Published: 2023-08-04 00:00:00 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, 2023

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.

86,125,500 common shares were outstanding at July 31, 2023.

 

 

 

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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, 2023 and December 31, 2022	5
	Consolidated Statements of Income (unaudited) – Three and Six Months Ended June 30, 2023 and 2022	6
	Consolidated Statements of Comprehensive Income (unaudited) – Three and Six Months Ended June 30, 2023 and 2022	7
	Consolidated Statements of Changes in Stockholders’ Equity (unaudited) – Three and Six Months Ended June 30, 2023 and 2022	8
	Consolidated Statements of Cash Flows (unaudited) – Six Months Ended June 30, 2023 and 2022	9
	Notes to Consolidated Financial Statements (unaudited) – June 30, 2023 and 2022	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	69
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

CEO – Chief Executive Officer

CFPB– Consumer Financial Protection Bureau

CFO – Chief Financial Officer

CME – Chicago Mercantile Exchange

CMO – collateralized mortgage obligation

Core client deposits – total deposits excluding public funds and brokered deposits

Core deposits – total deposits excluding certificates of deposits of $250,000 or more and brokered deposits

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

ESG – Environmental, Social and Governance; term used in discussion of risks and corporate policies related to those items

Excess Liquidity – deposits held at the Federal Reserve above normal levels

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

ICS – Insured cash sweep

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IRA 2022 – Inflation Reduction Act of 2022

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

MEFD - reportable modified loans to borrowers experiencing financial difficulty as defined by accounting guidance effective January 1, 2023

NAICS – North American Industry Classification System

NII – net interest income

n/m – not meaningful

NSF – Non-sufficient funds

OCI – other comprehensive income or loss

OD – Overdraft

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, as defined by accounting guidance that was superseded effective January 1, 2023

TSR – total shareholder return

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

 

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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)		2023				2022
ASSETS
Cash and due from banks		$	563,736			$	564,459
Interest-bearing bank deposits			673,650				323,332
Federal funds sold			513				728
Securities available for sale, at fair value (amortized cost of $6,151,183 and $6,310,214)			5,414,689				5,556,041
Securities held to maturity (fair value of $2,540,256 and $2,615,398 )			2,780,990				2,852,495
Loans held for sale (includes $24,163 and $10,843 measured at fair value)			55,902				26,385
Loans			23,789,886				23,114,046
Less: allowance for loan losses			(314,496	)			(307,789	)
Loans, net			23,475,390				22,806,257
Property and equipment, net of accumulated depreciation of $310,257 and $303,451			326,534				328,605
Right of use assets, net of accumulated amortization of $49,510 and $44,901			106,399				96,884
Prepaid expenses			58,762				44,632
Other real estate and foreclosed assets, net			2,174				2,017
Accrued interest receivable			141,442				131,849
Goodwill			855,453				855,453
Other intangible assets, net			50,122				56,193
Life insurance contracts			740,626				729,774
Funded pension assets, net			216,149				216,818
Deferred tax asset, net			200,910				211,418
Other assets			546,707				380,485
Total assets		$	36,210,148			$	35,183,825
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits
Noninterest-bearing		$	12,171,817			$	13,645,113
Interest-bearing			17,871,684				15,425,236
Total deposits			30,043,501				29,070,349
Short-term borrowings			1,629,538				1,871,271
Long-term debt			236,241				242,077
Accrued interest payable			35,639				9,935
Lease liabilities			125,750				116,422
Other liabilities			585,003				531,143
Total liabilities			32,655,672				31,841,197
Stockholders' equity:
Common stock			309,513				309,513
Capital surplus			1,727,745				1,716,884
Retained earnings			2,280,004				2,088,413
Accumulated other comprehensive loss, net			(762,786	)			(772,182	)
Total stockholders' equity			3,554,476				3,342,628
Total liabilities and stockholders' equity		$	36,210,148			$	35,183,825
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			86,123				85,941

 

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)		2023				2022				2023				2022
Interest income:
Loans, including fees		$	341,456			$	207,163			$	656,057			$	399,913
Loans held for sale			365				443				660				1,134
Securities-taxable			47,501				39,015				95,147				76,179
Securities-tax exempt			4,728				4,718				9,449				9,373
Short-term investments			11,223				3,525				16,563				5,051
Total interest income			405,273				254,864				777,876				491,650
Interest expense:
Deposits			102,535				5,051				166,986				8,829
Short-term borrowings			25,733				959				45,796				2,378
Long-term debt			3,094				3,122				6,189				6,248
Total interest expense			131,362				9,132				218,971				17,455
Net interest income			273,911				245,732				558,905				474,195
Provision for credit losses			7,633				(9,761	)			13,653				(32,288	)
Net interest income after provision for credit losses			266,278				255,493				545,252				506,483
Noninterest income:
Service charges on deposit accounts			21,491				20,495				42,113				42,169
Trust fees			17,393				17,309				34,127				32,588
Bank card and ATM fees			20,982				21,870				41,703				42,266
Investment and annuity fees and insurance commissions			8,241				8,001				17,108				15,428
Secondary mortgage market operations			2,299				2,990				4,467				6,736
Securities transactions, net			—				—				—				(87	)
Other income			12,819				14,988				24,037				29,985
Total noninterest income			83,225				85,653				163,555				169,085
Noninterest expense:
Compensation expense			94,121				94,155				186,524				180,148
Employee benefits			20,743				21,015				43,663				42,418
Personnel expense			114,864				115,170				230,187				222,566
Net occupancy expense			12,707				12,225				24,913				23,905
Equipment expense			5,043				4,703				9,779				9,570
Data processing expense			29,562				26,169				57,744				50,408
Professional services expense			8,915				8,423				18,046				16,216
Amortization of intangible assets			2,957				3,586				6,071				7,334
Deposit insurance and regulatory fees			6,463				3,503				12,383				7,243
Other real estate and foreclosed assets income, net			(282	)			(88	)			(127	)			(1,852	)
Other expense			21,909				13,406				44,026				31,646
Total noninterest expense			202,138				187,097				403,022				367,036
Income before income taxes			147,365				154,049				305,785				308,532
Income taxes expense			29,571				32,614				61,524				63,619
Net income		$	117,794			$	121,435			$	244,261			$	244,913
Earnings per common share-basic		$	1.35			$	1.39			$	2.81			$	2.79
Earnings per common share-diluted		$	1.35			$	1.38			$	2.80			$	2.78
Dividends paid per share		$	0.30			$	0.27			$	0.60			$	0.54
Weighted average shares outstanding-basic			86,096				86,067				86,057				86,362
Weighted average shares outstanding-diluted			86,370				86,354				86,350				86,654

 

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)		2023				2022				2023				2022
Net income		$	117,794			$	121,435			$	244,261			$	244,913
Other comprehensive income (loss) before income taxes:
Net change in unrealized loss on securities available for sale cash flow hedges and equity method investment			(103,503	)			(203,551	)			(2,559	)			(594,455	)
Reclassification of (income) or loss realized and included in earnings			11,245				(5,570	)			20,765				(9,408	)
Other valuation adjustments to employee benefit plans			(5,685	)			(7,987	)			(7,521	)			(7,987	)
Amortization of unrealized net loss on securities transferred to held to maturity			428				266				922				527
Other comprehensive income (loss) before income taxes			(97,515	)			(216,842	)			11,607				(611,323	)
Income tax expense (benefit)			(22,194	)			(48,941	)			2,211				(138,081	)
Other comprehensive income (loss) net of income taxes			(75,321	)			(167,901	)			9,396				(473,242	)
Comprehensive income (loss)		$	42,473			$	(46,466	)		$	253,657			$	(228,329	)

 

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, 2023 and 2022																		Accumulated
		Common Stock																Other
(in thousands, except parenthetical share data)		Shares Issued				Amount				Capital Surplus				Retained Earnings				Comprehensive Loss				Total
Balance, March 31, 2023			92,947			$	309,513			$	1,720,623			$	2,188,561			$	(687,465	)		$	3,531,232
Net income			—				—				—				117,794				—				117,794
Other comprehensive loss			—				—				—				—				(75,321	)			(75,321	)
Comprehensive income			—				—				—				117,794				(75,321	)			42,473
Cash dividends declared ($0.30 per common share)			—				—				—				(26,392	)			—				(26,392	)
Common stock activity, long-term incentive plans			—				—				6,123				41				—				6,164
Issuance of stock from dividend reinvestment and stock purchase plans			—				—				999				—				—				999
Balance, June 30, 2023			92,947			$	309,513			$	1,727,745			$	2,280,004			$	(762,786	)		$	3,554,476
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
Six Months Ended June 30, 2023 and 2022																		Accumulated
		Common Stock																Other
(in thousands, except parenthetical share data)		Shares Issued				Amount				Capital Surplus				Retained Earnings				Comprehensive Loss				Total
Balance, December 31, 2022			92,947			$	309,513			$	1,716,884			$	2,088,413			$	(772,182	)		$	3,342,628
Net income			—				—				—				244,261				—				244,261
Other comprehensive income			—				—				—				—				9,396				9,396
Comprehensive income			—				—				—				244,261				9,396				253,657
Dividends declared ($0.60 per common share)			—				—				—				(52,779	)			—				(52,779	)
Common stock activity, long-term incentive plans			—				—				8,927				109				—				9,036
Issuance of stock from dividend reinvestment and stock purchase plans			—				—				1,934				—				—				1,934
Balance, June 30, 2023			92,947			$	309,513			$	1,727,745			$	2,280,004			$	(762,786	)		$	3,554,476
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

 

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)		2023				2022
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	244,261			$	244,913
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			17,514				14,814
Provision for credit losses			13,653				(32,288	)
Gain on other real estate and foreclosed assets			(324	)			(3,276	)
Loss on sale of securities			—				87
Deferred tax expense			8,450				11,634
Increase in cash surrender value of life insurance contracts			(7,466	)			(920	)
Loss on disposal of assets			651				539
Net (increase) decrease in loans held for sale			(29,454	)			43,329
Net amortization of securities premium/discount			9,674				21,311
Amortization of intangible assets			6,071				7,334
Stock-based compensation expense			12,194				11,379
Net change in derivative collateral liability			85,986				96,591
Net increase (decrease) in interest payable and other liabilities			6,547				(19,009	)
(Increase) decrease in other assets			(146,238	)			108,679
Other, net			(6,828	)			(18,286	)
Net cash provided by operating activities			214,691				486,831
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale of available for sale securities			—				73,219
Proceeds from maturities of securities available for sale			157,474				295,121
Purchases of securities available for sale			—				(383,398	)
Proceeds from maturities of securities held to maturity			72,365				77,794
Purchases of securities held to maturity			(6,023	)			(708,439	)
Proceeds received upon termination of fair value hedge instruments			16,550				49,167
Net (increase) decrease in short-term investments			(350,103	)			2,959,439
Net (purchases) redemption of Federal Home Loan Bank stock			(68,057	)			37,423
Proceeds from sales of loans and leases			27,439				26,619
Net increase in loans			(718,348	)			(808,525	)
Purchase of life insurance contracts			—				(65,000	)
Purchases of property and equipment			(18,273	)			(18,212	)
Proceeds from sales of other real estate and foreclosed assets			1,420				9,378
Other, net			(7,594	)			4,277
Net cash provided by (used in) investing activities			(893,150	)			1,548,863
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits			973,152				(599,465	)
Net decrease in short-term borrowings			(241,733	)			(1,035,050	)
Repayments of long-term debt			—				(480	)
Dividends paid			(52,350	)			(47,365	)
Payroll tax remitted on net share settlement of equity awards			(3,267	)			(1,799	)
Proceeds from exercise of stock options			—				227
Proceeds from dividend reinvestment and stock purchase plans			1,934				1,800
Repurchase of common stock			—				(56,489	)
Net cash provided by (used in) financing activities			677,736				(1,738,621	)
NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS			(723	)			297,073
CASH AND DUE FROM BANKS, BEGINNING			564,459				401,201
CASH AND DUE FROM BANKS, ENDING		$	563,736			$	698,274
SUPPLEMENTAL INFORMATION FOR NON-CASH
INVESTING AND FINANCING ACTIVITIES
Assets acquired in settlement of loans		$	1,322			$	118

 

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, 2023 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 can be found in Part II, Item 1A. "Risk Factors" herein, in Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2022, or 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.

