.SCH		Inline XBRL Taxonomy Extension Schema Document		X
101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document		X
101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document		X
101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document		X
101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document		X
104		Cover Page Interactive Data File		X

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

	Hancock Whitney Corporation
	By:		/s/ John M. Hairston
			John M. Hairston
			President & Chief Executive Officer
			(Principal Executive Officer)
			/s/ Michael M. Achary
			Michael M. Achary
			Senior Executive Vice President & Chief Financial Officer (Principal Financial Officer)
			August 4, 2022

 

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