Published: 2022-11-03 00:00:00 ET

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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 September 30, 2022

OR

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

For the transition period from to

Commission file number: 001-36872

HANCOCK WHITNEY CORPORATION

(Exact name of registrant as specified in its charter)

 

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

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

(228) 868-4000

(Registrant’s telephone number, including area code)

 

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

 

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

 

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

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

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

 

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

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

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

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

85,693,303 common shares were outstanding at October 31, 2022.

 

 

 

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Table of Contents

 

Hancock Whitney Corporation

Index

 

Part I. Financial Information		Page Number
ITEM 1.	Financial Statements	5
	Consolidated Balance Sheets (unaudited) – September 30, 2022 and December 31, 2021	5
	Consolidated Statements of Income (unaudited) – Three and Nine Months Ended September 30, 2022 and 2021	6
	Consolidated Statements of Comprehensive Income (unaudited) – Three and Nine Months Ended September 30, 2022 and 2021	7
	Consolidated Statements of Changes in Stockholders’ Equity (unaudited) – Three and Nine Months Ended September 30, 2022 and 2021	8
	Consolidated Statements of Cash Flows (unaudited) – Nine Months Ended September 30, 2022 and 2021	9
	Notes to Consolidated Financial Statements (unaudited) – September 30, 2022 and 2021	10
ITEM 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	39
ITEM 3.	Quantitative and Qualitative Disclosures about Market Risk	64
ITEM 4.	Controls and Procedures	66
Part II. Other Information
ITEM 1.	Legal Proceedings	67
ITEM 1A.	Risk Factors	67
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	67
ITEM 3.	Default on Senior Securities	N/A
ITEM 4.	Mine Safety Disclosures	N/A
ITEM 5.	Other Information	N/A
ITEM 6.	Exhibits	68
Signatures		69

 

2

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Table of Contents

 

Hancock Whitney Corporation

Glossary of Defined Terms

Entities:

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

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

Company – Hancock Whitney Corporation and its consolidated subsidiaries

Parent – Hancock Whitney Corporation, exclusive of its subsidiaries

Bank – Hancock Whitney Bank

Other Terms:

 

ACL – allowance for credit losses

AFS – available for sale securities

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

AOCI – accumulated other comprehensive income or loss

ALCO – Asset Liability Management Committee

ALLL – allowance for loan and lease losses

ARRC – Alternative Reference Rates Committee

ASC – Accounting Standards Codification

ASU – Accounting Standards Update

ATM – automated teller machine

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

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

BOLI – bank-owned life insurance

bp(s) – basis point(s)

C&I – commercial and industrial loans

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

CD – certificate of deposit

CDE – Community Development Entity

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

CEO – Chief Executive Officer

CFPB– Consumer Financial Protection Bureau

CFO – Chief Financial Officer

CME – Chicago Mercantile Exchange

CMO – collateralized mortgage obligation

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

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

COVID-19 – disease caused by the novel coronavirus

CRE – commercial real estate

DEI – Diversity, equity and inclusion

DIF – Deposit Insurance Fund

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

FASB – Financial Accounting Standards Board

FDIC – Federal Deposit Insurance Corporation

FDICIA – Federal Deposit Insurance Corporation Improvement Act of 1991

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

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

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

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

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

FFIEC – Federal Financial Institutions Examination Council

FHA – Federal Housing Administration

FHLB – Federal Home Loan Bank

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

HTM – held to maturity securities

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IRS – Internal Revenue Service

LIBOR – London Interbank Offered Rate

LIHTC – Low Income Housing Tax Credit

LTIP – long-term incentive plan

MBS – mortgage-backed securities

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

MDBCF – Mississippi Department of Banking and Consumer Finance

NAICS – North American Industry Classification System

NII – net interest income

n/m – not meaningful

NSF – Non-sufficient funds

OCI – other comprehensive income or loss

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

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

PPNR – Pre-provision net revenue

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

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

Repos – securities sold under agreements to repurchase

SBA – Small Business Administration

SBIC – Small Business Investment Company

SEC – U.S. Securities and Exchange Commission

Securities Act – Securities Act of 1933, as amended

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

SOFR – secured overnight financing rate

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

TDR – troubled debt restructuring

TSR – total shareholder return

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

VERIP – Voluntary Early Retirement Incentive Program

 

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Part I. Financial Information

Item 1. Financial Statements

Hancock Whitney Corporation and Subsidiaries

Consolidated Balance Sheets

(Unaudited)

 

		September 30,				December 31,
(in thousands, except per share data)		2022				2021
ASSETS
Cash and due from banks		$	589,586			$	401,201
Interest-bearing bank deposits			261,225				3,830,177
Federal funds sold			440				458
Securities available for sale, at fair value (amortized cost of $6,342,379 and $6,984,530)			5,466,843				6,986,698
Securities held to maturity (fair value of $2,606,080 and $1,631,482)			2,866,348				1,565,751
Loans held for sale (includes $15,149 and $41,022 measured at fair value)			33,008				93,069
Loans			22,585,585				21,134,282
Less: allowance for loan losses			(306,116	)			(342,065	)
Loans, net			22,279,469				20,792,217
Property and equipment, net of accumulated depreciation of $297,664 and $280,065			346,566				350,309
Right of use assets, net of accumulated amortization of $42,468 and $34,425			100,105				102,239
Prepaid expenses			46,449				38,793
Other real estate and foreclosed assets, net			2,085				7,533
Accrued interest receivable			111,907				96,938
Goodwill			855,453				855,453
Other intangible assets, net			59,464				70,226
Life insurance contracts			725,820				664,535
Funded pension assets, net			235,799				227,870
Deferred tax asset, net			192,494				—
Other assets			394,181				447,738
Total assets		$	34,567,242			$	36,531,205
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits
Noninterest-bearing		$	14,290,817			$	14,392,808
Interest-bearing			14,660,457				16,073,089
Total deposits			28,951,274				30,465,897
Short-term borrowings			1,542,981				1,665,061
Long-term debt			236,410				244,220
Accrued interest payable			5,863				3,103
Lease liabilities			119,817				122,079
Deferred tax liability, net			—				19,434
Other liabilities			530,458				341,059
Total liabilities			31,386,803				32,860,853
Stockholders' equity:
Common stock			309,513				309,513
Capital surplus			1,715,447				1,755,701
Retained earnings			1,968,260				1,659,073
Accumulated other comprehensive loss, net			(812,781	)			(53,935	)
Total stockholders' equity			3,180,439				3,670,352
Total liabilities and stockholders' equity		$	34,567,242			$	36,531,205
Preferred shares authorized (par value of $20.00 per share)			50,000				50,000
Preferred shares issued and outstanding			—				—
Common shares authorized (par value of $3.33 per share)			350,000				350,000
Common shares issued			92,947				92,947
Common shares outstanding			85,686				86,749

 

See notes to unaudited consolidated financial statements.

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Hancock Whitney Corporation and Subsidiaries

Consolidated Statements of Income

(Unaudited)

 

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
(in thousands, except per share data)		2022				2021				2022				2021
Interest income:
Loans, including fees		$	248,895			$	204,102			$	648,808			$	626,881
Loans held for sale			398				635				1,532				1,954
Securities-taxable			43,860				33,936				120,039				98,287
Securities-tax exempt			4,743				4,724				14,116				14,269
Short-term investments			1,841				1,020				6,892				2,111
Total interest income			299,737				244,417				791,387				743,502
Interest expense:
Deposits			13,580				5,090				22,409				21,381
Short-term borrowings			2,749				1,470				5,127				4,558
Long-term debt			3,101				3,148				9,349				13,624
Total interest expense			19,430				9,708				36,885				39,563
Net interest income			280,307				234,709				754,502				703,939
Provision for credit losses			1,402				(26,955	)			(30,886	)			(49,095	)
Net interest income after provision for credit losses			278,905				261,664				785,388				753,034
Noninterest income:
Service charges on deposit accounts			23,272				21,159				65,441				59,686
Trust fees			16,048				16,041				48,636				47,351
Bank card and ATM fees			21,412				19,833				63,678				58,436
Investment and annuity fees and insurance commissions			6,492				7,167				21,920				21,956
Secondary mortgage market operations			3,284				6,972				10,020				31,238
Securities transactions, net			—				—				(87	)			333
Other income			14,829				22,189				44,814				55,722
Total noninterest income			85,337				93,361				254,422				274,722
Noninterest expense:
Compensation expense			98,985				92,601				279,133				289,034
Employee benefits			19,937				19,377				62,355				85,213
Personnel expense			118,922				111,978				341,488				374,247
Net occupancy expense			12,411				11,974				36,316				37,839
Equipment expense			4,527				4,894				14,097				14,067
Data processing expense			26,768				24,766				77,176				71,598
Professional services expense			9,679				12,748				25,895				37,472
Amortization of intangible assets			3,428				4,082				10,762				12,746
Deposit insurance and regulatory fees			3,596				3,680				10,839				10,042
Other real estate and foreclosed assets income, net			(1,782	)			(376	)			(3,634	)			(456	)
Other expense			15,953				20,957				47,599				66,990
Total noninterest expense			193,502				194,703				560,538				624,545
Income before income taxes			170,740				160,322				479,272				403,211
Income taxes expense			35,351				30,740				98,970				77,739
Net income		$	135,389			$	129,582			$	380,302			$	325,472
Earnings per common share-basic		$	1.56			$	1.46			$	4.35			$	3.67
Earnings per common share-diluted		$	1.55			$	1.46			$	4.33			$	3.67
Dividends paid per share		$	0.27			$	0.27			$	0.81			$	0.81
Weighted average shares outstanding-basic			85,706				86,834				86,141				86,800
Weighted average shares outstanding-diluted			86,020				87,006				86,439				86,951

 

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								Nine Months Ended
		September 30,								September 30,
(in thousands)		2022				2021				2022				2021
Net income		$	135,389			$	129,582			$	380,302			$	325,472
Other comprehensive income (loss) before income taxes:
Net change in unrealized gain or loss on securities available for sale and cash flow hedges			(367,437	)			(48,569	)			(961,892	)			(143,924	)
Reclassification of income realized and included in earnings			(1,441	)			(6,425	)			(10,849	)			(9,337	)
Valuation adjustments to pension plan attributable to the Voluntary Early Retirement Program and curtailment			—				—				—				59,606
Other valuation adjustments to employee benefit plans			(410	)			—				(8,397	)			(10,651	)
Amortization of unrealized net gain (loss) on securities transferred to held to maturity			434				(33	)			961				(134	)
Other comprehensive loss before income taxes			(368,854	)			(55,027	)			(980,177	)			(104,440	)
Income tax benefit			(83,250	)			(12,363	)			(221,331	)			(24,569	)
Other comprehensive loss net of income taxes			(285,604	)			(42,664	)			(758,846	)			(79,871	)
Comprehensive income (loss)		$	(150,215	)		$	86,918			$	(378,544	)		$	245,601

 

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 September 30, 2022 and 2021																		Accumulated
		Common Stock																Other
(in thousands, except parenthetical share data)		Shares Issued				Amount				Capital Surplus				Retained Earnings				Comprehensive Income (Loss)				Total
Balance, June 30, 2022			92,947			$	309,513			$	1,710,898			$	1,856,489			$	(527,177	)		$	3,349,723
Net income			—				—				—				135,389				—				135,389
Other comprehensive loss			—				—				—				—				(285,604	)			(285,604	)
Comprehensive loss			—				—				—				135,389				(285,604	)			(150,215	)
Cash dividends declared ($0.27 per common share)			—				—				—				(23,668	)			—				(23,668	)
Common stock activity, long-term incentive plans			—				—				6,081				50				—				6,131
Issuance of stock from dividend reinvestment and stock purchase plans			—				—				871				—				—				871
Repurchase of common stock (50,000 shares)			—				—				(2,403	)			—				—				(2,403	)
Balance, September 30, 2022			92,947			$	309,513			$	1,715,447			$	1,968,260			$	(812,781	)		$	3,180,439
Balance, June 30, 2021			92,947			$	309,513			$	1,770,973			$	1,439,553			$	42,862			$	3,562,901
Net income			—				—				—				129,582				—				129,582
Other comprehensive loss			—				—				—				—				(42,664	)			(42,664	)
Comprehensive income			—				—				—				129,582				(42,664	)			86,918
Cash dividends declared ($0.27 per common share)			—				—				—				(24,002	)			—				(24,002	)
Common stock activity, long-term incentive plans			—				—				5,432				48				—				5,480
Issuance of stock from dividend reinvestment and stock purchase plans			—				—				978				—				—				978
Repurchase of common stock (56,349 shares)			—				—				(2,509	)			—				—				(2,509	)
Balance, September 30, 2021			92,947			$	309,513			$	1,774,874			$	1,545,181			$	198			$	3,629,766
Nine Months Ended September 30, 2022 and 2021																		Accumulated
		Common Stock																Other
(in thousands, except parenthetical share data)		Shares Issued				Amount				Capital Surplus				Retained Earnings				Comprehensive Income (Loss)				Total
Balance, December 31, 2021			92,947			$	309,513			$	1,755,701			$	1,659,073			$	(53,935	)		$	3,670,352
Net income			—				—				—				380,302				—				380,302
Other comprehensive loss			—				—				—				—				(758,846	)			(758,846	)
Comprehensive loss			—				—				—				380,302				(758,846	)			(378,544	)
Dividends declared ($0.81 per common share)			—				—				—				(71,249	)			—				(71,249	)
Common stock activity, long-term incentive plans			—				—				15,967				134				—				16,101
Issuance of stock from dividend reinvestment and stock purchase plans			—				—				2,671				—				—				2,671
Repurchase of common stock (1,204,368 shares)			—				—				(58,892	)			—				—				(58,892	)
Balance, September 30, 2022			92,947			$	309,513			$	1,715,447			$	1,968,260			$	(812,781	)		$	3,180,439
Balance, December 31, 2020			92,947			$	309,513			$	1,757,937			$	1,291,506			$	80,069			$	3,439,025
Net income			—				—				—				325,472				—				325,472
Other comprehensive loss			—				—				—				—				(79,871	)			(79,871	)
Comprehensive income			—				—				—				325,472				(79,871	)			245,601
Cash dividends declared ($0.81 per common share)			—				—				—				(72,046	)			—				(72,046	)
Common stock activity, long-term incentive plans			—				—				16,506				249				—				16,755
Issuance of stock from dividend reinvestment and stock purchase plans			—				—				2,940				—				—				2,940
Repurchase of common stock (56,349 shares)			—				—				(2,509	)			—				—				(2,509	)
Balance, September 30, 2021			92,947			$	309,513			$	1,774,874			$	1,545,181			$	198			$	3,629,766

 

See notes to unaudited consolidated financial statements.