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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.

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

 

The U.S economy continues to show resiliency despite continued pressures and recessionary concerns. Second quarter 2023 gross domestic product (GDP) growth of 2.4% on an annual basis was notably higher than projected, and the June 2023 unemployment rate of 3.6% continues to hover near the point of full-employment. Thus far, the Federal Reserve's aggressive approach to curbing inflation has effected change without precipitating a recession. Signs of inflation cooling continued in the second quarter of 2023, with the consumer price index (CPI) headline rate falling to a more than two-year low of 3% on an annual basis; however, core inflation (defined as CPI excluding food and energy intended to measure long-run inflation) has been less responsive. The Federal Reserve issued additional 25-basis point interest rates increase in May and July, and has indicated that further interest rate increases are possible during this hiking cycle, depending on performance indicators. While the strength of the labor market may help prevent or reduce the severity of a potential recession, additional rate increases and the likelihood that interest rates will remain higher for longer are likely to result in below-trend economic growth. The U.S Treasury yield curve inversion deepened during the second quarter of 2023, giving further indication of a possible recession.

Within the financial services industry, a number of institutions are facing both macroeconomic and industry-specific headwinds, including tempered loan growth expectations and escalating expense pressures that have been compounded by recent turmoil in the sector. The rising interest rate environment has steadily affected the affordability of credit, and credit standards as a whole have tightened somewhat in the wake of economic uncertainty and post-pandemic effects on certain loan portfolio segments and lines of business. Despite this, we experienced 2% loan growth in the second quarter of 2023 and have yet to experience any significant decline in credit quality. The rising interest rate environment has also prompted a cumulative shift within deposit composition toward higher cost products and created increased competition for deposits; heightened regulatory scrutiny over the stability of an institution's deposit base and adequate levels of liquidity have compounded deposit retention efforts and other borrowing cost pressures, leading to a decline in net interest income and margin. We are continuously monitoring industry developments, deposit metrics, including the level of uninsured deposits, liquidity position and capital levels to support our ability to weather the current state of macroeconomic and industry-specific volatility.

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 2023 Moody’s forecast, the most current available at June 30, 2023. 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 that display varying depictions of economic performance as compared to the baseline.

While the credit loss outlook on our portfolio has not changed significantly, changes in the Moody’s scenarios have led to a shift in our weighting. At March 31, 2023, management applied a weighting of 40% to the baseline scenario, 50% to the mild recessionary S-2 scenario and 10% to the moderate recessionary S-3 scenario. Assumptions underlying the June 2023 baseline and S-2 scenarios shifted somewhat pessimistically from those included in the respective March 31, 2023 scenarios. To align the assumptions underlying

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the June 2023 macroeconomic forecasts to our economic outlook, management applied weighting of 40% to the baseline and 60% to the mild recessionary S-2 scenario in the computation of the allowance for credit losses at June 30, 2023.

The baseline scenario continues to incorporate the belief that the Federal Reserve will accomplish its goal of slowing inflation without precipitating a recession. Key assumptions within the June 2023 baseline forecast include the following: (1) the Federal Funds rate has reached its terminal value in the rate hiking cycle, with rate cuts forecasted to begin in March 2024; (2) recent bank failures, while disruptive, are not symptomatic of a broader problem in the financial system; (3) the unemployment rate will increase from its current state of full-employment at 3.6% to 4.1% in 2024, and 4.2% in 2025; (4) GDP will display modest annual growth of 1.6% in 2023, 1.4% in 2024, and 2.4% in 2025; and (5) the 10-year U.S. Treasury yield will peak in the second quarter of 2024 at approximately 4%.

The S-2 scenario predicts a mild recession beginning in the third quarter of 2023 that lasts for three quarters, with the stock market contracting 22%. Contributing to that prediction is the assumption that 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 prolonging elevated inflation. Compounding these factors is the assumption that recent bank failures reduce consumer confidence and cause banks to tighten lending standards. The scenarios also assumes that the 10-year U.S. Treasury yield falls to below 3% until the first quarter of 2025 due to a flight to quality. Because of the fragility of the economy, the Federal Reserve will keep interest rates elevated in efforts to tame inflation, but will begin lowering rates in the fourth quarter of 2023, earlier than expected in the baseline scenario, due to recessionary conditions. Further, the scenario assumes that the unemployment rate averages 4.2% in 2023, 6.1% in 2024 (peaking at 6.4%), and 4.6% in 2025, with the return to full employment in the third quarter of 2025. Further, the S-2 scenario assumes GDP growth of only 1.2% in 2023 and 0.3% in 2024 before returning to a more moderate level of 3.0% in 2025.

 

As noted earlier, the credit loss outlook for our portfolio as a whole has not changed materially since March 31, 2023. Our asset quality metrics have remained relatively stable over the preceding several quarters, with relatively modest variation in nonaccrual loans and commercial criticized loans and minimal net charge-offs. We continue to closely monitor our portfolio for customers that are sensitive to prolonged inflation and the elevated interest rate environment. We expect full year 2023 loan growth in the low-to-mid single digit range, reflecting our disciplined loan pricing, the potential for economic slowdown and a focus on lending to resilient borrowers with whom we have a full service relationship in light of current economic pressures.

 

There are a number of uncertainties in the current economic outlook. 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 have and are likely to continue to reduce economic growth in the near term. Recent disruption in the financial services industry has negatively affected equity markets, and a prolonged disruption could result in tightening of credit standards and pose risk of further volatility in equity markets. Further, on August 1, 2023, Fitch Ratings downgraded the United States of America's Long-Term Foreign-Currency Issuer Default Rating to 'AA+' from 'AAA', citing expected fiscal deterioration over the next three years, a high and growing general government debt burden, and the erosion of governance relative to 'AA' and 'AAA' rated peers over the last two decades that has manifested in repeated debt limit standoffs and last-minute resolutions. The full extent of the impact of these factors is uncertain and may have a negative impact on the U.S. economy, including the possibility of an economic recession in the near or mid-term.

Highlights of the Second Quarter 2023

We reported net income for the second quarter of 2023 of $117.8 million, or $1.35 per diluted common share, compared to $126.5 million, or $1.45 per diluted common share, in the first quarter of 2023 and $121.4 million, or $1.38 per diluted common share, in the second quarter of 2022.

Second quarter 2023 results compared to first quarter 2023:

 

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Our results for the second quarter of 2023, while solid, reflect ongoing challenges of the macroeconomic environment and within the financial services industry. The current interest rate environment continued to drive a shift in deposit mix to higher cost products. As a result, deposit betas outpaced loan betas, contributing to a compressing net interest margin. We faced additional headwinds to our efficiency ratio as a result of increased noninterest expense, including deposit insurance and regulatory fees. We continue to maintain what we believe is a stable and diversified deposit base, our asset quality metrics remain at relatively low levels, our allowance for credit losses is robust, and capital levels remain solid. We continue to focus on expense management and growing capital, and remain confident that we are well positioned to weather the challenges of current economic conditions and industry trends.

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, 2023			March 31, 2023			December 31, 2022			September 30, 2022			June 30, 2022			June 30, 2023			June 30, 2022
Income Statement Data:
Interest income	$	405,273		$	372,603		$	345,676		$	299,737		$	254,864		$	777,876		$	491,650
Interest income (te) (a)		408,110			375,187			348,291			302,340			257,449			783,297			496,780
Interest expense		131,362			87,609			50,175			19,430			9,132			218,971			17,455
Net interest income (te)		276,748			287,578			298,116			282,910			248,317			564,326			479,325
Provision for credit losses		7,633			6,020			2,487			1,402			(9,761	)		13,653			(32,288	)
Noninterest income		83,225			80,330			77,064			85,337			85,653			163,555			169,085
Noninterest expense		202,138			200,884			190,154			193,502			187,097			403,022			367,036
Income before income taxes		147,365			158,420			179,924			170,740			154,049			305,785			308,532
Income tax expense		29,571			31,953			36,137			35,351			32,614			61,524			63,619
Net income	$	117,794		$	126,467		$	143,787		$	135,389		$	121,435		$	244,261		$	244,913
Balance Sheet Data:
Period end balance sheet data
Loans	$	23,789,886		$	23,404,523		$	23,114,046		$	22,585,585		$	21,846,068		$	23,789,886		$	21,846,068
Earning assets		32,715,630			34,106,792			31,873,027			31,213,449			31,292,910			32,715,630			31,292,910
Total assets		36,210,148			37,547,083			35,183,825			34,567,242			34,637,525			36,210,148			34,637,525
Noninterest-bearing deposits		12,171,817			12,860,027			13,645,113			14,290,817			14,676,342			12,171,817			14,676,342
Total deposits		30,043,501			29,613,070			29,070,349			28,951,274			29,866,432			30,043,501			29,866,432
Stockholders' equity		3,554,476			3,531,232			3,342,628			3,180,439			3,349,723			3,554,476			3,349,723
Average balance sheet data
Loans	$	23,654,994		$	23,086,529		$	22,723,248		$	22,138,709		$	21,657,528		$	23,372,331		$	21,391,262
Earning assets		33,619,829			32,753,781			32,244,681			31,783,801			32,780,813			33,189,197			32,990,206
Total assets		36,205,396			35,159,050			34,498,915			34,377,773			35,380,247			35,685,113			35,690,303
Noninterest-bearing deposits		12,153,453			12,963,133			13,854,625			14,323,646			14,655,800			12,556,056			14,510,370
Total deposits		29,372,899			28,792,851			28,816,338			29,180,626			29,979,940			29,084,477			30,004,728
Stockholders' equity		3,567,260			3,412,813			3,228,667			3,405,463			3,383,789			3,490,463			3,494,809
Common Shares Data:
Earnings per share - basic	$	1.35		$	1.45		$	1.65		$	1.56		$	1.39		$	2.81		$	2.79
Earnings per share - diluted		1.35			1.45			1.65			1.55			1.38			2.80			2.78
Cash dividends per common share		0.30			0.30			0.27			0.27			0.27			0.60			0.54
Book value per share (period end)		41.27			41.03			38.89			37.12			39.08			41.27			39.08
Tangible book value per share (period end)		30.76			30.47			28.29			26.44			28.37			30.76			28.37
Weighted average number of shares - diluted		86,370			86,282			86,249			86,020			86,354			86,350			86,654
Period end number of shares		86,123			86,066			85,941			85,686			85,714			86,123			85,714

 

 

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	Three Months Ended															Six Months Ended
($ in thousands)	June 30, 2023			March 31, 2023			December 31, 2022			September 30, 2022			June 30, 2022			June 30, 2023			June 30, 2022
Performance and other data:
Return on average assets		1.30	%		1.46	%		1.65	%		1.56	%		1.38	%		1.38	%		1.38	%
Return on average common equity		13.24	%		15.03	%		17.67	%		15.77	%		14.39	%		14.11	%		14.13	%
Return on average tangible common equity		17.76	%		20.49	%		24.64	%		21.58	%		19.77	%		19.08	%		19.20	%
Tangible common equity (b)		7.50	%		7.16	%		7.09	%		6.73	%		7.21	%		7.50	%		7.21	%
Tangible common equity Tier 1 (CET1) ratio		11.83	%		11.60	%		11.41	%		11.10	%		11.08	%		11.83	%		11.08	%
Net interest margin (te)		3.30	%		3.55	%		3.68	%		3.54	%		3.04	%		3.42	%		2.92	%
Noninterest income as a percentage of total revenue (te)		23.12	%		21.83	%		20.54	%		23.17	%		25.65	%		22.47	%		26.08	%
Efficiency ratio (c)		55.33	%		53.76	%		49.81	%		51.62	%		54.95	%		54.54	%		55.47	%
Allowance for loan losses as a percentage of total loans		1.32	%		1.32	%		1.33	%		1.36	%		1.41	%		1.32	%		1.41	%
Allowance for credit losses as a percentage of total loans		1.45	%		1.46	%		1.48	%		1.50	%		1.55	%		1.45	%		1.55	%
Annualized net charge-offs to average loans		0.06	%		0.10	%		0.02	%		0.02	%		(0.01	)%		0.08	%		(0.00	)%
Nonaccrual loans as a percentage of loans		0.33	%		0.23	%		0.17	%		0.18	%		0.17	%		0.33	%		0.17	%
FTE headcount		3,705			3,679			3,627			3,607			3,594			3,705			3,594
Reconciliation of operating revenue and operating pre-provision net revenue (non-GAAP measure) (te) (d)
Net interest income	$	273,911		$	284,994		$	295,501		$	280,307		$	245,732		$	558,905		$	474,195
Noninterest income		83,225			80,330			77,064			85,337			85,653			163,555			169,085
Total revenue		357,136			365,324			372,565			365,644			331,385			722,460			643,280
Taxable equivalent adjustment		2,837			2,584			2,615			2,603			2,585			5,421			5,130
Nonoperating revenue		—			—			—			—			—			—			—
Total revenue (te)	$	359,973		$	367,908		$	375,180		$	368,247		$	333,970		$	727,881		$	648,410
Noninterest expense		(202,138	)		(200,884	)		(190,154	)		(193,502	)		(187,097	)		(403,022	)		(367,036	)
Nonoperating expense		—			—			—			—			—			—			—
Operating pre-provision net revenue (te)	$	157,835		$	167,024		$	185,026		$	174,745		$	146,873		$	324,859		$	281,374

 

 

RESULTS OF OPERATIONS

Net Interest Income

 

Net interest income (te) for the second quarter of 2023 was $276.7 million, down $10.8 million, or 4%, compared to the first quarter of 2023 and was $564.3 million for the first six months of 2023, up $85.0 million, or 18%, from the comparable period in 2022.