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Hancock Whitney Corporation and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)

 

		Nine Months Ended
		September 30,
(in thousands)		2022				2021
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	380,302			$	325,472
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			23,210				21,743
Provision for credit losses			(30,886	)			(49,095	)
Gain on other real estate and foreclosed assets			(5,210	)			(1,124	)
Loss (gain) on sale of securities			87				(333	)
Deferred tax expense			9,396				1,378
(Increase) decrease in cash surrender value of life insurance contracts			(2,372	)			(21,122	)
Impairment of or loss on disposal of assets			140				15,165
Loss on extinguishment of debt			—				4,165
Net decrease in loans held for sale			54,010				43,867
Net amortization of securities premium/discount			29,475				38,318
Amortization of intangible assets			10,762				12,746
Stock-based compensation expense			17,507				17,270
Net change in derivative collateral liability			36,776				53,387
Increase in interest payable and other liabilities			1,964				22,037
Decrease in other assets			174,915				60,971
Other, net			(24,999	)			(13,970	)
Net cash provided by operating activities			675,077				530,875
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale of available for sale securities			73,219				198,681
Proceeds from maturities of securities available for sale			415,221				831,433
Purchases of securities available for sale			(517,178	)			(2,235,723	)
Proceeds from maturities of securities held to maturity			111,612				99,044
Purchases of securities held to maturity			(859,333	)			(59,362	)
Proceeds received upon termination of fair value hedge instruments			74,006				—
Net (increase) decrease in short-term investments			3,568,970				(1,728,995	)
Net redemptions of Federal Home Loan Bank stock			4,969				52,535
Proceeds from sales of loans and leases			26,619				12,540
Net (increase) decrease in loans			(1,545,537	)			915,652
Purchase of life insurance contracts			(65,000	)			(75,000	)
Proceeds from the surrender of life insurance contracts			—				44,045
Purchases of property and equipment			(22,352	)			(12,402	)
Proceeds from sales of other real estate and foreclosed assets			11,308				7,804
Other, net			2,778				35,903
Net cash provided by (used in) investing activities			1,279,302				(1,913,845	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits			(1,514,623	)			1,510,280
Net increase (decrease) in short-term borrowings			(122,080	)			77,715
Proceeds from the issuance of long-term debt			—				22,388
Repayments of long-term debt			(480	)			(153,365	)
Dividends paid			(70,926	)			(72,046	)
Payroll tax remitted on net share settlement of equity awards			(1,891	)			(1,298	)
Proceeds from exercise of stock options			227				439
Proceeds from dividend reinvestment and stock purchase plans			2,671				2,940
Repurchase of common stock			(58,892	)			(2,509	)
Net cash provided by (used in) financing activities			(1,765,994	)			1,384,544
NET INCREASE IN CASH AND DUE FROM BANKS			188,385				1,574
CASH AND DUE FROM BANKS, BEGINNING			401,201				526,306
CASH AND DUE FROM BANKS, ENDING		$	589,586			$	527,880
SUPPLEMENTAL INFORMATION FOR NON-CASH
INVESTING AND FINANCING ACTIVITIES
Assets acquired in settlement of loans		$	328			$	2,623

 

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

 

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

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

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

OVERVIEW

Non-GAAP Financial Measures

 

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

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

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

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

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

 

Current Economic Environment

 

Economic conditions in the third quarter of 2022 continued to be influenced by the persistent high level of inflation. While the annual inflation rate, as measured by the consumer price index, slowed to 8.2% in September 2022 from the recent peak of 9.1% in June 2022, prolonged labor market shortages and resulting wage pressures and supply chain disruption remain significant impediments to the easing of inflation. After two consecutive quarters of contraction in Real Gross Domestic Product (GDP), the third quarter of 2022 reflected modest growth of 2.6%. Employment indicators also remain strong, with the unemployment rate at 3.5% in September 2022. The Federal Reserve has taken an aggressive approach to combat inflation, issuing a series of interest rate increases that began in March 2022 totaling 300 basis points, including 75-basis point rate increases in July and September 2022. The Federal Reserve has also accelerated quantitative tightening with its September 2022 announcement that the agency will allow its balance sheet to decline by $95 billion per month, as compared to $47.5 billion per month from June through August 2022. The full extent of the impact of the Federal Reserve’s actions to date to reduce inflation and the potential scope of additional Federal Reserve actions are uncertain and may have a significant negative impact on the U.S. economy, including the possibility of an economic recession in the near or mid-term.

 

Despite persistent inflationary pressures, much of our market area continued to show indications of economic health in the third quarter. We experienced strong loan demand across our portfolio that contributed to a more than 3% linked-quarter growth rate in loans, and our credit quality indicators remain near historically low levels. The growth in the loan portfolio, which was partially funded by the remaining excess liquidity in our balance sheet, was across our geographic footprint and diverse across most business lines. This shift in earning assets from excess liquidity into higher-yielding loans, along with the net impact of the most recent interest rate increases, contributed to a 50 basis point expansion of our net interest margin in the quarter. Increased customer spending amid inflationary conditions, and heightened competition for deposits in the rising interest rate environment has put some pressure on our deposit base, which was down over 3% linked-quarter.

 

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 September 2022 Moody’s forecast, the most current available at September 30, 2022. The forecasts are anchored on a baseline forecast scenario, which Moody’s defines as the “most likely outcome” of where the economy is headed based on current conditions. Several upside and downside scenarios are produced that are derived from the baseline scenario.

 

While incorporating a degree of optimism in terms of the effectiveness of monetary policy and the ultimate resolution of inflation, the assumptions underlying September 2022 baseline scenario are somewhat less optimistic than those included in the June 2022 scenario. Key assumptions within the September 2022 baseline forecast include the following: (1) the global oil market remains mostly balanced in 2023, allowing oil prices to gradually drop; (2) the return to full-employment, defined as an unemployment rate of 3.5%, labor force participation of approximately 62.5% and a prime age employment to population ratio above 80%, is expected to be achieved in the coming months; (3) GDP is expected to grow in the second half of the year, with forecasted annual growth of 1.6% in 2022, 1.4% in 2023 and 2.6% in 2024; (4) the Federal Funds rate will reach a target rate of 3.5% by the end of 2022, with the possibility of future rate increases; rate cuts not forecasted to begin until 2025; and (5) future surges in COVID-19 infections will not have a significant negative impact upon economic conditions.

 

The alternative Moody’s forecast scenarios have varying depictions of economic performance as compared to the baseline. Consistent with the prior quarter, management determined that assumptions provided for in the downside slower near-term growth/mild recessionary scenario (S-2) to be more likely than the baseline scenario; as such, the S-2 scenario was given a 75% probability weighting in our allowance for credit losses calculation at September 30, 2022. The S-2 scenario assumes that the conflict between

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Russia and Ukraine spans longer than anticipated in the baseline scenario and results in longer and larger interruption of global commodity supply; in turn, supply chain issues worsen, increasing shortages of affected goods and further boosting inflation. The Federal Reserve would react with a more aggressive approach than assumed in the baseline scenario, generating greater corrections in equity and housing markets and declines in spending. As such, the S-2 scenario incorporates a mild recession beginning in the fourth quarter of 2022, spanning three quarters, with a peak-to-trough in GDP decline of about 1.4%. Further, the S-2 scenario assumes that unemployment rate averages 4.0% in 2022, 6.1% in 2023 and 4.9% in 2024, with the return to full employment not occurring until the third quarter of 2024 and that an increase in the number of COVID-19 cases, hospitalizations and deaths will impede growth in spending on air travel, retail and hotels.

 

At September 30, 2022, the credit loss outlook for our portfolio as a whole was comparatively consistent with the prior period. To-date, our asset quality metrics have been relatively stable, with modest growth in commercial criticized loans, little change in nonperforming loans and only minimal credit losses. We continue to closely monitor our portfolio for customers that are sensitive to prolonged inflation and the rising interest rate environment. We expect slower loan growth in the fourth quarter when compared to the third quarter, reflecting slowing demand and a focus on lending to resilient borrowers in light of current economic pressures. We also expect a typical seasonal uptick in deposits during the fourth quarter.

 

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. While uncertainty over the consequences of these actions remains, we expect continued interest rate increases will contribute favorably to our net interest income and net interest margin and overall operating results.

 

Highlights of the Third Quarter 2022

We reported net income for the third quarter of 2022 of $135.4 million, or $1.55 per diluted common share, compared to $121.4 million, or $1.38 per diluted common share, in the second quarter of 2022 and $129.6 million, or $1.46 per diluted common share, in the third quarter of 2021. There were no nonoperating items in the third and second quarters of 2022. There was $1.4 million, or $0.01 per share after-tax, of net nonoperating income in the third quarter of 2021, attributable to a gain on the sale of the remaining Hancock Horizon funds and a severance expense reversal, partially offset by hurricane-related expenses.

Third quarter 2022 results compared to second quarter 2022:

 

 

The results for the third quarter of 2022 were one of the best in our Company’s history. We experienced strong loan growth of $739.5 million across our footprint and lines of business. The rising interest rate environment contributed to a $27.9 million increase in pre-provision net revenue and a 50 basis point expansion of our net interest margin. Our asset quality metrics remain near historically low levels, our capital levels are sound, and we once again lowered our efficiency ratio that remains well below our target of 55%. We are mindful of macroeconomic trends that could impact us and believe that we are well positioned should a recessionary period begin.

 

We continue to invest in new bankers across our footprint, adding a total of five during the third quarter to markets in Dallas, San Antonio, Nashville and Tampa. Technology enhancement also continues to be a focus as we strive to improve the customer experience and improve shareholder value.

 

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Consolidated Financial Results

 

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

 

	Three Months Ended																				Nine Months Ended
(in thousands, except per share data)	September 30, 2022				June 30, 2022				March 31, 2022				December 31, 2021				September 30, 2021				September 30, 2022				September 30, 2021
Income Statement Data:
Interest income	$		299,737		$		254,864		$		236,786		$		238,756		$		244,417		$		791,387		$		743,502
Interest income (te) (a)			302,340				257,449				239,331				241,391				247,185				799,120				752,046
Interest expense			19,430				9,132				8,323				9,460				9,708				36,885				39,563
Net interest income (te)			282,910				248,317				231,008				231,931				237,477				762,235				712,483
Provision for credit losses			1,402				(9,761	)			(22,527	)			(28,399	)			(26,955	)			(30,886	)			(49,095	)
Noninterest income			85,337				85,653				83,432				89,612				93,361				254,422				274,722
Noninterest expense			193,502				187,097				179,939				182,462				194,703				560,538				624,545
Income before income taxes			170,740				154,049				154,483				164,845				160,322				479,272				403,211
Income tax expense			35,351				32,614				31,005				27,102				30,740				98,970				77,739
Net income	$		135,389		$		121,435		$		123,478		$		137,743		$		129,582		$		380,302		$		325,472
For informational purposes - included above, pre-tax
Nonoperating item included in noninterest income:
Gain on hurricane-related insurance settlement	$		—		$		—		$		—		$		3,600		$		—		$		—		$		—
Gain on sale of Hancock Horizon Funds			—				—				—				—				4,576				—				4,576
Gain on sale of Mastercard Class B common stock			—				—				—				—				—				—				2,800
Nonoperating items included in noninterest expense:
Efficiency initiatives			—				—				—				(649	)			(1,867	)			—				38,945
Hurricane related expenses			—				—				—				(680	)			5,092				—				5,092
Loss on redemption of subordinated notes			—				—				—				—				—				—				4,165
Balance Sheet Data:
Period end balance sheet data
Loans	$		22,585,585		$		21,846,068		$		21,323,341		$		21,134,282		$		20,886,015		$		22,585,585		$		20,886,015
Earning assets			31,213,449				31,292,910				32,997,323				33,610,435				32,348,036				31,213,449				32,348,036
Total assets			34,567,242				34,637,525				36,317,291				36,531,205				35,318,308				34,567,242				35,318,308
Noninterest-bearing deposits			14,290,817				14,676,342				14,976,670				14,392,808				13,653,376				14,290,817				13,653,376
Total deposits			28,951,274				29,866,432				30,499,709				30,465,897				29,208,157				28,951,274				29,208,157
Stockholders' equity			3,180,439				3,349,723				3,450,951				3,670,352				3,629,766				3,180,439				3,629,766
Average balance sheet data
Loans	$		22,138,709		$		21,657,528		$		21,122,038		$		20,770,130		$		20,941,173		$		21,643,149		$		21,355,483
Earning assets			31,783,801				32,780,813				33,201,926				32,913,659				32,097,381				32,583,652				31,773,473
Total assets			34,377,773				35,380,247				36,003,803				35,829,027				35,207,960				35,247,985				34,821,420
Noninterest-bearing deposits			14,323,646				14,655,800				14,363,324				14,126,335				13,535,961				14,447,445				13,053,586
Total deposits			29,180,626				29,979,940				30,029,793				29,750,665				29,237,306				29,727,009				28,872,317
Stockholders' equity			3,405,463				3,383,789				3,607,061				3,642,003				3,606,087				3,464,699				3,512,651
Common Shares Data:
Earnings per share - basic	$		1.56		$		1.39		$		1.40		$		1.56		$		1.46		$		4.35		$		3.67
Earnings per share - diluted			1.55				1.38				1.40				1.55				1.46				4.33				3.67
Cash dividends per common share			0.27				0.27				0.27				0.27				0.27				0.81				0.81
Book value per share (period end)			37.12				39.08				39.91				42.31				41.81				37.12				41.81
Tangible book value per share (period end)			26.44				28.37				29.25				31.64				31.10				26.44				31.10
Weighted average number of shares - diluted			86,020				86,354				86,936				87,132				87,006				86,439				86,951
Period end number of shares			85,686				85,714				86,460				86,749				86,823				85,686				86,823