 

The decrease in net interest income (te) compared to the first quarter of 2023 is largely attributable to a combination of growth in and prevailing rates on interest-bearing liabilities outpacing those of earning assets. The increase in cost of funds is largely due to an increase in average interest-bearing deposits, with a shift of noninterest-bearing deposits and lower cost interest-bearing transaction and savings deposits into higher cost products, and increased average short-term borrowings and rates. The impact of the additional day in the second quarter of 2023 added approximately $2.3 million to net interest income (te).

 

The net interest margin for the second quarter of 2023 was 3.30%, down 25 bps from 3.55% in the first quarter of 2023. The decline in the net interest margin from the prior quarter was largely driven by a change in the funding mix as discussed above, with linked-quarter increases of $1.4 billion in average interest-bearing deposits and $288 million in average short-term borrowings, mainly in FHLB advances. The increase in average interest-bearing deposits is primarily attributable to the $1.7 billion increase in average time deposits, largely the result of growth driven by promotional rate offerings and, to a lesser extent, the addition of brokered deposits in March and May. Accordingly, the cost of funds increased 49 bps, including 38 bps related to interest-bearing deposit growth and increased rate offerings, 6 bps related to the increased cost of short-term borrowings and 4 bps related to incremental liquidity held as a cautionary measure following the recent bank failures. The impact of the increased cost of funds was partially offset by a 24 bp increase in the average earning asset yield that was favorably impacted by increases of $568 million in average loans and $425 million in average short-term investments in a rising interest rate environment, partially offset by a decline in average securities of $129 million.

 

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The $85.0 million increase in net interest income (te) for the six months ended June 30, 2023 compared to the same period in 2022 includes a $286.5 million increase in interest income (te), partially offset by a $201.5 million increase in interest expense. The increase in interest income is largely due to the rising interest rate environment, a favorable change in the earning asset mix, and an $11.6 million decrease in net premium amortization on the securities portfolio. The favorable change in the average earning asset mix reflects a $2.0 billion increase in loans and a $2.0 billion decline in short-term investments. The increase in interest income was partially offset by a $3.0 million decrease in nonaccrual interest recoveries and a $1.2 million decrease in purchase accounting discount accretion. The increase in interest expense was largely driven by the shift in mix of deposits from noninterest-bearing and low interest-bearing transaction and savings deposits into higher cost products at competitive interest rates in the rising rate environment. In addition, we experienced increased borrowing cost, primarily attributable to FHLB advances, as low fixed-rate instruments were called and replaced with new instruments at prevailing interest rates with higher average balances.

 

The net interest margin for the six months ended June 30, 2023 was up 50 bps compared to the same period in 2022, largely as a result of the rising interest rate environment and a more favorable earning asset mix. The yield on earning assets was up 172 bps to 4.75%, while the cost of funds increased 122 bps to 1.33%.

 

Given the pressure on deposit costs and assumed continued shift from noninterest-bearing deposits, we expect to see additional net interest margin compression in the second half of 2023, although likely at a slower pace than what we experienced in the first half of the year. This assumes the one 25 bp increase in the Federal Funds interest rate in July 2023 and then held flat through the end of 2023. This guidance also considers that the noninterest-bearing deposit mix could fall to just below pre-pandemic levels by the end of the year, or about 35% of total deposits.

 

 

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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, 2023												March 31, 2023												June 30, 2022
($ in millions)		Volume				Interest (d)				Rate				Volume				Interest (d)				Rate				Volume				Interest (d)				Rate
Average earning assets
Commercial & real estate loans (te) (a)		$	18,670.8			$	280.9				6.03	%		$	18,322.2			$	259.1				5.73	%		$	17,562.0			$	165.9				3.79	%
Residential mortgage loans			3,469.0				31.4				3.62	%			3,214.4				28.1				3.49	%			2,534.6				21.1				3.33	%
Consumer loans			1,515.2				30.7				8.14	%			1,549.9				29.2				7.63	%			1,560.9				19.6				5.03	%
Loan fees & late charges			—				—				0.00	%			—				(0.4	)			0.00	%			—				1.9				0.00	%
Total loans (te) (b)			23,655.0				343.0				5.81	%			23,086.5				316.0				5.54	%			21,657.5				208.5				3.86	%
Loans held for sale			25.1				0.4				5.83	%			22.9				0.3				5.21	%			48.1				0.4				3.69	%
US Treasury and government agency securities			537.4				3.4				2.50	%			541.3				3.4				2.49	%			387.6				1.7				1.79	%
Mortgage-backed securities and    collateralized mortgage obligations			7,552.0				43.2				2.29	%			7,668.0				43.3				2.26	%			7,658.2				36.3				1.90	%
Municipals (te)			894.9				6.7				3.00	%			904.3				6.7				2.98	%			912.4				6.8				2.96	%
Other securities			23.5				0.2				3.51	%			23.5				0.2				3.50	%			21.2				0.2				3.34	%
Total securities (te) (c)			9,007.8				53.5				2.38	%			9,137.1				53.6				2.35	%			8,979.4				45.0				2.00	%
Total short-term investments			931.9				11.2				4.83	%			507.3				5.3				4.27	%			2,095.8				3.5				0.67	%
Total earning assets (te)		$	33,619.8			$	408.1				4.87	%		$	32,753.8			$	375.2				4.63	%		$	32,780.8			$	257.4				3.15	%
Average interest-bearing liabilities
Interest-bearing transaction and savings deposits		$	10,478.4			$	41.3				1.58	%		$	10,650.4			$	27.3				1.04	%		$	11,412.9			$	1.3				0.05	%
Time deposits			3,759.3				36.9				3.93	%			2,018.6				13.4				2.70	%			1,005.2				0.4				0.15	%
Public funds			2,981.7				24.3				3.27	%			3,160.7				23.7				3.04	%			2,906.0				3.3				0.46	%
Total interest-bearing deposits			17,219.4				102.5				2.39	%			15,829.7				64.4				1.65	%			15,324.1				5.0				0.13	%
Repurchase agreements			497.9				1.7				1.38	%			445.8				0.8				0.69	%			523.0				0.1				0.08	%
Other short-term borrowings			1,888.7				24.1				5.10	%			1,652.8				19.3				4.74	%			701.2				0.9				0.49	%
Long-term debt			242.0				3.1				5.11	%			242.1				3.1				5.11	%			240.3				3.1				5.20	%
Total borrowings			2,628.6				28.9				4.40	%			2,340.7				23.2				4.00	%			1,464.5				4.1				1.12	%
Total interest-bearing liabilities			19,848.0				131.4				2.65	%			18,170.4				87.6				1.95	%			16,788.6				9.1				0.22	%
Net interest-free funding sources			13,771.8												14,583.4												15,992.2
Total cost of funds		$	33,619.8			$	131.4				1.57	%		$	32,753.8			$	87.6				1.08	%		$	32,780.8			$	9.1				0.11	%
Net interest spread (te)						$	276.7				2.21	%						$	287.6				2.67	%						$	248.3				2.93	%
Net interest margin		$	33,619.8			$	276.7				3.30	%		$	32,753.8			$	287.6				3.55	%		$	32,780.8			$	248.3				3.04	%

 

 

 

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		Six Months Ended
		June 30, 2023												June 30, 2022
($ in millions)		Volume				Interest (d)				Rate				Volume				Interest (d)				Rate
Average earning assets
Commercial & real estate loans (te) (a)		$	18,497.5			$	540.1				5.89	%		$	17,341.9			$	316.3				3.68	%
Residential mortgage loans			3,342.4				59.4				3.56	%			2,488.3				42.1				3.38	%
Consumer loans			1,532.4				59.9				7.88	%			1,561.1				37.9				4.90	%
Loan fees & late charges			—				(0.4	)			0.00	%			—				6.3				0.00	%
Total loans (te) (b)			23,372.3				659.0				5.68	%			21,391.3				402.6				3.79	%
Loans held for sale			24.0				0.7				5.53	%			56.1				1.1				4.07	%
US Treasury and government agency securities			539.3				6.7				2.49	%			392.7				3.4				1.71	%
Mortgage-backed securities and    collateralized mortgage obligations			7,609.7				86.5				2.27	%			7,506.2				70.8				1.89	%
Municipals (te)			899.6				13.4				2.99	%			914.4				13.5				2.95	%
Other securities			23.5				0.4				3.50	%			21.1				0.3				3.32	%
Total securities (te) (c)			9,072.1				107.0				2.36	%			8,834.4				88.0				1.99	%
Total short-term investments			720.8				16.6				4.63	%			2,708.4				5.1				0.38	%
Total earning assets (te)		$	33,189.2			$	783.3				4.75	%		$	32,990.2			$	496.8				3.03	%
Average interest-bearing liabilities
Interest-bearing transaction and savings deposits		$	10,563.9			$	68.6				1.31	%		$	11,418.2			$	2.5				0.04	%
Time deposits			2,893.8				50.3				3.51	%			1,046.6				1.0				0.20	%
Public funds			3,070.7				48.1				3.16	%			3,029.6				5.4				0.36	%
Total interest-bearing deposits			16,528.4				167.0				2.04	%			15,494.4				8.9				0.11	%
Repurchase agreements			472.0				2.5				1.05	%			555.1				0.2				0.07	%
Other short-term borrowings			1,771.4				43.3				4.93	%			900.7				2.2				0.49	%
Long-term debt			242.1				6.2				5.11	%			241.0				6.2				5.18	%
Total borrowings			2,485.5				52.0				4.21	%			1,696.8				8.6				1.02	%
Total interest-bearing liabilities			19,013.9				219.0				2.32	%			17,191.2				17.5				0.20	%
Net interest-free funding sources			14,175.3												15,799.0
Total cost of funds		$	33,189.2			$	219.0				1.33	%		$	32,990.2			$	17.5				0.11	%
Net interest spread (te)						$	564.3				2.43	%						$	479.3				2.83	%
Net interest margin		$	33,189.2			$	564.3				3.42	%		$	32,990.2			$	479.3				2.92	%

 

Provision for Credit Losses

 

During the second quarter of 2023, we recorded a provision for credit losses of $7.6 million, compared to $6.0 million in the first quarter of 2023. The provision in the second quarter of 2023 included net charge-offs of $3.4 million and a reserve build of $4.2 million, compared to net charge-offs of $5.7 million and a reserve build of $0.3 million in the first quarter of 2023. The provisions for credit losses in both the second and first quarters of 2023 reflect a modest build for continued loan growth and our relatively stable credit metrics and economic outlook, with the second quarter of 2023 also including an increase in individually evaluated reserves on our nonaccrual portfolio. Net charge-offs in the second quarter of 2023 were $3.4 million, or 0.06% of average total loans on an annualized basis, compared to net charge-offs of $5.7 million, or 0.10%, in the first quarter of 2023. The second quarter of 2023 included net charge-offs of $1.2 million in the commercial portfolio and $2.5 million in the consumer portfolio, partially offset by net recoveries of $0.3 million in the residential mortgage portfolio. The first quarter of 2023 included net charge-offs of $3.4 million in the commercial portfolio and $2.5 million in the consumer portfolio, partially offset by net recoveries of $0.2 million in the residential mortgage portfolio.

We recorded a provision for credit losses of $13.7 million for the six months ended June 30, 2023, compared to a $32.3 million negative provision for credit losses in the same period in 2022. The provision for credit losses in the first six months of 2023 included net charge-offs of $9.1 million and a reserve build of $4.6 million, compared to net recoveries of $0.4 million and a reserve release of $31.9 million in the first six months of 2022. As noted above, the provision for credit losses for the first half of 2023 is reflective of a modest build for continued loan growth, higher individually evaluated reserves on our nonaccrual portfolio, and our relatively stable credit metrics and economic outlook. The negative provision for credit losses in the first half of 2022 reflects the gradual release of

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pandemic-related allowance as overall credit performance continued to improve. Net charge-offs in the first six months of 2023 were $9.1 million, or 0.08% of average loans, comprised of net charge-offs of $4.6 million in the commercial portfolio and $5.0 million in the consumer portfolio, partially offset by net recoveries of $0.5 million in the residential mortgage portfolio. Net recoveries for the first six months of 2022 were $0.4 million, comprised of net recoveries of $2.4 million in the commercial portfolio and $0.5 million in the residential mortgage portfolio, partially offset by net charge-offs of $2.5 million in the consumer portfolio. The level of recoveries has declined in 2023, returning to a more normalized level of net charge-offs.

We expect to continue to see low to modest charge-offs and provision for credit losses for the remainder of 2023. However, loan growth, portfolio mix, asset quality metrics and future assumptions in economic forecasts will drive the level of credit loss reserves.

 

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

Noninterest Income

 

Noninterest income totaled $83.2 million for the second quarter of 2023, up $2.9 million, or 4%, from the first quarter of 2023. The increase in noninterest income from the first quarter of 2023 was largely attributable to increases in service charges on deposit accounts, trust fees, credit-related fees and other income, partially offset by a decrease in investment and annuity fees. For the six months ended June 30, 2023, noninterest income totaled $163.6 million, down $5.5 million, or 3%, from the same period in 2022. The decline is largely attributable to decreases in income from derivatives, secondary mortgage market operations, bank-owned life insurance and gains on sales of assets, partially offset by increases in trust fees and investment and annuity 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)		2023				2023				2022				2023				2022
Service charges on deposit accounts		$	21,491			$	20,622			$	20,495			$	42,113			$	42,169
Trust fees			17,393				16,734				17,309				34,127				32,588
Bank card and ATM fees			20,982				20,721				21,870				41,703				42,266
Investment and annuity fees and insurance commissions			8,241				8,867				8,001				17,108				15,428
Secondary mortgage market operations			2,299				2,168				2,990				4,467				6,736
Income from bank-owned life insurance			3,364				3,286				4,273				6,650				7,818
Credit related fees			3,231				2,765				2,543				5,996				5,212
Income from customer and other derivatives			584				583				2,728				1,167				5,077
Securities transactions, net			—				—				—				—				(87	)
Other miscellaneous			5,640				4,584				5,444				10,224				11,878
Total noninterest income		$	83,225			$	80,330			$	85,653			$	163,555			$	169,085

 

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 $21.5 million for the second quarter of 2023, up $0.9 million, or 4%, from the first quarter of 2023. The increase from the previous quarter is largely attributable to the business segment of this fee category, and includes a $0.7 million increase in business analysis fees, driven by higher activity, balance changes and strong sales activity. For the six months ended June 30, 2023, services charges on deposits totaled $42.1 million, down $0.1 million, or less than 1%, from the same period in 2022. Included in the year over year change are increases in analysis and overdraft fees within the business segment of this fee category, reflecting higher activity, balance changes and strong sales activity and higher instances of overdrafts. These increases were offset by a decrease in consumer overdraft and other service charges, largely the result of the elimination of certain consumer non-sufficient funds and overdraft fees in late fourth quarter 2022.

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 totaled $17.4 million for the second quarter of 2023, an increase of $0.7 million, or 4%, from the prior quarter, largely attributable to seasonal income tax preparation fees. For the six months ended June 30, 2023, trust fees totaled $34.1 million, an increase of $1.5 million, or 5%, from the same period in 2022. The year over year increase was primarily from corporate and institutional trust accounts, largely a product of the rising interest rate environment.

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 $21.0 million for the second quarter of 2023, up $0.3 million, or 1%, from the first quarter of 2023. The linked quarter increase reflects a return from the typical seasonal declines in debit and consumer credit card activity of the first quarter of the year, and an increase in credit

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card/purchasing card revenue, partially offset by a decline in merchant fees. Bank card and ATM fees for the six months ended June 30, 2023 totaled $41.7 million, down $0.6 million, or 1%, from the same period in 2022. The year over year decline was driven primarily by decreases in merchant and ATM fees, partially offset by an increase in credit card/purchasing card revenue.

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, totaled $8.2 million, a decrease of $0.6 million, or 7%, from the first quarter of 2023. The linked quarter change includes a $0.4 million decline in corporate underwriting fees and a $0.2 million decline in annuity sales as the previous quarter included two additional underwriting deals and near record annuity sales performance. Investment and annuity fees and insurance commissions totaled $17.1 million, up $1.7 million, or 11%, for the same period in 2022. The year over year increase includes a $1.7 million increase in annuity fees, reflective of increased demand amid the rising interest rate environment, and a $0.7 million increase in corporate underwriting fees. These increases were partially offset by a $0.6 million decline in other investment 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. Secondary mortgage market operations income will vary based on application volume and pull through rates. Income from secondary mortgage market operations was $2.3 million in the second quarter of 2023, up $0.1 million, or 6%, from the first quarter of 2023. The increase from the first quarter of 2023 is primarily attributable to an increase in the number of loans closed and the percentage of loans sold in the secondary market. The percentage of mortgage loans sold in the secondary market to total originations (as opposed to those held in our portfolio) was 34% in the second quarter of 2023, compared to 24% in the first quarter of 2023. Secondary mortgage market operations income for the six months ended June 30, 2023 totaled $4.5 million, down $2.3 million, or 34%, from the same period in 2022. The year over year decline is largely attributable to a decline in application volume and loans closed, driven by the sharp rise in interest rates that followed a two-year period of very favorable interest rates, partially offset by a higher percentage of originated loans sold in the secondary market, up to 30% compared to 24% in the prior year.

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 BOLI was $3.4 million for the second quarter of 2023, virtually flat when compared to the prior quarter. Income from BOLI for the six months ended June 30, 2023 totaled $6.7 million, down $1.2 million, or 15% from the same period in 2022. The year over year decrease reflects declines in income from cash surrender value and mortality gains.

Credit-related fees include fees assessed on letters of credit and unused portions of loan commitments. Credit-related fees were $3.2 million for the second quarter of 2023, up $0.5 million, or 17%, from the first quarter of 2023. Credit-related fees for the six months ended June 30, 2023 totaled $6.0 million, up $0.8 million, or 15%, from the same period in 2022. Income from these products will vary based on letters of credit issued, credit line utilization and prevailing assessment rates.

Income from customer and other derivatives is largely derived from our customer interest rate derivative program and totaled $0.6 million for the second quarter of 2023, relatively flat when compared to the first quarter of 2023. For the six months ended June 30, 2023, income from derivatives totaled $1.2 million, down $3.9 million, or 77%, from the same period in 2022. Derivative income can be volatile and is dependent upon the composition of the portfolio, volume and mix of sales and termination activity, and market value adjustments due to market interest rate movement. The substantial year over year decline in derivative income is largely tied to the significant change in the interest rate environment present in each of the comparative periods, which affects demand for variable rate loans and related derivative products, valuation adjustments, and related collateral income/expense for the program as a whole.

Other miscellaneous income is comprised of various items, including income from small business investment companies (SBIC), Federal Home Loan Bank (FHLB) stock dividends, gains on sales of assets, and syndication fees. Other miscellaneous income totaled $5.6 million, up $1.1 million, or 23%, compared to the first quarter of 2023. The increase compared to the first quarter of 2023 was largely driven by a $0.4 million increase in dividends on FHLB stock, attributable to the stock purchased in connection with the incremental borrowings held during the period and an increase in the dividend rate, a $0.2 million increase in SBIC income, and a $0.2 million increase in gain on sale of assets. For the six months ended June 30, 2023, other miscellaneous income totaled $10.2 million, down $1.7 million, or 14%, from the same period in 2022. The year over year decline was largely driven by a $1.9 million decrease in gains on sales of assets, a $0.6 million decrease in other loan fees and a $0.2 million decrease in SBIC income, partially offset by an increase of $1.4 million in FHLB stock dividends.

We expect noninterest income for the full year 2023 will increase 1% to 2% from 2022.

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Noninterest Expense

 

Noninterest expense for the second quarter of 2023 was $202.1 million, up $1.3 million, or 1%, from the first quarter of 2023. The increase in noninterest expense from the first quarter of 2023 was largely driven by increases in data processing expense, occupancy and equipment expense, deposit and regulatory fees, and travel expense, partially offset by a decrease in other miscellaneous and personnel expense. For the six months ended June 30, 2023, noninterest expense totaled $403.0 million, up $36.0 million, or 10%, from the same period in 2022. The year over year increase is attributable to most expense categories, notably personnel expense, other retirement expense, data processing expense, regulatory fees, occupancy and equipment, and other miscellaneous expense. Approximately 35% of the year over year increase in noninterest expense is attributable to the increases in other retirement expense and deposit and regulatory fees. A more detailed discussion of these and other noninterest expense variances follows.

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)		2023				2023				2022				2023				2022
Compensation expense		$	94,121			$	92,403			$	94,155			$	186,524			$	180,148
Employee benefits			20,743				22,920				21,015				43,663				42,418
Personnel expense			114,864				115,323				115,170				230,187				222,566
Net occupancy expense			12,707				12,206				12,225				24,913				23,905
Equipment expense			5,043				4,736				4,703				9,779				9,570
Data processing expense			29,562				28,182				26,169				57,744				50,408
Professional services expense			8,915				9,131				8,423				18,046				16,216
Amortization of intangible assets			2,957				3,114				3,586				6,071				7,334
Deposit insurance and regulatory fees			6,463				5,920				3,503				12,383				7,243
Other real estate and foreclosed asset expense (income)			(282	)			155				(88	)			(127	)			(1,852	)
Corporate value and franchise taxes and other non-income taxes			5,241				5,253				4,558				10,494				8,806
Advertising			3,476				3,256				3,512				6,732				6,678
Telecommunications and postage			2,712				3,071				2,971				5,783				5,896
Entertainment and contributions			2,582				2,631				2,440				5,213				5,401
Tax credit investment amortization			1,402				1,401				1,004				2,803				2,008
Printing and supplies			1,149				990				918				2,139				1,921
Travel expense			1,651				1,046				1,123				2,697				1,783
Net other retirement expense			(3,312	)			(3,655	)			(7,781	)			(6,967	)			(14,553	)
Other miscellaneous			7,008				8,124				4,661				15,132				13,706
Total noninterest expense		$	202,138			$	200,884			$	187,097			$	403,022			$	367,036

 

Personnel expense consists of salaries, incentive compensation, long-term incentives, payroll taxes, and other employee benefits such as 401(k), pension, and insurance for medical, life and disability. Personnel expense totaled $114.9 million for the second quarter of 2023, down $0.5 million, or less than 1%, from the prior quarter. The linked quarter decline reflects a decrease in benefits expense and incentive pay, partially offset by an increase in salary expense as a result of increased headcount and merit increases effective April 1. For the six months ended June 30, 2023, personnel expense totaled $230.2 million, up $7.6 million, or 3%, from the same period in 2022. The year over year increase reflects higher salary expense of $11.4 million as a result of increased head count and annual merit increases, partially offset by $5.0 million decrease in bonus and incentive pay expense.