 

 

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	Three Months Ended																				Nine Months Ended
($ in thousands)	September 30, 2022				June 30, 2022				March 31, 2022				December 31, 2021				September 30, 2021				September 30, 2022				September 30, 2021
Performance and other data:
Return on average assets			1.56	%			1.38	%			1.39	%			1.53	%			1.46	%			1.44	%			1.25	%
Return on average common equity			15.77	%			14.39	%			13.88	%			15.00	%			14.26	%			14.68	%			12.39	%
Return on average tangible common equity			21.58	%			19.77	%			18.66	%			20.13	%			19.22	%			19.98	%			16.89	%
Tangible common equity (b)			6.73	%			7.21	%			7.15	%			7.71	%			7.85	%			6.73	%			7.85	%
Tangible common equity Tier 1 (CET1) ratio			11.10	%			11.08	%			11.12	%			11.09	%			11.17	%			11.10	%			11.17	%
Net interest margin (te)			3.54	%			3.04	%			2.81	%			2.80	%			2.94	%			3.13	%			3.00	%
Noninterest income as a percentage of total revenue (te)			23.17	%			25.65	%			26.53	%			27.87	%			28.22	%			25.03	%			27.83	%
Efficiency ratio (c )			51.62	%			54.95	%			56.03	%			56.57	%			57.44	%			54.08	%			57.52	%
Allowance for credit loss as a percentage of total loans			1.50	%			1.55	%			1.63	%			1.76	%			1.92	%			1.50	%			1.92	%
Annualized net charge-offs to average loans			0.02	%			(0.01	)%			0.01	%			0.01	%			0.03	%			0.01	%			0.19	%
Nonperforming assets as a percentage of loans, ORE and foreclosed assets			0.19	%			0.20	%			0.24	%			0.32	%			0.34	%			0.19	%			0.34	%
FTE headcount			3,607				3,594				3,543				3,486				3,429				3,607				3,429
Reconciliation of operating revenue and operating pre-provision net revenue (non-GAAP measure) (te) (d)
Net interest income	$		280,307		$		245,732		$		228,463		$		229,296		$		234,709		$		754,502		$		703,939
Noninterest income			85,337				85,653				83,432				89,612				93,361				254,422				274,722
Total revenue			365,644				331,385				311,895				318,908				328,070				1,008,924				978,661
Taxable equivalent adjustment			2,603				2,585				2,545				2,635				2,768				7,733				8,544
Nonoperating revenue			—				—				—				(3,600	)			(4,576	)			—				(7,376	)
Total revenue (te)	$		368,247		$		333,970		$		314,440		$		317,943		$		326,262		$		1,016,657		$		979,829
Noninterest expense			(193,502	)			(187,097	)			(179,939	)			(182,462	)			(194,703	)			(560,538	)			(624,545	)
Nonoperating expense			—				—				—				(1,329	)			3,225				—				48,202
Operating pre-provision net revenue (te)	$		174,745		$		146,873		$		134,501		$		134,152		$		134,784		$		456,119		$		403,486

 

 

RESULTS OF OPERATIONS

Net Interest Income

 

Net interest income (te) for the third quarter of 2022 was $282.9 million, up $34.6 million, or 14%, compared to the second quarter of 2022 and up $45.4 million, or 19%, from the third quarter of 2021.

 

The increase in net interest income (te) compared to the second quarter of 2022 is largely attributable to the impact of the recent Federal Reserve interest rate increases, with variable-rate assets repricing, new loans and securities added at higher yields, and a lag in increasing our deposit rate offerings. Net interest income further benefitted from an additional accrual day during the third quarter ($2.0 million) and lower net premium/discount amortization on the securities portfolio ($1.9 million). These improvements were partially offset by lower levels of the accretion of PPP loan fees ($0.8 million) and a 13 bp increase in the cost of funds.

 

The net interest margin for the third quarter of 2022 was 3.54%, up 50 bps from 3.04% in the second quarter of 2022. The widening of net interest margin from the prior quarter was largely due to the series of Federal Reserve interest rate increases, coupled with a favorable shift in the earning asset mix, including average core loan growth of $603 million, securities portfolio growth of $198 million and a $1.7 billion reduction in lower-yielding short-term investments. Approximately 58% of our loan portfolio is tied to variable rates, including hybrid adjustable rate mortgages (ARMs). These improvements were partially offset by a 13 bp increase in the cost of funds and a 1 bp decline due to the impact of PPP loan forgiveness, resulting from a $122 million decrease in average PPP loans during the third quarter. The increase in cost of funds reflects increases in deposit costs as we began to increase rates to remain competitive, and in short-term borrowing costs as we entered into new variable-rate FHLB advances during the quarter.

 

The $45.4 million increase in net interest income (te) compared to the third quarter of 2021 is primarily attributable to a $55.1 million increase in interest income (te), partially offset by a $9.7 million increase in interest expense. The increase in interest income is largely due to the interest rate increases, a favorable change in the earning asset mix, and a $4.0 million decrease in premium amortization on the securities portfolio. The favorable change in the earning asset mix reflects a $1.2 billion increase in loans, $0.8 billion growth in the securities portfolio and a $2.3 billion decrease in short-term investments. The increase in interest income was partially offset by $13.4 million of lower PPP loan fees, a $1.1 million decrease in nonaccrual interest recoveries and a $0.4 million decrease in purchase accounting discount accretion. The increase in interest expense was driven by both a 23 bp increase in the cost of deposits, as interest

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rate offerings were increased to remain competitive, and a 97 bp increase in the cost of borrowings due to a change in mix from fixed-rate to variable-rate instruments within FHLB borrowings.

 

The net interest margin was up 60 bps compared to the third quarter of 2021 as a result of the rising interest rate environment and a more favorable mix of average earning assets. Compared to the third quarter of 2021, the yield on earning assets was up 72 bps to 3.78%, while the cost of funds increased 12 bps to 0.24%.

 

Net interest income (te) for the nine months ended September 30, 2022 was $762.2 million, up $49.8 million, or 7%, from the same period in 2021. The increase is attributable to an increase in interest income of $47.1 million and a decrease in interest expense of $2.7 million. Interest income (te) increased largely due to the impact of the series of interest rate increases upon new and repricing earning assets and a favorable change in the earning asset mix and, to a lesser extent, a decrease of $8.9 million of net premium amortization on the securities portfolio. The impact was partially offset by a $38.4 million reduction of PPP fees and decreases of $2.7 million of purchase accounting discount accretion and $7.6 million of nonaccrual interest recoveries. The decrease in interest expense is primarily due to lower cost of funds, driven by an improved mix of deposits and a decline in higher-cost borrowings. The net interest margin for the nine months ended September 30, 2022 was 3.13%, up 13 bps compared to the same period in 2021. The increase is reflective of an increase in the yield on average earning assets of 12 bps, primarily driven by higher interest rates, an improved earning asset mix, and a 2 bp reduction in the cost of funds.

 

We expect to see further widening of our net interest margin in the near term, but at a slower pace than experienced in the third quarter. We remain asset sensitive and expect to continue to benefit from additional Federal Reserve interest rate increases, our favorable mix of deposits and controlled funding costs.

 

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

 

		Three Months Ended
		September 30, 2022												June 30, 2022												September 30, 2021
(dollars in millions)		Volume				Interest (d)				Rate				Volume				Interest (d)				Rate				Volume				Interest (d)				Rate
Average earning assets
Commercial & real estate loans (te) (a)		$	17,855.9			$	203.0				4.51	%		$	17,562.0			$	165.9				3.79	%		$	16,918.4			$	150.3				3.52	%
Residential mortgage loans			2,713.4				22.7				3.34	%			2,534.6				21.1				3.33	%			2,376.5				21.5				3.63	%
Consumer loans			1,569.4				23.2				5.87	%			1,560.9				19.6				5.03	%			1,646.3				20.4				4.90	%
Loan fees & late charges			—				1.3				0.00	%			—				1.9				0.00	%			—				13.5				0.00	%
Total loans (te) (b)			22,138.7				250.2				4.49	%			21,657.5				208.5				3.86	%			20,941.2				205.7				3.90	%
Loans held for sale			35.2				0.4				4.48	%			48.1				0.4				3.69	%			82.6				0.6				3.06	%
US Treasury and government agency securities			420.3				2.0				1.94	%			387.6				1.7				1.79	%			395.6				1.6				1.59	%
Mortgage-backed securities and    collateralized mortgage obligations			7,822.4				40.9				2.09	%			7,658.2				36.3				1.90	%			7,033.7				31.4				1.79	%
Municipals (te)			911.5				6.8				2.97	%			912.4				6.8				2.96	%			925.0				6.8				2.93	%
Other securities			23.3				0.2				3.54	%			21.2				0.2				3.34	%			14.5				0.1				3.56	%
Total securities (te) (c)			9,177.5				49.9				2.17	%			8,979.4				45.0				2.00	%			8,368.8				39.9				1.91	%
Total short-term investments			432.4				1.8				1.69	%			2,095.8				3.5				0.67	%			2,704.8				1.0				0.15	%
Total earning assets (te)		$	31,783.8			$	302.3				3.78	%		$	32,780.8			$	257.4				3.15	%		$	32,097.4			$	247.2				3.06	%
Average interest-bearing liabilities
Interest-bearing transaction and savings deposits		$	11,164.4			$	4.3				0.15	%		$	11,412.9			$	1.3				0.05	%		$	11,341.0			$	1.7				0.06	%
Time deposits			954.4				0.4				0.18	%			1,005.2				0.4				0.15	%			1,274.9				1.0				0.32	%
Public funds			2,738.2				8.9				1.28	%			2,906.0				3.3				0.46	%			3,085.4				2.3				0.30	%
Total interest-bearing deposits			14,857.0				13.6				0.36	%			15,324.1				5.0				0.13	%			15,701.3				5.0				0.13	%
Repurchase agreements			516.6				0.2				0.13	%			523.0				0.1				0.08	%			509.0				0.1				0.08	%
Other short-term borrowings			434.0				2.5				2.36	%			701.2				0.9				0.49	%			1,103.3				1.4				0.49	%
Long-term debt			238.4				3.1				5.20	%			240.3				3.1				5.20	%			248.0				3.2				5.08	%
Total borrowings			1,189.0				5.8				1.96	%			1,464.5				4.1				1.12	%			1,860.3				4.7				0.99	%
Total interest-bearing liabilities			16,046.0				19.4				0.48	%			16,788.6				9.1				0.22	%			17,561.6				9.7				0.22	%
Net interest-free funding sources			15,737.8												15,992.2												14,535.8
Total cost of funds		$	31,783.8			$	19.4				0.24	%		$	32,780.8			$	9.1				0.11	%		$	32,097.4			$	9.7				0.12	%
Net interest spread (te)						$	282.9				3.30	%						$	248.3				2.93	%						$	237.5				2.83	%
Net interest margin		$	31,783.8			$	282.9				3.54	%		$	32,780.8			$	248.3				3.04	%		$	32,097.4			$	237.5				2.94	%

 