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 $17.8 million for the second quarter of 2023, up $0.8 million or 5%, from the prior quarter. The linked quarter increase was largely attributable to increases in property tax and insurance. For the six months ended June 30, 2023, occupancy and equipment expenses totaled $34.7 million, up $1.2 million, or 4%, driven largely by increases in insurance expense and higher depreciation expense on fixed assets.

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 $29.6 million for the second quarter of 2023, up $1.4 million, or 5%, from the first quarter of 2023. The linked quarter change is primarily attributable to an increase in costs associated with the implementation of technology enhancement projects, including maintenance and amortization of bank-owned software of $0.3 million and new data processing arrangements of $0.6 million. For the six months ended June 30, 2023, data

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processing expense totaled $57.7 million, up $7.3 million, or 15%, from the same period in 2022, also largely attributable to the same factors driving the linked quarter increase.

Professional services expense for the second quarter of 2023 totaled $8.9 million, down $0.2 million, or 2%, from the first quarter of 2023. For the six months ended June 30, 2023, professional services expense totaled $18.0 million, up $1.8 million, or 11%, from the same period in 2022, driven by an increase in consulting fees. Professional service expense may vary from period to period, generally related to consulting and legal needs.

Deposit insurance and regulatory fees totaled $6.5 million, up $0.5 million, or 9%, from the first quarter of 2023. The linked quarter increase is attributable to a $0.3 million increase in the deposit insurance assessment due to slightly higher assessment base and rate, and a $0.2 million increase in state regulatory fees. For the six months ended June 30, 2023, deposit insurance and regulatory fees totaled $12.4 million, up $5.1 million, or 71%, from the same period in 2022. The year over year increase includes $3.3 million attributable to a two-basis point increase in the deposit insurance fund assessment that was effective January 1, 2023 and will remain in effect until the Deposit Insurance Fund reserve ratio to insured deposits meets the FDIC’s long-term goal for the fund. The remaining increase reflects $1.3 million in higher deposit insurance expense resulting from an increase in our assessment base and rates, and $0.5 million in state regulatory fees. The Company expects to incur an additional FDIC deposit insurance charge in 2023 related to a special assessment to recover the costs associated with the systemic risk exception utilized in the March 2023 bank failures, the amount of which is still unknown. See further discussion in the forward-looking comments at the end of this section.

Net gains on sales of other real estate and foreclosed assets outpaced expense by $0.3 million in the second quarter of 2023, compared to expense of $0.2 million in the first quarter of 2023. The level of expense in the comparative period reflects a somewhat typical level of expense of maintaining the ORE portfolio, but can vary depending on sales activity. For the six months ended June 30, 2023, net gains on sales of other real estate and foreclosed assets outpaced expense by $0.1 million, compared to $1.9 million for the same period in 2022, reflecting higher property sales in the prior year. Gains or losses on the sale of other real estate and foreclosed assets may occur periodically and are dependent on the number and type of assets for sale and current market conditions.

Corporate value, franchise and other non-income tax expense for the second quarter of 2023 totaled $5.2 million, virtually unchanged from the prior quarter. For the six months ended June 30, 2023, corporate value, franchise and other non-income tax expense totaled $10.5 million, up $1.7 million, or 19%, from the same period in 2022, largely attributable to bank share tax. The calculation of bank share tax is based on multiple variables, including average quarterly assets, earnings and stockholders’ equity to determine the taxable assessment value.

Business development-related expenses (including advertising, travel, entertainment and contributions) totaled $7.7 million for the second quarter of 2023, up $0.8 million, or 11%, from the first quarter of 2023, largely attributable to travel expense. For the six months ended June 30, 2023, business development-related expenses totaled $14.6 million, up $0.8 million, or 6%, from the same period in 2022 and was also largely attributable to travel expense. The timing and level of business development expense can vary based on business needs and promotional campaigns.

All other expenses, excluding amortization of intangibles, totaled $9.0 million for the second quarter of 2023, down $1.0 million, or 10%, from the first quarter of 2023, primarily due to other lower miscellaneous losses. For the six months ended June 30, 2023, all other expenses, excluding amortization of intangibles, totaled $18.9 million, up $9.9 million from the same period in 2022. The year over year variance is largely attributable to a $7.6 million increase in pension-related other retirement expense that is driven by an increase in the discount rate and other changes in actuarial assumptions for the current plan year. The remaining difference includes higher other miscellaneous loss of $3.2 million largely related to loss recoveries in the prior year.

We expect noninterest expense for the full year 2023 will increase 7.5% to 8.5% from 2022. The anticipated year-over-year increase includes increases in retirement (pension) expense and the two basis point FDIC assessment increase as described above. This guidance does not include any potential expense from a deposit insurance special assessment in connection with the systemic risk exception discussed below.

 

On May 11, 2023, the FDIC Board of Directors published a notice of proposed rulemaking that would impose a special assessment to recover the loss to the Deposit Insurance Fund arising from the protection of uninsured depositors in connection with the systemic risk determination announced on March 12, 2023, following the closures of Silicon Valley Bank and Signature Bank. While we expect the final rule will be implemented, we believe that it is likely there will be modifications to the proposed calculation. Based on the information currently available, the Company estimates the special assessment expense under the proposed rule to be approximately $24 million. Upon issuance of the final rule, the Company will accrue the full amount of the special assessment expense in the period in which the expense is probable and estimable, which is expected to occur before year end 2023.

 

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Income Taxes

 

The effective income tax rate for the second quarter of 2023 was approximately 20.1% compared to 20.2% in the first quarter of 2023. The effective tax rate for the first six months of 2023 was 20.1%, compared to 20.6% in the same period of 2022. Based on the current forecast, management expects the effective income tax rate to be approximately 21% in 2023.

 

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 2023, we expect to realize benefits from federal and state tax credits over the next three years totaling $12.4 million, $9.8 million and $8.2 million in 2024, 2025 and 2026, 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.

In August 2022, the Inflation Reduction Act of 2022 (IRA of 2022) was signed into law to address inflation, healthcare costs, climate change and renewal energy incentives, among other things. Included in the IRA of 2022 are provisions for the creation of a 15% corporate alternative minimum tax rate (CAMT) that is effective for tax years beginning January 1, 2023 for corporations with an average annual adjusted financial statement income in excess of $1 billion. Based on information available to date, we do not anticipate our consolidated corporate group to be subject to the 15% CAMT, absent any further changes in law.

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 had access to sufficient liquidity at June 30, 2023, summarized as follows:

		June 30, 2023
($ in thousands)		Total Available				Amount Used				Net Availability
Available Sources of Funding:
Internal Sources:
Free securities		$	3,502,219			$	—			$	3,502,219
External Sources:
Federal Home Loan Bank (a)			6,824,213				1,221,175				5,603,038
Federal Reserve Bank			3,418,473				—				3,418,473
Brokered deposits			4,506,525				1,162,501				3,344,024
Other			1,369,000				—				1,369,000
Total Available Sources of Funding		$	19,620,430			$	2,383,676			$	17,236,754
Cash and other interest-bearing bank deposits											1,237,899
Total Liquidity										$	18,474,653

(a) Amount used includes funded advances and letters of credit.

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The recent failures of three major regional U.S. banks that included large-scale deposit runs has brought the subject of bank liquidity into focus. Dampened depositor confidence over a financial institution's ability to protect deposit balances in excess of the federally insured limit is thought to pose a higher likelihood of a deposit run, and, in turn, the risk that the institution may have insufficient liquidity to meet the demand. At June 30, 2023, our available on and off-balance sheet liquidity of $18.5 billion is well in excess of our estimated uninsured, noncollateralized deposits of approximately $10.3 billion.

 

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 41.23% at June 30, 2023, compared to 28.45% at March 31, 2023 and 41.59% at December 31, 2022. The free securities ratio at March 31, 2023 was impacted by pledging additional securities to the Federal Reserve Bank, done as a precautionary measure to increase borrowing capacity under its discount window as a result of the first quarter bank failures. The total pledged securities were $4.7 billion at June 30, 2023, compared to $6.1 billion at March 31, 2023 and $4.9 billion at December 31, 2022. Both 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		2023			2023			2022			2022			2022
Free securities / total securities			41.23	%		28.45	%		41.59	%		49.79	%		52.61	%
Core deposits / total deposits			91.63	%		94.83	%		98.12	%		98.93	%		99.00	%
Wholesale funds / core deposits			11.00	%		15.43	%		7.43	%		6.23	%		2.97	%
Quarter-to-date average loans /quarter-to-date average deposits			80.53	%		80.18	%		78.86	%		75.87	%		72.24	%

 

The liability portion of the balance sheet provides liquidity mainly through the ability to use cash sourced from customers’ interest-bearing and noninterest-bearing deposit accounts. At June 30, 2023, deposits totaled $30.0 billion, an increase of $430.4 million, or 1%, from March 31, 2023 and an increase of $973.2 million, or 3% from December 31, 2022. The increase from both comparative periods was primarily due to the issuance of brokered certificates of deposit, partially offset by an outflow of public funds deposits. Brokered time deposits totaled $1.2 billion as of June 30, 2023, compared to $573 million at March 31, 2023 and $5 million at December 31, 2022. In March 2023, we added $568 million of brokered certificates of deposit that mature in December 2023 and bear interest plus fees of 5.45% per annum. In May 2023, we added $590 million of brokered certificates of deposit that bear interest plus fees of 5.35% annum, of which, $195 million will mature in February 2024 and $395 million will mature in May 2024. The use of brokered deposits as a funding source is subject to certain policies regarding the amount, term and interest rate.

 

Core deposits consist of total deposits excluding certificates of deposit of $250,000 or more and brokered deposits. Core deposits totaled $27.5 billion at June 30, 2023, down $553.7 million, or 2%, compared to March 31, 2023 and down $1.0 billion, or 3%, compared to December 31, 2022. The decline in core deposits reflects the shift of deposits into certificates of deposits of $250,000 or more, up $394.1 million compared to March 31, 2023 and $810.4 million compared to December 31, 2022, largely due to attractive interest rates offered during those periods. The ratio of core deposits to total deposits was 91.63% at June 30, 2023, compared to 94.83% at March 31, 2023 and 98.12% at December 31, 2022.

 

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, 2023, the Bank had borrowings of $1.1 billion and approximately $5.6 billion available under this line. 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. In response to the March 2023 bank failures and resulting liquidity concerns, the Federal Reserve established a Bank Term Funding Program, available to eligible depository institutions to provide an additional source of liquidity secured by U.S. Treasury and government agency and mortgage-backed securities, and other qualifying assets at par. As a cautionary measure, the Bank registered for the program at its inception, but has not, and does not intend to borrow under this program.

 

Wholesale funds, which are comprised of short-term borrowings, long-term debt and brokered deposits were 11.00% of core deposits at June 30, 2023, compared to 15.43% at March 31, 2023 and 7.43% at December 31, 2022. At June 30, 2023, wholesale funds totaled $3.0 billion, a decrease of $1.3 billion, or 30%, from March 31, 2023 and an increase of $0.9 billion, or 43%, from December 31, 2022. The linked-quarter decrease was primarily due to a $2 billion net decrease in FHLB advances as excess liquidity held as a cautionary measure following the March 2023 bank failures was released, partially offset by the addition of $590 million in brokered

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deposits. The increase from December 31, 2022 reflects the addition of $1.2 billion in brokered deposits, partially offset by a net reduction in FHLB advances of $0.3 billion. 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 2023 was 80.53%, compared to 80.18% for the first quarter of 2023 and 78.86% for the fourth quarter of 2022. 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 pandemic where deposits became and remain elevated.

 

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, 2023 and 2022.

 

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 share repurchase or 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 $176.0 million at June 30, 2023.

Capital Resources

 

Stockholders’ equity totaled $3.6 billion at June 30, 2023, up $23.2 million, or 1%, from March 31, 2023 and $211.8 million, or 6%, from December 31, 2022. The increase from March 31, 2023 is attributable to net income of $117.8 million and $7.1 million of long-term incentive plan and dividend reinvestment activity. These factors were partially offset by other comprehensive loss of $75.3 million, net of tax, primarily attributable to fair value adjustments on securities available for sale and cash flow hedges and dividends of $26.4 million. The increase from December 31, 2022 is attributable to net income of $244.3 million, $10.9 million of long-term incentive plan and dividend reinvestment activity, and other comprehensive income of $9.4 million, net of tax; partially offset by dividends of $52.8 million.

 

The tangible common equity (TCE) ratio was 7.50% at June 30, 2023, up 34 bps compared to 7.16% at March 31, 2023 and 41 bps compared to 7.09% at December 31, 2022. TCE is influenced by net income, tangible net assets, other comprehensive income or loss, and dividends.

 

The regulatory capital ratios of the Company and the Bank at June 30, 2023 remained well in excess of current regulatory minimum requirements, including capital conservation buffers, by at least $645 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, 2022 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, 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.

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		Well-				June 30,				March 31,				December 31,				September 30,				June 30,
		Capitalized				2023				2023				2022				2022				2022
Total capital (to risk weighted assets)
Hancock Whitney Corporation			10.00	%			13.44	%			13.21	%			12.97	%			12.67	%			12.70	%
Hancock Whitney Bank			10.00	%			12.70	%			12.54	%			12.39	%			12.16	%			12.28	%
Tier 1 common equity capital (to risk weighted assets)
Hancock Whitney Corporation			6.50	%			11.83	%			11.60	%			11.41	%			11.10	%			11.08	%
Hancock Whitney Bank			6.50	%			11.68	%			11.52	%			11.43	%			11.20	%			11.28	%
Tier 1 capital (to risk weighted assets)
Hancock Whitney Corporation			8.00	%			11.83	%			11.60	%			11.41	%			11.10	%			11.08	%
Hancock Whitney Bank			8.00	%			11.68	%			11.52	%			11.43	%			11.20	%			11.28	%
Tier 1 leverage capital
Hancock Whitney Corporation			5.00	%			9.64	%			9.63	%			9.53	%			9.27	%			8.68	%
Hancock Whitney Bank			5.00	%			9.52	%			9.57	%			9.54	%			9.35	%			8.83	%

We regularly perform stress analysis on our capital levels. One such scenario included the hypothetical impact of including accumulated other comprehensive losses on market valuations of available for sale securities and cash flow hedges in regulatory capital and a further stress scenario that included both those losses plus losses on the held to maturity investment portfolio in regulatory capital. We estimate that our regulatory capital ratios would remain in excess of the well-capitalized minimums under both of these stress scenarios at June 30, 2023.

 

On January 26, 2023, our board of directors authorized the repurchase of up to 4,297,000 shares of the Company’s common stock (approximately 5% of the shares of common stock outstanding as of December 31, 2022). The authorization is set to expire on December 31, 2024. 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 Company is not obligated to purchase any shares under this program and the repurchase authorization may be terminated or amended by the Board at any time prior to the expiration date. No shares have been repurchased under this program.

 

On April 27, 2023, our board of directors declared the regular second quarter cash dividend of $0.30 per share. The quarterly common stock cash dividend was paid on June 15, 2023 to shareholders of record on June 5, 2023. The Company has paid uninterrupted dividends to its shareholders since 1967.

The Inflation Reduction Act of 2022 signed into law during in August 2022 includes a provision for an excise tax equal to 1% of the fair market value of any stock repurchased by covered corporations during a taxable year, subject to certain limits and provisions. The excise tax is effective beginning in fiscal year 2023. While we may complete transactions subject to the new excise tax, we do not expect a material impact to our statement of condition or results of operations.

 

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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 $674.2 million at June 30, 2023, down $1.6 billion from March 31, 2023 and up $350.1 million from December 31, 2022. Average short-term investments of $931.3 million for the second quarter of 2023 were up $424.7 million from the first quarter of 2023 and up $635.8 million from the fourth quarter of 2022. Typically, the balance of short-term investments will change on a daily basis depending upon movement in customer loan and deposit accounts. The significant linked quarter decline was largely attributable to the repayment of incremental FHLB advances drawn in March of 2023 and held through early May 2023 as a cautionary measure to provide additional on-balance sheet liquidity in response to the disruption in the financial services industry caused by the recent bank failures.

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. 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 or loss in stockholders' equity.

 

Investment in securities totaled $8.2 billion at June 30, 2023, down $195.0 million from March 31, 2023 and $212.9 million from December 31, 2022. The decrease from both comparative periods reflects net payoffs and paydowns, part of a strategic decision to allow cash inflows from the securities portfolio to fund loan growth. The decrease from March 31, 2023 also reflects $69.2 million unfavorable market valuation adjustment. The decrease from December 31, 2022 was partially offset by a $36.3 million favorable market valuation adjustment on the available for sale portfolio.

At June 30, 2023, securities available for sale totaled $5.4 billion and securities held to maturity totaled $2.8 billion.

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, 2023, the average expected maturity of the portfolio was 6.04 years with an effective duration of 4.71 years and a nominal weighted-average yield of 2.32%. Under an immediate, parallel rate shock of 100 bps and 200 bps, the effective durations would be 4.66 and 4.60 years, respectively. At December 31, 2022, the average expected maturity of the portfolio was 6.02 years with an effective duration of 4.87 years and a nominal weighted-average yield of 2.27%. The changes in expected maturity, effective duration, and nominal weighted-average yield were largely the result of maturities, paydowns and the impact from the termination of fair value hedges on available for sale securities. At June 30, 2023, approximately $560 million of our available for sale securities are hedged with $514 million 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 utilize the securities portfolio cash flow to fund loan growth 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 not material for any period presented, and therefore no allowance for credit loss was recorded.

 

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Loans

 

Total loans at June 30, 2023 were $23.8 billion, up $385.4 million, or 2%, compared to March 31, 2023, and $675.8 million, or 3%, from December 31, 2022. New loans and fewer paydowns contributed to the growth, with residential mortgage and commercial and industrial portfolios driving the linked quarter growth, and residential mortgage, income-producing commercial real estate and construction portfolios driving the change since year end.

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)		2023				2023				2022				2022				2022
Total loans:
Commercial non-real estate		$	10,113,932			$	10,013,482			$	10,146,453			$	9,905,427			$	9,645,092
Commercial real estate - owner occupied			3,058,829				3,050,748				3,033,058				3,033,133				2,964,474
Total commercial and industrial			13,172,761				13,064,230				13,179,511				12,938,560				12,609,566
Commercial real estate - income producing			3,762,428				3,758,455				3,560,991				3,686,540				3,641,243
Construction and land development			1,768,252				1,726,916				1,703,592				1,541,257				1,408,727
Residential mortgages			3,581,514				3,329,793				3,092,605				2,843,723				2,615,807
Consumer			1,504,931				1,525,129				1,577,347				1,575,505				1,570,725
Total loans		$	23,789,886			$	23,404,523			$	23,114,046			$	22,585,585			$	21,846,068

 

Commercial and industrial (“C&I”) loans, including both non-real estate and owner occupied real estate secured loans, totaled approximately $13.2 billion, or 55% of the total loan portfolio, at June 30, 2023, up $108.5 million, or 1%, from March 31, 2023 and virtually flat compared to December 31, 2022.

 

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, 2023 totaled approximately $2.8 billion, or 12% of total loans, an increase of $86.0 million compared to the prior quarter and $76.9 million compared to December 31, 2022. At June 30, 2023, approximately $450 million of our shared national credits were with healthcare-related customers, with the remainder in commercial real estate, finance and insurance, 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 exception 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).

		June 30,								March 31,								December 31,								September 30,								June 30,
		2023								2023								2022								2022								2022
						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:
Health care and social assistance		$	1,454,716				11	%		$	1,398,300				10	%		$	1,407,960				11	%		$	1,420,861				11	%		$	1,296,666				11	%
Real estate and rental and leasing			1,249,557				9	%			1,368,460				10	%			1,520,955				12	%			1,483,937				11	%			1,460,694				12	%
Retail trade			1,250,708				9	%			1,238,090				9	%			1,218,784				9	%			1,162,095				9	%			1,136,244				9	%
Manufacturing			1,143,417				9	%			1,149,578				9	%			1,145,947				8	%			1,123,087				9	%			1,046,900				8	%
Construction			1,052,386				8	%			1,025,582				8	%			1,034,860				8	%			1,021,365				8	%			1,047,686				8	%
Wholesale trade			1,064,342				8	%			999,258				8	%			997,930				8	%			1,001,960				8	%			999,589				8	%
Finance and insurance			925,639				7	%			914,033				7	%			966,683				7	%			981,823				8	%			914,570				7	%
Transportation and warehousing			902,181				7	%			852,153				7	%			872,234				7	%			856,599				7	%			837,701				7	%
Professional, scientific, and technical services			768,863				6	%			732,068				6	%			706,430				5	%			696,855				5	%			653,555				5	%
Accommodation, food services and entertainment			714,463				5	%			677,488				5	%			637,942				5	%			669,063				5	%			702,313				6	%
Public administration			489,503				4	%			507,291				4	%			542,698				4	%			556,938				4	%			570,069				5	%
Information			417,465				3	%			407,754				3	%			386,568				3	%			332,230				2	%			315,071				2	%
Other services (except public administration)			393,319				3	%			387,396				3	%			396,629				3	%			405,724				3	%			403,874				3	%
Admin, Support, Waste Mgmt, Remediation Services			348,540				3	%			326,667				3	%			314,921				2	%			244,399				2	%			262,326				2	%
Educational services			264,377				2	%			282,488				2	%			298,126				2	%			268,392				2	%			280,377				2	%
Energy			222,603				2	%			227,171				2	%			242,076				2	%			246,344				2	%			246,961				2	%
Other			510,682				4	%			570,453				4	%			488,768				4	%			466,888				4	%			434,970				3	%
Total commercial & industrial loans		$	13,172,761				100	%		$	13,064,230				100	%		$	13,179,511				100	%		$	12,938,560				100	%		$	12,609,566				100	%

 

 

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Commercial real estate – income producing loans totaled approximately $3.8 billion at June 30, 2023, virtually flat compared to March 31, 2023 and up $201.4 million, or 6%, from December 31, 2022. Construction and land development loans totaled approximately $1.8 billion at June 30, 2023, up $41.3 million, or 2%, from March 31, 2023 and $64.7 million, or 4%, from December 31, 2022. The increase from December 31, 2022 in the commercial real estate – income producing loans was largely the result of completed construction projects moving to permanent financing, with the shift from construction largely offset by continued funding on existing lines. We are continuing to limit our growth in income producing real estate with a focus on resilient projects given the current economic environment. The following table details the end-of-period aggregated commercial real estate – income producing and 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,
		2023								2023								2022								2022								2022
						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:
Multifamily		$	1,087,984				20	%		$	1,017,351				19	%		$	870,869				17	%		$	872,944				17	%		$	776,723				15	%
Healthcare related properties			844,304				15	%			865,414				16	%			854,563				16	%			851,998				16	%			879,474				18	%
Retail			822,134				15	%			802,220				15	%			811,990				15	%			803,300				15	%			780,454				16	%
Industrial			698,409				13	%			677,907				12	%			613,149				12	%			602,739				12	%			573,993				11	%
Office			555,080				10	%			561,248				10	%			569,452				11	%			585,614				11	%			569,055				11	%
1-4 family residential construction			593,238				11	%			623,293				11	%			602,867				11	%			588,122				11	%			548,286				11	%
Hotel/motel and restaurants			448,362				8	%			475,377				9	%			485,865				9	%			453,847				9	%			448,949				9	%
Other land loans			219,398				4	%			219,192				4	%			213,159				4	%			222,723				4	%			221,905				4	%
Other			261,771				5	%			243,369				4	%			242,669				5	%			246,510				5	%			251,131				5	%
Total commercial real estate - income producing and construction loans		$	5,530,680				100	%		$	5,485,371				100	%		$	5,264,583				100	%		$	5,227,797				100	%		$	5,049,970				100	%

 

The residential mortgage loan portfolio totaled $3.6 billion at June 30, 2023, up $251.7 million, or 8%, from March 31, 2023 and $488.9 million, or 16%, from December 31, 2022. Growth in residential mortgage includes a combination of completed construction loans converting to permanent financing as well new loan growth.

The consumer loan portfolio totaled $1.5 billion at June 30, 2023, down $20.2 million, or 1%, from March 31, 2023 and $72.4 million, or 5%, from December 31, 2022. 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.

Management expects the 2023 loan growth percentage to be in the range of low to mid-single digits from the December 31, 2022 balance of $23.1 billion.