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		Nine Months Ended
		September 30, 2022												September 30, 2021
(dollars in millions)		Volume				Interest (d)				Rate				Volume				Interest (d)				Rate
Average earning assets
Commercial & real estate loans (te) (a)		$	17,515.1			$	519.3				3.96	%		$	17,160.4			$	455.4				3.55	%
Residential mortgage loans			2,564.1				64.8				3.37	%			2,472.5				70.1				3.78	%
Consumer loans			1,563.9				61.2				5.23	%			1,722.6				62.7				4.87	%
Loan fees & late charges			—				7.6				0.00	%			—				43.4				0.00	%
Total loans (te) (b)			21,643.1				652.9				4.03	%			21,355.5				631.6				3.95	%
Loans held for sale			49.1				1.5				4.17	%			94.6				2.0				2.76	%
US Treasury and government agency securities			402.0				5.4				1.79	%			301.0				3.7				1.66	%
Mortgage-backed securities and    collateralized mortgage obligations			7,612.7				111.7				1.96	%			6,770.4				91.8				1.81	%
Municipals (te)			913.5				20.2				2.96	%			929.8				20.4				2.93	%
Other securities			21.8				0.5				3.40	%			12.8				0.4				3.73	%
Total securities (te) (c)			8,950.0				137.8				2.05	%			8,014.0				116.3				1.94	%
Total short-term investments			1,941.4				6.9				0.47	%			2,309.4				2.1				0.12	%
Total earning assets (te)		$	32,583.6			$	799.1				3.28	%		$	31,773.5			$	752.0				3.16	%
Average interest-bearing liabilities
Interest-bearing transaction and savings deposits		$	11,332.6			$	6.7				0.08	%		$	11,152.9			$	7.8				0.09	%
Time deposits			1,015.5				1.5				0.19	%			1,497.8				5.7				0.51	%
Public funds			2,931.4				14.2				0.65	%			3,168.0				7.8				0.33	%
Total interest-bearing deposits			15,279.5				22.4				0.20	%			15,818.7				21.3				0.18	%
Repurchase agreements			542.1				0.3				0.09	%			549.3				0.5				0.12	%
Other short-term borrowings			743.4				4.8				0.86	%			1,104.3				4.1				0.49	%
Long-term debt			240.2				9.4				5.19	%			338.4				13.6				5.37	%
Total borrowings			1,525.7				14.5				1.27	%			1,992.0				18.2				1.22	%
Total interest-bearing liabilities			16,805.2				36.9				0.29	%			17,810.7				39.5				0.30	%
Net interest-free funding sources			15,778.4												13,962.8
Total cost of funds		$	32,583.6			$	36.9				0.15	%		$	31,773.5			$	39.5				0.17	%
Net interest spread (te)						$	762.2				2.99	%						$	712.5				2.87	%
Net interest margin		$	32,583.6			$	762.2				3.13	%		$	31,773.5			$	712.5				3.00	%

 

 

 

Provision for Credit Losses

 

During the third quarter of 2022, we recorded a provision for credit losses of $1.4 million, compared to negative provisions for credit losses of $9.8 million in the second quarter of 2022 and $27.0 million in the third quarter of 2021. The third quarter of 2022 provision included net charge-offs of $1.3 million and a reserve build of $0.1 million, compared to net recoveries of $0.7 million and a reserve release of $9.1 million in the second quarter of 2022, and net charge-offs of $1.8 million and a reserve release of $28.8 million in the third quarter of 2021. Following the significant reserve build in 2020 in response to the economic fallout resulting from the COVID-19 pandemic, improvement in overall credit performance and in economic indicators in 2021 and in the first half of 2022 allowed for the gradual release of reserves.

 

For the nine months ended September 30, 2022, we recorded a negative provision for credit losses of $30.9 million, compared to a negative provision of $49.1 million for the nine months ended September 30, 2021. Included in the negative provision for the nine months ended September 30, 2022 was a reserve release of $31.8 million and net charge-offs of $0.9 million, or 0.01% of average total loans on an annualized basis, compared to a reserve release of $79.6 million and net charge-offs of $30.5 million, or 0.19% in the

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same period in 2021. The year-to-date reserve releases in both periods are also reflective of improvements in economic indicators in our markets and overall credit performance that followed the economic fallout of the COVID-19 pandemic experienced in 2020.

 

Net charge-offs in the third quarter of 2022 were $1.3 million, or 0.02% of average total loans on an annualized basis, compared to net recoveries $0.7 million, or (0.01)% in the second quarter of 2022, and net charge-offs of $1.8 million, or 0.03%, in the third quarter of 2021. The third quarter of 2022 included net recoveries of $0.3 million in the commercial portfolio and $0.9 million in the residential mortgage portfolio, and $2.5 million of net charge-offs in the consumer portfolio. The second quarter of 2022 included net recoveries of $1.6 million in the commercial portfolio and $0.4 million in the residential mortgage portfolio, and $1.4 million of net charge-offs in the consumer portfolio. The third quarter of 2021 included $0.5 million of net charge-offs in the commercial portfolio and $1.7 million in the consumer portfolio, and $0.4 million of net recoveries in the residential mortgage portfolio. For the nine months ended September 30, 2022, net charge-offs of $0.9 million is attributable to consumer net charge-offs of $5.0 million, largely offset by net recoveries in the commercial portfolio totaling $2.7 million and in the residential mortgage portfolio totaling $1.4 million. Net charge-off for the nine months ended September 30, 2021 totaled $30.5 million, including $26.0 million of net charge-offs in the commercial portfolio (including $14.5 million of energy related charge-offs) and $5.2 million of net charge-offs in the consumer portfolio, partially offset by net recoveries of $0.7 million in the residential mortgage portfolio.

 

We expect to see low to modest charge-offs and provision for credit losses in the fourth quarter of 2022. 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 $85.3 million for the third quarter of 2022, down $0.3 million, or less than 1%, from the second quarter of 2022, and down $8.0 million, or 9%, from the third quarter of 2021. There were no nonoperating items included in noninterest income in the third and second quarters of 2022. There was $4.6 million of nonoperating noninterest income in the third quarter of 2021 attributable to a gain on the sale of Hancock Horizon Funds. Excluding this item, operating noninterest income decreased $3.4 million, or 4%, from the same quarter last year. The decrease in noninterest income from the second quarter of 2022 was largely attributable to a decrease in investment and annuity fees and insurance commissions, income from derivatives, and trust fees, partially offset by an increase in net service charges on deposit accounts. The decrease in operating noninterest income from the third quarter of 2021 is largely due to a decline in secondary mortgage market operations income, miscellaneous income, income from derivatives, and investment and annuity fees and insurance commissions, partially offset by improvements in service charges on deposit accounts, and bank card and ATM fees.

 

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

 

		Three Months Ended												Nine Months Ended
		September 30,				June 30,				September 30,				September 30,				September 30,
(in thousands)		2022				2022				2021				2022				2021
Service charges on deposit accounts		$	23,272			$	20,495			$	21,159			$	65,441			$	59,686
Trust fees			16,048				17,309				16,041				48,636				47,351
Bank card and ATM fees			21,412				21,870				19,833				63,678				58,436
Investment and annuity fees and insurance commissions			6,492				8,001				7,167				21,920				21,956
Secondary mortgage market operations			3,284				2,990				6,972				10,020				31,238
Income from bank-owned life insurance			4,784				4,273				3,907				12,602				14,535
Credit related fees			2,628				2,543				2,568				7,840				8,383
Income from customer and other derivatives			1,309				2,728				2,970				6,386				11,755
Securities transactions, net			—				—				—				(87	)			333
Gain on sale of Hancock Horizon Funds			—				—				4,576				—				4,576
Gain on Sale of Mastercard Class B common stock			—				—				—				—				2,800
Other miscellaneous			6,108				5,444				8,168				17,986				13,673
Total noninterest income		$	85,337			$	85,653			$	93,361			$	254,422			$	274,722

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 $23.3 million for the third quarter of 2022, up $2.8 million, or 14%, from the second quarter of 2022, and up $2.1 million, or 10%, from the third quarter of

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2021. The increase from the second quarter of 2022 is primarily attributable to a higher level of consumer account fees, and to a lesser degree, higher business account fees. The increase from the third quarter of 2021 was largely due to an increase in business account fees, which include activity-related service charges, and higher consumer-related account fees. As noted in prior filings, we have announced plans to eliminate consumer (retail) non-sufficient funds fees and certain overdraft fees. The elimination of these fees is targeted to begin in December 2022. We expect these fees to decrease revenue in this line item, on average, by approximately $2 million to $3 million per quarter in 2023, with an annual estimated impact of approximately $10 million to $11 million. We believe these changes are in line with the evolving retail banking industry, as traditional banks adjust products to meet consumer needs and provide them with the tools needed to help manage their overall finances. We expect to see improving account acquisition rates in 2023 with this change and as we launch additional retail products and features.

 

Trust fee income represents revenue generated from a full range of trust services, including asset management and custody services provided to individuals, businesses and institutions. Trust fees decreased $1.3 million, or 7%, from the prior quarter and were virtually flat when compared to the same quarter a year ago. The decrease compared to the prior quarter is primarily due to seasonal tax preparation and other one-time corporate trust fees recorded during the second quarter.

 

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 $21.4 million for the third quarter of 2022, down $0.5 million, or 2%, from the second quarter of 2022 and up $1.6 million, or 8%, from the same quarter last year. The decrease from the prior quarter was largely attributable to declines in debit card, merchant and ATM fees. The increase from the same quarter last year was largely attributable to an increase in commercial credit card fees, with an increase in both transaction volume and amounts, as well as increases in consumer credit card fees, debit card fees, and to a lesser extent, ATM fees and merchant fees, as the prior comparative period was negatively impacted by Hurricane Ida disruptions.

 

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, decreased $1.5 million, or 19%, compared to the second quarter of 2022 and decreased $0.7 million, or 9%, compared to the same quarter a year ago. The decreases compared to both the prior quarter and the same quarter last year were largely attributable to a temporary business disruption as a result of conversion to an outsourced sales and service platform that began in mid-August 2022. The variance from the third quarter of 2021 was also favorably impacted by better overall market conditions.

 

Income from secondary mortgage market operations is comprised of income produced from the origination and sales of residential mortgage loans in the secondary market. We offer a full range of mortgage products to our customers and typically sell longer-term fixed-rate loans while retaining the majority of adjustable-rate loans, as well as loans generated through programs to support customer relationships. Income from secondary mortgage market operations was $3.3 million in the third quarter of 2022, up $0.3 million, or 10%, from the second quarter of 2022 and down $3.7 million, or 53%, from the third quarter of 2021. The decrease from the same quarter last year is largely attributable to the rising interest rate environment, with both a decline in refinancing activity and a lower percentage of originated loans sold in the secondary market, as we are retaining a higher volume of mortgage loans in our held for investment portfolio. The level of mortgage applications during the third quarter of 2022 were up 11% compared to the prior quarter and down approximately 30% when compared to the third quarter of 2021. The percentage of mortgage loans sold in the secondary market to total originations (as opposed to those held in our portfolio), was 21% in the third quarter of 2022, relatively flat when compared to the prior quarter, but down from 45% in the same quarter last year. Secondary mortgage market operations income will vary based on application volume and pull through rates. We expect current levels of quarterly income from secondary mortgage market operations to continue in the near-term as the demand for mortgage loans and refinancing slows in the rising interest rate environment.

 

Income from bank-owned life insurance (BOLI) is typically generated through insurance benefit proceeds as well as the growth of the cash surrender value of insurance contracts held. Income from bank-owned life insurance was $4.8 million for the third quarter of 2022, up $0.5 million, or 12%, from the second quarter of 2022, and up $0.9 million, or 22%, from the third quarter of 2021. The increase from the prior quarter is primarily attributable to an increase in benefit proceeds, and the increase from the same quarter last year is due to both an increase in benefit proceeds and a volume-driven increase attributable to the purchase of additional policies during the first quarter of 2022.

 

Credit-related fees include fees assessed on letters of credit and unused portions of loan commitments. Credit-related fees were $2.6 million for the third quarter of 2022, up $0.1 million, or 3%, from the second quarter of 2022 and up $0.1 million, or 2%, from the third quarter of 2021. The increase from the prior quarter is attributable to an increase in both letter of credit fees and unused commitment fees, which will vary with credit line utilization. The increase compared to the same quarter last year was due to higher letter of credit fees.

 

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Income from customer and other derivatives is largely derived from our customer interest rate derivative program and totaled $1.3 million for the third quarter of 2022, compared to $2.7 million in the second quarter of 2022 and $3.0 million in the third quarter of 2021. The decrease from both comparative periods is primarily attributable to the impact of interest rate increases upon the customer derivative program, as the rate increases have lessened the demand for variable rate loans and, in turn, the demand for associated derivative instruments. Derivative income can be volatile and is dependent upon the composition of the portfolio, volume and mix of sales activity and market value adjustments due to market interest rate movement.

 

Other miscellaneous income is comprised of various items, including income from small business investment companies (SBIC), FHLB stock dividends and syndication fees. Other miscellaneous income (excluding nonoperating items) totaled $6.1 million, up $0.7 million compared to the second quarter of 2022 and down $2.1 million compared to the third quarter of 2021. The increase compared to the prior period was largely driven by an increase in Small Business Investment Company (SBIC) income, partially offset by a decrease in gains on sales of assets. The decrease compared to the same quarter last year is primarily attributable to a decrease in gain on sales of assets, partially offset by an increase in SBIC income and syndication fees.

 

Noninterest income for the first nine months of 2022 was $254.4 million, down $20.3 million or 7%, from the same period last year. There were no nonoperating income items in the nine months ended September 30, 2022 compared to $7.4 million in the same period in 2021, which were attributable to gains on the sale of Mastercard Class B stock and the sale of the Hancock Horizon funds. Excluding the nonoperating items, operating noninterest income was down $12.9 million, or 5%, compared to the same period in 2021. The decline in fee income is largely related to a $21.2 million, or 68%, decrease in secondary mortgage market operations income, the result of both a decrease in demand for refinancing and a higher rate of retention of residential mortgage loans, and a $5.4 million, or 46%, decline in derivative income, as recent interest rate increases have affected the demand for interest rate swap arrangements. BOLI income also declined $1.9 million, or 13%. These decreases were partially offset with increases in SBIC income of $6.4 million, service charges of $5.8 million, or 10%, bank card and ATM fees which were up $5.2 million, or 9%, and trust fees, which were up $1.3 million, or 3%.

 

We expect our fourth quarter 2022 noninterest income to be down slightly linked quarter, with the full-year 2022 noninterest income, excluding nonoperating items, to decline 3% to 4%, from the 2021 level of $353.4 million, due largely to the decline in secondary mortgage market operations income.

 

 

Noninterest Expense

 

Noninterest expense for the third quarter of 2022 was $193.5 million, up $6.4 million, or 3%, from the second quarter of 2022, and down $1.2 million, or 1%, from the third quarter of 2021. There were no nonoperating noninterest expense items in the third and second quarters of 2022 and $3.2 million of net nonoperating expense items in the third quarter of 2021, that included hurricane-related expenses partially offset by a severance expense reversal related to internally placed employees. Excluding the nonoperating items, operating noninterest expense was up $2.0 million, or 1%, from the same quarter last year. The increase in noninterest expense from the second quarter was largely driven by higher personnel expense, miscellaneous expense and professional expense, partially offset by gains on other real estate and foreclosed assets and decreases in corporate value, franchise and other non-income taxes. Compared to the same quarter last year, the increase in operating noninterest expense was due to higher personnel expense and data processing expense, partially offset by a decrease in professional services expense and gains on other real estate and foreclosed assets. A more detailed discussion of the variances follows.

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

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		Three Months Ended												Nine Months Ended
		September 30,				June 30,				September 30,				September 30,				September 30,
(in thousands)		2022				2022				2021				2022				2021
Compensation expense		$	98,985			$	94,155			$	92,601			$	279,133			$	289,034
Employee benefits			19,937				21,015				19,377				62,355				85,213
Personnel expense			118,922				115,170				111,978				341,488				374,247
Net occupancy expense			12,411				12,225				11,974				36,316				37,839
Equipment expense			4,527				4,703				4,894				14,097				14,067
Data processing expense			26,768				26,169				24,766				77,176				71,598
Professional services expense			9,679				8,423				12,748				25,895				37,472
Amortization of intangible assets			3,428				3,586				4,082				10,762				12,746
Deposit insurance and regulatory fees			3,596				3,503				3,680				10,839				10,042
Other real estate and foreclosed asset expense			(1,782	)			(88	)			(376	)			(3,634	)			(456	)
Corporate value, franchise and other non-income taxes			4,010				4,558				3,414				12,816				11,300
Advertising			3,533				3,512				3,638				10,211				8,400
Telecommunications and postage			3,027				2,971				3,087				8,923				9,568
Entertainment and contributions			2,231				2,440				2,280				7,632				5,214
Tax credit investment amortization			1,004				1,004				1,112				3,012				3,337
Printing and supplies			971				918				914				2,892				2,833
Travel expense			1,239				1,123				765				3,022				1,789
Net other retirement expense			(7,570	)			(7,781	)			(7,294	)			(22,123	)			(20,645	)
Loss on extinguishment of debt			—				—				—				—				4,165
Loss on facilities and equipment from consolidation			—				—				—				—				15,462
Other miscellaneous			7,508				4,661				13,041				21,214				25,567
Total noninterest expense		$	193,502			$	187,097			$	194,703			$	560,538			$	624,545

 

Nonoperating Expenses (included above)

 

		Three Months Ended												Nine Months Ended
		September 30,				June 30,				September 30,				September 30,
(in thousands)		2022				2022				2021				2022				2021
Nonoperating expense
Compensation expense		$	—			$	—			$	(1,862	)		$	—			$	3,299
Employee benefits			—				—				3				—				20,192
Personnel expense			—				—				(1,859	)			—				23,491
Net occupancy			—				—				2				—				2
Equipment expense			—				—				2				—				2
Advertising			—				—				2				—				2
Entertainment and contributions			—				—				174				—				174
Travel expense			—				—				5				—				5
Printing and supplies			—				—				22				—				22
Loss on extinguishment of debt			—				—				—				—				4,165
Loss on facilities and equipment from consolidation			—				—				—				—				15,462
Other miscellaneous			—				—				4,877				—				4,877
Total nonoperating expenses		$	—			$	—			$	3,225			$	—			$	48,202

 

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 $118.9 million for the third quarter of 2022, up $3.8 million, or 3%, compared to the prior quarter and up $6.9 million, or 6%, compared to the same quarter last year. Excluding the third quarter 2021 nonoperating items noted above, personnel expense was up $5.1 million, or 4%. The increase from the prior quarter was largely due to increased performance-based incentives, an additional work day, and increased headcount, including new banker hires. The increase from the same quarter last year was largely due to annual merit increases, higher performance based incentives, and increased headcount, partially offset by the impact of efficiency measures implemented in early 2021.

 

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Occupancy and equipment expenses are primarily composed of lease expenses, depreciation, maintenance and repairs, rent, taxes, and other equipment expenses. Occupancy and equipment expenses totaled $16.9 million in the third quarter of 2022, virtually flat compared to the prior quarter, and up $0.1 million, or less than 1%, from the same quarter last year.

 

Data processing expense includes expenses related to third party technology processing and servicing costs, technology project costs and fees associated with bank card and ATM transactions. Data processing expense was $26.8 million for the third quarter of 2022, up $0.6 million, or 2%, compared to the second quarter of 2022, and up $2.0 million, or 8%, compared to the third quarter of 2021. The increase from both the second quarter of 2022 and the third quarter of 2021 is largely attributable to implementation of technology enhancement projects, and the variance from the same quarter last year is also due in part to processing expense related to the increase in bank card activity.

 

Professional services expense for the third quarter of 2022 totaled $9.7 million, up $1.3 million, or 15%, compared to the previous quarter and down $3.1 million, or 24%, from the third quarter of 2021. The increase from the second quarter of 2022 is primarily due to higher consulting expense related to various ongoing projects. The decrease from the same quarter last year is largely attributable to lower consulting expense primarily related to PPP support, as well as a reduction in legal fees.

 

Deposit insurance and regulatory fees totaled $3.6 million, up $0.1 million, or 3%, from the second quarter of 2022 and down $0.1 million, or 2%, from the third quarter of 2021. The modest variances from both comparative periods reflect relatively stable FDIC risk-based assessments. In October 2022, the FDIC adopted a final rule to increase the initial base deposit insurance assessment schedules uniformly by 2 bps beginning with the first quarterly assessment period of 2023. The increased assessment is expected to remain in effect until the Deposit Insurance Fund reserve ratio to insured deposits meets the FDIC’s long-term goal for reserve ratios of the deposit insurance fund.

 

Other real estate and foreclosed assets expense reflected net gains of $1.8 million in the third quarter of 2022 compared to net gains of $0.1 million in the second quarter of 2022 and $0.4 million in the third quarter of 2021. The increase when compared to both periods is due largely to a $1.6 million gain on the sale of equity interest received in satisfaction of debt that was sold in the third quarter of 2022. 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 third quarter of 2022 totaled $4.0 million, down $0.5 million, or 12%, from the prior quarter and up $0.6 million, or 17%, compared to the same quarter last year. The decrease from the second quarter of 2022 is largely attributable to a decline in bank share tax expense, primarily the result of updated assumptions in estimating the assessment. The increase from the same quarter last year is largely due to the bank share tax benefit realized during 2021 from the net loss recorded in 2020.

 

Business development-related expenses (including advertising, travel, entertainment and contributions) totaled $7.1 million for the third quarter of 2022, down $0.1 million, or 1%, from the second quarter of 2022, and up $0.3 million, or 5%, from the third quarter of 2021. The increase over last year was largely due to higher travel expenses.

 

All other expenses, excluding amortization of intangibles and nonoperating items, totaled $4.9 million for the third quarter of 2022, up $3.2 million, or 179%, from the second quarter of 2022, and down $1.0 million, or 17%, from the third quarter of 2021. The variances from both comparative periods are influenced by the level of miscellaneous losses and pension-related other retirement expense and other miscellaneous smaller items.

 

Noninterest expense totaled $560.5 million for the nine months ended September 30, 2022, down $64.0 million, or 10%, from the same period in 2021. The nine months ended September 30, 2021 included $48.2 million of nonoperating expense items, including $38.9 million of cost related to initiatives to improve overall efficiency, $5.1 million of hurricane-related expense and $4.2 million related to the early redemption of subordinated notes. Excluding the nonoperating expenses incurred in 2021, operating expense was down $15.8 million, or 3%. The decline in operating expense was largely due to a $9.3 million, or 2%, decrease in personnel expense due to the impact of the VERIP and reduction in force initiatives completed in 2021, partially offset by new banker hires and other headcount additions, and annual merit increases. Further, professional services expense declined $11.6 million, or 31%, largely due to the lower PPP consulting costs, other real estate expense and foreclosed assets expense declined $3.2 million, and net occupancy and equipment decreased $1.5 million, or 3%. These declines were partially offset by increases in data processing expense, which was up $5.6 million, or 8%, due both to increased card processing activity and expense associated with technology initiatives, and business development-related expense, which was up $5.6 million, or 37%, due in part to investment in our higher growth markets.

 

On a linked-quarter basis, we expect noninterest expense to be up slightly in the fourth quarter 2022, but full-year 2022 noninterest expense to be down slightly from the 2021 level of $760.1 million.

 

 

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Income Taxes

The effective income tax rate for the third quarter of 2022 was approximately 20.7% compared to 21.2% in the second quarter of 2022 and 19.2% in the third quarter of 2021. Fluctuations in the effective tax rate are primarily the result of changes in forecasted pre-tax earnings, largely attributable to rising interest rates. Many factors impact the effective income tax rate including, but not limited to, the level of pre-tax income and relative impact of net tax benefits related to tax credit investments, tax-exempt interest income, bank-owned life insurance, and nondeductible expenses. Based on the current forecast, management expects the effective income tax rate for 2022 to approximate 21%, absent any changes in tax law.

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

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

Based on tax credit investments that have been made to date in 2022, we expect to realize benefits from federal and state tax credits over the next three years totaling $11.2 million, $11.3 million and $8.7 million in 2023, 2024 and 2025, respectively. We intend to continue making investments in tax credit projects. However, our ability to access new credits will depend upon, among other factors, federal and state tax policies and the level of competition for such credits.

 

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

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monitor liquidity risk. The Company has access to sufficient liquidity for cash requirements, both on balance sheet and with $18.1 billion in net available sources of funds at September 30, 2022, summarized as follows:

 

		September 30, 2022
(in thousands)		Total Available				Amount Used				Net Availability
Internal Sources
Free Securities, cash and other		$	4,344,000			$	—			$	4,344,000
External Sources
Federal Home Loan Bank (a)			5,866,000				1,100,000				4,766,000
Federal Reserve Bank			3,247,000				—				3,247,000
Brokered deposits			4,342,691				9,190				4,333,501
Other			1,434,000				—				1,434,000
Total Liquidity		$	19,233,691			$	1,109,190			$	18,124,501

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

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 49.79% at September 30, 2022, compared to 52.61% at June 30, 2022 and 53.95% at December 31, 2021. Securities and FHLB letters of credit are pledged as collateral related to public funds and repurchase agreements.

 

		September 30,				June 30,			March 31,			December 31,			September 30,
Liquidity Metrics		2022				2022			2022			2021			2021
Free securities / total securities			49.79	%			52.61	%		50.63	%		53.95	%		56.73	%
Core deposits / total deposits			98.93	%			99.00	%		98.94	%		98.66	%		98.27	%
Wholesale funds / core deposits			6.23	%			2.97	%		6.21	%		6.45	%		7.19	%
Quarter-to-date average loans /quarter-to-date average deposits			75.87	%			72.24	%		70.34	%		69.81	%		71.62	%

 

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 September 30, 2022, deposits totaled $29.0 billion, a decrease of $915.2 million, or 3%, from June 30, 2022, and $1.5 billion, or 5%, from December 31, 2021. Both the linked-quarter decrease and the decrease from December 31, 2021 are primarily attributable to seasonal tax outflows in public funds, increased spending amid the inflationary environment, and increased competition for deposits as interest rates increase. Core deposits consist of total deposits excluding certificates of deposit of $250,000 or more and brokered deposits. Core deposits totaled $28.6 billion at September 30, 2022, down $925.0 million, or 3%, compared to June 30, 2022 and $1.4 billion, or 5%, compared to December 31, 2021. Core deposits have fluctuated over the past year due largely to pandemic related factors, including several forms of economic stimulus and reduced consumer spending. The ratio of core deposits to total deposits was 98.93% at September 30, 2022, compared to 99.00% at June 30, 2022 and 98.66% at December 31, 2021. Brokered deposits totaled $4.9 million as of September 30, 2022, compared to $4.3 million at June 30, 2022 and $30.2 million at December 31, 2021. The use of brokered deposits as a funding source is subject to certain policies regarding the amount, term and interest rate.