 

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Allowance for Credit Losses and Asset Quality

The Company's allowance for credit losses was $345.7 million at June 30, 2023, up $4.3 million from $341.4 million at March 31, 2023, and $4.6 million from $341.1 million at December 31, 2022. The $4.3 million linked-quarter increase in the allowance for credit losses is attributable to $3.4 million of net charge-offs and a provision for credit losses of $7.6 million, reflective of loan growth, higher individually evaluated reserves on our nonaccrual portfolio and a relatively consistent credit loss outlook on the portfolio as a whole. Uncertainty related to inflationary pressure and the outcome of the Federal Reserve’s monetary policy continues to result in an elevated reserve relative to pre-pandemic levels. After considering the variables underlying each of the Moody's economic scenarios, management weighed the baseline scenario at 40%, the downside S-2 mild recessionary scenario at 60% in the computation of the allowance for credit losses at June 30, 2023. Each of the scenarios utilized have varying degrees of severity and duration of inflationary pressure, including volatility in commodities prices stemming from geopolitical unrest, the consequences of the Federal Reserve's actions with regard to monetary policy, and the ultimate effects of recent disruption in the financial services industry on credit trends. Refer to the Economic Outlook section of this discussion and analysis for further information on the Moody’s scenarios and our weighting assumptions.

Our allowance for credit loss coverage to total loans was 1.45% at June 30, 2023, virtually unchanged compared to 1.46% at March 31, 2023. The allowance for credit losses on the commercial portfolio was up $2.6 million at $280.6 million, or 1.50% of that portfolio, at June 30, 2023, compared to the March 31, 2023 allowance of $278.0 million, or 1.50%, reflecting stable credit performance. Our residential mortgage allowance for credit loss increased modestly to $36.6 million, 1.02% of that portfolio at June 30, 2023, compared to $34.6 million, or 1.04%, at March 31, 2023, due largely to growth in the portfolio. Our allowance for credit losses on the consumer portfolio was $28.4 million, or 1.89% at June 30, 2023, compared to $28.8 million, or 1.89%, at March 31, 2023. The $4.6 million increase in the allowance for credit loss compared to December 31, 2022 is largely related to loan growth and higher individually evaluated loan reserves on our nonaccrual portfolio, with modest improvement in the economic outlook, resulting in a decline in coverage to total loans from 1.48% to 1.45%.

Criticized commercial loans totaled $302.2 million at June 30, 2023, up $6.7 million, or 2%, from $295.5 million at March 31, 2023 and was virtually unchanged from $301.9 million at December 31, 2022. 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 reviews portfolios of loans to determine if there are areas of risk not specifically identified in its loan by loan approach. Criticized commercial loans comprised 1.62% of that portfolio at June 30, 2023, up from 1.59% at March 31, 2023, but down from 1.64% at December 31, 2022, and remain near historically low levels. Our criticized commercial loans at June 30, 2023 are diversified across many industries, with the largest concentrations being construction, totaling $73.4 million; manufacturing, totaling $40.5 million; wholesale trade, totaling $37.3 million; and accommodation, food services and entertainment, totaling $27.8 million. Commercial loans risk rated pass-watch totaled $419.3 million at June 30, 2023, down $36.7 million from $456.0 million at March 31, 2023, and $38.3 million from $457.6 million at December 31, 2022. The pass-watch risk rating includes credits with negative performance trends that reflect sufficient risk to cause concern, but have not risen to the level of criticized.

Net charge-offs were $3.4 million, or 0.06% of average total loans on an annualized basis in the second quarter of 2023, compared to $5.7 million, or 0.10% of average total loans in the first quarter of 2023. Our commercial portfolio had net charge-offs of $1.2 million in the second quarter of 2023, compared to $3.4 million in the first quarter of 2023. Our residential mortgage portfolio had net recoveries of $0.3 million compared to $0.2 million in the first quarter of 2023. Consumer net charge-offs were $2.4 million in the second quarter of 2023 compared to $2.5 million in the first quarter of 2023. For the first six months of 2023, net charge-offs totaled $9.1 million, or 0.08% of average total loans on an annualized basis, compared to a net recovery of $0.4 million in the first six months of 2022. Results for the first half of 2023 reflect a decline in commercial recoveries to more normalized levels.

 

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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)		2023				2023				2022				2023				2022
Provision and Allowance for Credit Losses
Allowance for loan losses:
Allowance for loan losses at beginning of period		$	309,385			$	307,789			$	317,843			$	307,789			$	342,065
Loans charged-off:
Commercial non real estate			2,975				4,528				1,088				7,503				3,747
Commercial real estate - owner-occupied			—				—				857				—				857
Total commercial & industrial			2,975				4,528				1,945				7,503				4,604
Commercial real estate - income producing			73				—				1,062				73				1,066
Construction and land development			11				61				3				72				3
Total commercial			3,059				4,589				3,010				7,648				5,673
Residential mortgages			8				20				18				28				60
Consumer			3,549				3,363				2,947				6,912				5,627
Total charge-offs			6,616				7,972				5,975				14,588				11,360
Recoveries of loans previously charged-off:
Commercial non real estate			1,661				1,033				4,461				2,694				6,603
Commercial real estate - owner-occupied			155				195				102				350				491
Total commercial & industrial			1,816				1,228				4,563				3,044				7,094
Commercial real estate - income producing			10				—				—				10				878
Construction and land development			—				6				58				6				126
Total commercial			1,826				1,234				4,621				3,060				8,098
Residential mortgages			299				181				466				480				527
Consumer			1,115				838				1,574				1,953				3,102
Total recoveries			3,240				2,253				6,661				5,493				11,727
Total net charge-offs			3,376				5,719				(686	)			9,095				(367	)
Provision for loan losses			8,487				7,315				(10,354	)			15,802				(34,257	)
Allowance for loan losses at end of period		$	314,496			$	309,385			$	308,175			$	314,496			$	308,175
Reserve for Unfunded Lending Commitments:
Reserve for unfunded lending commitments at beginning of period		$	32,014			$	33,309			$	30,710			$	33,309			$	29,334
Provision for losses on unfunded lending commitments			(854	)			(1,295	)			593				(2,149	)			1,969
Reserve for unfunded lending commitments at end of period		$	31,160			$	32,014			$	31,303			$	31,160			$	31,303
Total Allowance for Credit Losses		$	345,656			$	341,399			$	339,478			$	345,656			$	339,478
Total Provision for Credit Losses		$	7,633			$	6,020			$	(9,761	)		$	13,653			$	(32,288	)
Coverage Ratios:
Allowance for loan losses to period-end loans			1.32	%			1.32	%			1.41	%			1.32	%			1.41	%
Allowance for credit losses to period-end loans			1.45	%			1.46	%			1.55	%			1.45	%			1.55	%
Charge-offs ratios:
Gross charge-offs to average loans			0.11	%			0.14	%			0.11	%			0.13	%			0.11	%
Recoveries to average loans			0.05	%			0.04	%			0.12	%			0.05	%			0.11	%
Net charge-offs to average loans			0.06	%			0.10	%			(0.01	)%			0.08	%			(0.00	)%
Net Charge-offs to average loans by portfolio
Commercial non real estate			0.05	%			0.14	%			(0.14	)%			0.10	%			(0.06	)%
Commercial real estate - owner-occupied			(0.02	)%			(0.03	)%			0.10	%			(0.02	)%			0.03	%
Total commercial & industrial			0.04	%			0.10	%			(0.08	)%			0.07	%			(0.04	)%
Commercial real estate - income producing			0.01	%			—				0.12	%			0.00	%			0.01	%
Construction and land development			0.00	%			0.01	%			(0.02	)%			0.01	%			(0.02	)%
Total commercial			0.03	%			0.07	%			(0.04	)%			0.05	%			(0.03	)%
Residential mortgages			(0.03	)%			(0.02	)%			(0.07	)%			(0.03	)%			(0.04	)%
Consumer			0.64	%			0.66	%			0.35	%			0.65	%			0.33	%

 

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The following table sets forth for the periods indicated nonaccrual loans and loans modified or restructured, by type, and foreclosed and surplus ORE and other foreclosed assets. The table also includes loans past due 90 days or more and still accruing.

 

		June 30,				March 31,				December 31,				September 30,				June 30,
($ in thousands)		2023				2023				2022				2022				2022
Loans accounted for on a nonaccrual basis:
Commercial non-real estate		$	39,361			$	12,378			$	3,078			$	3,563			$	3,600
Commercial non-real estate - modified/restructured (a)			907				924				942				965				1,230
Total commercial non-real estate			40,268				13,302				4,020				4,528				4,830
Commercial real estate - owner occupied			1,620				1,709				1,233				2,009				2,165
Commercial real estate - owner-occupied - modified/restructured (a)			675				684				228				228				228
Total commercial real estate - owner-occupied			2,295				2,393				1,461				2,237				2,393
Commercial real estate - income producing			356				1,501				1,174				1,814				1,842
Commercial real estate - income producing - modified/restructured (a)			—				—				66				69				74
Total commercial real estate - income producing			356				1,501				1,240				1,883				1,916
Construction and land development			370				340				306				349				676
Construction and land development - modified/restructured (a)			—				—				3				4				4
Total construction and land development			370				340				309				353				680
Residential mortgage			27,458				30,110				23,946				22,753				18,649
Residential mortgage - modified/restructured (a)			—				—				1,323				1,530				1,713
Total residential mortgage			27,458				30,110				25,269				24,283				20,362
Consumer			7,473				6,698				6,646				6,476				7,885
Consumer - modified/restructured (a)			—				—				46				47				—
Total consumer			7,473				6,698				6,692				6,523				7,885
Total nonaccrual loans		$	78,220			$	54,344			$	38,991			$	39,807			$	38,066
ORE and foreclosed assets			2,174				1,976				2,017				2,085				3,467
Total nonaccrual loans and ORE and foreclosed assets		$	80,394			$	56,320			$	41,008			$	41,892			$	41,533
Modified/Restructured loans - still accruing (a):
Commercial non-real estate		$	1,010			$	10			$	307			$	316			$	329
Commercial real estate - owner occupied			—				—				—				—				—
Commercial real estate - income producing			—				—				—				—				—
Construction and land development			—				—				113				114				116
Residential mortgage			—				—				1,018				1,016				1,142
Consumer			—				—				469				479				905
Total Modified/restructured loans - still accruing (a)		$	1,010			$	10			$	1,907			$	1,925			$	2,492
Total reportable modified loans (a)		$	2,592			$	1,618			$	—			$	—			$	—
Total troubled debt restructured loans (a)		$	—			$	—			$	4,515			$	4,768			$	5,741
Loans 90 days past due still accruing		$	7,552			$	13,155			$	4,585			$	2,600			$	4,697
Ratios:
Nonaccrual loans to total loans			0.33	%			0.23	%			0.17	%			0.18	%			0.17	%
Nonaccrual loans plus ORE and foreclosed assets to loans plus ORE  and foreclosed assets			0.34	%			0.24	%			0.18	%			0.19	%			0.20	%
Allowance for loan losses to nonaccrual loans			402.07	%			569.31	%			789.38	%			769.00	%			809.58	%
Allowance for loan losses to nonaccrual loans and accruing loans 90 days past due			366.67	%			458.35	%			706.33	%			721.85	%			720.66	%
Loans 90 days past due still accruing to loans			0.03	%			0.06	%			0.02	%			0.01	%			0.02	%

 

Nonaccrual loans plus ORE and foreclosed assets totaled $80.4 million at June 30, 2023, up $24.1 million compared to March 31, 2023 and $39.4 million from December 31, 2022. Nonaccrual loans of $78.2 million increased $23.9 million compared to March 31, 2023 and $39.2 million compared to December 31, 2022, and remains at a relatively low percentage of the total portfolio at 0.33%. The increase in nonaccrual loans compared to both periods was largely attributable to the downgrade of a single credit. ORE and foreclosed assets were $2.2 million at June 30, 2023, relatively flat to both March 31, 2023 and December 31, 2022. Nonaccrual loans plus ORE and other foreclosed assets as a percentage of total loans, ORE and other foreclosed assets was 0.34% at June 30, 2023, up 10 bps compared to March 31, 2023 and 16 bps from December 31, 2022.