 

Purchases of federal funds, securities sold under agreements to repurchase and other short-term borrowings from customers provide additional sources of liquidity to meet short-term funding requirements. Besides funding from customer sources, the Bank has a line of credit with the FHLB that is secured by blanket pledges of certain mortgage loans. At September 30, 2022, the Bank had borrowings of approximately $1.0 billion and had approximately $4.8 billion available under this line. The unused borrowing capacity at the Federal Reserve’s discount window is approximately $3.2 billion. There were no outstanding borrowings with the Federal Reserve at any date during any period covered by this report.

 

Wholesale funds, which are comprised of short-term borrowings, long-term debt and brokered deposits were 6.23% of core deposits at September 30, 2022, compared to 2.97% at June 30, 2022 and 6.45% at December 31, 2021. At September 30, 2022, wholesale funds

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totaled $1.8 billion, an increase of $905.0 million, or 103%, from June 30, 2022 and a decrease of $155.2 million, or 8%, from December 31, 2021. The linked-quarter increase was primarily due to a net increase of $800 million in FHLB advances during the third quarter of 2022. The Company has established an internal target for wholesale funds to be less than 25% of core deposits.

 

Another measure used to monitor our liquidity position is the loan-to-deposit ratio (average loans outstanding for the reporting period divided by average deposits outstanding). The loan-to-deposit ratio measures the amount of funds the Company lends for each dollar of deposits on hand. Our average loan-to-deposit ratio for the third quarter of 2022 was 75.87%, compared to 72.24% for the second quarter of 2022 and 69.81% for the fourth quarter of 2021. Management has an established target range for the loan-to-deposit ratio of 87% to 89%, but will operate outside that range under certain circumstances, such as those caused by the continuing economic impact of the pandemic.

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 nine months ended September 30, 2022 and 2021.

Dividends received from the Bank have been the primary source of funds available to the Parent for the payment of dividends to our stockholders and for servicing its debt. The liquidity management process takes into account the various regulatory provisions that can limit the amount of dividends the Bank can distribute to the Parent. The Parent targets cash and other liquid assets to provide liquidity in an amount sufficient to fund approximately four quarters of ongoing cash or liquid asset needs, consisting primarily of common stockholder dividends, debt service requirements, and any expected early extinguishment of debt. The Parent may operate below the target level on a temporary basis if a return to the target can be achieved in the near-term, generally not to exceed four quarters. The Parent had cash and liquid assets of $100.8 million at September 30, 2022.

During the third quarter of 2022, we repurchased 50,000 shares of our common stock at an average cost of $48.05 per share, inclusive of commissions, under a Board authorization to repurchase up to 4,338,000 shares of the company’s common stock, set to expire December 31, 2022. To-date, the Company has repurchased 1,654,244 shares under this plan at a total cost of $80.7 million.

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

 

 

Capital Resources

Stockholders’ equity totaled $3.2 billion at September 30, 2022, down $169.3 million from June 30, 2022 and $489.9 million from December 31, 2021. The decrease from June 30, 2022 is largely due to $285.6 million of other comprehensive loss, net of tax, primarily attributable to fair value adjustments on securities available for sale and cash flow hedges, along with dividends of $23.7 million, and the repurchase of $2.4 million of common stock. These factors were partially offset by $135.4 million of net income and $7.0 million of long-term incentive plan and dividend reinvestment activity. The decrease from December 31, 2021 is largely due to $758.8 million of other comprehensive loss, net of tax, that was largely due to fair value adjustments on securities available for sale and cash flow hedges, along with dividends of $71.2 million, and the repurchase of $58.9 million of common stock. These factors were partially offset by net income of $380.3 million and $18.7 million of long-term incentive plan and dividend reinvestment activity.

The tangible common equity (TCE) ratio was 6.73% at September 30, 2022, compared to 7.21% at June 30, 2022 and 7.71% at December 31, 2021. The decrease from June 30, 2022 is largely attributable to other comprehensive loss due primarily to fair value adjustments on the available for sale securities portfolio and cash flow hedges, and dividends, partially offset by both earnings and long term incentive plan and dividend reinvestments. The decline from December 31, 2021 was primarily due to other comprehensive loss, dividends and common stock repurchases, partially offset by earnings, tangible asset contraction and long-term incentive plan and dividend reinvestment activity.

The regulatory capital ratios of the Company and the Bank at September 30, 2022 remained well in excess of current regulatory minimum requirements, including capital conservation buffers, by at least $471 million. The Company and the Bank have been categorized as “well-capitalized” in the most recent notices received from our regulators. Refer to the Supervision and Regulation section in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 for further discussion of our capital requirements.

The following table shows the regulatory capital ratios for the Company and the Bank as calculated under current rules for the indicated periods. The capital ratios reflect the election to use the CECL five-year transition rule that allowed for the option to delay

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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.

 

		Well-				September 30,				June 30,				March 31,				December 31,				September 30,
		Capitalized				2022				2022				2022				2021				2021
Total capital (to risk weighted assets)
Hancock Whitney Corporation			10.00	%			12.67	%			12.70	%			12.82	%			12.84	%			13.06	%
Hancock Whitney Bank			10.00	%			12.16	%			12.28	%			12.33	%			12.33	%			12.51	%
Tier 1 common equity capital (to risk weighted assets)
Hancock Whitney Corporation			6.50	%			11.10	%			11.08	%			11.12	%			11.09	%			11.17	%
Hancock Whitney Bank			6.50	%			11.20	%			11.28	%			11.27	%			11.24	%			11.30	%
Tier 1 capital (to risk weighted assets)
Hancock Whitney Corporation			8.00	%			11.10	%			11.08	%			11.12	%			11.09	%			11.17	%
Hancock Whitney Bank			8.00	%			11.20	%			11.28	%			11.27	%			11.24	%			11.30	%
Tier 1 leverage capital
Hancock Whitney Corporation			5.00	%			9.27	%			8.68	%			8.38	%			8.25	%			8.15	%
Hancock Whitney Bank			5.00	%			9.35	%			8.83	%			8.49	%			8.36	%			8.25	%

Our regulatory ratios reflect the impact of PPP loans, which are guaranteed by the SBA and, when meeting certain criteria, are subject to forgiveness to the debtor by the SBA. These loans carry a 0% risk-weighting in the tier 1 and total capital regulatory ratios due to the full guarantee by the SBA. However, these loans are reflected in average assets used to compute tier 1 leverage. PPP loans totaled $76 million, $151 million and $531 million at September 30, 2022, June 30, 2022 and December 31, 2021, respectively.

On April 22, 2021, our board of directors authorized the repurchase of up to 4,338,000 shares of the Company’s common stock (approximately 5% of the shares of common stock outstanding as of March 31, 2021). The authorization is currently set to expire on December 31, 2022. The shares may be repurchased in the open market, by block purchase, through accelerated share repurchase plans, in privately negotiated transactions or otherwise, in one or more transactions, from time to time, depending upon market conditions and other factors, and in accordance with applicable regulations of the Securities and Exchange Commission. The repurchase authorization may be terminated or amended by the Board at any time prior to the expiration date. During the third quarter of 2022, 50,000 shares were repurchased under this program at an average cost of $48.05 per share, inclusive of commissions. To date, 1,654,244 shares with an average cost of $48.77 per share have been repurchased under this program.

 

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 result of operations.

On July 28, 2022, our board of directors declared a regular third quarter cash dividend of $0.27 per share, consistent with the prior quarter. The quarterly common stock cash dividend was paid on September 15, 2022 to shareholders of record on September 6, 2022. The Company has paid uninterrupted dividends to its shareholders since 1967.

BALANCE SHEET ANALYSIS

Short-Term Investments

 

Short-term assets are held to ensure funds are available to meet the cash flow needs of both borrowers and depositors. Short-term investments, including interest-bearing bank deposits and federal funds sold, were $0.3 billion at September 30, 2022, down $0.6 billion from June 30, 2022, and $3.6 billion from December 31, 2021. Average short-term investments of $0.4 billion for the third quarter of 2022 were down $1.7 billion compared to the second quarter of 2022 and $3.3 billion from the fourth quarter of 2021. Typically, these balances will change on a daily basis depending upon movement in customer loan and deposit accounts. The decline in short-term investments from each comparative period is the result of the redeployment of excess liquidity that had been present on our balance sheet for the better part of two years attributable to pandemic-related factors.

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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 in stockholders' equity.

 

Investment in securities totaled $8.3 billion at September 30, 2022, down $198.2 million, or 2%, from June 30, 2022 and $219.3 million, or 3%, from December 31, 2021. The decrease from June 30, 2022 is attributable to a negative market valuation adjustment on the available for sale portfolio of $296.5 million, partially offset by net purchases of $98.3 million. The decrease from December 31, 2021 was attributable to a negative market valuation adjustment of $877.7 million on the available for sale portfolio, partially offset by net purchases of $658.4 million. The net purchases of securities compared to year-end reflect investment of a portion of excess cash held in federal funds into higher-yielding securities.

 

At September 30, 2022, securities available for sale totaled $5.5 billion and securities held to maturity totaled $2.9 billion. To provide some protection from the impact of future interest rate changes upon accumulated other comprehensive income, we reclassified securities available for sale with an aggregate fair value of $561.8 million to the securities held to maturity portfolio during the first quarter of 2022.

 

Our securities portfolio consists mainly of residential and commercial mortgage-backed securities and collateralized mortgage obligations that are issued or guaranteed by U.S. government agencies. We invest only in high quality investment grade securities with a targeted portfolio effective duration generally between two and five and a half years. At September 30, 2022, the average expected maturity of the portfolio was 5.88 years with an effective duration of 4.93 years and a nominal weighted-average yield of 2.18%. Under an immediate, parallel rate shock of 100 bps and 200 bps, the effective durations would be 4.89 and 4.82 years, respectively. At June 30, 2022, the average expected maturity of the portfolio was 5.91 years with an effective duration of 4.93 years and a nominal weighted-average yield of 2.08%. The average maturity of the portfolio at December 31, 2021 was 5.80 years, with an effective duration of 4.25 years and a nominal weighted-average yield of 1.87%. The changes in expected maturity, effective duration, and nominal weighted-average yield were largely the result of market conditions at the time of reinvestment of maturities, paydowns and growth from the investment of excess liquidity. At September 30, 2022, approximately $1.0 billion of our available for sale securities are hedged with $0.9 billion in fair value hedges in order to provide protection and flexibility to reposition and/or reprice the portfolio in a rising interest rate environment, effectively reducing the duration (market price risk) on the hedged securities. Our strategy in the near term will be to invest in the securities portfolio as rates rise and monitor our hedge positions to adjust interest rate sensitivity.

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

Loans

 

Total loans at September 30, 2022 were $22.6 billion, up $739.5 million, or 3%, from June 30, 2022 and $1.5 billion, or 7%, from December 31, 2021. The linked-quarter increase was primarily attributable to growth of $815.1 million in core loans (excluding PPP loans), partially offset by a decrease of $75.7 million in PPP loans. New loans, increased credit line utilization, and fewer paydowns contributed to core growth in all markets across our footprint, with commercial and industrial (including healthcare), residential mortgage and construction and land development as the main drivers. The increase compared to December 31, 2021 includes core loan growth of $1.9 billion, partially offset by a decrease of $455.3 million of PPP loans.

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

 

		September 30,				June 30,				March 31,				December 31,				September 30,
(in thousands)		2022				2022				2022				2021				2021
Total loans:
Commercial non-real estate		$	9,905,427			$	9,645,092			$	9,584,480			$	9,612,460			$	9,416,990
Commercial real estate - owner occupied			3,033,133				2,964,474				2,868,233				2,821,246				2,812,926
Total commercial and industrial			12,938,560				12,609,566				12,452,713				12,433,706				12,229,916
Commercial real estate - income producing			3,686,540				3,641,243				3,563,299				3,464,626				3,467,939
Construction and land development			1,541,257				1,408,727				1,286,655				1,228,670				1,213,991
Residential mortgages			2,843,723				2,615,807				2,462,900				2,423,890				2,351,053
Consumer			1,575,505				1,570,725				1,557,774				1,583,390				1,623,116
Total loans		$	22,585,585			$	21,846,068			$	21,323,341			$	21,134,282			$	20,886,015

 

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Commercial and industrial (“C&I”) loans, including both non-real estate and owner occupied real estate secured loans, totaled approximately $12.9 billion, or 57% of the total loan portfolio, at September 30, 2022, an increase of $329.0 million, or 3%, from June 30, 2022, and $504.9 million, or 4%, from December 31, 2021. The growth in the portfolio for all periods is net of the reduction in PPP loans due to repayment primarily through the SBA’s forgiveness program. Our commercial and Industrial loan growth was diverse across our footprint and industries.

 

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 September 30, 2022 totaled approximately $2.6 billion, or 11% of total loans, an increase of $170 million from June 30, 2022 and $492 million at December 31, 2021. At September 30, 2022, approximately $503 million of our shared national credits were with healthcare-related customers, with the remainder in commercial real estate and other diverse industries.

 

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

 

		September 30,								June 30,								March 31,								December 31,								September 30,
		2022								2022								2022								2021								2021
						Pct of								Pct of								Pct of								Pct of								Pct of
( $ in thousands )		Balance				Total				Balance				Total				Balance				Total				Balance				Total				Balance				Total
Commercial & industrial loans:
Real estate and rental and leasing		$	1,483,053				11	%		$	1,457,730				12	%		$	1,363,548				11	%		$	1,311,241				11	%		$	1,298,560				11	%
Health care and social assistance			1,414,675				11	%			1,283,176				10	%			1,182,345				10	%			1,284,578				10	%			1,219,769				10	%
Retail trade			1,156,774				9	%			1,128,931				9	%			1,104,686				9	%			1,086,204				9	%			1,069,225				9	%
Manufacturing			1,118,510				9	%			1,038,052				8	%			984,699				8	%			919,830				7	%			928,041				8	%
Construction			1,013,468				8	%			1,026,278				8	%			1,027,469				8	%			923,040				7	%			861,075				7	%
Wholesale trade			996,690				8	%			991,718				8	%			856,534				7	%			823,295				7	%			808,252				7	%
Finance and insurance			980,664				7	%			913,300				7	%			911,910				7	%			896,105				7	%			796,980				7	%
Transportation and warehousing			854,893				7	%			831,602				7	%			771,865				6	%			780,934				6	%			785,367				6	%
Professional, scientific, and technical services			692,848				5	%			642,337				5	%			662,559				5	%			621,739				5	%			521,965				4	%
Accommodation, food services and entertainment			648,229				5	%			664,282				5	%			644,919				5	%			595,698				5	%			604,550				5	%
Public administration			556,918				4	%			570,032				5	%			588,755				5	%			596,301				5	%			625,979				5	%
Other services (except public administration)			404,684				3	%			399,936				3	%			401,243				3	%			424,090				4	%			421,884				3	%
Information			327,587				3	%			307,717				3	%			286,132				2	%			280,019				2	%			245,933				2	%
Educational services			268,245				2	%			279,322				2	%			274,848				2	%			255,127				2	%			251,383				2	%
Energy			246,344				2	%			246,961				2	%			249,235				2	%			266,235				2	%			264,791				2	%
Other			699,259				5	%			676,877				5	%			807,138				7	%			838,211				7	%			590,832				4	%
Total commercial & industrial loans			12,862,841				99	%			12,458,251				99	%			12,117,885				97	%			11,902,647				96	%			11,294,586				92	%
PPP loans			75,719				1	%			151,315				1	%			334,828				3	%			531,059				4	%			935,330				8	%
Total commercial & industrial loans		$	12,938,560				100	%		$	12,609,566				100	%		$	12,452,713				100	%		$	12,433,706				100	%		$	12,229,916				100	%

 

Commercial real estate – income producing loans totaled approximately $3.7 billion at September 30, 2022, an increase of $45 million, or 1%, from June 30, 2022 and $222 million, or 6%, from December 31, 2021. Construction and land development loans, totaling approximately $1.5 billion at September 30, 2022, increased $133 million, or 9%, from June 30, 2022 and $313 million, or 25%, from December 31, 2021. 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.

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		September 30,								June 30,								March 31,								December 31,								September 30,
		2022								2022								2022								2021								2021
						Pct of								Pct of								Pct of								Pct of								Pct of
( $ in thousands )		Balance				Total				Balance				Total				Balance				Total				Balance				Total				Balance				Total
Commercial real estate - income producing and construction loans:
Multifamily		$	872,944				17	%		$	776,723				15	%		$	695,090				14	%		$	647,300				14	%		$	696,924				15	%
Healthcare related properties			851,998				16	%			879,474				18	%			815,090				17	%			766,338				16	%			677,137				15	%
Retail			803,300				15	%			780,454				16	%			793,126				17	%			777,594				17	%			756,619				16	%
Industrial			602,739				12	%			573,993				11	%			568,886				12	%			561,022				12	%			577,988				12	%
Office			585,614				11	%			569,055				11	%			554,005				11	%			501,771				11	%			487,510				10	%
1-4 family residential construction			588,122				11	%			548,286				11	%			516,580				11	%			469,690				10	%			441,925				9	%
Hotel/motel and restaurants			453,847				9	%			448,949				9	%			441,285				9	%			437,241				9	%			504,536				11	%
Other land loans			222,723				4	%			221,905				4	%			214,446				4	%			257,594				5	%			291,415				7	%
Other			246,510				5	%			251,131				5	%			251,446				5	%			274,746				6	%			247,876				5	%
Total commercial real estate - income producing and construction loans		$	5,227,797				100	%		$	5,049,970				100	%		$	4,849,954				100	%		$	4,693,296				100	%		$	4,681,930				100	%

 

Our residential mortgages loan portfolio totaled $2.8 billion at September 30, 2022, up $228 million, or 9%, from June 30, 2022 and $420 million, or 17%, and from December 31, 2021. The increase in residential mortgage loans from the prior comparative periods is largely due to a lower percentage sold in the secondary market, partially offset by paydowns. The percentage of the originations sold in the secondary market was 21% in both the third and second quarters of 2022 and 35% in the fourth quarter of 2021.

 

The consumer loan portfolio totaled $1.6 billion at September 30, 2022, up $5 million, or less than 1%, from June 30, 2022, and down $8 million, or less than 1%, from December 31, 2021. Changes in the consumer loan portfolio balance include the impact of our exit from the indirect automobile lending market, where the existing portfolio is in run-off, declining $26 million linked-quarter and $88 million compared to December 31, 2021.

 

Management expects loan growth of approximately $200 million to $450 million in the fourth quarter, with full-year 2022 loan growth estimated to be about 8% to 9% over the December 31, 2021 balance of $21.1 billion.

Allowance for Credit Losses and Asset Quality

 

The Company's allowance for credit losses was $339.6 million at September 30, 2022, compared to $339.5 million at June 30, 2022, and $400.5 million at September 30, 2021 and $371.4 million at December 31, 2021.

 

The $0.1 million linked-quarter increase in the allowance for credit losses is attributable to $1.3 million of net charge-offs and a provision for credit losses of $1.4 million, reflective of a relatively consistent credit loss outlook on the portfolio as a whole and growth across the portfolios, particularly in commercial non-real estate, construction and land development, and mortgage segments. Both collectively evaluated reserves and individually evaluated reserves (generally used for nonperforming and troubled debt restructured loans) were virtually unchanged compared to the prior quarter. Risks related to the pandemic have mostly subsided, but uncertainty related to inflationary pressure and the outcome of the Federal Reserve’s monetary policy has resulted in a continued elevated reserve. Consistent with the prior period, the slower near-term growth S-2 scenario (anchored on the baseline) was weighted more heavily at 75% and the baseline scenario was weighted 25% to incorporate reasonably possible alternative economic outcomes. Both economic scenarios utilized have varying degrees of severity and duration of inflationary pressure, including volatility in commodities prices stemming from geopolitical unrest, and the consequences of the Federal Reserve's actions with regard to monetary policy, with the S-2 scenario reflecting a mild recession.

 

The September 2022 baseline forecast assumes the global oil market remains mostly balanced in 2023, allowing oil prices to gradually drop; the return to full-employment to be achieved in the coming months; GDP will grow in the second half of the year, with forecasted annual growth of 1.6% in 2022, 1.4% in 2023 and 2.6% in 2024; the Federal Funds rate will reach a target rate of 3.5% by the end of 2022, with the possibility of future rate increases and no rate cuts until 2025; and, future surges in COVID-19 infections will not have a significant impact upon economic conditions. The S-2 scenario assumes that the conflict between Russia and Ukraine spans longer than anticipated in the baseline scenario and leads to worsened supply chain issues and further boosting inflation. The Federal Reserve would in turn react with a more aggressive approach than assumed in the baseline scenario, generating greater corrections in equity and housing markets and declines in spending. As such, the S-2 scenario incorporates a mild recession beginning in the fourth quarter of 2022 that spans three quarters. Further, the S-2 scenario assumes that the return to full employment will not be achieved until the third quarter of 2024 and that an increase in the number of COVID-19 cases, hospitalizations and deaths will impede growth in spending on air travel, retail and hotels. Additional information on the Moody’s forecast is provided in the “Economic Outlook” section of this document.

 

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In the third quarter of 2022, the provision for credit losses included a reserve build of $0.1 million, compared to a reserve release of $9.1 million in the second quarter of 2022 and release of $28.7 million in the third quarter of 2021. While economic growth, continued improvement in credit quality metrics and minimal credit losses allowed for the release of certain reserves during the preceding six quarters, current period loan growth and economic uncertainty resulted in a relatively flat allowance compared to the second quarter. Our allowance for credit loss coverage to total loans was 1.50% at September 30, 2022, compared to 1.55% at June 30, 2022, and 1.76% at December 31, 2021. While our reserve coverage to total loans declined linked quarter as a result of strong portfolio growth and stable credit metrics, it remains elevated compared to normalized levels, reflecting the current economic uncertainty.

 

The allowance for credit losses on the commercial portfolio was relatively unchanged at $279.1 million, or 1.54% of that portfolio, at September 30, 2022 compared to the June 30, 2022 allowance of $280.0 million, or 1.59%, primarily due to stable credit performance. Our residential mortgage allowance for credit loss increased modestly to $31.0 million, 1.09% of that portfolio at September 30, 2022, compared to $28.6 million, or 1.09%, at June 30, 2022, due to both growth in the portfolio and changes in certain forecasted economic variables. Our allowance for credit losses on the consumer portfolio was $29.5 million, or 1.88% at September 30, 2022, compared to $30.9 million, or 1.97%, at June 30, 2022.

 

Criticized commercial loans totaled $304.4 million at September 30, 2022, up $23.4 million, or 8%, from $281.0 million at June 30, 2022, and up $17.2 million, or 6% from $287.2 million at December 31, 2021. The increase in commercial criticized loans is the result of net activity where downgraded credits exceeded payoffs, paydowns, upgrades, and charge-offs during the quarter. Criticized loans are defined as those having potential weaknesses that deserve management’s close attention (risk-rated as special mention, substandard and doubtful), including both accruing and nonaccruing loans. The Company routinely assesses the ratings of loans in its portfolio through an established and comprehensive portfolio management process. In addition, the Company often looks at portfolios of loans to determine if there are areas of risk not specifically identified in its loan by loan approach.

 

Net charge-offs were $1.3 million, or 0.02% of average total loans on an annualized basis in the third quarter of 2022, compared to net recoveries of $0.7 million, or (0.01)% of average total loans in the second quarter of 2022 and net charge-offs of $1.8 million, or 0.03% in the third quarter of 2021. Our commercial portfolio had net recoveries of $0.3 million and $1.6 million in the third and second quarters of 2022, respectively, while the third quarter of 2021 had net charge-offs totaling $0.5 million. Our residential mortgage portfolio had net recoveries of $0.9 million in the third quarter of 2022 and $0.4 million in both the second quarter of 2022 and the third quarter of 2021. Consumer net charge-offs were $2.5 million in the third quarter of 2022, $1.4 million in the second quarter of 2022, and $1.7 million in the third quarter of 2021.