 

We expect to continue to see low to modest charge-offs and provision for credit losses for the remainder of 2023. Loan growth, portfolio mix, asset quality metrics and future assumptions in economic forecasts will drive the level of credit loss reserves.

 

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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. 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. In late 2022, we began to see outflows of some of the deposit bases built over the preceding two years, as spending levels have increased amid inflationary conditions and an increase in competition for deposits, though deposits remain above pre-pandemic levels.

The failures of three large U.S. banks in the first half of 2023 has created disruption in the financial services industry. While many factors played a role in the ultimate failures, these institutions had significant industry/demographic concentration within their deposit bases and a high ratio of uninsured deposits. Lack of diversity in concentration within a deposit base may increase the risk of events or trends that could prompt a larger-scale demand for deposits outflow. Concerns over a financial institution's ability to protect deposit balances in excess of the federally insured limit may increase the risk of a deposit run. We consider our deposit base to be seasoned, stable and well-diversified. We also offer our customers an insured cash sweep product (ICS) that allows customers to insure deposits above FDIC insured limits. We have seen increased demand for the ICS product following the recent bank failures, with the balance totaling $220.9 million at June 30, 2023, compared to $111.4 million at March 31, 2023 and $12.2 million at December 31, 2022. At June 30, 2023, we have calculated our average deposit account size by dividing period-end deposits by the population of accounts with balances to be approximately $38,400, which includes $199,100 in our commercial and small business lines (excluding public funds), $132,300 in our wealth management business line, and $18,400 in our consumer business line.

Further, at June 30, 2023, our sources of liquidity exceed uninsured deposits. We have estimated the Bank’s amount of uninsured deposits using the methodologies and assumptions required for FDIC regulatory reporting to be approximately $13.6 billion at June 30, 2023, down from $14.2 billion at March 31, 2023 and $14.7 billion at December 31, 2022. Approximately half of the linked quarter decline in uninsured deposits is related to the reduction of an intercompany deposit balance. Our uninsured deposit total at June 30, 2023 includes approximately $3.3 billion of public funds that have pledged securities as collateral, leaving $10.3 billion of noncollateralized, uninsured deposits compared to total liquidity of $18.5 billion. Our ratio of noncollateralized, uninsured deposits to total deposits was approximately 34.4% at June 30, 2023, compared to 36.2% at March 31, 2023 and 37.9% at December 31, 2022.

Total deposits were $30.0 billion at June 30, 2023, up $430.4 million, or 1%, from March 31, 2023 and $973.2 million, or 3%, from December 31, 2022. Average deposits for the second quarter of 2023 were $29.4 billion, up $580.0 million, or 2%, from the first quarter of 2023.

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)		2023				2023				2022				2022				2022
Noninterest-bearing deposits		$	12,171,817			$	12,860,027			$	13,645,113			$	14,290,817			$	14,676,342
Interest-bearing retail transaction and savings deposits			10,455,175				10,682,568				10,757,495				10,924,309				11,359,561
Interest-bearing public fund deposits:
Public fund transaction and savings deposits			2,828,301				2,987,565				3,132,828				2,737,074				2,832,720
Public fund time deposits			97,130				98,644				111,397				59,288				50,943
Total interest-bearing public fund deposits			2,925,431				3,086,209				3,244,225				2,796,362				2,883,663
Retail time deposits			3,328,577				2,411,765				1,418,596				934,866				937,676
Brokered time deposits			1,162,501				572,501				4,920				4,920				9,190
Total interest-bearing deposits			17,871,684				16,753,043				15,425,236				14,660,457				15,190,090
Total deposits		$	30,043,501			$	29,613,070			$	29,070,349			$	28,951,274			$	29,866,432

 

Noninterest-bearing demand deposits were $12.2 billion at June 30, 2023, down $688.2 million, or 5%, from March 31, 2023 and $1.5 billion, or 11%, from December 31, 2022. The declines from both comparative periods reflect both the continued shift to interest-bearing products, particularly retail time deposits, amid the rising interest rate environment and typical seasonal outflows of public funds deposits. Noninterest-bearing demand deposits comprised 40% of total deposits at June 30, 2023, 43% at March 31, 2023 and 47% at December 31, 2022.

 

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Interest-bearing transaction and savings accounts of $10.5 billion at June 30, 2023 were down $227.4 million, or 2%, from March 31, 2023 and $302.3 million, or 3%, from December 31, 2022. Interest-bearing public fund deposits totaled $2.9 billion at June 30, 2023, down $160.8 million, or 5%, from March 31, 2023 and $318.8 million, or 10%, from December 31, 2022. The decrease in public funds is mostly reflective of typical seasonal outflows. Retail time deposits totaled $3.3 billion at June 30, 2023, up $916.8 million, or 38%, from March 31, 2023 and $1.9 billion, or 135%, from December 31, 2022. The increase in retail time deposits reflects the continued shift from noninterest-bearing or lower yielding interest-bearing products amid the rising interest rate environment as depositors take advantage of the current rate offerings. Brokered time deposits of $1.2 billion at June 30, 2023 represents the addition of brokered time deposits of $568 million in March and $590 million in May. These instruments are short-term in nature, maturing between December 2023 and May 2024 bear interest plus fees of either 5.35% or 5.45%.

 

As previously noted, interest rates paid on deposit accounts continued to increase in the second quarter of 2023, particularly on retail time deposits where we have offered promotional rates. The following table sets forth average balances and weighted-average rates paid on deposits for the second and first quarters of 2023 and the second quarter of 2022.

 

	June 30, 2023											March 31, 2023											June 30, 2022
($ in millions)	Balance			Rate				Mix				Balance			Rate				Mix				Balance				Rate				Mix
Interest-bearing deposits:
Interest-bearing transaction    deposits	$	2,355.0			0.74		%		8.0		%	$	2,468.9			0.46		%		8.6		%	$	2,674.7				0.09		%		8.9		%
Money market deposits		5,648.8			2.62				19.2				5,497.3			1.80				19.1				5,806.7				0.05				19.4
Savings deposits		2,493.7			0.01				8.5				2,684.2			0.01				9.3				2,957.6				0.01				9.9
Time deposits		3,740.3			3.95				12.7				2,018.6			2.70				7.0				979.2				0.15				3.3
Public Funds		2,981.7			3.27				10.2				3,160.7			3.04				11.0				2,906.0				0.46				9.7
Total interest-bearing deposits		17,219.5			2.39		%		58.6				15,829.7			1.65		%		55.0				15,324.2				0.13		%		51.1
Noninterest-bearing demand    deposits		12,153.4							41.4				12,963.2							45.0				14,655.8								48.9
Total deposits	$	29,372.9							100.0		%	$	28,792.9							100.0		%	$	29,980.0								100.0		%

The following sets forth the maturities of time certificates of deposit greater than $250,000 at June 30, 2023.

	June 30,
($ in thousands)	2023
Three months	$	567,620
Over three months through six months		417,338
Over six months through one year		341,543
Over one year		25,771
Total	$	1,352,272

Management expects relatively flat or low single digit end of period deposit growth for 2023 compared to the balance of $29.1 billion at December 31, 2022.

Short-Term Borrowings

 

At June 30, 2023, short-term borrowings totaled $1.6 billion, down $1.9 billion from March 31, 2023 and down $241.7 million, or 13%, from December 31, 2022. The decline from both comparative periods is primarily attributable to FHLB borrowings. The significant linked quarter decline reflects the repayment of incremental borrowings drawn in March 2023 as a cautionary measure to provide additional on-balance sheet liquidity in response to the disruption in the financial services industry caused by the bank failures. FHLB borrowings totaled $1.1 billion at June 30, 2023 and consisted of one fixed-rate advance maturing July 3, 2023. The remaining variance is largely due to changes in customer repurchase agreements discussed below. Average short-term borrowings of $2.4 billion in the second quarter of 2023 were up $288.0 million, or 14%, from the first quarter of 2023 and up $810.8 million, or 51%, from the fourth quarter of 2022.

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.

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Long-Term Debt

Long-term debt totaled $236.2 million at June 30, 2023, down $5.9 million, or 2%, from March 31, 2023 and down $5.8 million, or 2%, from December 31, 2022.

Long-term debt at June 30, 2023 includes subordinated notes payable with an aggregate principal amount of $172.5 million, a stated maturity of June 15, 2060, and 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.

 

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, 2023, the Company had a reserve for unfunded lending commitments totaling $31.2 million.

 

The following table shows the commitments to extend credit and letters of credit at June 30, 2023 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		$	10,083,714			$	3,854,996			$	2,587,327			$	2,809,459			$	831,932
Letters of credit			439,444				353,507				57,103				28,834				—
Total		$	10,523,158			$	4,208,503			$	2,644,430			$	2,838,293			$	831,932

 

 

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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, 2022.

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, 2023. Shifts are measured in 100 basis point increments in a range from -500 to +500 basis points from base case, with -300 through +300 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)
-300			-10.23	%			-15.42	%
-200			-6.46	%			-10.05	%
-100			-2.90	%			-4.46	%
+100			3.03	%			4.22	%
+200			5.70	%			8.18	%
+300			8.37	%			12.18	%

The results indicate a general asset sensitivity across most scenarios driven primarily by repricing in variable rate loans and a funding mix which includes a large percentage of noninterest-bearing and lower rate sensitive deposits. As rates have risen over the past year, the funding mix has experienced a shift to more rate sensitive deposit and wholesale funding which has resulted in a lower net interest income at risk measurements compared to recent years. When deemed 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

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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. All of these factors are considered 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. The Company discontinued the use of LIBOR for new contracts after December 31, 2021, with limited exceptions as permitted by regulatory guidance and internal policy.

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. Further, the Adjustable Interest Rate (LIBOR) Act, enacted in March 2022, provides a statutory framework to replace U.S. dollar LIBOR with a benchmark rate based on the SOFR for contracts governed by U.S. law that have no or ineffective fallbacks, and in December 2022, the Federal Reserve Board adopted related implementing rules. In addition, where fallback language allows the Bank to select a benchmark rate, the statutory framework grants the authority to select the Board-selected benchmark replacement as the benchmark replacement, including the safe harbor provisions that, among other things, generally provide that such selection or use will not discharge or excuse performance under, give any person the right to unilaterally terminate or suspend performance under, or constitute a breach, of the contract.

 

The Bank has adopted several replacement benchmarks to use in place of LIBOR benchmark rates, including Chicago Mercantile Exchange Inc. (CME) Term SOFR, FRB-NY SOFR and AMERIBOR as the primary rates. The replacement benchmark 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. In the first half of 2023, the Company converted all of its LIBOR based cash flow hedges to SOFR and replaced the variable rate loan pools with SOFR based instruments, with limited financial impact or cost.

 

Effective July 3, 2023, all remaining LIBOR instruments were transitioned in accordance with the statutory framework established by the Federal Reserve with no material financial impact. While we have not had any material issues to-date, the discontinuance of LIBOR could result in customer uncertainty and disputes arising as a consequence of the transition, and could result in damage to our reputation and loss of customers.

 

 

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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, 2023, 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, 2023, 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

In addition to the other information set forth in this Report, in evaluating an investment in the Company’s securities, investors should consider carefully, among other things, the risk factors previously disclosed in Part I, Item 1A of our 2022 Form 10-K, and as disclosed in Part II, Item 1A of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2023, which could materially affect the Company's business, financial position, results of operations, cash flows, or future results. Please be aware that these risks may change over time and other risks may prove to be important in the future. New risks may emerge at any time, and we cannot predict such risks or estimate the extent to which they may affect our business, financial condition or results of operations, or the trading price of our securities.

 

There are no material changes during the period covered by this Report to the risk factors previously disclosed in our 2022 Form 10-K or our Quarterly Report on Form 10-Q for the quarter ended March 31, 2023.

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, 2024. 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, 2023.

 

		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, 2023 - April 30, 2023			—			$	—				—				4,297,000
May 1, 2023 - May 31, 2023			—			$	—				—				4,297,000
June 1, 2023 - June 30, 2023			—			$	—				—				4,297,000
			—			$	—				—

 

 

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Item 5. Other Information

 

Pursuant to Item 408(a) of Regulation S-K, none of the Company's directors or executive officers adopted, terminated or modified a Rule 10b5-1 trading arrangement or a non-Rule 10b5-1 trading arrangement during the three months ended June 30, 2023.

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, 2023

 

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