 

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

 

 

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		Three Months Ended												Nine Months Ended
		September 30,				June 30,				September 30,				September 30,
(in thousands)		2022				2022				2021				2022				2021
Provision and Allowance for Credit Losses
Allowance for loan losses:
Allowance for loan losses at beginning of period		$	308,175			$	317,843			$	399,668			$	342,065			$	450,177
Loans charged-off:
Commercial non real estate			2,619				1,088				3,437				6,366				32,369
Commercial real estate - owner-occupied			89				857				40				946				1,722
Total commercial & industrial			2,708				1,945				3,477				7,312				34,091
Commercial real estate - income producing			—				1,062				—				1,066				231
Construction and land development			—				3				11				3				267
Total commercial			2,708				3,010				3,488				8,381				34,589
Residential mortgages			42				18				11				102				218
Consumer			3,837				2,947				3,256				9,464				9,874
Total charge-offs			6,587				5,975				6,755				17,947				44,681
Recoveries of loans previously charged-off:
Commercial non real estate			2,857				4,461				2,392				9,460				6,579
Commercial real estate - owner-occupied			115				102				76				606				363
Total commercial & industrial			2,972				4,563				2,468				10,066				6,942
Commercial real estate - income producing			—				—				100				878				100
Construction and land development			6				58				384				132				1,548
Total commercial			2,978				4,621				2,952				11,076				8,590
Residential mortgages			936				466				496				1,463				933
Consumer			1,377				1,574				1,537				4,479				4,636
Total recoveries			5,291				6,661				4,985				17,018				14,159
Total net charge-offs (recoveries)			1,296				(686	)			1,770				929				30,522
Provision for loan losses			(763	)			(10,354	)			(26,377	)			(35,020	)			(48,134	)
Allowance for loan losses at end of period		$	306,116			$	308,175			$	371,521			$	306,116			$	371,521
Reserve for Unfunded Lending Commitments:
Reserve for unfunded lending commitments at beginning of period		$	31,303			$	30,710			$	29,524			$	29,334			$	29,907
Provision for losses on unfunded lending commitments			2,165				593				(578	)			4,134				(961	)
Reserve for unfunded lending commitments at end of period		$	33,468			$	31,303			$	28,946			$	33,468			$	28,946
Total Allowance for Credit Losses		$	339,584			$	339,478			$	400,467			$	339,584			$	400,467
Total Provision for Credit Losses		$	1,402			$	(9,761	)		$	(26,955	)		$	(30,886	)		$	(49,095	)
Coverage Ratios:
Allowance for loan losses to period-end loans			1.36	%			1.41	%			1.78	%			1.36	%			1.78	%
Allowance for credit losses to period-end loans			1.50	%			1.55	%			1.92	%			1.50	%			1.92	%
Charge-offs ratios:
Gross charge-offs to average loans			0.12	%			0.11	%			0.13	%			0.11	%			0.28	%
Recoveries to average loans			0.09	%			0.12	%			0.09	%			0.11	%			0.09	%
Net charge-offs to average loans			0.02	%			(0.01	)%			0.03	%			0.01	%			0.19	%
Net Charge-offs to average loans by portfolio
Commercial non real estate			(0.01	)%			(0.14	)%			0.04	%			(0.04	)%			0.35	%
Commercial real estate - owner-occupied			(0.00	)%			0.10	%			(0.01	)%			0.02	%			0.06	%
Total commercial & industrial			(0.01	)%			(0.08	)%			0.03	%			(0.03	)%			0.29	%
Commercial real estate - income producing			—				0.12	%			(0.01	)%			0.01	%			0.01	%
Construction and land development			(0.00	)%			(0.02	)%			(0.12	)%			(0.01	)%			(0.15	)%
Total commercial			(0.01	)%			(0.04	)%			0.01	%			(0.02	)%			0.20	%
Residential mortgages			(0.13	)%			(0.07	)%			(0.08	)%			(0.07	)%			(0.04	)%
Consumer			0.62	%			0.35	%			0.41	%			0.43	%			0.41	%

 

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

 

		September 30,				June 30,				March 31,				December 31,				September 30,
(in thousands)		2022				2022				2022				2021				2021
Loans accounted for on a nonaccrual basis:
Commercial non-real estate		$	3,563			$	3,600			$	4,065			$	4,058			$	7,167
Commercial non-real estate - restructured			965				1,230				1,247				2,915				2,781
Total commercial non-real estate			4,528				4,830				5,312				6,973				9,948
Commercial real estate - owner occupied			2,009				2,165				2,514				3,104				4,922
Commercial real estate - owner-occupied - restructured			228				228				235				1,817				1,798
Total commercial real estate - owner-occupied			2,237				2,393				2,749				4,921				6,720
Commercial real estate - income producing			1,814				1,842				1,880				5,377				4,167
Commercial real estate - income producing - restructured			69				74				76				81				82
Total commercial real estate - income producing			1,883				1,916				1,956				5,458				4,249
Construction and land development			349				676				578				837				1,230
Construction and land development - restructured			4				4				6				7				8
Total construction and land development			353				680				584				844				1,238
Residential mortgage			22,753				18,649				20,709				23,483				23,423
Residential mortgage - restructured			1,530				1,713				2,036				1,956				2,541
Total residential mortgage			24,283				20,362				22,745				25,439				25,964
Consumer			6,476				7,885				9,093				11,888				12,238
Consumer - restructured			47				—				—				—				—
Total consumer			6,523				7,885				9,093				11,888				12,238
Total nonaccrual loans		$	39,807			$	38,066			$	42,439			$	55,523			$	60,357
Restructured loans - still accruing:
Commercial non-real estate		$	316			$	329			$	494			$	515			$	480
Commercial real estate - owner occupied			—				—				—				—				—
Commercial real estate - income producing			—				—				—				—				—
Construction and land development			114				116				117				118				119
Residential mortgage			1,016				1,142				1,363				2,169				1,407
Consumer			479				905				929				986				1,065
Total restructured loans - still accruing			1,925				2,492				2,903				3,788				3,071
Total nonperforming loans			41,732				40,558				45,342				59,311				63,428
ORE and foreclosed assets			2,085				3,467				6,345				7,533				8,423
Total nonperforming assets (a)		$	43,817			$	44,025			$	51,687			$	66,844			$	71,851
Loans 90 days past due still accruing		$	2,600			$	4,697			$	4,258			$	5,524			$	9,970
Total restructured loans		$	4,768			$	5,741			$	6,503			$	10,564			$	10,281
Ratios:
Nonaccrual loans to total loans			0.18	%			0.17	%			0.20	%			0.26	%			0.29	%
Nonperforming assets to loans plus ORE and foreclosed assets			0.19	%			0.20	%			0.24	%			0.32	%			0.34	%
Allowance for loan losses to nonaccrual loans and accruing loans 90 days past due			721.85	%			720.66	%			680.65	%			560.33	%			528.28	%
Allowance for loan losses to nonperforming loans and accruing loans 90 days past due			690.51	%			680.97	%			640.81	%			527.59	%			506.17	%
Loans 90 days past due still accruing to loans			0.01	%			0.02	%			0.02	%			0.03	%			0.05	%

 

 

Nonperforming assets totaled $43.8 million at September 30, 2022, down $0.2 million from June 30, 2022, and $23.0 million from December 31, 2021. Nonperforming loans increased $1.2 million compared to June 30, 2022, and decreased $17.6 million compared to December 31, 2021. The minimal increase in nonperforming loans compared to June 30, 2022 was largely attributable to downgrades, partially offset by payoffs and charge-offs. ORE and foreclosed assets were $2.1 million at September 30, 2022, down from $3.5 million at June 30, 2022, and $7.5 million at December 31, 2021. Nonperforming assets as a percentage of total loans, ORE and other foreclosed assets was 0.19% at September 30, 2022, down 1 bp from June 30, 2022, and 13 bps from December 31, 2021.

 

We expect to see low to modest charge-offs and provision for credit losses in the fourth quarter of 2022. 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. In order to meet our customers’ needs, we offer high-quality banking services with convenient delivery channels, including online and mobile banking. We provide specialized services to our commercial customers to promote commercial deposit growth. These services include treasury management, industry expertise and lockbox services. Since early 2020, deposit levels have also been influenced by pandemic-driven factors, such as inflows from government stimulus payments, deposits related to funding PPP loans into business checking accounts and a slowdown in customer spending during the height of the pandemic. In the third quarter of 2022, in addition to expected seasonal contraction, 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 increased competition for deposits as customers seek higher returns at other financial institutions and/or in other investment vehicles.

Total deposits were $29.0 billion at September 30, 2022, with noninterest-bearing deposits comprising nearly half of the total. Total deposits were down $915.2 million, or 3%, from June 30, 2022, and $1.5 billion from December 31, 2021. Average deposits for the third quarter of 2022 were $29.2 billion, down $799.3 million, or 3%, from the second quarter of 2022, $570.0 million, or 2%, from fourth quarter of 2021, and $56.7 million, or less than 1%, from the third quarter of 2021.

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

		September 30,				June 30,				March 31,				December 31,				September 30,
(in thousands)		2022				2022				2022				2021				2021
Noninterest-bearing deposits		$	14,290,817			$	14,676,342			$	14,976,670			$	14,392,808			$	13,653,366
Interest-bearing retail transaction and savings deposits			10,924,309				11,359,561				11,488,607				11,677,333				11,306,731
Interest-bearing public fund deposits:
Public fund transaction and savings deposits			2,737,074				2,832,720				2,962,811				3,216,651				2,938,943
Public fund time deposits			59,288				50,943				51,496				77,956				116,445
Total interest-bearing public fund deposits			2,796,362				2,883,663				3,014,307				3,294,607				3,055,388
Retail time deposits			934,866				937,676				1,010,935				1,091,959				1,183,482
Brokered time deposits			4,920				9,190				9,190				9,190				9,190
Total interest-bearing deposits			14,660,457				15,190,090				15,523,039				16,073,089				15,554,791
Total deposits		$	28,951,274			$	29,866,432			$	30,499,709			$	30,465,897			$	29,208,157

 

Noninterest-bearing demand deposits were $14.3 billion at September 30, 2022, down $385.5 million, or 3%, from June 30, 2022, and $102.0 million, or 1%, from December 31, 2021. The linked-quarter decrease reflects a decline in noninterest-bearing commercial, consumer and public funds deposits due in part to typical seasonality, while the year-over-year changes are likely the result of pandemic and hurricane related cash inflows. Noninterest-bearing demand deposits comprised 49% of total deposits at September 30, 2022 and June 30, 2022, and 47% at December 31, 2021.

 

Interest-bearing transaction and savings accounts of $10.9 billion at September 30, 2022 were down $435.3 million, or 4%, from June 30, 2022, and $753.0 million, or 6%, from December 31, 2021. Interest-bearing public fund deposits totaled $2.8 billion at September 30, 2022, down $87.3 million, or 3%, from June 30, 2022, and $498.2 million, or 15%, from December 31, 2021. The linked quarter decrease in public funds also reflects a typical seasonal outflow. Retail time deposits totaled $0.9 billion at September 30, 2022, down $2.8 million, or less than 1%, from June 30, 2022, and $157.1 million, or 14%, from December 31, 2021. The decrease in time deposits from both periods was due in part to maturing retail and jumbo certificates of deposit which were not renewed, likely due to prevailing rates that reflect management’s strategic approach to controlling the cost of funds.

 

Management expects seasonal deposit growth in the fourth quarter, with year-end deposits expected to be down 3% to 4% from the December 31, 2021 level of $30.5 billion.

 

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Short-Term Borrowings

 

At September 30, 2022, short-term borrowings totaled $1.5 billion, up $913.0 million, or 145%, from June 30, 2022, and down $202.2 million, or 12%, from September 30, 2021, and down $122.1 million, or 7%, from December 31, 2021. The increase from June 30, 2022 is primarily attributable to $1.0 billion of new floating-rate FHLB borrowings as a source of funding for loan growth amid some deposit contraction. While the variance from the December 31, 2021 is much less significant, it is reflective of repayment of $1.1 billion of low fixed-rate FHLB borrowings during the second and third quarters of 2022, and the addition of $1.0 billion in new floating-rate advances. The remaining variance for both periods is largely due to changes in customer repurchase agreements discussed below. Average short-term borrowings of $950.6 million in the third quarter of 2022 were down $273.6 million, or 22%, compared to the prior quarter, $741.0 million, or 45%, from the fourth quarter of 2021 and $661.7 million, or 41%, compared to the same quarter last year.

 

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

Long-Term Debt

 

Long-term debt totaled $236.4 million at September 30, 2022, down $3.7 million, or 2%, from June 30, 2022, and $7.8 million, or 3%, from December 31, 2021.

 

Long-term debt at September 30, 2022 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.

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The contract amounts of these instruments reflect our exposure to credit risk. The Bank undertakes the same credit evaluation in making loan commitments and assuming conditional obligations as it does for on-balance sheet instruments and may require collateral or other credit support. At September 30, 2022, the Company had a reserve for unfunded lending commitments totaling $33.5 million.

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

 

						Expiration Date
						Less than				1-3				3-5				More than
(in thousands)		Total				1 year				years				years				5 years
Commitments to extend credit		$	10,285,394			$	4,092,399			$	2,425,858			$	2,935,821			$	831,316
Letters of credit			373,002				329,424				39,013				4,565				—
Total		$	10,658,396			$	4,421,823			$	2,464,871			$	2,940,386			$	831,316

 

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

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

NEW ACCOUNTING PRONOUNCEMENTS

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

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

 

		Estimated Increase
		(Decrease) in NII
Change in Interest Rates		Year 1				Year 2
(basis points)
-100			-4.55	%			-7.11	%
+100			4.10	%			6.56	%
+200			8.14	%			13.02	%

 

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

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

 

LIBOR Transition

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

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

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

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

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The Bank has adopted several replacement benchmarks to use in place of LIBOR benchmark rates, with AMERIBOR along with Chicago Mercantile Exchange Inc. (“CME”) Term SOFR and FRB-NY SOFR as the primary rates. The replacement 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.

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

 

Item 4. Controls and Procedures

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

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

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

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

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

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

 

		Total number of shares or units purchased				Average price paid per share				Total number of shares purchased as part of a publicly announced plan or program				Maximum number of shares that may yet be purchased under such plans or programs
July 1, 2022 - July 31, 2022			—			$	—				—				2,695,756
August 1, 2022 - August 31, 2022			16,497			$	48.23				16,497				2,679,259
September 1, 2022 - September 30, 2022			33,503			$	47.96				33,503				2,645,756
			50,000			$	48.05				50,000

 

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Item 6. Exhibits

(a) Exhibits:

 

Exhibit Number		Description		Filed Herewith		Form		Exhibit		Filing Date
3.1		Second Amended and Restated Articles of Hancock Whitney Corporation				8-K		3.1		11/03/2022
3.2		Second Amended and Restated Bylaws of Hancock Whitney Corporation				8-K		3.2		11/03/2022
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)
			November 3, 2022

 

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